WASHINGTON – U.S. Air Force leaders faced a dilemma. The service needed an important raw material from Italy for one of its critical nuclear modernization programs. However, in the early days of the coronavirus pandemic, it was unclear how the material got to the U.S. as industrial plants shut down and transit between nations slowed.
Air Force officials were so concerned that they eventually allowed military aircraft to fly to Italy to personally collect the remaining supply, thus preventing an interruption to one of the country’s strategically important weapons programs.
According to Will Roper, who led the Air Force acquisition efforts under the Trump administration, the ordeal was an example of the Pentagon having to launch a “worst-case scenario call” to protect the US military’s technological edge, when COVID-19 threatened the defense -industrial base. That sense of urgency would prove to be widespread over the next year.
As the pandemic spread, the reality of a global supply chain with a number of small one-stop suppliers and an aging industrial workforce collided in a calamity that threatened to irreparably damage the American defense industry.
“I had moments in March, got up at 3 a.m. and wondered what crisis was going to happen that day,” said Roper. “I just wonder if we might be able to get the solvent on an industrial basis to aid military readiness and modernization.”
The chaos came quickly: On March 4, 2020, the only impact the novel coronavirus had on the American defense industry was the temporary shutdown of F-35 manufacturing facilities in Japan and Italy. Nine days later, the pandemic was so widespread in the US that President Donald Trump declared a state of national emergency. And by March 25, the U.S. military officially suspended all travel, missions, and exercises to get the disease under control.
A year into the pandemic began, a defense news review attempted to measure its toll on the defense industry. The overall extent of the damage is complex and still being brought into focus, but a broad outline becomes clear. Among the results:
- At the start of the pandemic, Pentagon leaders were concerned about the health of the industrial base and program times. However, the largest companies have recovered and the largest projects are for the most part on track. Over the past year, at least half of the Pentagon’s major defense acquisition programs have been delayed due to COVID-19. Programs recovered, often within months, after reaching nearly $ 5 billion in federal aid and efforts to get suppliers cashed faster. The Pentagon leaders have not listed all of the specific programs that have experienced delays.
- Smaller businesses that were at risk before the pandemic still have problems. One in seven believes they will never return to pre-pandemic levels.
- The industry invested around $ 10 billion in reconfiguring production lines and building a remote working infrastructure. These costs could amortize over time and potentially lead to price increases per unit.
- After all, it is almost impossible to quantify the number of employees. The Pentagon has not tracked defense industry deaths, and only two companies that contacted Defense News have contacted recognized employee deaths due to the pandemic. BAE Systems mourned “several” employees, while Boeing said that “unfortunately, some of our Boeing teammates and their family members have tragically lost their lives to the virus”. None of the companies released the total numbers. In addition, local reports have identified deaths from other companies, including Lockheed Martin. With an aging workforce making up much of what the National Defense Industrial Association trade group counts as 1.1 million defense industry workers, the total death toll is likely higher.
“COVID-19 was terrible, but it could have been a lot worse. And if it had been like that, we probably wouldn’t have been ready for it, ”said Roper. “The worst second sin we could commit is not to learn from the first pandemic and not prepare for the next.”
The defense industry’s first response to COVID-19 was to put the brakes on.
Textron Aviation took 7,000 workers off on March 18; Boeing ceased production at its Seattle, Washington facility on March 23. Around the same time, CAE introduced mandatory wage cuts and layoffs. The company’s CEO said the financial impact on commercial aviation was worse than it was after 9/11.
The situation looked dire, but a year later prime contractors Defense News announced that the industry was largely back to normal. Our staff asked the largest defense companies in the United States – including Lockheed Martin, Boeing, Raytheon Technologies, Northrop Grumman, BAE Systems, Huntington Ingalls Industries, and General Dynamics – how they had been doing over the past 12 months. (L3Harris Technologies declined to comment.)
None of them provided detailed information on how many programs were delayed by the pandemic or what pandemic-related financial losses were associated with them. Instead, the speakers broadly discussed the remaining impact.
Raytheon, for example, had “no long-term challenges that matched customer needs” and felt only “minimal” disruption to work at the start of the pandemic. Huntington Ingalls Industries, the country’s largest shipbuilder, acknowledged “cost and schedule implications” for some programs but said it was “inappropriate” for the company to make them public. And Northrop Grumman went on to “deliver and execute our programs for our customers.”
The BAE, which was more specific, said there had been “some delays” in procurement from both the industry and government side regarding the late calls for proposals.
