Foreign vulnerability inherent in US globalization of its commercial and defense supply chains
- Gordon Housworth [ 5/6/2008 - 11:36 ] #
The US and, and to a lesser degree, Europe have lost control of their defense and commercial industrial supply chains. Exporting capability rather than capacity, the US has increasingly retained only a top tier or integrator role while exporting its tier 2-tier n base. Worse, the US cannot realistically define discrete and net risk as the chains are too opaque for identification and there is decreasing ability to direct sourcing to less risky tiers.
The loss has not come without warning, especially in the seminal analyses of the mid-1980s to early 90s (much of which is cited here) and near-disaster supply chain bottlenecks that nearly sidelined front line equipment during Desert Storm (1990-91).
Having surveyed four decades of research on globalization impacts, we can state that there are virtually no metrics in open source. There are drivers and characteristics but there are no actionable metrics of sufficient robustness to pass the test of falsifiability. At a macro level we are secure that we and some others have the compass right, but actionable information about a specific chain condition and greatest risk at component at tier in the chain is fuzzy at best. Given our supply chain analytic experience, we can see the tracks of bland assumptions without the understanding of how supply networks actually work. Defense and commercial sides of the house share the same problem - insufficient granularity of analysis which if they get there they find that they do not have accurate and timely data. At this point the commercial side generally gives up. The defense side can't so spends much time in Rommel's Wolkenkuckucksheim (Cloud-Cuckoo-Land after Aristophanes). Striped of politeness, almost everyone is guessing although they shroud it in tech speak which pacifies the unknowing.
The US manufacturing loss is staggering in its sweep as it includes:
Technology (Research Testing Development and Evaluation - RTD&E)
Industrial base (tier base capability , knowledge gaining, performance curve and price/volume)
Availability (conversely product unavailability, product as hostage, withheld or not surged in time of national need)
Supply chain (chain complexity masks risky sourcing and possible interdiction)
Forensics (undocumented/latent/hostile firmware and/or software additions)
Education (learning citadels clustered to engineering and production centers)
Having reviewed analyses of manufacturing globalization for both the defense and commercial sectors, this analyst is of the opinion that the risk to the US has become so great that it should study itself as a reasonable target of economic sanctions (also here), hence the inclusions of citations on that topic. (The Chinese have studied means of countering economic sanctions; can we do no less?)
Before globalization there was 'NATO-azation'
The issue of dealing with the effects of globalization on US commercial and defense industries has been with us for decades. The 1985 Strategic Materials: Technologies To Reduce U.S. Import Vulnerability, whose advisory panel an Air Force logistics colleague advised me "looks like a 'Who's Who' for the defense department in the 1990's. Lot of them went on to very senior DoD positions," stated the problem and its complexity well:
Crafting a workable policy [regarding dependence on foreign sources, NATO allies included, for defense material and technology] will be a tricky job.
There are three basic policy choices:
demand that anything that goes into defense equipment be built in the U.S. from U. S.-sourced components, taking whatever measures are necessary to ensure that all the necessary industries are alive and well in the United States;
let the market dictate which industries will be healthy in the United States and look only for the best deals wherever they can be found worldwide; or
choose some industries that have to be located in the United States, take appropriate measures to ensure that, and let the rest go with the market.
The first and third require some sort of intervention in the international economy, either supporting the international competitiveness of U.S. companies or protecting, supporting, and subsidizing U.S. companies that cannot otherwise survive. Another approach is to design nothing into U.S. defense systems that cannot be domestically sourced. But this cuts off a great deal of modern technology, a Western strength. In making these choices, the United States will have to decide how dependent we can afford to be, and how much independence we are willing to pay for. If the United States demands self-sufficiency without taking measures to keep U.S. companies alive and competitive, the list of technologies available for defense systems is likely to decrease as time goes on.
It will be necessary to decide how to treat dependence on various nations. There are significant differences in being dependent on Canada (already defined as part of the North American industrial base), Britain, our other NATO allies, Mexico, Japan, Korea, etc... Other nations are much less tightly tied to the United States.
The high-technology economy is an international one and responds to international market forces. These forces are likely to continue to move industries offshore despite U.S. efforts to will (or legislate) them to stay. In the vast majority of cases, defense business is far too small to provide the necessary clout, particularly when faced with other nations that manipulate their civilian markets to keep their companies healthy. Competition comes from Japan, the smaller Asian nations - Korea, Taiwan, Singapore, etc - and Western Europe...
The US chose the second path by a combination of default and design augmented by partial regulation; Private industry sought performance and integration coupled with higher margin and lower costs. Our current globalization impasse is its direct descendent.
By 2000, the challenges facing the US Air Force were typical of an increasingly globalized and consolidated industrial base:
Between 1990 and 1998, a horizontal and vertical integration took place across all segments of the U.S. aerospace industry. [Driven by a dramatic decline in military aircraft procurement budgets as well as overall defense authorizations since the end of the Cold War,] The number of credible U.S. prime contractors for integrating fighters and bombers fell from seven to two; the number of U.S. missile manufacturers from fourteen to four; and the number of space launch vehicle producers from six to two. By the end of the 1990s, the European defense aerospace industry had also begun to experience a dramatic cross-border consolidation and restructuring. This growing consolidation of defense prime integrators and subsystem suppliers has resulted in increased numbers of strategic and product-specific alliances, international teaming and joint ventures, and cross-border mergers and acquisitions (M&As) among defense firms, together with heightened interest in foreign exports and foreign lower-tier suppliers.
