Sequestration and the US Defense Industrial Base – Dawn over Doomsday?


By morning of March 1, 2013 as mandatory budget cuts will take effect, the US DOD will enter a ruthless, potentially devastating cycle of budget cutting that will be further exacerbated with the planned cutbacks mandated by the sequester. Testifying before the House Armed Services Committee Pentagon leaders said today the planned cuts could continue and affect military preparedness, readiness and acquisitions for years to come.

The combination of sequestration in fiscal year (FY) 2013 reduced discretionary budget caps in FY 2014-2021, and a possible year-long continuing resolution (CR) are creating a ‘perfect storm’ that have already brought the military acquisition and the whole defense marketplace to a standstill.

These cuts impact almost all programs – large or small, driving potential layoffs of hundreds of thousands in the military and defense industries in the US. “We will have to address a revised defense strategy based on a post-sequester budget environment.” Lt Gen. Charles R. Davis, USAF Military Deputy, Office of the
Assistant Secretary of the Air Force (Acquisition) told the Committee, “This will require tough strategic choices to ensure the Air Force balances competing requirements across our enduring contributions – Air and Space Superiority; Intelligence, Surveillance, and Reconnaissance; Rapid Global Mobility; Global Strike; Command and Control.”

The reduction of about $8 billion in Department of the Navy Fiscal Year 2013 investment accounts due to sequestration are also far reaching – with impacts to naval aviation, ground-warfare systems, strike weapons, research and development, shipbuilding and the associated support, training, and outfitting required for current and future readiness. Vice Admiral Allen G. Myers, USN Deputy Chief of Naval Operations, Integration of Capabilities and Resources (N8), U.S. Navy said the Navy’s $7.8 billion dollar sequestration investment reduction would potentially impact over 100,000 private sector jobs across the nation considering direct and indirect impacts to the economy.

Defense Industrial Base to Suffer the Most

According to Lt. General James O. Barclay III, Deputy Chief of Staff Army G-8, if the planned measures will take place, the Army is looking at FY 2013 budget cut of $12 billion, of which half will be cut in operations and maintenance, mostly form the active forces. The cuts will affect the careers of quarter million civilians across all Army levels. Additional $6 billion in cuts will be taken from procurement and construction, research, development and testing. General Barclay said these cuts would be applied equally across over 400 Army programs, causing ripple effects throughout the US industrial base, impacting over 300 companies in 40 states. “The impacts to the industrial base grow in magnitude as the reductions cascade down through the network of companies that support each program,” Barclay explained.

The industrial base that supports the US military will suffer a major blow, its consequences are yet unknown. Delayed weapon system production and cancelled maintenance and repair will immediately impact aircraft, missile, and land system manufacturers and our military industrial supplier base. “The projected loss of work in Fiscal Year 2013 alone will further stress smaller businesses that provide supplies and services to major manufacturers which have already been negatively impacted due to the general downward trend in defense spending.“ said Vice Admiral Allen G. Myers, USN, Deputy Chief of Naval Operations, Integration of Capabilities and Resources. “Assuming a nine-percent sequestration reduction for the March 1 and March 27, we project industry contract awards will be reduced by approximately $6.7 Billion Fiscal Year 2013.” Myers said.

According to Adm. Myers, many small businesses, which are often the sole source for aircraft, missile, and land-system components, may be driven to shut down if meaningful disruptions to planned workload occur. “Once these companies, their engineers and skilled workers move on to other work, they are hard and sometimes impossible to reconstitute, even if our national security requires it. With many weapon systems already at minimum sustaining rates and extended production runs, we are continually faced with the challenges of parts obsolescence that will be further exacerbated by sequestration and year-long CR disruptions.”

Myers added that it is not known how many suppliers have already decided, or plan to exit the defense market due to business base uncertainties driven by frequent CR, sequestration, and the prospect of nine years of continuing budget uncertainty. “When suppliers determine that they can no longer rely on future work, or conclude that the regulatory and contractual environment is unavailing to a reasonably predictable business base, they will adapt and may turn to other economic sectors.” Myers added.

“Despite our extreme disappointment that sequestration was not averted, we are by no means giving up the fight” Aerospace Industries Association President and CEO Marion C. Blakey said after first steps implementing $85 billion budget cuts (about half in defense spending) took effect this morning. “On March 27, the Continuing Resolution for funding federal agencies through the current fiscal year will expire.  This is the next major opportunity for Congress and President Obama to halt the crisis that our industry has highlighted for nearly two years.  We urge our elected leaders to use this period to put a stop to the damage that sequestration is doing to our country” Blakey added.

Programs at Risk

Army procurement programs will experience reductions of roughly nine percent across the board. In his testimony, Gen. Barclay indicated among the programs to be hit immediately is the AH-64E Apache. He said this acquisition is a fixed cost program and reducing quantities means increasing cost due, in part, to fixed costs already incurred in conjunction with planned production this year. Another Army Aviation program to be hit is the OH-58 Kiowa Warrior replacement. The Army also expects at least six month production gap in the MQ-1 Grey Eagle program which could drive cost up. A delay in the acquisition of a new, high definition common sensor payload for the drone will also prevent fielding of essential Intelligence, Surveillance and Reconnaissance asset. Barclay also indicated that the cost of the Javelin Missile could also increase by 12 percent, if the Army buys less than the planned 400 units through 2013.

