The backbone of the U.S. defense base is in big trouble. The large prime contractors, with the possible exception of Boeing, can hold out long enough to receive whatever assistance the federal government will provide them. These companies may have to cut back on dividends, and would be wise to avoid stock buybacks, though the government may prohibit those anyway.
It is the small firms, which can be defined as having anywhere from 250 to 1,500 employees, that are in serious trouble. Small businesses account for more than 99 percent of all U.S. firms. And it is these small operations that are the third- and fourth-tier suppliers to the prime military contractors — in other words, they are the supply chain that enables the primes to deliver their products to the Defense Department.
Congress is on the verge of approving its third tranche of funds to restore an economy that continues to flounder in the face of the coronavirus. Billions of dollars are meant to be made available not only to major industries that are hemorrhaging — the airlines, for example — but to small businesses as well. It is precisely these businesses, however, even more than the weakest of the big firms, that are most urgently in need of assistance. With payrolls that could amount to several million dollars, they desperately need government loans to avoid shutting their doors. Yet, they may find that they are unable to stave off bankruptcy before that assistance arrives.
To meet their obligations to their employees, these companies require a degree of responsiveness that is unusual for the federal government. The government is slow-moving in the best of times, and these are hardly the best of times. While Congress may be voting huge sums to relieve the economy, and the Defense Department has designated contractor as “critical infrastructure” — contractors will be expected to continue working without restriction — there have yet to be any publicly articulated plans for the distribution of those funds.
Many federal employees, like workers everywhere, are not coming into their offices. It is therefore exceedingly difficult for them to carry out their normal day-to-day functions, which in any event are not nearly responsive enough relative to what the nation needs at present. Yet, for these workers to change their work habits to meet the needs of the defense supply chain requires clear and precise guidance. It is not clear that such guidance is either forthcoming or even has been formulated to the level of detail necessary for it to be implemented.
The defense prime contractors cannot rely on foreign suppliers to fill any domestic shortfalls. Many of those suppliers are themselves in deep trouble, as their domestic economies are reeling from the global effects of the virus. The primes need the American supply chain to remain intact.
Under normal circumstances the Defense Department hires contractors to compensate for personnel shortfalls. This is especially the case with respect to the so-called “Fourth Estate,” the agencies that are not military departments but that are responsible for a significant portion of the Defense Department’s back-office activities. But contractor personnel are in the same bind as their government counterparts. They are being encouraged to stay home, and there is a severe limit to what they can accomplish while working remotely.
The President’s obvious initial reluctance to implement the Defense Production Act (DPA) has only further aggravated the plight of small suppliers. Title III of the act grants the federal government the power to open the financial spigot for significant loans to these firms. In contrast, Small Business Administration loans will not enable many of these firms to meet payroll for even one month. Until the government’s implementation efforts are at full tilt, little money will be forthcoming to rescue these suppliers. Moreover, the president’s earlier hesitancy with respect to the DPA could have the effect of undermining the trust that these firms might otherwise have had that the government would come to their rescue; a rash of declared bankruptcies could be the result.
Small firms should receive priority under the Defense Production Act. No doubt, granting them priority and rapidly implementing the act will not, by itself, remedy the crisis that confronts small suppliers. But it would represent an important start. Small companies would try to find ways of staying afloat and to reassure their employees that help is on its way — and the defense supply chain, though hardly robust, would not disintegrate. All that is needed is true leadership from the White House.
Dov S. Zakheim is a senior adviser at the Center for Strategic and International Studies and vice chairman of the board for the Foreign Policy Research Institute. He was under secretary of Defense (comptroller) and chief financial officer for the Department of Defense from 2001 to 2004 and a deputy under secretary of Defense from 1985 to 1987.