1.  Why does the Department of Defense conduct industrial base studies?  

The Department has focused its resources on ensuring that, when indications of potential industrial concerns arise, they are identified, analyzed, and effectively integrated into key DoD budget, acquisition, and logistics processes. "DoD-wide" industrial assessments evaluate and address changes and issues in key system, subsystem, component, and/or material providers that supply many programs, and affect competition, innovation, and product availability. DoD Components conduct their own assessments when there is an indication that industrial or technological capabilities associated with an industrial sector, subsector, or commodity important to a single DoD Component could be lost; or an assessment is necessary to provide industrial capabilities information to help make specific programmatic decisions. These assessments generally are conducted, reviewed, and acted upon internally within the DoD Components. Additionally, the Defense Contract Management Agency supports DoD-wide and DoD Component industrial assessments by utilizing its broad knowledge across industrial sectors and its on-site presence in many contractor industrial facilities.

Industrial base issues highlight the need for the Department to continue to improve its requirements generation process—particularly for contingency operations—in order to provide better and more timely guidance to its industry partners. The Department must carefully balance the costs associated with maintaining excess production capacity for operationally-critical items in order to respond to a sudden accelerated production requirement, the unavoidable lead time necessary to fund and establish increased production capacities for those items, and the risk associated with having only a marginal peacetime production capacity on which to draw should sudden accelerated production become necessary. Whenever DoD identifies conditions where our requirements could potentially exceed the capabilities or capacities of our suppliers, studies are conducted to assess the ability of our suppliers to meet those requirements, and to identify appropriate actions which may be needed to ensure continued availability of the full range of supplies and services we need.

Some examples of specific conditions which might result in the need to conduct industrial base studies include:

• Contingency requirements or operational lessons learned
• Incremental changes or dislocations in the defense industrial base
• DoD's annual budget development cycle
• Studies required by Defense Authorization or Appropriation Acts and congressional letters citing specific industrial concerns
• Concerns cited by defense contractors
• Changes to defense industrial base to support transformation of warfighter capabilities
  

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2.  How does the Department assess the health of the defense industrial base?

The Department desires that the industrial base on which it draws be reliable, cost-effective, and sufficient to meet strategic objectives. Stable, robust, Department of Defense (DoD) funding is the primary factor in sustaining those industrial capabilities supporting defense because such funding focuses market demand across a broad spectrum of industry segments to meet emerging and projected DoD requirements. Several other criteria also can be used to evaluate the extent to which the industrial base has the desired attributes of reliability, cost-effectiveness, and sufficiency.

For example, a “reliable” industrial base is one in which suppliers ship contracted products and services on time. Additionally, reliable firms are viable for the long-term when they are likely to be healthy for the long-term. That is, the Department would like the firms on which it draws to have a stable or expanding business base, earn fair operating margins for owners, and invest in internal research and development and capital equipment such that long-term viability, innovation, and competitiveness is likely.

A “cost-effective” industrial base is one in which suppliers deliver contracted products and services at or below cost targets. Cost-effective suppliers require not only stable, well-structured weapon system programs, but also optimized acquisition strategies. A cost-effective industrial base maintains an adequate number of competitive suppliers in key and emerging technology areas. In addition to the number of suppliers in a given product area, another indicator of competitiveness (and cost-effectiveness) is the extent to which suppliers participate in non-defense (dual-use) U.S. markets and export products overseas. In fact, a positive trade balance within a market segment is a solid indicator that firms within that segment are world-class and provide cost-competitive products.

Finally, a “sufficient” industrial base is one in which suppliers deliver contracted products and services that meet Department performance requirements. Suppliers with sufficient industrial capabilities are flexible and react positively and quickly to changing requirements and priorities within the Department, particularly during times of conflict—indicative of the adaptability of both production lines and technology. They can effectively manage their way through requirements peaks and valleys while maintaining the ability to hire, train, and retain the specialized skills required to meet these dynamic requirements. They also have technology or technology development programs planned and/or in place to meet current and projected DoD needs.

