The end of the Cold War has brought dramatic changes to the Department of Defense's relationship with the national and world economies. With changes in military missions and sharp reductions in defense spending, the Department must rely on the broader commercial world. Defense can no longer rely solely upon defense-unique industries and capabilities to equip its forces. Economic security has become a vital issue for the Department in recognition that a strong military requires a robust commercial and defense industry.
The Department is determined to respond effectively to this new environment and is adjusting its policies accordingly. It has initiated new ways of doing business with the business community, with other governments, and in its own operations. In each case, DoD is changing policies and programs to ensure both national and economic security and guarantee that the military continues to be ready for meeting future threats.
DOD -- A SMALLER CUSTOMER, CHANGING NEEDS
During the Cold War, DoD developed leading-edge technologies and industrial capabilities to meet Defense's unique requirements. Any commercial applications were incidental to meeting national security needs.
Today, the Department finds itself in an entirely new environment. First, it is a smaller customer. Defense budgets have declined dramatically in recent years. Second, many leading-edge technologies that will be critical to success on future battlefields (electronics, computers, information processing, and communications) come from the commercial sectors of the economy.
As a result, the Department can no longer afford to rely solely upon defense-unique capabilities. To continue to provide the armed forces with the most technologically advanced systems in the world, the Department increasingly must rely on commercial or dual-use technologies, products, and processes. In developing new systems, DoD must look to commercial markets. The Department will develop military-unique capabilities only after it has determined that commercial capabilities will not meet its requirements. Commercial markets are international by nature. Therefore, as the Department turns towards commercial industry, it will necessarily draw upon resources from international suppliers and will seek greater international cooperation with its allies and friends.
THE DEFENSE INDUSTRY RESTRUCTURES
Although reductions in the defense budget have sharply reduced defense industry sales, defense contractors have generally remained profitable, in part by restructuring and consolidating. Restructuring and consolidation are normal and traditional business responses to declining demand. Industrial restructuring often includes reducing the size of factories, closing some factories that are no longer needed, merging divisions and operations, and cutting corporate workforces. Recent examples of industry consolidation include Northrop merging with Grumman and Loral's purchase of IBM's Federal Systems. These steps result in short-term costs for the companies, but much greater long-term operating and overhead savings. The final result is lower costs to DoD.
DEFENSE RESPONDS -- NEW WAYS OF DOING BUSINESS WITH BUSINESS
DoD recently submitted to Congress a report describing its processes for addressing industrial issues and identifying progress that has been made to date. The report, entitled Industrial Capabilities for Defense, analyzes the changed environment for Defense, and discusses the Department's new efforts to respond accordingly. Key findings in the report focus on:
Achieving Acquisition Reform
The Department's efforts to realign the acquisition process to reduce the use of military-unique specifications and standards and to rely more heavily on commercial technologies, manufacturing processes, goods, and services are an integral part of its strategy to adjust to the post-Cold War era. These efforts are described in detail in the chapter on Acquisition Reform.
Taking Advantage of Commercial and Dual-Use Products and Processes
An essential issue discussed in the industrial capabilities report is the Administration's dual-use technology policy. The fundamental objectives are:
The strategy for achieving these objectives consists of three pillars: insertion of commercial technology into defense systems, integration of defense and commercial production, and increased R&D of dual-use technologies.
The Flat Panel Display (FPD) Initiative is an example of the dual-use technology policy at work. Its goals are to support research and development of FPDs for defense use, to encourage U.S. industry investment, and to foster market development. DoD has made substantial investments in FPD technology over the last five years, and implementation of the initiative will help ensure that the U.S. FPD production base becomes a stable, reliable industrial asset serving both the Department and commercial markets providing early, assured, affordable access to this vital technology for meeting defense needs.
Another example is the National Shipbuilding Initiative (NSI). The NSI's objective is to ensure near-term commercial survival in the international shipbuilding market and long-term industry viability with continuous product and process improvement. The NSI is achieving these objectives by removing unnecessary regulatory barriers, offering R&D resources, and providing financing to domestic shipbuilders. Finally, the Department is issuing an overall Dual-Use Technology Plan which outlines and guides the process for identifying critical dual-use areas, analyzing critical technological and industrial issues in these areas, and formulating and implementing specific action plans.
Encouraging Industry Restructuring
The Department must encourage much needed rationalization in the defense industry. Nonetheless, while consolidations and restructuring may create efficiencies that benefit the Department, they also pose challenges that require DoD's active attention and involvement.