As a result, the company has increased production rates for certain programs, according to a spokesman. This includes the fact that our total monthly production of combat vehicles has more than doubled over the course of the year. The pandemic timing was particularly challenging for our previous ones. [low-rate initial production] Phase programs like [the Army’s Armored Multi-Purpose Vehicle] when we produced the first series vehicles. Despite the effects of COVID on the supply chain, we had successfully delivered at least one vehicle of each of the five AMPV variants to the army by the end of 2020. “
Ellen Lord, who served as Undersecretary for Acquisitions and Sustainability during the crisis – the Pentagon’s top industry representative – described a “triage” effort by armed forces acquisitions officials to focus attention on key programs that do not afford delays could like nuclear modernization and shipbuilding. The latter is a particular problem, she said, as the workers who build a submarine or an aircraft carrier have to work in confined spaces.
For the Air Force, that effort was led by Maj. Gen. Cameron Holt, the deputy assistant secretary of the Contracting Service. Roper, his civilian chief, hired Holt to set up a task force to minimize the impact of the pandemic on the defense industry while working with agencies like the Federal Emergency Management Agency for COVID-19 relief.
“The ultimate throwing of the ball would have resulted in the loss of the businesses that were needed for readiness,” said Roper. “And I really had the feeling that COVID was just as much about sending a signal to the opponents that no internal crisis can disrupt military readiness.”
As the virus toured the country, the Air Force tracked 43 large corporations and their supply chains – spread across sectors such as aerospace, shipbuilding, and soldier systems – that were “threatened” by work stoppages or existential concerns that might preoccupy vendors Going business, said Holt.
In total, the Pentagon poured $ 4.6 billion into the defense industrial base between the start of the pandemic and January 31, 2021, according to Defense Department spokeswoman Jessica Maxwell. These included increased upfront payments of approximately $ 4 billion, industry reimbursements of $ 73.2 million, and Defense Production Act funds of $ 700 million. This legislation provides that the presidential authorities can accelerate and expand the supply of materials and services to private industry for national defense purposes.
There were delays in some acquisition efforts. According to the division made available to Defense News between June 2020 and February 2021, an average of 40 programs experienced delays related to COVID-19 with a mean impact of two months on a monthly basis.
“Of the 54 programs that had a delay and have now recovered, 20 received schedule relief. Most of the relief was for three months or more, “Maxwell said in a statement. “The average delay was about two months, which can take several months to recover from a given program.”
In total, there were 48 major defense acquisition programs (MDAPs) that suffered from pandemic-related delays. Of those, 22 MDAPs continue to experience delays, Maxwell said. Some of the delays were reported at this point: In March and April, Boeing ceased operations at its Philadelphia, Pennsylvania and Seattle plants for a few weeks and ceased production of the KC-46 tanker, the P-8 seaplane V- . 22 tilt-rotor aircraft, H-47 cargo helicopters and MH-139 helicopters. Due to the slowdown in the global supply chain, Lockheed Martin was unable to ship 141 F-35 fighter aircraft in 2021 and only shipped 120 aircraft after the production line had to be braked.
Despite these delays, the defense industry is doing well overall, said Byron Callan, an analyst at Capital Alpha Partners.
“Financially, it’s great. Companies have positive cash flow and no company has suffered severe trauma,” Callan said. “Congratulations to the department and industry that managed this. In its own small defense contract environment, it was going well very good. “
Prime contractors are “in excess of cash,” added McAleese and Associates analyst Jim McAleese, thanks to a mix of government efforts including increased advance payments and wage tax deferrals under the Coronavirus Aid, Relief and Economic Security Acts.
Talks with the large contractors resulted in defense leaders turning their attention to smaller suppliers. This group had been identified by a number of Pentagon reports as fragile and almost non-existent for some critical components.
“We’d have big primes calling someone, you know, four or five levels in the supply chain who was shut down or devastated for one reason or another,” Lord said in a recent interview with Defense News. “And we found that a lot of the problem was just pure cash flow and couldn’t deliver, so couldn’t get paid, couldn’t order their deliveries, and so on.”
As a result, on March 23, 2020, the Pentagon announced it would increase its advance payment rates for contracted defense equipment from 80 percent of cost to 90 percent for large businesses and from 90 percent to 95 percent for small businesses – essentially flooding the industry with cash, by paying more for a project in advance.
In both private and public circles, Lord then put the prime numbers under pressure not to keep the extra money in stock, but to pass it on to the suppliers in order to keep the subordinate producers open. If the Department of Defense had not acted quickly, “we would have seen many sub-suppliers go out of business,” she said. Lord, like Roper, left the Pentagon when the Biden administration took over on January 20th.
On the Air Force side, Holt’s task force accelerated $ 3.9 billion in advances payments and contract awards in the first few months of the pandemic in hopes of sending money to defense foundations and their suppliers to help ensure businesses remain solvent.
