Defense Secretary Says Industrial Base Decline Is 'A Serious Problem'.

• Author: Skibbie, Larry
• Position: Brief Article

Defense Secretary Donald Rumsfeld recently noted that the decline of the nation's defense industrial base is a "very serious problem." One major challenge confronting the industry, he explained, is that it has not fared favorably on Wall Street, thus failing to attract investors. But unlike other industries that can afford to fail, the defense sector is critical to the security of the United States and must be financially healthy. "The government doesn't make things," he said. "We purchase things, we acquire things, and that industry has to be there. And to be there, it has to be viable from an economic standpoint or people are not going to invest in it. It is a very serious problem."

Certainly, we agree with Rumsfeld's thoughts, not only because he is the Defense Secretary, but because he has extensive experience in private business, in the legislative and executive branches of government.

Given Rumsfeld's viewpoint about the defense industry, it would seem timely to offer a few suggestions on improving the state of the base:

First, the defense industrial base is not some monolithic entity. It is composed of various sectors, which include large, medium and small systems integrators, component suppliers, parts manufacturers, and a large element of professional services companies--doing everything from base support in Bosnia to motor pool operations in Ohio. The defense industrial base is a varied lot. However, the one function all elements have in common is that they provide services or products needed by some element of our national security apparatus.

Defense firms also share basic business needs, one of the most important of which is access to capital. This is a fundamental need of every element of our defense industrial base. The requirement is to have reasonable access to capital, and not to have to depend solely on increased budgets. This would be facilitated by:

* Consistency of funding, without the annual gyrations from the original financial plan. These variations, almost a way of life, originate both in the Pentagon, as a result of budget balancing, as well as the whims of Congressional committees.

* Predictability in programs, which translates into consistency of funding, unlike the traditional approach where quantities often are reduced in the production stages of a program after industry has made risk and investment decisions. These quantity reductions often lower the profit margin to less than cost of capital to the company.

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