Consolidation entails the risk that DoD will lose the competition that encourages defense suppliers to reduce costs, improve quality, and stimulate innovation. Therefore, DoD is improving its review of proposed mergers, acquisitions, and joint ventures to ensure full consideration of the tradeoffs and risks involved. Over the last 20 years, DoD has not actively participated in antitrust reviews carried out by the Federal Trade Commission (FTC) and the Antitrust Division of the Department of Justice, and did not take formal positions supporting or opposing mergers. Given recent changes in the defense industry, the Department is committed to playing a more active role.
In 1993, the Department chartered the Defense Science Board Task Force on Antitrust Aspects of Defense Industry Consolidation to advise the Department on how to meet these challenges effectively. The Task Force, which issued its report in April 1994, concluded that while competition among firms in the defense industry is significantly different from competition among firms in other sectors of the economy, the current Antitrust Merger Guidelines are flexible enough to take the special circumstances of defense industry downsizing into consideration.
DoD is committed to developing its own views concerning the national security implications and competitive aspects of selected transactions, and to communicating those views more effectively to the Justice Department and the FTC. The recent letter from the Deputy Secretary of Defense to the FTC on the proposed merger of the Lockheed Corporation and the Martin-Marietta Corporation illustrates the extensive assessments that the Department will undertake. DoD's concerns include cost savings; preservation of essential research, development, and production capabilities; preservation of a core of skilled personnel; and assurance of efficiency and quality within the defense industry.
Although restructuring and consolidation can save the Department and U.S. taxpayers billions of dollars, in some instances they will first require the Department to share in restructuring costs. The Department is establishing procedures to allow such costs if they will produce savings for Defense and the U.S. taxpayer. These costs are not allowed unless and until the Department determines that the benefit to U.S. taxpayers outweighs the expense. Not allowing companies to be reimbursed for restructuring costs would discourage them from undertaking restructuring efforts at all, which would result in higher costs to DoD and thus to U.S. taxpayers.
Recognizing Commercial Imperatives
The Department recognizes that changes in both U.S. national security posture and economic position require a fresh look at the commercial requirements of defense suppliers. One example is in export control regimes and processes. In 1993, the Administration led the effort to establish higher thresholds for export controls on computer products due to the advances in technical performance that had become commonplace in this rapidly changing industry. The lower threshold did not contribute to U.S. security, because computer systems with these levels of performance had become available worldwide, while the low level of control thresholds impaired U.S. exports in this industry. In 1994, working with the Departments of State and Commerce, DoD helped develop an Administration proposal to amend the Export Administration Act and improve and streamline the export control process as a whole. DoD is also an active participant in the Administration's ongoing review of conventional arms transfer policies. In each instance, the Department is working to reconcile and integrate economic and industrial concerns with its long-standing goal of preventing weapons proliferation.
A New Dialogue -- Better Communication with the Business Community
The Department is striving to enhance communication with the business community. DoD requires a better understanding of industry's views to ensure that it continues to supply the armed forces with military systems of unquestioned technological superiority during this period of dramatic changes.
To this end, DoD has revised and restructured the Defense Policy Advisory Committee on Trade. DoD has also drawn on the capabilities of the Defense Science Board to provide advice on defense business issues. Finally, the Department is committed to more consultation with industry, through both formal and informal channels.
RECOGNIZING ESSENTIAL INDUSTRIAL CAPABILITIES
While the Department recognizes the need to change the way it conducts business, it will be careful not to allow the loss of essential capabilities in the process. DoD is developing the ability to identify, analyze, and when necessary, act to preserve essential capabilities. These include specialized equipment and facilities, skills, and technological knowledge. Some capabilities required for national defense are defense-unique -- they have no commercial counterparts and must depend upon defense markets for survival (for example, building nuclear-powered submarines and the production of most ammunition). As procurement shrinks, DoD must take appropriate action to ensure the preservation of key industrial base sectors.
For several years, DoD has been concerned with the effect of reduced defense procurements upon essential industrial capabilities. In cases where essential capabilities were threatened with unacceptable risks, DoD has taken action. Maintaining production of SSN- 21 Seawolf and development of the New Attack Submarine and upgrading the Abrams main battle tank to the M1A2 configuration are prime examples of such actions. DoD will continue to take action when necessary.
However, DoD neither can nor should seek to preserve every company that supplies defense. The Department's goal must be to preserve capabilities. Many suppliers, faced with smaller orders, have claimed that defense production is no longer profitable and have threatened to cease production. Given the many demands on a reduced defense budget, the Department can afford to support only those industrial capabilities that are both essential to defense and genuinely at risk. This requires more frequent and more careful assessment skills by DoD. Therefore, DoD is developing organizations and policies that will ensure consistent analysis of industrial capabilities.
New Organizations
The Department of Defense has reorganized in order to focus attention on industrial capabilities and related issues. In some cases, existing operations have been changed; in others, new ones have been established.
