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Chief of Naval Operations Adm. Mike Gilday participates in the panel discussion, "Restoring Strength at Home: Toward a Robust and Resilient Industrial Base," at the Reagan National Defense Forum (RNDF), with U.S. Under Secretary of Commerce for Industry and Security Alan Estevez; U.S. Under Secretary of Defense for Acquisition and Sustainment William LaPlante; U.S. Senator Roger Wicker; and James Taiclet, Chairman, President, and CEO, Lockheed Martin Corporation, in Simi Valley, California, Dec. 3, 2022.
Below is a transcript of the remarks as delivered:
ANNOUNCER: Ladies and gentlemen, welcome to Panel 3, “Restoring Strength at Home: Towards a Robust and Resilient Industrial Base.” Please welcome Ms. Morgan Brennan of CNBC and our distinguished panelists. (Applause.)
MORGAN BRENNAN: Well, good morning. Thanks for joining us here this morning. And I will just go – jump right into it, because we have a very meaty topic, I think, and many things to cover over this next hour.
But first, just to introduce our panel, we have Secretary Alan Estevez, the U.S. Undersecretary of Commerce for Industry and Security; Admiral Michael Gilday, Chief of Naval Operations; Secretary William LaPlante, U.S. Undersecretary of Defense for Acquisition and Sustainment; James Taiclet, Chairman, President, CEO of Lockheed Martin; and Senator Roger Wicker of Mississippi.
Welcome to you all. And I think we’ll start here with maybe just a few opening remarks from each of our panelists on this topic of a robust and resilient industrial base. And then we’ll go from there. So, Secretary Estevez, let’s start with you.
ALAN ESTEVEZ: Sure. A couple points now. My job at Commerce is on the export control side, which we call the defense side. So, you know, I just put on these export controls regarding China that will slow China’s ability to produce the highest-end semiconductors for a period of time. They will figure this out, but what we’ve done is pretty comprehensive, and it will slow them down. Which is important for our national defense.
That is insufficient for what need to be done. We need to play offense too. So Senator Wicker, CHIPS Act, key in invigorating our sector there. That’s one sector. There’s other sectors where we need to invest, we need American industry, Jim, to play its role in innovating and developing the new technologies that we need to protect ourselves. And we need to develop the talent in America to do that.
So let me stop there, and we’ll go down, and we can talk about those things as we go through.
MS. BRENNAN: That sounds great. Admiral Gilday.
ADMIRAL MICHAEL M. GILDAY: Yeah, just a couple comments leading off. First of all, with respect to coming out of COVID, I think that the degree of opaqueness that exists between the Pentagon, down 395, and Crystal City has somewhat – has somewhat lessened. I think I see a much stronger relationship, a much more honest relationship with industry, specifically supply chain vulnerabilities. Those discussions are very, very healthy. We both have a lot at stake there on both sides. And so I see that – I wouldn’t necessarily refer to it as teamwork – but I think honest conversations about those kinds of challenges that we face.
The second thing that I’d mention, just briefly, as I look across this audience, is that when people typically think about the defense industrial base, they really think about the primes, they think about the shipbuilders, they think about the right end of the continuum – those big companies. Having spent the last couple of days in Silicon Valley, and right now in the Middle East we have a big, unmanned exercise going on called Digital Horizons. I think of all of the opportunity exists at the other end of the spectrum, with small high-tech companies that build unmanned platforms and specialize in AI and data analytics.
We are really leveraging that kind of innovative technology. And I think at the same time – I think that is having a very positive, productive impact on the other end of the continuum of those large companies. Thanks.
WILLIAM LAPLANTE: Good morning. I guess I’d start with a few remarks citing the National Defense Strategy, that was recently released, and how it ties to this topic of integrated deterrence, campaigning, partners and allies. Really underneath that all is a robust industrial base, and a resilient industrial base, and really a 21st industrial base that gets at a little bit what the CNO is getting at. We need all hands on deck. We need everybody from the companies like Jim’s, to the right, to small startups that don’t even know how to spell DOD. We need everybody. But we also need everybody not just to work on the front end or the back end but be working on the design and development and the production together going back and forth. That’s where we need the innovation.
I think that – you know, that’s where my head is at. So I think that we have a great opportunity now because we’re being focused by the events of Ukraine and looking around the world. And I think there’s a real technology opportunity to take modern design techniques – some call it digital engineering – with high-powered computing, going back and forth with advanced manufacturing, including with small companies and startups, and getting into real economies and scale. And really, not just to follow the industrial model of in series, but to do it all together.
MS. BRENNAN: OK. I have a feeling you, Jim, have a few thoughts on that.
JAMES TAICLET: Yeah. Good morning, Morgan. Good morning to everybody here. Look, it’s evident to everybody that we’re in a geopolitical competition era. But it’s great for me to hear our government leadership recognize that we’re also in a techno-security competition, especially with China but with others as well. And in the case of China, their leadership has identified that digital technology is at least as important as physical or Newtonian technologies to the future of defense. And with civil-military fusion in their system, they’re including their digital industries in their defense enterprise more and more effectively.
