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As U.S. Manufacturing Moves Overseas, Military Loses Crisis Production Source

By | October 2, 2006

      U.S. military forces have lost much of their emergency production reserve for weapons platforms that might be required if a major conflict erupted, because a significant chunk of the commercial U.S. industrial base that might be converted to producing ships, tanks and aircraft has been moved overseas.

      And U.S. defense contractors, while enjoying lush times in recent years, likely are headed for a sharp contraction that may leave the industry badly damaged. Already, there are plans for the eventual shutdown of numerous military aircraft production lines.

      So says Loren Thompson, chief operating officer of the Lexington Institute, a think tank near the Pentagon focusing on defense and other issues. He spoke before the Air Force Association Air & Space Conference at a large hotel in Washington.

      Thompson recalled how, in times of crisis such as World War II, armed forces could gain an abrupt exponential increase in defense platforms production capacity by transforming factories producing civilian goods into production lines for military hardware.

      Alas, he said, that U.S. production capability is dwindling rapidly, “a continuous erosion of the U.S. [commercial] industrial base.” Labor statistics show the United States is losing an average of 43,000 manufacturing jobs every month, as production is shifted overseas. That shift also means goods produced domestically now are made in foreign factories, creating a U.S. trade deficit of $800 billion yearly that will grow to $1 trillion annually by the end of this decade, he predicted. For comparison, $1 trillion amounts to the output of every man, woman and child in the largest economy on Earth for one month.

      Industrial output of goods makes up a far smaller portion of total U.S. economic output now, compared to three decades ago, he said. (Meanwhile, service providers have increased.)

      This shrinkage of the civilian manufacturing base has major implications for the military, Thompson indicated. To put it bluntly, the American manufacturing base that has been termed “the vast arsenal of democracy” is disappearing.

      “You really have to wonder how the nation would mobilize for a prolonged conflict,” Thompson said.

      For example, a huge amount of goods and services bought by American businesses and consumers are made in Japan, Taiwan, China, South Korea and other nations in the area. What would happen, Thompson asked, if China were to cut off the United States from its commercial suppliers in the Western Pacific region?

      If the Pentagon can buy sufficient hardware from defense contractors, it might not matter that much, he indicated. But the way to guarantee a vibrant U.S. defense industrial base is to increase spending on weapons procurement, and “I don’t think that’s going to happen” absent an insanely horrific terrorist or rogue nation attack on the United States or its interests, he said.

      While some military leaders and analysts predict the global war on terrorism will continue for a very long time, Thompson said it really is unknown how long the conflict will last. Just as a threat burst seemingly from nowhere on Sept. 11, 2001, he noted, so too “threats … recede unpredictably. We really don’t know how long the threat [of terrorism] will last.” Therefore, it remains unclear as to how long the U.S. government will retain the political will to fund defense programs, including procurement, adequately.

      There are projections that defense spending will decline substantially in coming years, Thompson said. Since politically it is very difficult to cut some portions of the overall defense budget such as pay for service personnel or their health care costs, that could leave defense procurement to take the brunt of the losses, he said. Thus any cuts in the total defense budget are “likely to take a considerable toll on the [defense] industrial base in the next decade,” he said.

      Gloomy as the outlook for the defense industrial base may be currently, it could have been worse, if it weren’t for Osama bin Laden, Thompson said. The 9/11 attacks and the ensuing global war on terror caused defense spending to swell in this decade, he said.

      A Different View

      A more upbeat view of the aerospace industry came from John W. Douglass, president and chief executive officer of the Aerospace Industries Association (AIA), a group including the leading defense contractors.

      The aerospace industry that has done well on Pentagon contract awards and some overseas military hardware buys, plus commercial aircraft sales, will “see growth likely to continue,” Douglass predicted.

      While Thompson warned that defense spending may contract in coming years, Douglass doesn’t see a drastic decline in the offing. “I don’t see drastic cuts coming in the military [aerospace procurement] in the next four or five years,” he said.

      Douglass also said he expects further progress by NASA in pursuing its move toward eventual missions to the moon, Mars and beyond, a vision set forth by President Bush.

      NASA will have to spend more in pursuing that vision than it currently spends on its space programs, Douglass said.

      Overall, he said the aerospace industry has reached its highest sales level, and profits are good compared with past profits in this industry.

      At the same time, Douglass added, one must put that in perspective: The typical 3 percent to 8 percent profit margins in the aerospace industry pale in comparison to profit percentages in other industries.

      He also took sharp issue with reports asserting that costs are soaring on aerospace industry contracts, saying that in innumerable procurement programs, “we are far from out of control” on costs.

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