A prime contractor who mainly focused on commercial work was “at risk immediately,” said Holt. The unnamed company was unable to accept payments due to its commercial accounting system. The hundreds of companies that made up the supply base were in a similar boat, and although the Prime was believed to have some liquidity that could protect it from the worst of the pandemic, it was unclear how far along it would go could spread his cash.
“If we hadn’t done that and allowed a significant number of prepayments, and then [the] The acceleration of the procurement would have had a very serious impact, ”said Holt.
The Army also channeled CARES Act funding to critical suppliers facing financial difficulties, the service’s acquisitions division said in a statement.
A company that makes organic light-emitting diode displays for aircraft and night vision devices received stimulus money after the pandemic made it difficult to get the necessary production equipment. The spread of the virus had created cash flow problems for the company.
Another company that makes fabrics for uniforms and body armor received CARES Act funding after a downsized workforce slowed production, the Army said.
However, the focus on small businesses meant the Pentagon had to be on guard during nightly operations in order to get money from the CARES act.
“When you spend a few trillion dollars out there, the unfortunate reality is that you get a lot of fraudulent companies and actually adversarial action where they’re really trying to get money for nothing,” Holt said.
In one case, FEMA asked the Air Force Task Force’s Market Intelligence Cell to conduct technical assessments of companies that had responded to a wave of contract inquiries made public at the start of the pandemic. The cell went one step further by reviewing providers.
“We avoided dozens, literally dozens of contractors who were literally just clams,” Holt said.
The cell also investigated a company that had emailed Air Force leadership about contract options. The deal “looked very believable on the surface,” Holt said, but the cell found that the company was actually a Shell company operated by a person with an active warrant believed to be that she is hiding in the Philippines.
A year after the pandemic began, the vast majority of smaller suppliers are still up and running. But there were consequences.
In a survey last year, 70 percent of NDIA members – including a large portion of small businesses – said the pandemic had affected their bottom line. Almost 13 percent said their companies would never return to the same level, and 30 percent said their supplier network would be less reliable this year than last year.
“When I speak to our small businesses, the real impact is still being felt. We didn’t assess the real impact until later … when the cameras are turned off; No attention is paid, “said NDIA senior vice president of policy Wesley Hallman. “Even a 13 percent cleanup of the defense industry would be pretty big, mostly because [NDIA’s research shows the] In many cases, base is dependent on individual producers. “
Those concerns were confirmed in the fall when an official from the Defense Logistics Agency warned that the agency would see a decline in smaller suppliers participating in defense contracts.
Businesses large and small that rely on both the commercial and defense markets have been particularly hurt by the dramatic decline in passenger traffic, which in turn weighed on demand for aircraft and related parts. Consulting firm Deloitte expects the defense side to remain stable, but demand for travel will not recover to pre-pandemic levels until 2024, resulting in a slow recovery on the commercial side.
“The fact is, the defense and aerospace sectors need some of these economies of scale to be able to produce and be profitable, and so on [commercial demand] has sunk, they watch many challenges [retaining] the workforce, ”Hallman said. “Many companies hold on to their lives and know that there will be a requirement [for them]. But they have to get through this phase of commercial aerospace to hit that growth curve on the reverse side. “
The Defense Production Act is a long-standing, albeit fairly opaque, piece of legislation for the Department of Defense to send money to key suppliers. The DPA had already gained favor with key Defense Department and White House civilians who had begun shoring up targeted portions of the industrial base after a landmark October 2018 report warned of the “domestic extinction” of single-source suppliers would have.
Suddenly the department was urged to use the data protection agency to flood the market with much-needed supplies. The Air Force acted as the executive agent responsible for accelerating the production of medical supplies and protective equipment that the rest of the federal government needed.
One such incident occurred in late April when the White House and Department of Health and Human Services tried to ramp up COVID-19 test swab production by Puritan Medical Products, a small family business based in Guilford, Maine. At the time, the company only had about 500 employees and one manufacturing facility, although it was the only approved swab manufacturer for certain tests.
“Puritans faced an enormous challenge,” said Holt. “They knew how to do what they did, [but] Little did they know how to reproduce all of their industrial capacity. They knew how to use their machines, but they really had no idea how and where to get new machines. And they had no experience of growing or scaling quickly. “
Air force research laboratory officials quickly found a nearby defense company that could help Puritans: General Dynamics Bath Iron Works, which builds Arleigh Burke-class destroyers for the Navy and had the ability to make the machinery Puritans needed in a new plant.
When Holt called the Bath Iron Works executive team, its members “were in disbelief that the Air Force even called them because they never do business for the Air Force,” he said. They were also a little concerned about the scope of work, which included involving the Bath Iron Works supply chain in building a new nasal swab manufacturing facility, as well as the company’s expertise on government contracts, he added.