Therefore, I think it’s really critical and timely that the relationship between the U.S. government and industry, that the CNO recognized just a minute ago, really get driven home. And it’s got to evolve rapidly for us to be able to compete with China and others. And the strategy of integrated deterrence that you mentioned, Mr. Secretary, really demands the implementation of joint all-domain operations. And to actually do that, we have to address our acquisition process, because the existing processes and organizations and acquisition in DOD are designed to address physical development technology cycles. Those run up to 10 years, and some of them beyond, because of the complexity of satellites, submarines, aircraft, et cetera.
These processes and procedures are unsuited, though, for the more rapid development cycles in the digital world, that you referred to, Bill, which can be ten weeks or ten months, but they’re not ten years. So to maintain our techno-security industrial lead, which we have today against China, I think it’s imperative for DOD to establish a parallel acquisition process to acquire those 21st century digital technologies that you talked about, Bill, that you need to deploy JADO. And that’s really the theme that we’re driving, is how do we get the small, medium, and large – especially the large, including them – digital leaders in the U.S. economy involved in the defense enterprise?
MS. BRENNAN: Senator Wicker.
SENATOR ROGER WICKER (R-MS): Thank you. I think this is a good follow up to our breakfast panel. And I’m sure it was designed that way. I can’t resist making general comments that, of course, pertain to our industrial base. Chairman Smith is – he’s been a great friend and an ally in adding $45 billion to the defense budget. But he did say a couple of things that I want to respond to about the think tanks who come to us and say that everything is going to hell and scaring us to death.
I would love to hear a think tank come and tell us that they war gamed the Pacific, and we’re just fine. That they war gamed a competition with the People’s Republic of China over Taiwan and we were great. But I haven’t heard that from the classified war games in the Pentagon, which we hear about in open forum. We don’t hear the classified parts of it in a forum like this, but we know that we’d lose war games, when we fight China. We know that the RAND Corporation says that we are not ready for whatever might happen. And I don’t know if there’s a Davidson Window or not, but it could certainly come sooner than that.
Heritage Foundation, which is an organization – it’s another think tank, and it’s an organization that I respect – does an annual index of military strength. And the one that comes out for 2023 just came out last month. The Army, the U.S. Army, was rated as marginal. The U.S. Navy was listed as weak by the Heritage Foundation. The Air Force was listed as very weak. The Marine Corps, listed as strong, but it is small. Space Force, weak. And Heritage says there’s a growing risk of not being able to defend national interests.
So I’m making general comments, and I’ll be happy to drill down on the more specific subject matter. But I would just say to you that our industrial base, whether it be the large corporations like Huntington Ingalls, with 11,500 employees in the state of Mississippi, or the smaller suppliers with 90 or fewer, like Seemann Composite that makes the nosecones for submarines and we absolutely could not do without them, it’s all – it all goes back to the fact that for whatever reason, over time we have not – we have not funded the military, and we have not made sure that we were ready to do the two things that we – that we might be called on to do. And that is win two major theater areas.
So I worry about the fact that we’re not supporting the industrial base, to the extent that we’re not giving them the programs they need to manufacture the ships, and weapons, and ammunition we need.
MS. BRENNAN: And I would imagine it’s not just a matter of funding, but it’s also a matter of things like continuing resolutions and the roles those play, especially on your mid-tier and your smaller suppliers within the supply chain. I want to get into all of this a lot more.
But first –
SEN. WICKER: OK. I’d be glad to talk about the continuing resolutions.
MS. BRENNAN: But first – but first, Admiral Gilday, I want to get your response to that. To what the senator just said. When we talk – I mean, on CNBC, this is a conversation that comes up all the time. Investors are very focused on this topic, because they see it as a potential Black Swan. But if and when China were to make a move on Taiwan, is the U.S. Navy, if tasked to do so, in a position to counter it successfully?
ADM. GILDAY: So about a third of the Navy’s at sea today. We’re forward. We have more ships right now in the European theater than the rest of the NATO nations combine. We have more than 25 ships. We have ships right now in the Taiwan Strait and the South China Sea. We are forward. We are present in the Arabian Gulf, in the Gulf of Aden, in the Mediterranean Sea. The United States Navy is in contact with peer competitors under the sea, on the sea, and in the air every single day. You see snippets of it with ships going through the Taiwan Strait, they were going nose-to-nose with Chinese ships. You see it with our aircraft in the Eastern Mediterranean, or out by the Sea of Japan with the Russians. There’s a lot of stuff going on under the sea that I can’t talk about publicly, but just to know that we have significant overmatch in that domain against any competitor.