From foreign source to dependency to vulnerability
As early as 1987, US Industrial Base Dependence/Vulnerability. Phase 2. Analysis, had defined three elements of foreign sourcing: (1) a foreign source is a source of supply, manufacture, or technology that is located outside the United States or Canada, (2) a foreign dependency refers to a source of supply for which there is no immediate available alternative in the United States or Canada, and (3) foreign vulnerability, related to foreign dependency. refers to a source of supply whose lack of availability jeopardizes national security by precluding the production, or significantly reducing the capability. of a critical weapon system. While the US has yet to suffer a sustained foreign supplier cutoff "either in peacetime or war," the military and economic balance has now shifted against the US, making it increasingly plausible that the PRC or Russian Federation could directly or indirectly influence 'just-in-time' availability:
One potential scenario simply posits disagreement by the foreign supplier with US policy... Problems such as strikes, political unrest, or natural disasters within the supplier's country are all plausible. Cutoffs might also be created by the supplying nation giving priority to ventures more profitable than DOD contracts, or giving priority to the supplier's home country needs over the United States, especially in times of crisis. Countries external to the supplying country could also create cutoffs - by threatening the supplier, by an overt blockade, or by war. One US study done prior to the end of the Cold War, reminded readers that Japan was within easy bombing distance of the Soviet Union, and thus the USSR could easily cut off critical components for US weapon systems... The USSR test fired two sea-launched ballistic missiles into the Sea of Japan at a time coinciding with Mikhail Gorbachev's April 1991 visit to Japan. Some analysts described the test firings as a "muscle flex" and a "political message for Tokyo." The message, however, has ramifications for the United States also - sources of certain critical supplies are vulnerable to hostility, a situation that creates a possible domino effect on US weapon systems.
Given the shift in manufacturing key component categories from Japan to China, were the US to incur the ops tempo of a second Desert Storm or OIF level endeavor not to Chinese favor, the issue of shortages would not be 'if' but rather 'how many and how soon.' (Nothing has to overt; polite expressions of regret coupled with 'work to rule' responses and the need to service current customers would attenuate/terminate supplies of many critical parts and assemblies needed to sustain the ops tempo.):
Despite the successes of US military weapon systems that used foreign high technology components during the Gulf War, there were moments of uncertainty as to whether the United States would be able to get requested "rush" orders filled for needed components on a timely basis. [On] "nearly thirty occasions, the Bush administration had to call upon foreign governments for help to get delivery of crucial parts for the war effort."... "foreign manufacturers often were reluctant to put the Pentagon's purchase orders ahead of their regular customers' without prompting from their governments, according to officials at embassies here and at the Commerce Department." Of special concern were Japanese suppliers... "The Japanese electronics companies - whose identities have not been publicly disclosed - reportedly said they could not curtail existing commercial contracts, such as orders from VCR, television, and automobile manufacturers, to meet the needs of the US forces in the Gulf." Experts on Japan [also] speculated that Japanese suppliers, in a society geared toward avoiding any military involvement beyond national borders in the post-World War II era, "may have been afraid of domestic political ramifications of favoring military over commercial customers." [An] interview with an unnamed Commerce Department official revealed that the US government "had to 'jump through the hoops' and that the department took the unusual step of asking Japanese government officials at the embassy in Washington for help in prodding Japanese suppliers."
Said of Japan in 1991, the following applies with greater intensity to China. As a calibration, consider a US air and naval intercession on behalf of Taiwan in the Formosa Strait. Leaving aside the likely effort by the Chinese to sink a US carrier battle group, thereby shocking the American populace, one can assume that the entire component supply chain would shut down. Whatever ops tempo the US envisioned would have to come from inventory or alternate supply. Lesser scenarios should have less chain disruption, but a degree of disruption remains high:
The potential for crisis, however, certainly existed and only a common political objective shared by top levels of the US and foreign governments averted more serious problems. The bond between most governments during the war was created by nearly-unanimous outrage over Iraq's aggression; such a bond was both unprecedented and delicate, thus it may be tough to duplicate in the future. Had there not been a common political objective or had the Japanese government, for instance, been more inclined to bow to domestic calls for avoiding contributions to the war effort (and there was considerable pressure within Japan for noninvolvement), it is quite likely the United States would have had to look for other sources to obtain necessary components. Without pre-planning for alternate supply sources, the probability of a favorable resolution would have decreased significantly.