Cost, schedule, and technical performance are ultimately the bottom line metrics in assessing the defense industrial base. A healthy industrial base is a vehicle to the Department’s ultimate objective: the most affordable, supportable, and effective defense capability in the world. The Department has a major role to play in enabling superior contract performance. It must realistically balance program performance, funding, and schedule requirements. Failure to do so dooms programs and the industrial base supporting those programs to failure.

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3.  How does the Department deal with shortcomings in the industrial base?  

DoD research, development, and acquisition, and associated policies and program decisions, play the major role by focusing market demand across a broad spectrum of industry segments to meet emerging and projected DoD requirements. First, the Department’s weapons system acquisition policies and decisions shape the technological and programmatic focus of industry. Second, decisions made on mergers and acquisitions involving defense firms continue to shape the financial and competitive structure of the industry. Third, DoD evaluations and assessments of sectors or specific industry issues help identify future budgetary and programmatic requirements. Finally, the Department incorporates industrial base policies into its acquisition regulations and strategies on an on-going basis to promote competition and innovation.

When the Department has to deal with shortcomings in the industrial base, it has a wide variety of tools with which to promote innovation and competition:

• Directly fund innovation in its science and technology accounts, and encourage industry to do the same via their independent research and development accounts.
• Induce innovation by employing acquisition strategies that encourage competition at all levels of contract performance.
• Use contract provisions to preclude the ability of contractors to favor in-house capabilities or long-term teammate products over more innovative solutions available elsewhere.
• Block exclusive contractor teaming arrangements that effectively reduce the number of suppliers in a given market, especially if the teammates are dominant in a particular market sector.

The Department also can, and does, formally establish restrictions within the Defense Federal Acquisition Regulation Supplement (DFARS) on the use of foreign products for certain defense applications, when necessary to ensure the survival of domestic suppliers required to sustain military readiness. These DFARS foreign product restrictions are imposed by administrative action (that is by a DoD policy decision, not by statute).

The Department of Defense has the authorities, responsibilities, and resources to address shortcomings in the industrial base supporting defense. Reliable and cost-effective industrial capabilities sufficient to meet strategic objectives are and will continue to be priorities of the Department.

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4.  Under what circumstances will DoD intervene in the marketplace to preserve industrial base capabilities?  

The Department understands that the industry supporting defense is reshaping itself to respond to significant changes in military missions. Major defense firms are responding by reducing excess capacity, streamlining processes, and revamping supplier relationships. These changes may have negative impacts on certain suppliers within the United States. Recognizing the potential long-term negative consequences of firms exiting the defense business, the Department has policies, processes, and structured procedures in place to make appropriate judgments about identified industrial issues and to integrate those judgments into its regular budget, acquisition, and logistics processes. DoD Directive 5000.60, “Defense Industrial Capabilities Assessments,” and the accompanying DoD Handbook 5000.60-H, “Assessing Defense Industrial Capabilities,” establish the policies, procedures, and circumstances under which the Department will take action to preserve endangered industrial capabilities. Before taking action, the Department must verify the warfighting utility of the industrial capability, that the industrial capability is unique and at risk, that there are no acceptable alternatives, and that the proposed action is the most cost- and mission-effective.

These criteria deliberately set a high standard for intervention into the industrial base in order to ensure that limited DoD resources are not expended unnecessarily.

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5.  What is the Priority Allocation of Industrial Resources (PAIR) Task Force?

The PAIR Task Force's mission is to ensure industrial resources are allocated to DoD procurement programs in accordance with operational priorities in a comprehensive and integrated manner. The purpose of the Task Force is not to resolve Service unique needs. Rather, the Task Force determines industrial resources required to execute emergent plans, identifies any conflicting demands on these resources, and devises alternative approaches to resolving these conflicts based on warfighting requirements established by the Joint Staff. Download the PAIR Charter by clicking here.

