Technology & Trade

COVID-19 and the U.S. Defense Industry

During the global COVID-19 pandemic, the defense industry is trying to navigate and offset the negative consequences of the crisis
By Shannon Dick Co-Author ·  Rachel Stohl Co-Author

COVID-19 has upended the global economy, pausing production lines, halting business, and arresting day-to-day operations for millions of employees. It seems as though very few businesses have been spared, and the defense industry is among those trying to navigate and offset the negative consequences of the crisis – with some converting their factories to produce medical equipment, including ventilators, in this new and complex environment. Amid the uncertainty of the pandemic, COVID-19 has made one thing clear: governments lack an adequate understanding of what the defense supply chain looks like both within their home countries and abroad.

To be sure, the supply chain for defense-related items is historically murky. Global export controls are governed by a patchwork of regulations, control systems, and operating procedures that often vary from country to country, lack clarity and transparency, and are difficult to navigate in the best of circumstances. COVID-19 has compounded these challenges and is now serving as a stress test for the entire global supply chain system. In this environment, manufacturers, suppliers, and regulators are working to better understand how the supply chain operates and identify where gaps currently exist and may arise.

One challenge faced by U.S. defense industry is in part the result of the pandemic’s impact on overseas suppliers. U.S. defense companies have to confront a myriad of challenges in getting parts and components from countries that have reduced and/or temporarily closed their defense industry operations, such as those for the F-35. On April 20, Pentagon acquisition chief Ellen Lord said that the Pentagon anticipates a three-month slowdown for many major defense acquisition programs as a result of closures throughout the supply chain, both within the United States and abroad.

U.S. government and industry partners are also realizing the acute risk that COVID-19 poses to smaller businesses and suppliers. There are concerns about the extent to which small firms will be able to sustain their businesses, if at all in some cases, and the second- and third-order effects that limited operations could have on innovation in defense technologies down the line. Small businesses are struggling to maintain their operations amid the recent economic upheavals, and both U.S. government and larger industry partners are stepping in to mitigate these challenges. For example, the U.S. Navy accelerated arms purchases in efforts to offset some of the burdens and, in particular, cash flow challenges faced by smaller supplier companies during the pandemic. And Lockheed Martin has accelerated payments to its supply chain partners, so far providing more than $155 million in fast-tracked funds to help keep small- and medium-sized businesses operational.

As companies grapple with these supply chain issues, they have looked to the government for some support. Lobbyists successfully pushed for the U.S. stimulus bill to include aid for U.S. defense industry and ensured that defense companies were deemed “essential” during the pandemic to minimize the impact on their businesses. And some business continues, as the U.S. government continues to announce new arms deals with governments around the world.  In the last few weeks, major arms deals, worth nearly a billion dollars, have been announced with India, Morocco, the Netherlands, and South Korea.

The State Department’s Directorate of Defense Trade Controls – responsible for licensing direct commercial arms sales – has also implemented mitigating measures to lessen the impact of COVID-19 on U.S. companies and the defense industry supply chain. In a release, they announced that they have temporarily suspended registration renewal requirements for manufacturers, exporters, and brokers; extended soon-to-be expired licenses for an additional 6 months (with certain exceptions); allowed company employees to work remotely where they would otherwise be required by U.S. regulations to work at the company’s facilities; transitioned to electronic submissions for congressional arms sales notifications for both direct commercial sales and foreign military sales; and pursued temporary reductions in registration fees for select companies – among other measures related to compliance, licensing, and management of arms sales.

Overall, these new realities have led to a growing sense within the U.S. government on the need for improved supply chain awareness and visibility. It remains to be seen how governments and companies will respond as the crisis continues to unfold and especially when this crisis is over. Will they try to develop global controls or safeguards for the supply chain for the future or will they turn inward and try to protect their own? While it’s too early to tell what the overall impact of COVID-19 will be on the defense industry in the future, what is clear is that existing approaches are not sustainable in the long term.

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