In terms of looking at our investments, right now on the Hill is the largest shipbuilding budget in the history of the United States Navy at 27 ½ billion (dollars). You cannot throw much more money at the seven shipbuilders that build U.S. warships in the United States of America right now. Their capacity is about at max. And Congress is helping us max them out. I would say the same thing for weapons production. If you take a look at our budgets and where we’re putting money, we are trying to send a very strong signal to industry that we need consistent, stable production lines for weapons with range and speed for a long time.
We certify every deploying unit for combat operations before we take in all lines and send them to sea. There are an awful lot of assertions in different surveys. Those surveys don’t go out – take a look at who the audience is for those surveys. And I would invite all of you to talk to sailors, to Marines, to airmen, to Coast Guardsmen, to soldiers, to space guardians, and get their sense of whether or not they feel that they’re ready, and what they think that we’re not doing more of that we should be. I think that would be a good data point. But look, you know, the Secretary of the Navy has been clear to me that our responsibility is to field the most lethal, capable, ready force not in 2027 but on December 3rd, 2022. And that’s what we focus on every day.
MS. BRENNAN: OK. Secretary LaPlante, you dig into the supply chain. You see – are assessing things like production and the ability to ramp production. It’s been a focus with Ukraine certainly. We can talk about it where that’s concerned. We can talk about it where China – countering China is concerned as well. What do you see as challenges right now when it comes to the industrial base? And we’ll use the example of Ukraine to start. How quickly – what needs to happen to see some of these lines ramp more quickly, and some of these systems be able to get into the hands of Ukrainians, or allies, or even into replenishment of our stockpiles more quickly?
MR. LAPLANTE: Yeah, thank you. And I think, just to start with, the experience we all had during COVID is we all – I think a lot of Americans and people around the world recognized, whether it’s baby formula or prescription drugs or PPE or getting a vaccine quickly, that it didn’t take much to disrupt our supply chain just in our economies. Why is that? Probably because of the just-in-time delivery, minimizing inventory, reduce tooth to tail, all the rest of it. We had the – we had the same issue in the DOD. And you find out in a time of crisis. So that’s point one.
Point two is, and particularly in the DOD, we’ve gone out of our way to really minimize any redundancies because, again, that’s efficiency. But one person’s efficiency is another person’s vulnerability. So what we’ve done systemically – it started well before Ukraine – is going through. We have a team of experts doing this, but deep dives into critical munitions and systems, and going down and finding the chokepoint in each one. And the chokepoint can be a variety of things. It can be the workforce. It could be ball bearings. It could be batteries. It could be obsolescent parts. It could be microelectronics.
And then, as best we can, get money to those places, using Defense Production Act, et cetera. At the same time we’re doing that, we are also building the plans to get it to more sustainable, longer-term production lines. And the other piece of it, I would say to folks, is that we have to get comfortable with the fact that production and getting to production is as important as part of any other part of the acquisition system. And I would really want or folks that are innovators in the front end – which we need you; we will not win without you – to also help us on the backend as well. I think that’s what we need to do as a country.
MS. BRENNAN: Jim, I see you nodding your head.
MR. TAICLET: Well, first of all, I want to recognize Dr. LaPlante, the Army, and the other services for really, you know, attacking this issue when it emerged. But it’s a little bit at the battlefield hospital level. And you guys are fighting hard and you’re making great progress but, as you said, the U.S. defense industrial base is scoped for maximum efficiency at peacetime production rates. That’s what it’s built to do today. We’re working on that now with government, but it’s overly vulnerably to those disruptive events like COVID as a result. And there’s labor and supply shortages that are still continuing through because they’ve been structured in such – in this way.
It was also rapidly – or, unable to rapidly scale, and scale up quickly, when the circumstances demanded it, like with Ukraine. So we’re learning a lot now about this situation between the supply chain disruption of COVID and the Ukrainian crisis. So we should be applying concepts of anti-fragility to the whole industrial base. And by anti-fragility, I mean when there are shocks to the system they do not damage or stop the system from operating. And some of the tools that I know that you’re already employing in the DOD – multiyear procurement contracts for expendables, such as munitions, but it needs to go beyond that. A significant reduction in the single-source suppliers of key components, because you won’t have those emergencies in the ball bearing single supplier for that one part that you need.
And then, thirdly, you know, procurement and maintenance of the tooling and capacity you need to quickly move two standard deviations above what peacetime production rates are in a reasonable amount of and short time. So those are some of the ideas that we can implement, and I know that the government’s looking at now. But we’re going to need to fund those. You know, resiliency isn’t without cost. There will be some cost to this. But we’re learning so much in this experience that I think it’s going to be a cost-benefit tradeoff worth looking really hard at.
MS. BRENNAN: OK. I know there’s a few people who want to jump in on this. (Laughs.) Secretary Estevez, I’ll start with you.
MR. ESTEVEZ: Sure, a couple things. One, and I like what you were saying, Jim. But, you know, we need to look at this as across the full American industrial base, not just the defense industrial base, because frankly they’re completely linked, right? We need to get away from reliance on adversarial countries as sources of supply, again, the China problem which, you know, rare earth, neodymium magnets, and on and on and on. I could go on and on and on there. And we need to start encouraging buy America or buy allied. And if it costs a little more, OK.