The Office of the Director (Industrial Policy) convenes and chairs the Task Force. Task Force membership includes representatives from the following organizations: Departments of the Army, Navy, and Air Force Service Acquisition Executives (SAE); Office of the Undersecretary of Defense (Acquisition, Technology and Logistics); Director, Strategic and Tactical Systems, Office of Assistant Secretary of Defense (C31); Defense Logistics Agency; Office of the Undersecretary of Defense (Comptroller); Defense Contract Management Agency (DCMA), the Joint Staff, the Joint Materiel Priorities and Allocation Board, and the Department of Commerce. Senior DoD decision makers support the efforts of the Task Force to ensure the Department speaks with one voice to industry and balances limited resources to meet warfighting priorities.

The Task Force addresses all issues brought by the members and utilizes a variety of means to mitigate production bottlenecks and resolve industrial conflicts by requiring priority performance of identified critical DoD contracts over any other DoD or non-DoD contracts to meet emergent and projected warfighting needs. An important means available to the Task Force is the authority provided by Title I of the Defense Production Act, and its implementation tool, the Defense Priorities and Allocations System (DPAS). The Task Force can use the DPAS to request Special Priorities Assistance and ensure critical defense orders receive preferential treatment from industry.

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6.  What process does the Department of Defense use to review the impact of mergers and acquisitions on competitiveness?

The Hart-Scott-Rodino Antitrust Improvement Act imposes waiting periods on companies (Parties) proposing mergers in order to allow the Antitrust Agencies to complete an investigation prior to consummation. The waiting periods are statutorily limited to encourage the agencies with Antitrust responsibilities (Antitrust Agencies) to expedite their investigations and enforcement decisions. Before companies can consummate mergers or acquisitions above a certain size (currently, $50M), they must provide prior notification, via a premerger filing, to the Federal Trade Commission (FTC) and the Department of Justice (DoJ). The premerger filing includes general information about the companies involved, the lines of business in which the companies are engaged, and the proposed transaction, itself. Once filings have been submitted, either the FTC or DoJ reviews the proposed transaction for possible antitrust concerns.

The Hart-Scott-Rodino Act also sets forth time limits for the government's review. Once filings are submitted, companies must wait 30 days before they are permitted to merge (15 days for an all-cash transaction tender). If the Antitrust Agency determines that no antitrust problems exist, the companies may consummate the merger or acquisition at the end of the waiting period. If the proposed acquisition raises antitrust concerns, the Antitrust Agency may require further information by issuing a request for additional information (a "second request") to both Parties prior to expiration of the Hart-Scott-Rodino waiting period.

Once the Parties certify that they are in substantial compliance with a second request and the Antitrust Agency approves the certification, the Antitrust Agency has 30 days to bring an action to enjoin the proposed transaction in federal court; or to seek remedies that would mitigate antitrust objections. (In the case of a cash offer, the reviewing agency has 15 days from substantial compliance in which to bring action.) If no action is taken within the allotted time period, the Parties may consummate the transaction. The limited waiting periods imposed by the Hart-Scott-Rodino Act, and the review costs borne by both the firms and the government, discourage protracted investigations.

The FTC and the DoJ have the statutory responsibility for determining the likely effects of a defense industry merger on the performance and dynamics of a particular market; and whether a proposed merger should be challenged on the grounds that it may violate antitrust laws. As the primary customer impacted by defense business combinations, DoD's views are particularly significant because of its special insight into a proposed merger's impact on innovation, competition, national security, and the defense industrial base. The Department conducts its reviews concurrently and in cooperation with the Antitrust Agencies' reviews.

DoD focuses its reviews primarily to ensure that a cost-effective, innovative industrial base will remain after the transaction and that the industrial and technological capabilities needed to supply critical warfighting products are not compromised. Also, DoD reviews provide a robust foundation from which DoD decision makers can develop a Department view; provide a timely, fair review for the Parties involved; and ensure a single DoD voice to the Antitrust Agencies and a coordinated U.S. Government position on the transaction.