Analogous to mercury accumulation in top tier marine predators, buyers of assemblies, modules and larger finished goods faced with chain opacity will incur rising risk of chain interruption and functional tampering. Without actionable information and the ability to affect chain substitutions, virtually all are now accepting risk by default. See: Confluence of thinking on Chinese outsourcing and supply chain risks from DSB and USCC. From an ICG note:
As we do quite a lot of supply chain analysis, we know why it so often fails, namely the OEM or top tier cannot get the data from their immediate tier who are loath to reveal their chains. Data is shielded, normalized, changed without notification, fictionalized either by surrogate data or simple commercial misrepresentation. Counterfeits add yet another layer on the problem set.
From electronic/electrical chain examples we have at hand, many are PRC at tier 2 to tier 5, others are Taiwanese ODMs which means PRC for almost all tiers save design, Japanese chains have PRC, Korean and Singaporean tiers. There are many cases where the OEM or top tier believe that a certain part comes in at tier x in its entirety, but the reality is that a goodly portion comes in PIA down to tier x+3. The PRC presence, either as source or influencer, is overwhelming.
Our commercial experience has repeatedly shown that the OEMs don't know what, from where, is in their chains. A common experience is that as the OEM or top tier develops the algorithms of granularity needed to be effective, the data becomes too difficult or costly to obtain. If the OEM demands an identified tier x validate volume and pricing as stated by the purchasing tier (tier x-1), the tier x will validate lest they run afoul of their purchasing tier.
As automotive OEMs are phasing out Full Service Suppliers (FSS) by their recognition that they were enduring margin without equivalent value, defense sector firms are enthusing over Performance Based Logistics (PBL) structures which are beginning to blind Defense Logistics Information Service (DLIS) as to what it in a chain and conceivably debase the value of a National Supply Number (NSN). (It should be remembered that DLIS rose from "the World War II era when each of the Military Services operated independently and maintained a separate supply system and procedures for cataloging their items of supply [in which] many items were given a different name by each of the services, making efficient use of available stock impossible.") [As an aside, buying "Power by the Hour" (PBH) has its merits (also here) but it is disconcerting to see how contractors perceive its profitability.] [ICG note]
Inability to divorce supply chain access from mercantile efforts
Writing in 2004:
The PRC is preoccupied with the US given it current dominance in Asian and global affairs, and see it as the principal "international danger" able to "confront and complicate China's development and rising power and influence in Asian and world affairs." China is mindful that three nations that sought to overturn the prevailing international order of their day, Weimar Germany, Imperial Japan, and the Soviet Union, were punished by an allied coalition of established nations. While I've not see it in print, I cannot but note that the leader of the winning coalition in each case was the United States, a fact that I cannot imagine has been lost on the Chinese.
China is well into the process of creating a mercantile, rather than fungible, market for raw materials that is expressly grounded on the inability of the US or US allies to interdict it. (China's growing mercantile net is of keen interest to this author, but lest I be accused of China bashing, items of equal weight are a Russian kleptocracy class armed with the energy weapon and the implosion of the US Pre-K through 20+ education structure.) See:
Chinese mercantile highlights of interest to this author are:
Strategic plan creates mercantile structure that secures energy stocks, raw materials, and crops.
Cannot be interdicted by the US or its allies.
Delivers export markets for commercial and military production, redirects regional elites to study in China, and extracts diplomatic obedience.
Sends large groups of diplomatic and consular agents that meet counterparts at each level of the target country's bureaucracy.
Promotes infrastructure projects using Chinese firms, creating a camouflaged posting for People's Liberation Army (PLA) assets.
Veiled PLA works have common pattern: tidewater port presence offering partial or complete opaqueness connected by a strassendorf (street city) style of satellite towns connected by new roads to a processing plant at the primary extraction asset, e.g., coal, oil, minerals, timber, etc.
Taken together with China's regional economic might, the PRC is demonstrably capable of building the regional relationships needed to eject the US and in the process become the dominant mercantile center of an Asian trading block that includes Asia's "most vibrant economic sub-region" (China, Hong Kong, Taiwan, South Korea, and Japan).
While I freely admit this macro level view lacks granularity and has yet to be submitted to the test of falsifiability, I do not believe it can be removed from a discussion of sustained supply chain access.
A unitary threat exceeding combined prior Soviet and Japanese threats
Economic power is the foundation of military power. The most important single indicator is GDP. Like defense budgets, however, GDP provides only a limited picture of power. It says little about the composition of the economy, such as whether it is spearheaded by leading sectors or dominated by old and declining ones. Other important variables include human capital and technology. The best readily available measure of human capital is the average year of educational attainment. For technology, the best indicator is per-capita expenditure on research and development.
The US now faces a potential threat of chain disruption from the PRC greater than that presented by combined Soviet espionage efforts directed against the US technology base, military, dual-use and commercial, and Japanese commercial inroads against a wide range of commercial products, notably electrical and electronic systems, that were conceived in the US:
I submit that the PRC will continue to strengthen the independence its own strategic supply chains, a condition that the US/EU have aided by seconding wholesale the manufacture, now design, and in the offing, unique product standards, to the Chinese. A current example of this effort is the gaining of indigenous, as opposed to Taiwanese owned, semiconductor device fabrication capacity from wafer fab through deposition, removal, patterning, and properties modification.