As part of the Office of the Secretary of Defense, the Department established an Assistant Secretary of Defense for Economic Security (ASD(ES)). The ASD(ES) is responsible for setting DoD policy in the areas of industrial affairs, dual-use technology, and international cooperation programs. The office also has oversight responsibility for installations, base realignment and closure (BRAC), and community economic adjustment. The ASD(ES) works with and provides guidance to the Military Services in these areas, and serves as a liaison to private industry, the White House National Economic Council, the Departments of Treasury and Commerce, and other economic agencies within the Executive Branch.
In addition, the Department established the new office of the Deputy Under Secretary of Defense for Acquisition Reform (DUSD(AR)). The DUSD(AR) is responsible for streamlining and improving DoD's acquisition system. The DUSD(AR) is supported by the DoD Acquisition Reform Senior Steering Group, whose members are responsible for the full spectrum of acquisition matters confronting the Department.
In April 1994, the Deputy Secretary of Defense established the Defense Industrial Base Oversight Council. The Council integrates responsibilities, processes, and functions that previously were fragmented throughout the Department. Acting as a management board of directors, the Council provides guidance for, and high level oversight of, an extensive Industrial Base Review (discussed below). The ASD(ES) acts as the Council's executive secretary.
The Industrial Base Review
In directing the creation of an Industrial Base Review, the Department recognized the need for an overall review of DoD programs and policies concerning industry. The Review is focusing senior management attention on the Department's current programs and practices, on different methods, guidelines and models for conducting analyses, and on the development and implementation of new policy and program initiatives.
The Department's goal is to integrate the organizations and processes that address industrial capabilities into its existing budget, acquisition, and logistics processes. To date, the Department has been engaging in such analysis on an ad hoc basis. The new organizations and the Industrial Base Review are designed to ensure that systematic analysis of industrial capabilities is a key part of the DoD's everyday decisionmaking.
INTERNATIONAL COOPERATION -- NEW WAYS OF DOING BUSINESS WITH GOVERNMENTS
In military operations, U.S. forces often fight or work alongside the military forces of other nations. Deploying forces in cooperation with those of other countries place a high premium on interoperability -- ensuring that U.S. systems are compatible with allied systems.
This new emphasis on interoperability, to include operations other than war, is especially important because it comes during a period of declining defense budgets not only in the United States, but also in allied nations. Thus, the United States and its allies are challenged to do more with fewer resources, and interoperability provides needed leverage.
International cooperative efforts offer a real chance to enhance interoperability, stretch declining defense budgets, and preserve local defense industrial capabilities. Thus, the Department has renewed its efforts at international cooperative development. Such cooperation can range from simple subcontracting relationships to licensing and royalty arrangements, joint ventures, and bilateral and multilateral cooperative programs. Some of the more notable success stories in international industrial cooperation include the F-16 Falcon, AV-8 Harrier, T-45 training aircraft, CFM-56 engine, and the continuing cooperative efforts under the NATO Airborne Warning and Control System (AWACS) program and in theater missile defense. The Department is now working with allies in Europe and Asia to explore new possibilities.
As DoD takes greater advantage of the opportunities in international cooperation and commerce, it is continuing to focus on the risks of weapons proliferation. DoD has worked to ensure that agencies understand the likely nature and extent of impacts on industry that different arms transfer policies might have, and that these are taken into account in the new conventional arms transfer policy. Through this process, the resulting U.S. arms transfer policy can place appropriate weight on industrial capabilities, while maintaining an overall focus on the long-standing national security and foreign policy objectives that are at the heart of arms transfer policy.
NEW WAYS OF DOING BUSINESS WITHIN DOD
The Department is undertaking several initiatives to restructure the way it conducts business to give greater recognition to economic and commercial imperatives. Depot maintenance and base closures are two areas that highlight changes underway.
Depot Maintenance
The Department has put in place a core depot maintenance policy to help quantify its infrastructure requirement for depot maintenance. DoD requires sufficient capacity within its depots to support the core readiness, sustainability, and life-cycle requirements of weapons and equipment, which are based on the contingency scenarios established by the Joint Chiefs of Staff (JCS). The core depot maintenance policy identifies and quantifies specific capabilities that need to be resident in the Department's depots to meet the JCS requirements. Depot maintenance is discussed in more detail in the Infrastructure and Logistics chapter.
Base Closing -- Restructuring Continues
Closing military bases that are no longer needed continues to be a high priority for the Department. The chapter on Infrastructure and Logistics describes the 1995 BRAC process and the Department's efforts to structure and manage its installations.
