Interview transcript:
David Norquist So I think the key to understanding the status is understanding what it’s being designed for. So both the Trump and Biden administration have highlighted the rise of China and the return of great power competition as putting a greater demand on the defense industrial base. But the industrial base we have now is a reflection of the policies we adopted in the drawdown following the collapse of the Soviet Union. So there are fewer companies, there are fewer workers, there’s lack of resilience in terms of surge capacity, use of just-in-time inventory and fragile supply chain. So in order to produce the type of defense industrial base the nation needs, we need to address the policies that led us to the position we’re currently in.
Terry Gerton That’s a great point, because it really is a reflection of our 25 years or so of investment strategy. And right now, we’re being challenged in terms of, can we make enough fighter planes? Can we do enough ship replacement? Can we manufacture enough munitions even, given those have certainly been in the news lately with our resupply of Ukraine. What do we need to be investing in now?
David Norquist So I think you’ll see that, as you pointed out, you get the defense industrial base you contract for. So right now, if a company has unused capacity, there’s a penalty for that, because you’re trying to keep the overhead cost down. But that also means when you go to them, you say, we’d like you to ramp up production, they don’t have idle capacity waiting to do that. So what you really need is both the investment in capacity and a very stable demand signal that says, when we invest in these technologies — and you brought up a couple of the key ones — munitions is a very big one in the near term, there’s issues with submarines and shipbuilding, a lot of new technology’s coming online, and being able to signal that those demands are going to be there and if you invest in capacity, you will be able to have a business that recoups what you invested.
Terry Gerton President Trump has certainly issued a number of executive orders getting after the defense industrial base. Secretary Hegseth has said this is a key priority. What are you seeing in terms of actions right now that are really translating into changes and investment?
David Norquist So you see a number of things. First, there’s been an investment in production capacity, where the government is working with industries to try and produce the facilities that would make it possible. You’ve seen multi-year use for munitions. We didn’t used to do that with munitions. Now, that tells somebody that you’ve got a guaranteed sale over five years, so if you increase your production, you’re good. We’ve seen an emphasis now on looking at the acquisition regulations and reducing the burden. That does two things. One is it creates more incentives for commercial companies to come in. They don’t normally have to operate with those rules, so the FAR can discourage. But it also speeds things up. It puts a premium on getting technology to the field. So in the Hill, it’s the SPEED Act and the FoRGED Act. And in the administration, there’s a number of executive orders on the FAR Overhaul and others, all aimed at the same thing: speed up the ability to get technology and systems into the field.
Terry Gerton And how is the industrial base responding to that demand for speed?
David Norquist So it’s doing a number of things. One is it’s working with the department on how to bring innovative new technologies into the system, and it’s working with them on where are the barriers that slow things down. So you’ll see Congress looking at the requirements process to try and change that, looking under the authority to operate, which predominantly affects software. A number of the areas where there’s a lot of paperwork involved, the question is, does this stand in the way of getting things into the hands of the warfighter quickly?
Terry Gerton The reconciliation bill that passed recently added hundreds of millions—
David Norquist 150 billion.
Terry Gerton Billions.
David Norquist To the defense side, yes.
Terry Gerton To defense. And a lot of it was seeking to promote innovation. What will be the near term and midterm impacts of that investment?
David Norquist So what you’ve seen there is a couple of things. One is a clear investment in the topics you talked about earlier, the munitions, high priority, industrial capacity. So a number of those areas, the administration said, this matters to us. Part of the advantage of funding that is in reconciliation is it’s not disrupted by CRs. So often you go to ramp up production and then there’s a continuing resolution which says don’t build to your plan, build to what you did last year. And those disruptions have been contributing to our munition backlog. Reconciliation is a legally different mechanism not affected by CR. So that helps speed things up. But you’ve also seen a number of areas where the department has recognized that the delays in the administrative procedures don’t get rid of risk. They move risk out of acquisition, and they put it in the operating side, which is the warfighter is now at risk of not having the best technology. So you can think about a doctor responding to someone having a heart attack. They could go in through a checklist to minimize their legal risk or their insurance risk, but if it takes them an hour before they treat the patient, the whole point is lost. And so here the department is really focusing on, my risk is greatest that the warfighter doesn’t have what they need, that’s where I need to design the system to go.
Terry Gerton I’m speaking with David Norquist. He’s president and chief executive officer for the National Defense Industrial Association. Let’s change angle just a little bit. We’ve been talking in a way that mostly deals with the prime contractors, the big players. Let’s talk about supply chains where there are lots and lots and lots of little players, including even some foreign companies. There’s been a lot of talk about supply chain risk, what’s your assessment?