In the case of the Japanese, the US had an exceptionally strong commercial competitor periodically balanced by a pro-US government that recognized its privileged place under a US defense umbrella which allowed it to devote its GNP to commercial pursuits; when it was essential to US interests, Tokyo would intervene on our behalf. See Refining a China forecast
. (It was an unwritten rule of the Nixon administration that the Japanese were to be allowed to dominate electronics markets in return for their unwavering support of US diplomatic initiatives.)
As for the US/EU, the de facto 'sole sourcing' of much of the US and elements of the EU industrial base to China has already rendered its manufacturing base into Chinese hands at multiple tiers, many of which, as noted above, are opaque to the top tier, integrator and ultimate buyer. Similarly, the export of much of its design process for future products to China-based R&D hives have increased the potential for IP predation and the appearance of peer Chinese competitors before the US/EU products reach market.
Just as the Soviet Union pointedly pressed Japan over its commercial and military partnership with the US, so will China both direct its domestic suppliers to comply while pressing Taiwan, Japan and Singapore when any of those states significantly work against Chinese Interests.
We have already seen two examples of that pressure, one in Japan and the other in the US. Japan squelched what it described as a 'national security' IP theft from Denso, which is itself a repeat of the humiliation that Cisco received at the hands of Huawei and the PLA, i.e., suppress litigation or your commercial interests in China suffer. In each case, once matters became public, and in the case of Cisco went litigious, the Chinese were able to apply commercial pressure on Cisco and Toyota-Denso to relent or suffer immediate penalty. See two items: Prediction: the Cisco-Huawei IP debacle repeated itself with Denso, and likely for the same reasons and A tipping point in intellectual property protection?
I submit that both the US government and private industry would find it instructive to receive the equivalent of the Russia's gas embargo to the Ukraine who surprised all by continuing to tap their allotment, thereby plunging the EU into shortage. European energy sourcing directions shifted in the moment with reliable sourcing and self-sufficiency rising in relation to cost as prime issues.
I further submit that the US needs to adopt the Toyota/Denso model of retaining the capacity to design and manufacture a portion of the annual buy of everything that they purchase. Toyota/Denso is the only significant automotive OEM to retain that capacity which also gives Toyota leverage with its suppliers by its understanding the technological, design, manufacturing, component pricing and supply chain tier structure of what it procures.
This process was proposed, at least for the defense sector in the 1980s but was not acted upon. In the interval, the US, much like the other automotive OEMs has already surrendered much of its process technology in the form of joint ventures, outsourcings and tier manufacturing, leaving the Chinese only to target mathdata and key design efforts not sourced to the tier base.
Chicken Little's sky may be falling but it is does not fall uniformly
If at a macro level it is plausible that the US/EU are subject to systematic supply chain interruption/embargo by the PRC at the commercial and dual-use level, what is the status for defense items given the near misses of Desert Storm? How do we validate (falsifiability) and prioritize investigation in order to identify the most essential chain elements? Even the salient works of the 1980s-early 1990s were imprecise on granular means of analysis. DoD has been providing guidelines "for evaluating, on a case-by-case basis, the need for Government action to preserve industrial capabilities vital to national security" for some time. Witness the 1996 Assessing Defense Industrial Capabilities handbook. The problem was then, and appears to remain, one of data, rigorous trigger thresholds and chain transparency below the DoD vendor.
It is with some interest that DoD appears to believe that its key systems are intact. A three year 2006 National Research Council effort on Critical Technology Accessibility attempted to answer two questions:
- What products/components/technologies currently being solely procured from foreign suppliers could significantly disrupt U.S. defense capabilities if access to them were denied (through conflict, embargo, treaty, etc.)?
- What emerging technologies/products that, if the United States chooses not to pursue domestic production, could significantly disrupt U.S. defense war fighting capabilities if access to them were denied?
In which the NRC Committee:
looked for but did not find an existing, exhaustive database of foreign products/components being procured by the Department of Defense (DoD) and decided to not attempt to develop such a database on current foreign sourcing across the vast numbers of DoD systems. Nor did the committee assess, for each foreign component, the impact of denial on operational capability or try to understand the particular mitigation opportunities and consequences. Finally, it did not develop a collective assessment of the technological and industrial trajectories of emerging technologies that promise to be key to our nation's security. The size and scope of such an effort would have exceeded the time and resources available to the committee, and it became clear from the information provided to it and from its deliberations that this was not the right approach.
In the absence of data, the NRC committee:
did listen to government plans and perspectives, discussed the issues with recognized experts, and independently reviewed source material and past literature. In addition, the members of the committee arrived with substantial background, service, and expertise in these matters.
Without intending to flip, they guessed, or as you prefer, SWAGed. Without data, chain transparency, metrics and algorithmic analyses, how could they do better? We find Fortune Fifty firms in similar predicaments with their supply chains.
Despite these limitations, the NRC Committee was confident that:
Based on the information they received and their own knowledge, committee members were unable to identify any product or technology currently being exclusively procured from a foreign supplier that could significantly disrupt U.S. capabilities or operations should it suddenly become unavailable...