DoD is closing and realigning bases in the United States as a result of decisions made through base closure processes in 1988, 1991, and 1993. These three rounds identified 70 major bases for closure. The Department estimates that these closures will save about $4.3 billion a year once they have been fully implemented.
Reinventing the Base Reuse Process
Over a year ago, President Clinton presented his new Plan for Revitalizing Base Closure Communities. Its five elements are:
JOBS-CENTERED PROPERTY DISPOSAL FOR ECONOMIC DEVELOPMENT AND JOB CREATION
Today the Administration can report real progress in implementing the vision of job-centered property disposal. Because existing federal law required DoD to charge full price when transferring property to local redevelopment authorities, the Administration sought and received authority to transfer property at less than fair market value to facilitate local economic development. On April 6, 1994, DoD published an Interim Final Rule implementing this authority and, after a four-month public comment period, revised the rule to address concerns expressed by affected communities. These new regulations, which outline the criteria and application process for economic development conveyances, mark a significant departure from the old way of doing business and will help speed economic recovery and job creation. Efforts are ongoing to refine the process further, and DoD expects to publish a comprehensive guidebook regarding these procedures early this year.
FAST-TRACK CLEANUP
As part of the Fast-Track Cleanup initiative, BRAC Cleanup Teams have been formed at bases where significant land transfers to the local communities are planned. These teams, composed of representatives from DoD and regulatory agencies, have completed comprehensive reviews of the environmental condition of their bases and are working on cleanup remedies.
TRANSITION COORDINATORS
To help implement the President's plan, the Department established the Base Transition Office (BTO). The BTO supports the work of the transition coordinators at closing major bases. DoD currently has 67 base transition coordinators (BTCs) in the field tasked to identify and integrate community reuse needs. The BTCs work directly with communities, base commanders, OSD, and other agencies to speed reuse and redevelopment assistance. Of the 339 issues raised by communities in these reports over the past year, 87 percent have been resolved, with DoD working hard to address the remaining issues.
REDEVELOPMENT HELP
In addition, assistance teams representing several federal agencies visited closing bases over the last year to outline the types of job-search help available to employees. These efforts are coordinated by the Under Secretary of Defense for Personnel and Readiness. Also, a joint DoD-Department of Commerce clearinghouse has been established to provide information needed to anticipate, plan for, and respond to defense downsizing.
FOSTERING COMMUNITY ECONOMIC ADJUSTMENT
The task of remaking the economic foundation of communities affected by base closures is not easy. Because local communities are the best judges of their strengths and opportunities, DoD's approach to community adjustment is to provide resources and advice on charting a course for revitalization, rather than to impose solutions from Washington. The President's initiative will give local communities the funds and technical assistance necessary to plan for the future and to reuse base land and facilities.
DoD's Office of Economic Adjustment (OEA) operates a community-based technical assistance and grant program that supports development and redevelopment plans for closing installations. Currently, OEA is working with 82 communities affected by base closures, realignments, or personnel reductions. During FY 1994, OEA provided 60 grants to base closure communities totaling about $24 million.
The Department's activities, together with those of other agencies, are already demonstrating results. By the end of the 1994 fiscal year, base reuse activities had replaced over one-third of the civilian positions that were lost at closed military bases as a result of 1988 and 1991 BRAC decisions, and DoD expects the number of new jobs to increase.
In addition to assisting communities affected by base closures, OEA also provides transition planning assistance to communities facing defense contractor cutbacks and to states and regions in developing proactive defense conversion plans. The office has provided 31 grants, totaling about $5 million, in FY 1993 and FY 1994 for these purposes.
REINVENTING HOMELESS ASSISTANCE PROCESS
The Department was also successful in working with other federal agencies and Congress to pass the Base Closure Community Redevelopment and Homeless Assistance Act of 1994, which improves the process for addressing local reuse needs, including the balancing of homeless assistance with economic development. Under the new process, local communities work along with homeless assistance providers to decide how best to address homeless needs. The old process permitted homeless providers to acquire property as an entitlement, directly from the federal government without regard to local community reuse plans. The Act permits the balancing of homeless needs with communities' desires to create jobs and promote economic development.
Defense budgets are no longer large enough to accommodate all defense acquisition needs through a defense-unique industrial base. For the United States military to continue to have the most advanced weaponry, the Department has to adjust its policies. It must change the way it does business with business, through acquisition reform, dual-use technology policies, and recognition of essential capabilities. It must change the way it does business with allies through increased international cooperation and interoperability. Finally, it must change the way it does business itself through restructuring and community reinvestment. The Department is confident that these policy changes will strengthen both national and economic security, and ensure that the military continues to be prepared to meet threats of the post-Cold War era.
