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DoD Delivers A Mixed Report on the Health of the Defense Industrial Base

DoD recently released its FY 2017 Annual Defense Industrial Capabilities Report (Report). The Report presents a comprehensive overview of DoD’s assessment of key issues and risks facing the defense industrial base (DIB), generally and in specific sectors. It also discusses DoD’s plans and strategies for addressing those issues and risks.

The Report identifies the DIB as including contractors, government entities such as government labs and GOCO facilities, FFRDCs, and universities. These entities enable DoD to produce and maintain military weapons, conduct R&D, improve information technology, maintain skills to ensure technological superiority, ensure reliable sources of material, reduce the presence of counterfeit parts, and provide essential services.

The Report notes that while the defense sector has financially outperformed the broader equity markets, there are a number of challenges that threaten the health of the DIB. These include obsolescence, foreign dependency, fluctuating demand, industry consolidation, and loss of design and manufacturing skills for critical defense products. Those challenges can also limit innovation and reduce US competiveness in the global market place. The Report specifically notes that manufacturing’s share of total employment and GDP is at “historic lows,” resulting in shortages of well trained and capable manufacturing workers. According to the Report, “[a]ttracting and retaining a qualified workforce is imperative to sustain a healthy manufacturing and industrial base,” and it goes on to discusses steps that DoD, in collaboration with its partners in the DIB, has taken to address this issue.

The Report also discusses DoD’s national security strategy and defense priorities. These include restoring military readiness; improving cooperation with international partners as it relates to the DIB; and simplifying and accelerating DoD’s acquisition process.

The Report also notes the President’s July 2017 Executive Order on assessing and strengthening the DIB and on supply chain resilience. [Steptoe’s advisory Executive Order Addresses the Defense Industrial Base and Supply Chain Resiliency is available here]. According to the Report, DoD is participating in an interagency process to assess the DIB and make recommendations pursuant to that EO. The interagency task force was expected to make policy, regulatory and legislative recommendations to the President in April 2018, but those recommendations have not yet been released. 

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