David Norquist So there’s several parts to the supply chain risk. The first one is small companies who are partially in defense, partially in commercial. The more rules we put on the defense side, the more likely they are to go pure commercial. So we noticed that the DoD reported that over the last 10 years, they lost 40% of their small businesses. Those types of challenges, many of our primes, when we interview them, report losses of suppliers. So that’s the first one, which is the risk of driving people out of this field. The second one you’ve got is mapping the supply chain, which is, regardless of where you are, when you’re assembling a final missile and you’ve got solid rocket motors and you’ve got wiring and you’ve got chips, you may know that you’ve bought them from a US-based company, but did the things they buy come from it? And so going further and further back in the supply chain has been a big issue for the department. And then the last one you touched on is what if the raw material simply comes from overseas, and the risk of the Chinese interrupting that supply like they’re doing now? And you’ve seen an emphasis on, well, how do we produce those domestically, and how do we ensure, whether in the U.S. or through our allies, we have access to those key minerals?
Terry Gerton Are you working with the Small Business Administration to sort of strengthen the ecosystem to support these small businesses?
David Norquist Yes, we do. NDIA has 1,700 members. The majority are small businesses. So we have a thousand or so small businesses as members of our association. And we work very closely with them on how do the rules affect you, what drives you to stay in business. Many of the things that sound like status quo, like continuing resolutions, are actually incredibly destructive to small businesses who don’t get paid during shutdowns, who have their plans disrupted during CRs, but we work very closely with the Hill and with others on how to ensure that we are encouraging small businesses to participate in the defense industrial base.
Terry Gerton There’s been some conversation about the burden of compliance, especially on small businesses, and there’s a trade between flexibility and responsiveness and compliance. Where do you stand on that?
David Norquist So I think the key with the balance between complexity and requirements is you need to ensure that the system you have bought works the way it’s intended. So the checks and the controls about, did the munition I buy fly the distance, hit the target, have the effect I’m looking for? Does the software function as intended? Those are all valuable. But there are some times when the government’s asking questions either to gather more information or to mitigate against contract risk, the dollar value of which to the government is significantly less than the operational risk to the war fighter. And so I think one of the things we have to remember is you’re not getting rid of the risk, you’re pushing it to the field and on the backs of the men and women in the military that they may go to combat without the latest systems. In wartime, we see that and we really push urgently. It’s in the period before then that we often de-emphasize speed and emphasize these sort of checklist controls.
Terry Gerton That’s really helpful. Along the lines of complexity, we’re talking about complexity in the supply chain, complexity in the defense workforce is another challenge. We’re seeing AI rollout, we’re seeing new technologies. How are we doing in terms of making sure we have the workforce amongst this environment to make sure that we’re meeting requirements?
David Norquist So there’s a number of areas in the workforce, and I’ll start with the different ones. So start with, for example, submarines, which is a lot in the news. The United States used to make three submarines a year. After the Soviet Union collapse, we went down to ordering one submarine every other year. You laid off a very large number of people. A lot of companies either went out of business or shifted to commercial. Now we want to get back up to three submarines a year, takes a lot of effort to bring on board those people. They need to be trained and skilled in order to be productive, they have to have that workflow. So we work with a group called Navy Talent Pipeline Program. They work, for example, with local schools to try and get the type of equipment in the school shop that might be used at the local factory. They work with local companies to then recruit and hire these. So the whole goal is, each step of the pipeline, how do I build up that workforce and show people there are very good paying jobs in this field and we encourage them to go in. So there’s a number of things that are going on to try and bring in the workforce. On the high tech side, the real challenge is you’re bidding against high-end commercial ones. And so if somebody gets paid more to develop a video game than the command and control system for a real weapon system, that’s where your talent’s going to go. That’s the part of being competitive in the market space for very specific talent.
Terry Gerton What are the solutions in that challenging space?
David Norquist So on the one is building a pipeline. It’s showing people these are credible careers, that you can have them and they’ll be there for you for your lifetime. On the other side, it’s making sure you value the talent for the type of thing you’re buying. If you don’t value high-end military equipment, that’s not where the talent is going to go. So you’ve got to realize you’re dealing with a marketplace and you’ve got to be competitive in that marketplace.
Terry Gerton Well, you’ve got a conference coming up at the end of the month, the Emerging Technologies for Defense Conference. What are you going to be talking about there?
David Norquist So this is really about the focus of what we’ve talked about here today, accelerating the adoption of emerging technology all the way to the warfighter. This has been a DoD priority, so we’re going to have engagement, that’s the goal for this, engagement between the DoD on what their needs are and industry on their innovations and their solutions. So 27 to 29 August, the D.C. Convention Center, we are going to have defense officials, technologists, acquisition leaders, industry innovators. So think of people, Under Secretary of A&S, Under Secretary for R&E, which is the research side, the Vice Chairman of the Joint Chiefs of Staff, the EUCOM Commander is going to speak, and then there’ll be breakout sessions, because what we want to have is, right down at the working level, industry and government talking through the issues, talking through the problems. And this year we’re running something new which is we’re going to have a hackathon, which doesn’t mean breaking into systems, it means solving problems, somebody had to teach me that. But they’ve been given a series of challenges by the combatant commanders and the warfighters. And so they’ll be developing coding, prototyping, and testing to demonstrate that their team can solve real challenges in real time. So that will be going on right next to the convention, the activity we’ve got going on. So we’re very excited about this, because we really believe, and part of the reason NDIA exists is, to let government bring their problems to industry, let industry bring their solutions to government, and be able to benefit from that combination.
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