The impact of sequestration in Fiscal Year 2013 would result in a loss of more than $1.0 billion in aircraft production for the US Navy. The reductions will affect the Lockheed Martin F-35 Joint Strike Fighter, Bell Huey and Cobra Rotary-Wing Aircraft, Boeing P-8 Poseidon Maritime Patrol Aircraft, Northrop Grumman E-2D Hawkeye Surveillance Aircraft, and Vertical Take-Off Unmanned Aerial Aircraft (VTUAV), and the Boeing/Insitu Small Tactical Unmanned Aerial Vehicle production lines. Further, the Department would delay the Initial Operating Capability (IOC) of VTUAV Intelligence, Surveillance and Reconnaissance in support of Special Operations Forces. Delays are also expected in the Joint Strike Fighter at-sea testing due to postponement of required ship modifications and integration activities.

Similarly, at the Navy, transitioning the Bell-Boeing MV-22 Osprey program into a multi-year procurement will be suspended, resulting in approximately $1.1 billion in additional program cost to deliver the same number of aircraft.

Due to sequestration our weapons and ammo procurement accounts will be reduced by approximately $450 million dollars. Impacts will occur to sea-strike and sea-shield weapons procurement that include a reduction of over 200 air-launched weapons for air-to-air and air-to-ground combat; more than 50 sea-launched weapons, including our front-line, deep-strike land-attack weapons; and nearly all of our ammo and direct attack munitions accounts. “Since many of our weapons programs are already at minimum sustaining rates, further quantity reductions will jeopardize the supplier base and drive higher unit production costs.” Myer said, adding that the Navy plans to further reduce procurement of acoustic device countermeasure systems impacting ship torpedo defense and reduce systems engineering and technical assistance oversight of our Mobile User Objective System (MUOS).

Marine Corps to Suffer ‘Disproportional Impact”

The entirety of the Marine Corps Fiscal Year 2013 ground material modernization investment is only $2.5 billion, comprising 12 percent of the baseline budget. Further reductions in ground investment accounts, although proportional to the other services in terms of a percentage reduction, will have disproportional impact on Marine Corps modernization and readiness, particularly after a decade of increased operational tempo.

“The impending sequestration will cause a cut of over $850 million dollars and delay efforts of multiple ground programs directly impacting delivery of future capabilities. “Lt. General John E. Wissler, USMC, Deputy Commandant for Programs and Resources told the committee.

Examples for such cuts include reduced procurement and installation of safety and force protection modification kits on both the Medium Tactical Vehicle Replacement and Logistics Vehicle System Replacement trucks which will decrease overall fleet capability. Program delays to the Amphibious Combat Vehicle will result in the Marines being required to operate and maintain the already 40-year old Assault Amphibious Vehicle for at least the next decade.

Maintenance and Support Cuts Drive Long Term Damage

Lack of funding will virtually eliminate new depot maintenance orders for the third and fourth quarters of this year, causing further pressure on the suppliers of spare parts and equipment. These cuts will also have impact on the rate of reconditioning and reset of tactical wheeled vehicles, radios and other weapon systems. Disrupting reset programs could have long-term effect of three-to-four years as units are redeployed from Afghanistan. The BAE Systems M-109PIM (artillery modernization program) will also suffer from delays in proceeding to Low-rate Initial Production, scheduled for 2013. The Army expects up to two years delay in the development of the Alternative Warhead for the Guided MLRS rockets. Delays are also expected in the procurement of Mid-Tier Networking Vehicular Radios (MNVR).

According to Adm. Myers, a year-long CR and sequestration will lead to inefficiencies caused by loss of learning; productivity losses; cost increases driven by lengthening schedules; he added that increased burdens on military personnel and lower morale – all translates to reduced readiness. He said the civilian-hiring freeze and overtime restrictions in Naval Shipyards have already caused non-recoverable impacts to the shipyards’ ability to execute many assigned workloads and nuclear submarine availabilities while threatening to impact Docking Planned Incremental Availabilities for the USS Eisenhower (CVN 69) and the USS John C. Stennis (CVN 74).

For the Navy, current CR restrictions and potential sequestration-driven decreases to naval aviation readiness would impact Fleet Replacement Squadrons (FRS), reduce rotary-wing readiness in support of swarming boat defense, airborne mine counter-measures and antisubmarine warfare, and cancel aircraft and engine depot inductions in the 3rd/4th quarter of Fiscal Year 2013. Depot cancellations jeopardize planned aircraft modernization, mission system software capability improvements, fatigue-life management, depot support, and our flight hour program Across the Department of Navy, there will be a total of 327 aircraft and over 1,200 engine modules that will miss induction in the 3rd/4th quarter of Fiscal Year 2013 due to CR and sequestration, with several years required to recover the backlog. If the forecast impacts were to occur, we would not be able to recover in a timely manner, even if funding were restored.

In the near-term, these cuts will drive maintenance and training programs that will have effect in the future. Long-term, the fiscal challenges will constrain the Navy’s ability to invest in future capability and capacity, “If a strict year-long CR and sequestration occur, we will not be able to afford in the future the Navy and Marine Corps we have today” Myers concluded.