For the majority of cases, the Department performs a "quick look" review designed to complete the evaluation and communicate its views on the transactions to the appropriate Antitrust Agency within 30 days (within 15 days for an all cash transaction).

The Director, Industrial Policy and the Deputy General Counsel for Acquisition and Logistics (DGC(A&L)) may designate certain cases (based on complexity, value, potential impact on DoD, criticality of technology, and national security issues) as "high interest cases." In such cases:

• The Department establishes a Joint Consultation Committee to secure necessary information and provide advice and counsel. The Director, Industrial Policy and DGC(A&L) chair the Committee. The Committee reports to the Under Secretary of Defense for Acquisition, Technology & Logistics (USD(AT&L)) and the DoD General Counsel (DoD GC). It includes representatives from appropriate DoD Components that are chosen for each transaction. Antitrust Agency representatives usually participate as invited observers.
  
  
• Under Director, Industrial Policy and DGC(A&L) chairmanship, Committee representatives function as an integrated team to identify and collect necessary information, perform analyses, develop preliminary findings and conclusions, and identify and evaluate potential remedies should concerns arise.
  
  
• Based on the findings of the Joint Consultation Committee, the Director, Industrial Policy and DGC(A&L) present recommendations to the Under Secretary USD(AT&L) and DoD GC, who in turn, convey recommendations to the Deputy Secretary of Defense and the Secretary of Defense, as appropriate.
  

Once the Deputy Secretary of Defense or the Secretary of Defense reaches a decision, the DoD GC or designee transmits final DoD views to the Antitrust Agency.

The Department's two-tiered review process recognizes that different cases may require different review responses based on case complexity, and ensures that DoD's senior leaders are engaged actively in a rigorous, disciplined, and expeditious review of high interest business combinations.

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7.  What is CFIUS?

CFIUS is the Committee on Foreign Investment in the United States. It has authority delegated from the President to conduct national security reviews of foreign acquisitions of U.S.-based firms under the Exon-Florio Amendment to the Defense Production Act. Under Exon-Florio, the President has the authority to suspend or block foreign mergers and acquisitions involving U.S.-based firms if they present credible threats to national security which cannot be prevented under other provisions of law. These national security threats include unauthorized disclosure of classified information, unauthorized transfer of export controlled technology, and the loss of reliable suppliers to defense-related Federal departments and agencies.

CFIUS is chaired by the Department of the Treasury with the Departments of Defense, State, Commerce, Homeland Security, and Justice as members as well as several Executive Office agencies. Once CFIUS has been notified of a foreign acquisition, the Committee has 30 days to determine whether the transaction threatens national security and, if so, to negotiate risk mitigation measures with the acquiring firm that would reduce these risks to an acceptable level. At the end of 30 days, CFIUS must either approve the transaction conditional on the foreign firm's acceptance of any risk mitigation measures CFIUS deems necessary, or initiate a further 45-day Presidential Investigation. At the end of such an Investigation, the President has 15 additional days to determine what action, if any, is necessary to protect national security. For transactions that involve U.S. firms with facility clearances, the development of risk mitigation measures is mandated by the DoD's own industrial security regulations as outlined in the National Industrial Security Program (NISP) administered by the Defense Security Service.

Firms that are planning a CFIUS filing that involves sensitive and/or extensive defense contracts are encouraged to meet informally with staff of Industrial Policy and other relevant DoD components prior to formal CFIUS notification so that DoD analysis of the transaction can begin before the start of the 30-day initial review clock. Some foreign firms planning to acquire U.S. firms with sensitive and/or extensive defense contracts have temporarily withdrawn their CFIUS petitions when 30-days notice without prior informal consultation with DoD was not sufficient time for CFIUS to analyze and resolve all national security issues.

