U.S. military reliance on China, foreign suppliers exposed by pandemic

The COVID-19 pandemic has exposed just how deeply foreign companies are embedded in U.S. defense industry supply chains, and the incoming Biden administration faces a daunting challenge to pull as much production as possible back to American shores at a time when startups and small businesses are struggling to stay afloat.

Pentagon officials and defense industry leaders say that one of the key takeaways from a grueling 2020 is just how important it is for the U.S. to “reshore” crucial components in the production of weapons, vehicles, electronics and other military equipment. That effort is likely to be front and center for the Defense Department’s new leadership team next year.

Foreign involvement in supply chains has already proved to have wide-ranging impacts on U.S. diplomacy and geopolitics, perhaps best evidenced by the Pentagon’s painfully slow effort to fully remove Turkey from the lucrative F-35 program in response to Ankara’s growing military cooperation with Russia. Despite a bipartisan firestorm on Capitol Hill, Turkish companies remain a part of F-35 supply chains, mainly because it has been difficult to find domestic firms able to make the same airplane components at scale and under budget.

At the same time, the industry has become increasingly reliant on Chinese companies, which now have a massive presence in the lower tiers of U.S. production. That could give Beijing dangerous leverage over the American defense sector if relations between the two countries continue to deteriorate during a push to “decouple” the two giant economies.

But analysts say that the reshoring effort faces a steep climb next year and beyond, with the defense industry still reeling from the coronavirus outbreak and, in many cases, still clinging to government programs and financial assistance initiatives to stave off layoffs. Particularly vulnerable are the smaller businesses that would be best positioned in some cases to replace foreign suppliers.

“The lower tiers are always going to be more vulnerable,” said Gregory Sanders, deputy director and fellow with the Defense-Industrial Initiatives Group at the Center for Strategic and International Studies.

“If you’re in the system, if you’re on a multi-award contract, you might be protected. But if you’re on the outside or hope to get in, or you’re a nontraditional player who wants to get in, then probably the government has less tools to help” right now, he said. “If this was the year you have a great idea, this was going to be the year you made your debut, I’m sorry.”

Indeed, for a fledgling U.S. firm seeking to win its first Pentagon contract and find its footing in the defense industrial base, the first step often is building relationships at industry conventions, product demonstrations or even the once-unremarkable business lunch.

With in-person networking likely to remain on the shelf for at least the first half of 2021, analysts say, small firms face huge obstacles and may find it exceedingly difficult to capitalize on the Pentagon’s reshoring push.

The biggest impacts could be felt in advanced and highly technical fields where the Defense Department is counting on creativity, ingenuity and bold thinking, such as the newly minted Space Force.

“Let’s say a year ago today, we were potentially on the cusp of an explosion in terms of what I’ll call opportunities presented by the creativity and the energy and the ingenuity in the commercial space mark,” Gen. David Thompson, vice chief of space operations for the Space Force, told the news outlet Breaking Defense.

“I’m not sure yet if we figured out a way to ensure part of that will survive,” he said. “If we do, it will serve us greatly. If not, it may take us years to recover, back to the point where I think we were prior.”

Reversing the trend

Industry leaders say the Pentagon has gone out of its way to aid defense contractors, ensure that key assembly lines remain open and keep valuable ideas moving ahead. They also say the sector is banking on lawmakers to extend a program that allows the federal government to reimburse contractors that offer paid leave to workers because of the COVID-19 pandemic.

The provision was set to expire this week unless reauthorized as part of the COVID-19 stimulus negotiations on Capitol Hill.

While some major firms such as Boeing and Raytheon have laid off thousands of workers, the defense side of those and other companies have largely remained intact. Federal programs and intensive Pentagon-industry collaboration have kept defense production lines moving with relatively few problems, though officials readily acknowledge that social distancing and other precautions have made life more complicated in the office and on the factory floor.

Smaller, less-established businesses, however, have much less room for error in the current environment.

“The smaller the business, the harder they’re getting hit,” said retired Air Force Gen. Herbert J. “Hawk” Carlisle, now president and CEO of the National Defense Industrial Association. “I think many people are realizing that securing the supply chain means you need a resilient, reliable small-business sector.”

For all the negative impacts of COVID-19, it does seem to have galvanized Pentagon officials, industry leaders and lawmakers to accelerate the drive to bring production back to America as much as possible, or to at least slow a growing trend of offshoring. Officials and analysts say the past nine months have revealed the logistical difficulties that can arise when trying to move products internationally during an unprecedented health crisis, with closed borders and limited travel making it more difficult or expensive to transport goods.

Even more concerning are potential national security implications, especially as they relate to an increasingly sour relationship between Washington and Beijing.

From 2013 to 2019, the number of Chinese suppliers in U.S. defense industry supply chains shot up by 356%, according to an August analysis by Govini, a leading data science company that tracks the sector.

Close U.S. allies such as Japan, South Korea and Canada also reported significant increases over the same time period, the study showed, and officials say U.S. allies can and should retain a significant presence in supply chains.

But the strained U.S.-Turkish relationship, and the complications it has brought for the F-35, demonstrate that even putative allies can present problems for critical defense supply chains.

China’s gains have mostly come further down in the product line. More than 80% of the Pentagon’s “Tier One” vendors — the large companies that typically get multibillion-dollar contracts and supply finished products — are based in the U.S., according to the Govini analysis. But American firms make up less than half of next four levels of vendors, meaning the subcontractors that supply components to the larger firms are located mostly abroad.

That dynamic could be especially dangerous given the growing U.S.-Chinese divide, particularly in light of Beijing’s efforts this year to cover up the severity of COVID-19 and to expand its military footprint in key areas such as the South China Sea.

Chinese involvement in military and technological systems is a worldwide problem. Countries around the globe are still trying to figure out to what degree, if any, Chinese firms such as Huawei should be involved with the construction of national 5G data networks, for example.

“I do think in some ways this has become even more clear with respect to what the world looks like going forward,” Gen. Carlisle said. “Some of this that’s gone on has totally unmasked the Chinese attempts to literally change the world order, change the rule set, with them calling the shots as an authoritarian, non-civil-liberties type of society.”