If the ]US] were to become strategically dependent on a foreign industrial base for items that are critical or for which the regeneration of a U.S. industrial base would take a long time, the risk would be unacceptable. The committee does not see any signs of that at this time, but the possibility should be taken into account when determining what the U.S. industrial base needs to be for defense purposes. The committee identified four areas of future technological and industrial advancement that warrant discussion: (1) information technology (IT) components; (2) IT services, which include many forms of the capability to manipulate, store, and exploit data and information; (3) nanotechnology; and (4) biotechnology. The committee also identified another area of concern, systems integration capabilities.
The 2006 NRC Committee text strongly echoed, and possibly accepted the findings of, a 2004 Study on Impact of Foreign Sourcing of Systems that "contacted a total of 806 prime contractors and first and second tier subcontractors in order to collect and evaluate information" for systems:
shaped by the recent experiences in Operations Enduring Freedom and Iraqi Freedom. Those operations were conducted largely as "come-as-you-are" conflicts with the combat platforms already deployed to our forces; and they consumed significant quantities of precision guided munitions. As a result, this study is focused on those items that were or would be in high demand and/or consumed during similar future operations.
In the absence of rigorous means and metrics coupled with our case work in supply chain analysis, we question the findings of that 2004 effort:
Foreign sources provide limited amounts of materiel for the identified programs.
Utilization of these foreign sources for these programs does not impact long-term readiness.
Utilization of these foreign sources does not impact the economic viability of the national technology and industrial base.
In most cases, domestic suppliers are available for the parts, components, and materials provided by the foreign sources.
The results of this study are consistent with recent related studies.
This voluntary survey went down to tier two, identifying a total of "73 first, second, and third tier foreign subcontractors" from Austria, Belgium, Finland, France, Germany, Israel, Italy, Japan, Malaysia, New Zealand, Netherlands, Russian Federation, Singapore, Spain, Sweden, Switzerland, Turkey, and the UK. (DoD has been habitually comforted by UK subs, after that NATO and friendlies.) This analyst is pleased that the questionnaire went to tier two, but the report seems to treat 'tier two' (from any country) as the edge of the world after which one needs to look no further.
Also the test characteristics seem vague, looking to the past ("Supply disruption is not likely since the current suppliers have demonstrated reliability in the past..."), rather than to the future. There was also a repeated implication that if the dollar amounts were small that the risk was low as opposed to cessation of component access regardless of cost. ("Collectively, foreign subcontracts represent about four percent of the total contract value and less than ten percent of the value of all subcontracts for these programs.")
The report did not reveal or imply any further granular analysis. Based upon our supply chain analysis, this analyst would want more rigorous analysis, look at lower tiers and other chain characteristics before issuing a similar pronouncement.
Returning to the 2006 NRC report, its recognition of the changing nature of the supply base harkens back to the good works of the 1980s:
The impact of component denial is not a static estimate. The risks entailed in depending on a foreign-produced component are embedded in the strategy of supply management and the diversity of the impacted operational system or force. The size and power of the globalized commercial marketplace are such that we must find a way to exploit the marketplace's value for our security. The risks and benefits of this exploitation are at least as much an issue of acquisition and logistics strategy as they are of estimating foreign intent. The viability of the future assured domestic supply of critical components for the DoD is dependent on the health of the U.S. industrial base in these sectors.
Its recommendations to Under Secretary of Defense for Acquisition, Technology and Logistics (USD(AT&L)) and DIA are interesting, although some are unworkable while others are likely to be ineffective:
[D]evelop a system for monitoring the risks of component unavailability within the procurement and operating elements of DoD... [ICG comment: Having not worked before, and with no better tools and metrics on offer, how will it work now?]
A self-certification approach by USD(AT&L) should direct the services and defense agencies to annually prepare a product and supply chain assurance report that identifies important vulnerabilities, potentially significant operational consequences, and recommended mitigation actions... [ICG comment: Self-certification rarely, if ever, works as bureaucracies are loathe to mark themselves deficient; even less likely without clear means and metrics.]
[A]nalyze these annual reports to identify DoD-wide vulnerabilities that might not be detected by the individual services and agencies and to warn of worrisome trends in the integrity of the supply chain, ensuring it is not compromised by foreign supply sources... [ICG comment: Unlikely to work as the certifications are suspect, and no metrics are proposed.]
[ICG comment: There are, however, some useful questions which could lead to metrics:
[D]evelop a system for monitoring U.S. industrial health in strategically important global commercial market sectors that are critical to the availability of components for DoD... [ICG comment: Fine, but how and by what means and metrics?]
[O]organize a systematic method of assessing the health of military systems integration in and for the DoD as well as that of potential coalition partners and adversaries... [ICG comment: Again, how and by what means and metrics?]