We need to encourage – and companies need to understand their supply chains, and they need to start thinking about how to diversify those supply chains. But if COVID didn’t show that, Ukraine should have, in spades. You know, if Putin is doing anything good, he’s helping NATO membership and he’s helping people understand the problems in their supply chain, including our European allies, who are all over this right now.
Two, we need to look at our own manufacturing capability, Bill, to your point. It’s not just R&D. It’s got to be production. And modernizing our production capability. That includes whether it be organic production at DOD or production across industry to digital industrial capability, 21st century capability, more agile and more fluid. You know, we’re not going to be building F-35s at Willow Run, right? So we need to figure out a better way to increase our production capacity in the United States.
MS. BRENNAN: Admiral Gilday.
ADM. GILDAY: I’d just make a couple of comments, as the guy in uniform, and thinking about this through the lens of what could we possibly do to allow industry to be able to surge when it needs to surge? And I go back to steady state production. You’ve got to solve that problem first, and we haven’t. And so I believe that from the services and – from the services, we need to give a steady, clear, consistent and predictable demand signal to industry. That needs to be reflected in our budgets. The sine waves are unhelpful. We’ve seen that in munitions lines out of Ukraine. What that ends up yielding, I believe, is more level-loaded production lines that are much more efficient.
And the next thing I’d add is for the services, we also have to minimize changes to that production line when it’s in progress. That leads to more time, it leads to more cost, and typically takes us off track. So I’d just add those tidbits to the comments that Mr. Taiclet made and the secretary made.
MS. BRENNAN: Senator Wicker, I want to get your thoughts on that, both in terms of budget and also in terms of the crafting of policy, the balancing of existing programs and a production ramp, and what that means in terms of balancing legacy, legacy where it makes sense, versus newer technologies and investing in newer capabilities, and how quickly we can – we can get that manifest.
SEN. WICKER: Well, I think we have to – we have to balance that based on the best information we have. And again, a lot of what was said at breakfast is absolutely true. But we’re still going to need tanks. And we’re still going to need missiles. And we’re still going to need ammunition. Let me also clear – let me make sure everyone’s clear. I’m on Admiral Gilday’s side. He’s been given a job to do, and he has to put the best face on what he’s been provided. And Secretary Del Toro is here too. And I think he’s the only secretary that actually spent a year in Pascagoula making ships. So I’m on their side.
A few years ago, when we passed the first SHIPS Act, maybe we’ll pass another one soon, every expert in uniform – admirals and generals around the globe – told us we needed 355 ships to compete. We finally decided to take them at their word, and we didn’t pass a sense of the Senate. We passed a statute that was passed by the House of Representatives and signed by the president, saying that 355 ships in our Navy is the statutory requirement.
It’s been somewhat treated as advisory since then, but the Congress in that statute – and what I would have preferred to do is actually implement that in our authorization bills. China has 400 ships. And they’re building them more and they’re building them better. Some of ours are much more technically capable. But I just – I want to give Secretary Del Toro and Admiral Gilday what the experts say they’ve needed.
Now, with regard to the budget, I was – I was heartened to hear everyone say that we need to pass an NDAA. There had been some school of thought that the new speaker would like to tinker with that after the first of the year. I really do – I think we all – I think most of us agree we need to get our work done for this year and get that done. And of course, we need to pass the NDAA really before the end of the summer next year.
With regard to the omnibus, in my view it would be a disaster not to pass an omnibus before the end of this calendar year. We had – I had my staff calculate this just a few days ago. If we go on the continuing resolution, which is what we appropriated last year, we just do that again with a few anomalies, it is actually – Admiral, it is an $80 billion hit to national defense, not just $45 billion. So it would be an utter disaster, and would send absolutely the wrong signals to Russia, send the wrong signals to the people who are our adversaries and looking at a possible challenge to us in the Pacific.
In addition, there’s such a small majority in the House of Representatives, there’s a small Republican majority coming next year, I really think it would be very, very difficult for Speaker McCarthy to get an omnibus bill done after the first of the year. So it’s incumbent on us. If we support national defense, and if we back the public in hoping that we can avoid a war with China and help our Ukrainian friends win, we need to pass an omnibus bill. It’s not the way to do it.
One other thing, I don’t think Americans realize, there’s one person in the world who can schedule a bill on the Senate floor. There’s only one person on the face of the globe, and that’s the majority leader. I will say this for Mitch McConnell, we’ve had a hard time bringing bills to the floor, but we – under his leadership, when he was majority leader, we did do some minibuses and didn’t leave everything to the end. But clearly, for whatever reason, Majority Leader Schumer has decided not to allow the appropriation bills to come to the floor, against our – against our best advice.
I hope – he’s going to be majority leader again next year. And I hope, in light of everything that’s going on and the threats that might happen to us, we can come to a national consensus to go ahead and bring those bills and let the House and Senate work on them. But one person and one person alone, schedules bills on the Senate floor. And that’s the majority leader.
