How many missiles will the US need in a conflict in the Indo-Pacific? How much ammunition? Perhaps most importantly, how far current stockpiles fall short of what would be needed in a war.
The first-ever U.S. National Defense Industrial Strategy, released in 2022, sparked important discussions about these and other questions about the U.S. defense industrial base. These questions led to the strategy’s four strategic priorities: resilient supply chains, workforce readiness, acquisition flexibility, and improved economic containment. However, despite these improvements, significant differences have emerged between peacetime stockpile requirements and the magnitude of acute, ongoing, and perhaps long-term demands during wartime.
Consider a hypothetical conflict with China in the Pacific. Wargames estimates that the United States could expend more than 5,000 long-range missiles within the first few weeks of the engagement. At the same time, multiple analysts and government agencies have highlighted the difficulty of replenishing the weapons currently in use in Ukraine, which is a much smaller conflict compared to what is expected in a war with China. are.
There are two ways to address this challenge. (1) Enabling production in advance, stockpiling equipment, and deploying it in advance. (2) Replenishment of supplies and reserves after the start of battle. However, the latter strategy often overlooks the complex challenge of rapidly ramping up production to meet wartime demands, which could leave the United States vulnerable in the early stages of a conflict.
The U.S. government has begun investing in strengthening its defense industrial base, but the current contracting system lacks the flexibility needed to move from low demand to rapid production increases to replenish depleted stockpiles. are. To address this issue, the United States should adopt an option contract model for arms procurement. Under this model, the government pays a premium on current orders purchased at peacetime stockpile levels, with the option (but not the obligation) to purchase significantly larger quantities over a period of time to support the development and maintenance of the defense industrial base. Provide the necessary funds. Ability to quickly replenish supplies in the event of a conflict.
What is an option contract?
Similar to stock market options, option contracts give the buyer (in this case the U.S. government) the right to purchase weapons or ammunition at a preset price at a later date. If the government chooses not to exercise this option, usually because peace prevails, policyholders keep their premiums. This premium will serve as a financial investment in future rapid replenishment capacity and continued stable demand signals to the industry, encouraging preparedness and innovation without the need for governments to maintain unnecessary and wasteful stockpiles. .
How this works in practice
To explain why option contracts are an improvement over the current model of U.S. arms procurement, consider the example of the Tomahawk missile. A February 2023 Center for Strategic and International Studies report estimated that the United States would expend 400 Tomahawk missiles in the first three weeks of a full-scale conflict with China. In 2022, the U.S. Navy will procure 154 Tomahawks over three years, equivalent to approximately 50 missiles per year. This rate is orders of magnitude lower than the rate needed to replenish spending during a full-scale conflict.
Applying the proposed option contract model to this scenario, the Navy would pay a premium for an annual order of 50 missiles, with an option to purchase an additional 400 missiles within a year if needed. . Contractors use premiums to invest in the ability to scale up production, ensuring they can quickly meet all contract requirements should the need arise. This approach not only provides contractors with capital to strengthen their production infrastructure and incentives to maintain excess capacity, but also ensures that the United States has ready access to critical munitions when needed. We also guarantee that you will.
The option contract model has four main advantages.
Increased production readiness: Option contracting models provide upfront financial incentives to help defense contractors invest in infrastructure and workforce improvements as a reserve that can quickly scale up in response to a crisis. It will be. Increased flexibility: This model allows the U.S. government to secure production capacity without immediate full-scale procurement and balance budget constraints with strategic preparedness. This can also accommodate small increases in demand in the event of minor disputes. Stimulating industry investment: Premiums paid on option contracts indicate sustained demand and encourage defense contractors to prioritize production capacity and innovation over stock buybacks and similar programs that benefit shareholders at the government’s expense. We encourage people to invest. Risk Mitigation: This approach hedges geopolitical risks and ensures that necessary arms and ammunition are quickly available in the event of a major unforeseen contingency.
At the same time, several challenges need to be addressed, including:
Potential cost increases: Premiums paid on option contracts increase procurement costs. Because military programs are generally under-resourced in a constrained budget environment, increased procurement costs may reduce peacetime stockpile levels. If the increased capacity is never utilized, the premiums paid may be considered waste to the government. However, some of the funds spent on employee training and capacity expansion may be recovered through savings in subsequent contracts. A detailed cost-benefit analysis is essential to ensure that increased spending meets strategic needs and budgetary constraints. Difficulties in contract negotiation: Establishing effective option agreements requires careful negotiation to define terms, production capacity, and performance indicators to ensure that both the government and the contractor can meet their obligations. I will do so. Military industrial bases have not traditionally used this type of contract. This unfamiliarity can mean that currently simple contracts take longer to complete. Industry Capacity Limitations: Not all defense contractors have the ability to quickly scale up production. Especially in the case of “sophisticated” weapons systems, they often use high-end technology, are difficult and expensive to produce on a large scale, and require numerous subcontractors to complete. Therefore, it is important to assess the capabilities of your industry partners and ensure that they can meet the demands of your option agreement. Honest use of premiums requires contractors to demonstrate the ability to rapidly increase production.
The option contracting model represents a viable solution to address current shortcomings in the U.S. defense industrial base with respect to some munitions. By incentivizing contractors with upfront payments, this approach can increase production readiness, flexibility, and investment in the industry, ultimately preparing the United States to meet the demands of future conflicts. Masu.
Michael Hogan is the 2024-2025 U.S. Navy Senior Fellow at the Scowcroft Center for Strategic Security at the Atlantic Council.
The opinions expressed are those of the authors and do not necessarily reflect the views or policies of the U.S. Department of Defense, Department of the Navy, or the U.S. Government.
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Thursday, June 27, 2024
Production Diplomacy for Deterrence, Readiness and Resilience in the Indo-Pacific Region
Problem Summary Andrew Brown, John T. Watts, Marcus Galauskas
Although production diplomacy is not without risks and challenges, it offers opportunities to protect supply chains, strengthen alliances and partnerships, strengthen deterrence, and build defense posture.
Image: U.S. Marine Corps Corporal 3D Carter Hughes, a combat engineer with Alpha Company, 9th Engineer Support Battalion, Marine Logistics Group, carries a 155mm artillery shell during an explosive ordnance disposal operation at Range 10 at Camp Schwab, Okinawa, Japan. I am, July 13, 2021. (U.S. Marine Corps) Corps photo by Sgt. Haley D. Clay)