The foreign dependency analysis that this analyst would like to see is a Joint Logistics Commanders' 1986 report, A Study of the Effect of Foreign Dependency, summarized in GAO/NSIAD-90-48, that "reviewed 13 DOD weapon systems and found dependencies1 on foreign sources in 8 of them with severe problems in 6. According to the study, these dependencies could result in a total cut-off of the production of these items as early as 2 months into a war mobilization effort for a period lasting from 6 to 14 months.":
To obtain information regarding the lower subcontractor/vendor levels, for 12 of the 13 weapon systems reviewed, the project team performed a limited survey of the market structure supporting the systems. That is, for each of the 12 systems, program officials were asked to identify 5 subsystems and components at the next lower production tier meeting certain criteria2 and this identification continued through the lower production tiers down to the level of basic materials. For the other system, the Sparrow missile, a complete vertical tier analysis was done.3
1 A foreign dependency, as defined in this study, is an immediate, serious logistics support problem that affects the combat capability of the United States because of the unavailability of a foreign sourced item.
2 Each subsystem or component had to be (1) complex enough so that the program officials were unable to categorically state that it did not contain any foreign manufactured items and (2) critical enough to production, and complex enough to produce, so that its loss would pose serious problems in meeting production schedules
3 A vertical tier analysis identifies critical items acquired from foreign sources for an individual weapon system down through the tiers of suppliers and evaluates possible production constraints at each level.
Going forward, RAND's effort to assess industrial impacts identified a typology of "cross-border business relationships and activities" then, and still, prevalent in the defense aerospace industry:
- Cross-border shipments of finished platforms, systems, or major subsystems
- Licensed coproduction
- Foreign Military Sales (FMS) coproduction
- "Partnership" coproduction
All five were supported primarily by "prime/subcontractor [by far and away the leader], marketing agreement, team, joint venture, and parent/subsidiary" structures while the latter three usually involved "relatively greater level of collaboration among participating firms."
RAND also segmented USAF objectives relevant to globalization into three categories (economic-technological, political-military and national security-viability) and identified program characteristics it said showed "the most promise for promoting the potential military-political and economic benefits of globalization." This analyst notes that those same characteristics also made it possible to individually and incrementally transfer the US technology base. Note that the primary driver is the defense firm not the government; all other drivers follow:
- voluntarily structured and often initiated by defense firms rather than by governments on the basis of internal business calculations of market conditions and best business practices.
- painstakingly structured to satisfy the existing U.S. arms export and technology security regulatory regime and CFIUS.
- often focus on promoting existing products or modifications thereof, or on specific product market sectors.
- frequently focus on subsystems, munitions, or discrete components or areas rather than on large, complex programs for the development of entire weapon system platforms.
- designed to gain and expand active reciprocal market access through new programs.
- often motivated by a desire to add to a company's product portfolio a highly competitive product in a market sector dominated by another firm or firms.
- characterized by mutual perception of balanced and complementary bilateral market access opportunities and technology transfer.
- most aggressive and innovative among these relationships depend on continued reform of the U.S. export control regime in order to achieve their full potential.
RAND’s defense globalization conclusions from 2001 have only accelerated (while they have exploded exponentially in the commercial sector):
- Numerous innovative cross-border strategic market sector agreements initiated by U.S. and foreign companies are emerging.
- U.S. aerospace firms are not significantly increasing their acquisition of wholly owned subsidiaries of foreign defense aerospace firms.
- Teaming and joint ventures with non-UK and non-Europe-based firms are increasing.
- U.S. industry collaboration with one country's firm increasingly means collaboration with many countries' firms.
- Consolidated European and other foreign firms mean potentially more equal partners as well as stronger competitors.
- European and other foreign firms seek U.S. market access but resent barriers.
- European and other foreign firms view the acquisition of U.S. firms as the most effective means of penetrating the U.S. market.
- Non-European foreign firms are forming strategic relationships with European and U.S. firms, potentially enhancing competition but complicating standardization and interoperability objectives.
- European and other foreign industry consolidation present U.S. government and industry with unprecedented opportunities as well as risks.
Yet all of the above are drivers and characteristics which may yet yield metrics, but do not now offer the analyst an actionable means of identifying trigger thresholds.
Where are the metrics?
Metrics in open source have been difficult to obtain. An effort was made by King and Cameron in 1974 and updated in 1977. Their work was reprised, and remains online, in Appendix A of Strategic Materials: Technologies To Reduce U.S. Import Vulnerability.
A more intriguing effort, Conservation, Integration and Foreign Dependency: Prelude to a New Economic Security Strategy, was done by David Leech, then at TASC, now Northrop Grumman, in 1993. His was the sole search result on "foreign vulnerability index." Leech proposed the use of Herfindahl-Hirschman Index normally used in anti-trust litigation to "measure the worldwide supply concentration of items, both overall for firms and with firm market shares grouped by country of origin." Along with risk factors it is one of the methods noted in INDUSTRIAL BASE: Assessing the Risk of DOD's Foreign Dependence, GAO/NSIAD-94-104.
This author found Leech's approach of sufficient interest to post a fair use excerpt of the GeoJournal piece, with footnotes, dealing with its Foreign Vulnerability Index (FVI). I believe it reasonable to say that Leech believes that:
It remains to be seen if Leech's approach falls victim to the problem we frequently see in supply chain analysis, namely that the complexity issue is so great that cost effective, perishable data is not available. I fear that may well be the case, hence the value of inserting a Design Basis Threat (DBT) analysis as we must have actionable values in a low data environment and be able to defend them. See:
Still, Leech is the strongest approach to metrics that this author has seen and deserves exploration anew.