MS. BRENNAN: Secretary LaPlante, the fact that we’re even having this conversation – and we tend to have this conversation to some varying degree, unfortunately, rather regularly over the years – how do you navigate it? Both in terms of continuing to fortify an industrial base, from a DOD perspective, but also being able to bring on new technologies, new potential companies, create some sort of certainty in those – for the ability to on-ramp some of these new – yeah, new technologies in an uncertain environment?
MR. LAPLANTE: Yeah. It’s a great question. And I would just say, let’s first talk about the progress that’s been made. It goes back multiple administrations. There is much – this is a good thing – there’s much more prototyping going on and experimentation. There is much more of a leadership push, just like the CNO being in Silicon Valley the other day. There’s so much more of a leadership push to reach out to these nontraditionals, all that. So I think we’re at a point where we’ve got to get this into the mainstream and we’ve got to get it to scale.
And so this is where my head is as I’ve been watching this. And maybe it’s overly influenced by Ukraine. Is I think we can get these modern techniques that are coming from the commercial world and the high-tech industry that are at this intersection of large data sets, AI, modern digital engineering where you’re really able to go back and forth in designs. And you’ll produce a design that a human would never have produced. You look at the thing and you say, my God, who produced it? And you find out it’s optimal, because the algorithm produced it.
Getting that with production together out into the field is the next big step. So we got to get the innovations and the new folks into the mainstream. Now, you can ask the question, and we often do, how do you do that with major platforms, right? Well, there was an example just last night with the rollout of the B-21. The B-21 has an open mission systems architecture deliberately put in with standard interfaces, such that there can be technology insertion for the next 40-50 years. And it could be competed with small businesses directly from the government to inject it right into the open architecture.
That’s what we need to do. And when we have these open architectures, we got to use them and we got to open them up to small businesses and to startups and say: Hey, do you want to get your algorithm into the B-21? Here’s a chance to do a bake-off. So those are the things we need to do.
MS. BRENNAN: Secretary Estevez, I want to get your thoughts on that, especially because, I mean, a key part of this is an industrial capacity is – needs a market globally. And that’s part of, I think, what helps to add resiliency, even in the face of maybe uncertain budgetary environments from a government, or U.S. government perspective.
MR. ESTEVEZ: So, a couple things. And I’m looking at Ellen Lord and Mike Brown who are in the audience. And I was up in Silicon Valley with them the other day, also looking at technologies. I was also visiting some of the companies that I’ve impacted billions of dollars of their revenue by stopping them from being able to sell to China. So I thought it was important for me to go up and explain the national security implications of why we did what we did.
But to Bill’s point, you need to bring in the entire industrial base to have that innovative ecosystem. I mean, I was listening to some really cool stuff that I knew nothing about on technology, synthetic biology, for example. That, you know, we need to start making investments in order to grow our own innovation ecosystem. My earlier comment, you know, if I impede China here that’s five years, maybe. I need to run faster on the offensive side, so I’m making that five-year gap into a 10-year gap. And so that we, as a nation, and we as a nation with our allies, can remain that far in front.
Let me address the budget thing really fast, because since I’m in the Department of Commerce people don’t think about my budget as much. I know Senator Wicker does. I have these authorities to protect American companies and American people, related to things like China cloud companies and China software. And I’m not going to go into the TikTok problem. But I have no money to do that, because it’s sitting on the floor of the Congress right now waiting. So I am doing this incredibly important job with borrowed manpower, trying to capture lawyers that are walking down 15th Street because they have a phone and they look like they might know something about this space. And that’s not the way we should be doing business. We need to have budgets passed so that we can get on with our job.
MS. BRENNAN: I want to pause here, because we have a live polling question. So for our audience, I’m going to pull that up on the screen here. The question is: Many are concerned about how thoroughly integrated the American economy is with the Chinese economy. The U.S. government should prioritize, number one: Encouraging U.S. businesses to move out of China. Two, adopting policies to support the U.S. industrial base to compete with China. Three, enacting sanctions on Chinese corporations threatening U.S. national security. Or, four, leave it to China to decouple from the U.S. economy. So if you want to weigh in on this poll and your thoughts, please do so now. We’re going to continue the conversation. We’ll come back to those results in just a few moments.
But, Admiral Gilday, I want to go back to you. I want to get your thoughts on how you’re thinking about new technologies and new capabilities, especially given the fact that – and we’re seeing this industry, these investments in anticipation of it – the balancing of, I think, what the Navy currently looks like, versus things like unmanned.
ADM. GILDAY: Mmm hmm. So a lot of opportunities. And some of this has been touched on up here over the last few minutes. The fundamental problem is not attracting innovative, high-tech companies to DOD. The problem is transitioning their products into a production line and crossing that three-year gap. When I think about – you know, there’s an ongoing effort right now to come up with ideas to revitalize the system that Secretary McNamara put in place in the 1960s.
