Adjusting to a New Superpower Rivalry: The Pentagon's Industrial Strategy

Russia is trying to conquer Ukraine. China is challenging in the western Pacific. In the Red Sea, guerrilla groups supported by Iran are attacking civilian shipping. These incidents mark just a few of the hot spots on the global map, all varying in significance to the USA, which must be ready to defend its interests or allies.

The dawn of a new era of superpower rivalry, following the end of the Pax Americana, necessitates adjustments in policy, armed forces, and industry. The war in Ukraine has vividly demonstrated the vast resources required for a modern, full-scale conflict and how quickly stockpiles can be depleted, if they exist at all. Given these challenges, the American Department of Defense has adopted an unprecedented industrial strategy aimed at reorganizing, standardizing, and streamlining arms purchases.

After the Cold War, the diminished threat of unrestricted warfare prompted significant changes in arms acquisition and the relationship between the armed forces and industry. Arsenals were greatly reduced, numerous arms companies either went out of business or shifted their production focus, and production lines were dismantled for immediate cost savings.

Today, with tensions rising, decisions made over a decade ago are proving problematic, and Western governments, including that of the USA – the world's most formidable military with an annual budget of £630 million – are struggling to order weaponry as efficiently as the centralized and authoritarian governments of China or Russia due to issues like resource shortages for operations.

In the USA, one major mistake post-Cold War was the excessive consolidation of the arms industry. In the early 1990s, approximately 50 companies made up the core of the USA’s defense industry. Now, there are five main corporations. This consolidation was intended to enhance competitiveness and secure a dominant position in international markets. However, it also resulted in monopolies within the domestic market, allowing corporations like Lockheed Martin, Northrop Grumman, Boeing, or RTX (formerly Raytheon) to dictate trade terms to the Pentagon. For instance, the price of Stinger anti-aircraft systems has risen tenfold since the 1990s, six times the rate of inflation, due to lack of competition. The emergence of new companies is stifled as they are quickly acquired by giants like RTX, mirroring trends in the IT sector where startups and small firms are often bought out by major players like Facebook, Microsoft, Google, or Amazon to eliminate competition.

This trend has led to a situation where even relatively small companies, as the exclusive manufacturers of certain items, can charge the Department of Defense several times the price without the fear of being replaced. The shift towards digital transactions over specialized negotiation teams has only compounded the issue.

Another significant mistake was the reduction or complete elimination of stockpiles, whether of entire weapons systems, spare parts, or ammunition, believing it would save on storage and management costs. Often, the responsibility for storing these stockpiles was outsourced to the industry, mistakenly assuming private businesses could do so more cost-effectively. Yet, this approach backfired, revealing that in critical times, those stockpiles were often nonexistent.

The Pentagon's new industrial strategy seeks to reverse these trends, improving the efficiency and availability of military resources without increasing the budget. The strategy includes rebuilding large stockpiles, especially of ammunition, and reinstating specialized negotiation and contract management teams. This approach aims to bridge the gap between immediate operational needs and production capabilities, ensuring armed forces have the necessary resources in times of crisis, giving the industry time to scale production. It's also expected to benefit the industry by stabilizing orders for longer production runs, potentially lowering costs due to scale effects and making military contracts more appealing to new companies, thus fostering competition.

Defense officials believe the savings from better-negotiated contracts will outweigh the costs of establishing and maintaining stockpiles, while significantly improving the availability of parts and ammunition, ultimately enhancing the armed forces' capabilities.

The Pentagon now faces the challenge of convincing defense industry leaders and Congress of its plan's merits. Convincing profit-driven defense corporations may be particularly daunting, given that American weaponry, often more expensive due to higher labor costs and quality, also includes significant profit margins. The Department of Defense acknowledges the imperative for change, recognizing that while battles are fought in the field, wars are won in the factories. Successfully directing the defense industry's potential is critical not just for the USA's prospects in any future conflict with China, but also for the security of its allies who largely depend on American arms.