“I told them I was going to direct them to a small business subcontractor two hours away from you,” Holt said. “They asked me,” How much experience do Puritans have in federal government contracts? “I said ‘zero’.
In early May, Puritan announced the opening of a second manufacturing facility in Pittsfield, Maine. Under a $ 75.5 million contract, the company would produce an additional 20 to 40 million swabs per month at the second facility, using Bath Iron Works machines to pack the product.
“Within the next 90 days, they were beyond the capacity that we were aiming for at full rate [production]”Said Holt.” We’ve expanded them several times since then, and today – under an Air Force treaty – they’re actually in a new facility in Tennessee. “
Future strategy … and concerns
After a year of figuring out how to protect the industrial base, some clear lessons have been learned – and it’s important that the Pentagon doesn’t forget them quickly. The former officials who spoke to Defense News all agreed.
“We adapt, which is a wonderful thing. But we have to stop and think and make sure we take note of what we have learned that we can do differently and better, and make sure we can remember it, ”said Lord. “And as far as possible we now have that in politics and procedures.”
Section 3610 of the CARES Act gave the Pentagon the power to reimburse companies for the work they did to keep their lines open. This includes everything from installing new secure facilities on industrial sites to closing government facilities to dramatic overhauls of the manufacturing facility to create 6 feet of space between workers.
However, Congress never allocated funding to Section 3610, allowing the industry to cover what Lord had estimated at around $ 10 billion by the end of fiscal 2020.
And while the defense industry won’t collapse under this weight, adding those costs – and production delays since an expanded line won’t be able to produce as many tanks or aircraft as a more efficient design – could have long-term implications on a program.
“I think the biggest question right now for the defense industry base is how these one-time costs can be covered so that they are ultimately not written off over the next few years of production, which drives up and separates all service costs,” said lord. “All of a sudden, the appropriated money won’t get you 100 planes anymore. It could get you 51 planes or something.”
The concern there, she explained, is that rising program costs as a result of the one-time investment jeopardize the risk of a Nunn-McCurdy violation for programs, which is triggered when a program is more than 15 percent from its current baseline or 30 percent from its current base deviates from the original baseline. This leads to administrative requirements and increased control by Congress.
“Unless we deal with one-time, one-time costs, it will tarnish the record for understanding the real costs,” warned Lord.
While a $ 1.9 trillion COVID-19 aid bill passed by Congress on March 10 expanded the authorities of Section 3610, industry remains concerned that it will not be fully funded.
“There has never been a line of funding against 3610; funding has always been available and that is not optimal,” Hallman said.
Another problem, Callan said, is that defense stocks are starting to lag behind overall market growth. He attributes this to investors who find that while businesses are now cash rich, they must compete for budget funding against transportation investments, recovery efforts, and other priorities under the Biden administration.
If the pandemic has a silver lining, Lord said, then there is a new urge in government and industry to have as much of the supply chain in the U.S. as possible, with a particular focus on one-stop suppliers – an area where the Pentagon is located could be cut off thanks to a natural or man-made disaster. (This topic is likely to be handled by the House Armed Services Committee’s new Defense Critical Supply Chain task force, established in March 2021.)
However, she acknowledged that having two suppliers for everything is not feasible to get out of the defense industry, saying, “In a perfect world, you would. However, the cost of this is very, very high. “
Roper agreed that the Department of Defense must re-examine whether it should move certain critical supply chains back to the US, even if it comes at an additional cost.
“Domestic supply is a strategic strength,” said Roper. “Und eine, über die die Abteilung – die Nation – kritischer nachdenken muss, wofür sie bereit ist, Quellen aus Übersee zu vertrauen.” Ihnen kann vertraut werden, aber was passiert, wenn Sie keinen Zugriff auf sie haben? Und das sollten wir nicht ein zweites Mal lernen. Diese Lektion wurde während COVID-19 gelernt. “
Mit der Einführung und Verteilung mehrerer Impfstoffe hat die Verteidigungsindustrie wahrscheinlich die schlimmste COVID-19-Pandemie überstanden, sagte Holt. Aber neue Stämme des Coronavirus oder andere Krankheiten könnten leicht zu einer weiteren Krise führen – einer, die tödlicher sein kann.
„Wenn wir uns rechtzeitig freuen – ich hasse es, das zu sagen -, aber ich denke wirklich, dass wir viel besser darauf vorbereitet sein müssen, dass dies in irgendeiner Weise erneut geschieht, egal ob es sich um ein Coronavirus oder eine andere medizinische Ansteckung handelt eine Art «, sagte Holt.
“Das letzte haben wir noch nicht gesehen.”
Joe Gould, Jen Judson und David B. Larter haben zu diesem Bericht beigetragen.