It doesn’t quite work for the kinds of technologies that we want to leverage quickly in a decade of concern. What we want to be able to do is to get to production fast. And a couple of exemplars might be Operation Warp Speed, maybe how we fielded MRAPs quickly a decade or so ago. Those are the exemplars. Instead of blowing up the whole system, I just look at how do we do that really well? What did learn from that? And how can we apply it to some of these new technologies?
If I go back to the framework that McNamara created, there’s a lot of laws. There’s a lot of processes in place to drive down technical risk so that we don’t scale too early and end up with stuff for hundreds of billions of dollars that doesn’t work very well. There’s plenty of examples of that. Now, if I talk – if I think about the high- tech firms that are offering their products, their AI – their AI products, their unmanned platforms, these are dual use technologies. And much of that technical risk has already been driven down.
And so we could go to the Congress. We can go to our boss, Secretary Del Toro, and he can take it up the chain of command in the Pentagon, to say: Look, I have a very high degree of confidence that this unmanned platform coupled with this AI software plug is going to solve the problem we need to solve, which is to understand the domain which we operate in much better than we do today. I’m an optimist in terms of where we’re headed. And again, I go back to, you know, solving that problem. And I think that there are exemplars out there that we should leverage, learn from, and execute off of.
MS. BRENNAN: We’re starting to get some questions from the audience, and I want to weave them into this conversation. Jim, I’m going to put this question to you. What steps is the United States taking to strengthen our supply chain be deconflicting it with potential adversaries? And I put that question to you because, as we’re having this conversation about supply chain, I would imagine that we’re seeing a company like Lockheed Martin and many other companies I’ve spoken to, take a deeper, closer, more rigorous look at just how far down that supply chain goes, and where different aspects of it actually come from.
MR. TAICLET: Sure. Well, there are regulations about where to source for defense articles. And we, you know, apply and hew to those regulations. However, when you get three or four layers of suppliers down, they will be sourcing from distributors, small parts, microelectronics, rare earth elements, magnets as you mentioned, Alan. Those come in pools. It’s hard to figure out where that commercial distributor that sells to the fourth level down supplier got that magnet material. It’s a real test case I will point out to you.
And we had to figure out that it happened. It took 15 years for someone to identify that that was going on. And then we were able to resolve it. But one way to resolve it is to go to Alan and get a waiver, because either we don’t know where that article ultimately comes from, as commercial and in the defense industry, or it’s the only place to get it, which is the real risk. For semiconductors, the CHIPS Act was really important to our industry, our company, and national defense.
And so we advocated heavily with the administration for that because the semiconductors we need include the sub-10 or sub-6 nanometer chips. But most of them are much less sophisticated than that. And almost all that production is moving to three places – China, South Korea, and Taiwan. And the real issue of a nightmare scenario, not for the defense industrial base alone but for the entire economy, is China to withhold its, you know, non – sub-10 nanometer chips, for it to blockade Taiwan, and intimidate South Korea in a way that none of them can export to the global economy anymore.
It's the Russia play with natural gas. So we have to address microelectronics, semiconductors specifically, and not the most sophisticated but all semiconductors. And then, as I think, Alan, you had already mentioned, rare earth minerals and critical raw materials. Because if those get shut off by one or two countries that could be or are adversaries of ours, the DIB will stop, but the larger economy may also slow down or stop. So those are some of the critical areas there.
MS. BRENNAN: Senator Wicker, how quickly and how effectively can the government step in to help that process?
SEN. WICKER: I think we’ve got to move – we are moving quickly, and Commerce can verify this, on implementing the CHIPS and Science Act. We were talking earlier about who gets credit for this. And also at some town meetings, there’s who gets blame for this. Because there are some people who believe this is industrial policy and we ought to be using trade policy, or some other means that I don’t think would be effective, to get the semiconductors made in the United States.
We’re going to add a provision, I think Monday – I think when NDAA comes out Monday we’ll have a provision that perhaps some members of the panel are familiar with. There are three Chinese companies that we very much want to prohibit their chips from being in our products, because of national security concerns. The problem with that that we’ve had to deal with is the layers of supply, third and fourth level, it’s hard to know. It’s hard for the ultimate contractor to know where those chips came from.
And so we’ve had to work this out with a safe harbor clause. And I think we’ve got it where it needs to be. Also, it will not be fully implemented for five years. But we are continuing as soon as Monday with the rollout of the NDAA of, again, trying to protect our national security from China getting their secrets, and at the same time not shutting down manufacturing because it’s just impossible to comply with that. So thank you, Commerce, for working with us on that.
MS. BRENNAN: Secretary LaPlante, I actually want to get your thoughts on this discussion, especially when you talk about something like rare earths, since that’s coming up right now. It’s a tricky one, right? Because we don’t do very much in terms of mining here where rare earths are concerned. So much of that does happen in China. And what doesn’t happen in China gets sent to China for the refining process, almost all of it, actually. So when you think about the resilience of the defense industrial base, and when you think about this kind of decoupling that’s happening, and the fortifying and ensuring of companies like Lockheed Martin to be able to get those products they need, how do you – how do you navigate that?