Among the factors that are considered in determining the risks of a transaction and the needed risk mitigation measures both during the initial review and any subsequent Investigation are:

• the level of classification of any contracts with DoD and its prime contractors;
  
  
• whether the firm being acquired possesses critical defense technology or is otherwise important to the defense industrial and technology base because of unique capabilities;
  
  
• the record of the acquiring firm and its host country in complying with U.S. and international export licensing regulations, international agreements governing weapons of mass destruction and missile technology, and efforts to prevent international terrorism.

While notifying CFIUS of a foreign acquisition is voluntary, the Committee has the right to initiate its own review of a foreign acquisition that raises defense-related issues. So far only approximately 25 CFIUS cases out of a total exceeding 1,570 filed cases have required a Presidential Investigation primarily because the risk mitigation measures governed by the DoD's industrial security regulations have been extensive enough to reduce national security risks to acceptable levels.

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8.  What is DPAS?

DPAS is the Defense Priorities and Allocations System. DPAS provides the DoD with powerful authorities to help protect our nation. Title I of the Defense Production Act provides the President the authority to require preferential performance on contracts and orders, as necessary, to meet national defense and emergency preparedness program requirements. Executive Order 12919 delegates these authorities to various Federal Departments and Agencies. The Secretary of Commerce has been delegated the authority to manage industrial resources. To implement its authority, the Department of Commerce (DoC) administers the Defense Priorities and Allocations System (DPAS). The DPAS:

• establishes priority ratings for contracts;
  
• defines industry's responsibilities and sets forth rules to ensure timely delivery of industrial products, materials and services to meet approved national defense program requirements; and
  
• sets forth compliance procedures.
  

The DoC has delegated to DoD authority under the DPAS to:

• apply priority ratings to contracts and orders supporting approved national defense programs. (However, DoD is precluded from rating orders for end items that are commonly available in commercial markets and for items to be used primarily for administrative purposes, i.e., office computers); and
  
• request DoC provide Special Priorities Assistance (SPA) to resolve conflicts for industrial resources among both rated and unrated (i.e., non-defense) contracts and orders; and to authorize priority ratings for other U.S. federal agency and friendly nation defense orders in the United States when such authorization furthers U.S. national defense interests.

Except as noted above, all DoD contracts (including construction contracts and Foreign Military Sales contracts) are authorized an industrial priority rating. DoD uses two levels of rating priority, identified by the rating symbols "DO" or "DX." If a contractor cannot meet all required delivery dates because of schedule conflicts, DO rated orders must be given preference over unrated orders and DX rated orders must be given preference over DO rated orders and unrated orders. Such preferential treatment is necessary even if it requires the diversion of items being processed for delivery against lower rated or unrated orders. Only the Secretary of Defense can approve programs to use a DX rating. The current list of approved DX programs is available for download - click here - updated November 7, 2007.

Although the DPAS is largely self-executing, if problems occur, the contractor or the DoD can ask the DoC for SPA to resolve the problem. This includes requesting accelerated delivery for urgent defense orders at the expense of other defense orders. The Priority Allocation of Industrial Resources (PAIR) Taskforce adjudicates such requests.

Additional information can be obtained as follows:

• Detailed guidance on DoD use of DPAS is contained in DoD 4400.1-M, Department of Defense Priorities and Allocations Manual found at http://www.dtic.mil/whs/directives/corres/html/44001m.htm
• The vehicle for requesting DoC assistance is Form BIS-999, "Request for Special Priorities Assistance" can be obtained from http://www.bis.doc.gov/dpas/pdfdocs/dpasformbis-999.pdf.  Upon completion of this form, please print it out and scan into a non-fillable PDF file format or fax your form to the appropriate DPAS POC. Do not email as a fillable PDF file as DoD network firewalls may prevent it from being delivered without providing notice to either sender or receiver.
  
• Further information on DPAS, including 15 CFR 700, is available at http://www.bis.doc.gov/dpas
  
• Through the DPAS DAWAI Continuous Learning Module (CLC043). Learn more about this new course offered at Defense Acquisition University by clicking HERE.