Postscript: The Appendices (actually Vol. 2 issued in 1990) of the 1985 Strategic Materials analysis had a specific case study of the strategic value of the carbon fiber market, Case Study: The Advanced Composites Industry.
Leaping forward to the present, we see aviation/aerospace, industrial, sporting goods and automotive driving a robust market:
Over the last several decades, the global market for carbon fiber has grown about 12%. Industry experts expect this market to reach $0.9 billion by the year 2010 (around 50 million lbs), with the market for finished carbon fiber reinforced composites parts growing to $9.9 billion. The price of carbon fibers is expected to reach around $5/lb in 2008, a significant reduction in the $150/lb price in 1970 when the market was only around several million lbs.
Aerospace markets have led recent demand and are expected to grow at a 19% compounded annual growth rate (CAGR) through 2010. However, industrial applications are taking off, too, with a total combined CAGR of 14% through the end of the decade (this segment currently accounts for around 60% of the current demand). Sporting goods CAGR is estimated at 5% over the same time period, resulting in a total overall projected growth rate of a robust 13%. Wind energy could become the second largest market sector after aerospace by 2010. The following table summarizes some of these applications.
In this thriving environment, the last principal US producer of Acrylonitrile (AN or ACN), the precursor to Polyacrylonitrile (PAN) (See carbon fiber value chain) which is the basis for all aerospace/high end carbon fiber, has passed into foreign hands.
Apocryphal stories to the contrary, frogs are smart enough to jump from water whose temperature is elevating; in this skill of self-preservation, frogs are smarter than governments, corporations and self-interested political elites who will stay in the water until it is too late. Once again, low cost has proven not to be low risk.
Bibliography Note: While the following list of citations is not exhaustive, I submit that they reasonably constitute a four decade record on globalization and are a good jump point for further investigation.
Crafting A Contractor PBL Organization
By John Kotlanger & Ron Giuntini
Performance Based Logistics
29 April, 2008
PRC still expanding sub fleet: analysts
THREAT: Many security experts say that China's main objective in upgrading its submarine fleet is the ability to delay or deter US intervention on behalf of Taiwan
NY TIMES NEWS SERVICE, BEIJING
Tuesday, Feb 26, 2008
Final Report, Spring 2007 Industry Study
The Industrial College of the Armed Forces, NDU
'Power by the Hour': Can Paying Only for Performance Redefine How Products Are Sold and Serviced?
Sang-Hyun Kim, Morris A. Cohen, and Serguei Netessine
Wharton School, University of Pennsylvania
February 21, 2007
Critical Technology Accessibility
Committee on Critical Technology Accessibility, National Research Council
National Academies Press
Appendix C - Previous Reports on Globalization and the U.S. Military Industrial Base
PERP Program - Acrylonitrile
New Report Alert
Letter from China: Is it a 'peaceful rise'? U.S. shouldn't bet on it
Howard W. French
APRIL 20, 2006
Russia and Ukraine Reach Compromise on Natural Gas
By ANDREW E. KRAMER
New York Times
January 5, 2006
Measuring National Power
Gregory F. Treverton, Seth G. Jones
Intelligence Policy Center (IPC), RAND National Security Research Division (NSRD)
Measuring vulnerability to U.S. foreign economic sanctions: focused sanctions reduce costs to business.
Askari, Hossein; Forrer, John; Hachem, Tarek; Yang, Jiawen
VOL 40; NUMB 2, pages 41-55
Sanctions Assessment Handbook
Humanitarian Information Centre (HIC)
UN Office for the Coordination of Humanitarian Affairs
2004 last update
VALUE CHAIN OF CARBON FIBERS: Issues associated with production, conversion, and supply of PAN carbon fibers into high volume applications.
Presented by: Martin Kokoshka
Study on Impact of Foreign Sourcing of Systems
Office of the Deputy Under Secretary of Defense for Industrial Policy
Speed Kills: Supply Chain Lessons from the War in Iraq
by Diane K. Morales and Steve Geary
Harvard Business Review
OPEN SOURCE MIRROR
Positioning Your Company for Defense Department Work
Helping Remanufacturer's of Service Parts Capture A Highly Profitable New Source of Revenue Through Performance Based Logistics (PBL)
November 2, 2003
Background Paper of the Millennium Project Task Force on Science, Technology and Innovation
Smita Srinivas et al
United Nations Development Programme (UNDP)
April 18, 2003
Going global: U.S. government policy and the defense aerospace industry
Mark A. Lorell, Julia Lowell, Richard M. Moore
Certain Issues on China Countering Future Economic Sanctions
By Jiang Luming
The (Chinese) National Defense University
Military Economics Study, November 2001
Was America hunting for a new killer submarine?