MR. LAPLANTE: Yeah. I think what we have to recognize is that the term that some have used is called “weaponized interdependence,” which is the recognition by some countries that control over a certain part of the supply chain can actually be used, of course, for their national advantage, whether it’s for chips or it’s rare earths. I think in the case of rare earths, as has been said by many people, rare earths are actually not that rare. What is – the hard part about it is getting not just the material but getting the processing of it and extracting it. And it actually is a technology issue.
And it’s something that we in this country and with our friends – and this is another piece of what we’re calling friend-shoring – have to start funding new ways to extract the rare earths wherever they come from. That is sort of what China locked up about 30 years ago. They recognized the fact that they could – they could lock into this market. Yes, China has a lot of stuff. And they’ve dug a lot of holes in China. But that’s not the key part. The key part is they locked up all the processing. We have to do that too. And it’s a high-tech issue.
The other piece of it, which I think is related to supply chain, is thinking about buying items as a service, where we do space launch as a service. We have to ensure that they have the right supply chain it, but then how they do the engineering, how they do the packaging, how they do the manufacturing is up to them. But again, I think that’s a tie between the supply chain and also how we buy things.
MS. BRENNAN: OK. We have so many questions coming in, which is very exciting. So I’m going to get to as many as I can here. But Admiral Gilday mentioned we’ve maximized the capacity of America’s seven shipyards. Do we need an eighth or ninth shipyard? If America’s shipbuilding capacity is maxed out, should the Navy be able to buy ships from trusted allies with shipbuilding capacity, like, for example, South Korea?
ADM. GILDAY: Yeah, I’m not going to touch the second one. (Laughter.) On the first one the answer is absolutely yes. So what we’ve seen in the midsized ships – that’s where we have seen more competition. Austal down on the Gulf Coast, right, shifting to – shifting their processes from aluminum to steel. Much more competitive, and with work coming their way from the Coast Guard. And they’re doing some work for us on the Ford-class carrier. Fincantieri up in Wisconsin is another midsize company that’s come online here recently with frigate.
We need to incentivize the entry of additional companies into this – into this market, make it more competitive, give us more capacity. We’ve been fighting ground wars obviously for the last 20 years. And so because that’s been the priority, the nation has not made investment in the recapitalization of the United States Navy as high a priority as we probably should have. So now we’re playing catch up ball. So again, the Congress is being great. They’re trying to optimize, maximize, those production lines. But we need more shipbuilders. Not just for the United States Navy and the United States Coast Guard, but also for the commercial industry. There is also a demand signal there.
We have significantly downsized the number of shipyards we have in the United States. You know, over my lifetime it’s gone from 60 shipyards that supported DOD down to just seven. You could say the same thing for aerospace companies – over 50 down to maybe five. Space launch companies that build spacecraft cut in half from eight to four. And so the trends are not good. But it is a challenge, I think, from a workforce perspective, in a society where our manufacturing demographic has essentially been cut by 35 percent over the past three decades.
And so it’s not just the shipyards. It’s also the ecosystem that supports them. It’s vocational schools in terms of education. It’s the Department of Commerce, the Department of Labor, the Department of Education kind of pitching in and shouldering this with us. It’s wage incentives. It is a number of things that I think we can think about in terms of revitalizing this critical part of the United States economic sector.
SEN. WICKER: I was just thinking, tomorrow’s headline: “Gilday Refuses to Rule Out Buying Navy Ships from Korea.” (Laughter.) I actually agree with everything else he said. (Laughter.)
MS. BRENNAN: Oh, boy. (Laughs.)
ADM. GILDAY: Thanks, Senator. (Laughter.)
MS. BRENNAN: OK. So let’s run through a few more questions. We have about six and a half minutes left here, so I’m going to do my best. How can government better signal to corporations their needs from the industrial base? Who would like to take that?
MR. LAPLANTE: Well, let me give a shot at it. I think this was a – this was mentioned earlier by the CNO. And we hear this term “demand signal” all the time. And what really is meant, as I understand it is, is whether it’s to a board of a corporation or a small business that’s got investors, they have to see the business case. The business case has to close. Now, they know that they’re not going to bat 1000, but they want to bat something, some type of low batting average. And we’ve got to give them the evidence. And it’s got to be credible that they can do that.
Part of it is these multiyear contracts. I think it’s part of it. But the other piece of it, it gets to the production. And again, not to make everything about production, but if they can see the business case that this item, this technology, this technique, this service can actually scale and even if they can be spin off into the private sector from the public, and you can see a plausible business case – even if it’s a one out of five chance – that’s what they need to see. And we have to think of it that way and provide them that evidence. And if we can’t provide the evidence to ourselves, then maybe we should think to ourselves: Maybe we’re not setting up the right conditions. So I think it’s not just the focus on the technology, but the focus on the business case and what closes the business case for corporations, and for investors, and small companies, and startups?
