For over a century, America led the world in producing telecommunications equipment. The American telecom industry, according to Zach Mottl of Atlas Tool Works, a subcontractor in the industry, used to be a “crown jewel of American manufacturing.” Mottl’s company had been a manufacturing supplier to AT&T and its Bell Labs from the early 1900s until the early 2000s. “The radar system was invented here. The transistor came out of Bell Labs.
Yet it wasn’t one of those adversaries that killed our telecommunications capacity, but one of our own institutions, Wall Street, and its pressure on executives to make decisions designed to impress financial markets, rather than for the long-term health of their companies.
Focus on short term/stock buybacks and bye bye R&D & production capacity.
In September 2018, the Department of Defense released findings of its analysis into its supply chain.
*The report listed dozens of militarily significant items and inputs with only one or two domestic producers, or even none at all. Many production facilities are owned by companies that are financially vulnerable and at high risk of being shut down. *
Even more unsettling is the reliance on foreign, and often adversarial, manufacturing and supplies. The report found that “China is the single or sole supplier for a number of specialty chemicals used in munitions and missiles…. A sudden and catastrophic loss of supply would disrupt DoD missile, satellite, space launch, and other defense manufacturing programs.
In the 1990s post-Cold War era, the White House sought to cut defense spending. Bill Clinton’s administration arranged a deal with defense contractors; they would tolerate lower revenue or stagnant revenue, if they got higher margins. And so at a dinner known as ‘The Last Supper’ held in the Pentagon, the Clinton Defense Department encouraged a merger wave. Throughout the 1990s, the DOD even paid the merger costs of its defense base firms; the number of major prime contractors (or ‘primes’) dropped from dozens to 5. In addition, Congress, under ‘Reinventing Government,’ passed laws to eliminate contracting rules that blocked price gouging of the treasury.[1]
All of this monopolization was done in a unipolar moment, when just-in-time manufacturing where suppliers kept no inventory on hand was applied to everything, even military stockpiles. This was, in retrospect, insane. Who thinks that having no resiliency is a good strategy for wars?
in 2020, factories in Mexico that make defense base materials as part of the just-in-time model of supply chain management closed down, against the Pentagon’s wishes. In 2022, the Ukraine war, which depleted U.S. military stockpiles, accelerated a conversation over geopolitics, with leaders on the right like Elbridge Colby forcing a conversation over trade-offs between China, Russia, and the Middle East
The DOD tasked three universities with examining how Pentagon contracting works, and did an internal analysis, all to determine the financial health of the defense base. And what they found is not so different than health care, big tech, finance, or any other industry segment; defense is run by a few giant middlemen who do exceptionally well by shareholders, outperforming commercial rivals and the S&P index. Contracting doesn’t look especially profitable, but the relatively lower margins are more than compensated by a host of favorable contracting terms offered by the government.
[1]