Global industrial trends spell doom for defense.

• Author: Erwin, Sandra I.
• Position: DEFENSE WATCH

THE WELL-PUBLICIZED INTENT OF the U.S. military to remain on technology's cutting edge appears to overlook the predictions of the Pentagon's own soothsayers, who warn that the Defense Department soon may be unable to acquire critical microelectronics.

Simply put, a large portion of the industry that manufactures the most sophisticated microchips--which are key to modern weapon systems--resides offshore, and even those suppliers that remain in the United States view the military as an undesirable customer.

The problem was laid out in excruciating detail in a 118-page report that the Defense Science Board published last year.

"The Department of Defense and its suppliers face a major integrated circuit supply dilemma that threatens the security and integrity of classified and sensitive circuit design information, the superiority and correct functioning of electronic systems," the report says.

As surprising as this may sound, this is one problem that the Pentagon cannot solve by throwing money at it. Even the largesse of U.S. defense spending cannot compete with the thriving global market. The Semiconductor Industry Association estimated that global sales for semiconductors in 2004 were $214 billion. The Defense Department's share of the demand is 1 to 2 percent.

William Howard, a former Motorola executive who chaired the DSB panel, says the implications of current industry trends for the Defense Department are "perverse and far reaching."

These trends are "directly contrary to the best interests of the Department of Defense," Howard tells a seminar hosted last month by the Center for Strategy and International Studies, in Washington, D.C.

Only two U.S.-based manufacturers--Intel and IBM--are able to produce the cutting-edge semiconductors that the Defense Department requires. But Intel supplies standard "off-the-shelf" chips and has no interest in allocating any of its production capacity to make military-unique sensitive electronics. Only IBM has agreed to segregate a portion of its production line to military-unique classified devices.

During the past decade, the government attempted to boost its in-house capacity by setting up facilities operated by the National Security Agency and the Energy Department's Sandia laboratory. But those efforts largely failed, says the DSB report.

The economies of the industry dictate that large volume is key to profitability. The relatively small military buys make the Pentagon an unattractive customer.

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