MS. BRENNAN: Jim?
MR. TAICLET: I really want to emphasize what Secretary LaPlante is speaking to here, because all companies in a free-market economy do have to have return on investment, whether it’s – as you say – the smallest startup all the way up to tech companies we’re working with, like Verizon, and Intel, and Microsoft. We’re working with them because they think ultimately there’s a business case there for them. But there are some other aspects of working with the Defense Department or the Federal Acquisition Regulation that really inhibit those business cases, for everybody.
You know, one is how do we balance the level of compliance and oversight with the cost of doing it? A lot of small and medium companies won’t engage. And we are trying to get them in, especially the tech companies, in our space because for them to set up the compliance infrastructure with no revenue yet coming in is just something they can’t do. Another one is to minimize the suppliers funding the government, which happens in a couple places. Prefunding of materials and labor of a contract you’ve won, during the time it takes to definitize that contract, which could take six months to a year. Small and medium companies can’t afford to do that.
Another one is to maintain a robust level of progress payments. It went to 90 percent under COVID. It may go back to 80. But let me tell you, that that flow through of 90 percent kept a lot of companies in business. And I would recommend maintaining the 90 percent but requiring those of us as prime contractors who receive it to flow 100 percent of that 90 percent, or that incremental 10 percent, to our suppliers. That should be part and parcel of that rule. It isn’t today. It should be, because we’re really trying to protect those small and medium suppliers with that change in the ruling.
And then expand, as you said, Bill, the use of block buys, long-term agreements, because you’ve got – we went to our board, frankly. And this is Lockheed Martin. It’s the largest aerospace company at the moment by revenue in the world, for a $6 billion approval for digital factories. It was going to take eight years to do. And we had to make our case to our board that that was going to get a return on investment. As big a company as ours, we had to get that case.
And you know what we got approval for? The first $500 million. We’ve already almost spent it, but, you know, that’s the way industry works. You’ve got to have a viable business case, as Dr. LaPlante is saying, especially if you want to get new entrants. Because if they don’t see it, their board or their private equity firm owner is not going to encourage them, or even enable them, to get involved. We want them involved, especially in the tech space.
MS. BRENNAN: The panelists all seem to agree that the U.S. has a long-term production capacity problem, particularly when compared to China. What steps do we need to take to expand cooperative development and production with U.S. allies and partners and leverage their combined capacities to offset this disadvantage? And how can we do that in a way that sustainably supports the health of the U.S. industrial base? It’s a big question. Who would like to start?
MR. LAPLANTE: I hate having to take it again, but I’ll just have to start because I’m sort of in the middle of this with the Ukraine group that the secretary has pulled together, where we have 50 countries around the world huddling on how to help Ukraine. My equivalents are now meeting, the national armaments directors. And what we’re talking about, and we’re trying to figure out, is much more co-production, where we have production in each other’s countries. Co-development, interchangeability between our different systems. And just – and a lot more sharing of information. I think the – you know, there is this recognition that we all are going to need to do this together in a country. Yes, jobs are important, but we’re going to have to produce things for each other. And we’re going to have to be comfortable using equipment developed in another country in our own military, and vice versa.
MS. BRENNAN: I would love to get your thoughts on this, Secretary Estevez, from the Commerce side, as we have had this conversation about decoupling.
MR. ESTEVEZ: Yeah. A couple of things there. One, you know, and Secretary Raimondo did a speech earlier this week where she said, you know, we’re not really looking to decouple from China. But we’re going to protect the technologies that we much protect for national security, full stop, bottom line. So promote what we can, decouple, protect what we must. For working with our allies on that, which, you know, I just got back from Europe myself, and I have a trip planned to Asia shortly. They’re more than willing now – because of the actions of Putin, because of the temper tantrum that Xi Jinping threw over the Straits in August when Speaker Pelosi visited – they’re more than willing to start talking China with us, which is a good thing.
So they also are looking, how do I diversify my supply chains? How do I get out where I have to get out? And I’m talking to a lot of companies too, especially the tech companies. And they are looking to where they have to go outside of China. Now, it took us 40 years to get where we are. It’s not going to happen overnight. But there’s a wakeup call going on. And I think that’s a great thing for us.
MS. BRENNAN: OK. We are out of time, unfortunately. I think we could have this conversation for the whole rest of the day, but maybe that’s just me and I’m partial to the topic. But – (laughs) – I just want to say thank you to our esteemed panel – Secretary Estevez, Admiral Gilday, Secretary LaPlante, Jim Taiclet, and Senator Wicker. Thank you so much, all of you, for being with us, and for your insights today. Appreciate it. (Applause.)
ANNOUNCER: Ladies and gentlemen, this concludes panel three. Panel four will begin in five minutes on this stage. Panel five will begin in five minutes in the Presidential Learning Center. Thank you.
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