Global Intelligence Update/Asia Times
April 6, 2001
Measuring National Power in the Postindustrial Age
By: Ashley J. Tellis, Janice Bially, Christopher Layne, Melissa McPherson
Analyst's Handbook - Measuring National Power in the Postindustrial Age
By: Ashley J. Tellis, Janice Bially, Christopher Layne, Melissa McPherson, Jerry M. Sollinger
Interpreting China's Grand Strategy: Past, Present, and Future
By: Michael D. Swaine, Ashley J. Tellis
How Long Do Economic Sanctions Last? Examining the Sanctioning Process through Duration
Sean M. Bolks, Dina Al-Sowayel
Political Research Quarterly, Vol. 53, No. 2, pp. 241-265
Task Force on Globalization and Security
Defense Science Board
The Impact of Economic Sanctions on Health and Well-being
by Richard Garfield
Relief and Rehabilitation Network (RRN)
Overseas Development Institute
RRN Network Paper 31
Overview and Analysis of the Economic Impact of U.S. Sanctions With Respect to India and Pakistan
James Stamps, Project Leader
U.S. International Trade Commission
Investigation No. 332-406
Publication 3236 September 1999
Assessing Defense Industrial Capabilities
DoD Handbook 5000.60-H
Under Secretary of Defense for Acquisition and Technology
INDUSTRIAL BASE: Assessing the Risk of DOD's Foreign Dependence
Report to the Chairman, Subcommittee on Defense Technology, Acquisition, and Industrial Base, Committee on Armed Services, U.S. Senate
Conservation, Integration and Foreign Dependency: Prelude to a New Economic Security Strategy
David P. Leech
The Analytic Sciences Corporation (TASC)
Volume 31, Number 2, October, 1993
Abstract and order info
FAIR USE excerpt of its Foreign Vulnerability Index (FVI)
US Procurement of Weapon Components from Foreign Sources: Policy Implications
Guy J. Fritchman
Major, US Air Force
USAF Research Associate
Program in Arms Control, Disarmament, and International Security
January 1993 (written during spring 1991)
Building Future Security: Strategies for Restructuring the Defense Technology and Industrial Base
Office of Technology Assessment
NTIS order #PB92-208156
A CALL TO LIFT ECONOMIC SANCTIONS AGAINST IRAQ
Henry B. Gonzalez, (TX-20)
(House of Representatives - June 24, 1991)
Industrial Base: Significance of DOD's Foreign Dependence
Report to the Chairman, Subcommittee on Technology and National Security, Joint Economic Committee, U.S. Congress
House of Representatives
The Globalization of America's Defense Industries: Managing the Threat of Foreign Dependence
Theodore H. Moran
International Security, Vol. 15, No. 1, pp. 57-99
Technology and Competitiveness: The New Policy Frontier
B.R. Inman and Daniel F. Burton, Jr.
Holding the Edge: Maintaining the Defense Technology Base - Vol. II, Appendices
NTIS order #PB90-253345
Industrial Strength Defense: A Disquisition on Manufacturing, Surge and War
Martin C. Libicki
National Defense University
Arsenal of Democracy in the Face of Change: Economic Policy for Industrial Mobilization in the 1990s
D. J. Bjornstad, ORNL Principal Investigator, et al
OAK RIDGE NATIONAL LABORATORY
Industrial Base: Adequacy of Official Information on the U.S. Defense Industrial Base
Report to the Chairman, Subcommittee on Legislation and National Security, Committee on Government Operations, House of Representatives
Holding the Edge: Maintaining the Defense Technology Base
Office of Technology Assessment
NTIS order #PB89-196604
US Industrial Base Dependence/Vulnerability. Phase 2. Analysis,
Martin Libicki,; Jack Nunn, Bill Taylor
Mobilization Concepts Development Center
National Defense University
US Industrial Base Dependence/Vulnerability. Phase 1. Survey of Literature,
Roderick L. Vawter
Mobilization Concepts Development Center
National Defense University
A Study of the Effect of Foreign Dependency
The Joint Logistics Commanders
Department of Defense,
(Contact No. F33600-85-C-0293), March 1986
Item is often cited, but no direct citation appears.
Brief summary of its foreign dependency analysis contained in: Industrial Base: Adequacy of Official Information on the U.S. Defense Industrial Base
Strategic Materials: Technologies To Reduce U.S. Import Vulnerability
Office of Technology Assessment, OTA-ITE-248
NTIS order #PB86-115367
Appendix A - Review of Previous Lists and Methods of Selection
Strategic Materials: Technologies to Reduce U.S. Import Vulnerability
Appendix E - Case Study: The Advanced Composites Industry
Scientific Communication and National Security
Panel on Scientific Communication and National Security, National Academy of Sciences, National Academy of Engineering, Institute of Medicine
National Academies Press
Appendix H: Statement of Admiral B.R. Inman for the May 11, 1982, Senate Governmental Affairs Subcommittee on Investigations Hearing on Technology Transfer (140-142)
Materials Vulnerability of the United States - An Update
Alwyn H. King
Strategic Studies Institute, U.S. Army War College
Materials and the New Dimensions of Conflict
Alwyn H. King and John R. Cameron
Strategic Studies Institute, U.S. Army War College
InfoT Public Infrastructure Defense Public Intellectual Property Theft Public Risk Containment and Pricing Public Strategic Risk Public Weapons & Technology Public