By: LTC Sandra R. Thomas, USA

The US and PRC are distinctly different because they define the Defense Industrial Base (DIB) differently and each country has different viewpoints for what Industrial Bases can offer their economies. In the United States, federal acquisition regulations or the FAR govern industrial policies and procedures for industry interactions with government contracts. The FAR defines how industry can interact with the government when it comes to contracts. The FAR has over 99 chapters with indexes, descriptions, definitions, and subparagraphs, that are well into the thousands. The PRC does not have a document like the FAR and their regulatory guidance is based on policies made by their political leaders. This main distinction defines historically how the defense industries were sidelined in the US and surged in China, monetary transactions differences in GDP group, capital limitations on funding requirements for investments, and other supply resilience differences.

Comparing regulation differences and guidelines between the US and the PRC is one of the main reasons for the overarching economic differences in system process for each of the countries. Defense companies in the US must abide by the regulations to gain contractual agreements with the government. The Department of Defense (DoD) allocates and obligates funds according to contracts. Anything external to contract award is not standard practice. Sure, there are programs that are one-time events that are not standard such as Rapid Development Prototypes and other innovation programs, but traditionally “to do business with the government,” a contract is needed.  For the PRC, industry companies are already under their scope because the companies are owned by the political leaders, funded by the government, and the government officials have oversight on all parts of the industrial base, to include the prime contractor to the downtrace suppliers or tier suppliers under the prime contractors.

One supply commodity that is of great concern right now is critical minerals. China has recently placed holds on exporting certain defense critical minerals. This will eventually create problems for defense contractors servicing the DoD. Currently, there are bottleneck concerns for downstream, within the supply chain, which are going to raise significant issues at the tier 2 and tier 3 lower levels down from the prime contractors. Recently in a meeting, a prime vendor admitted that they did not look closely at their lower-level suppliers in downstream tiers and where they were importing/exporting their raw materials. This is problematic in that the FAR only applies to end items in most cases, but the adversary could place harmful materials in products to disrupt the DoD. Currently, federal regulations governing the purchase of the minerals will not affect the procurement process of items controlled by China in the export control issues. Eventually, defense contractors will have to find new means of procuring products, but the reality is two-fold. If the disruptions are at the lower supply chain tiers levels and the prime vendors are not managing at that level due to cost, how will they know what supply risks are at stake? There are disruptions that will cause future problems, but understanding the root of the issues will serve as a knowledge base. Defining the differences in how the US and the PRC define the industrial base is important. Though a definition alone cannot be the cause for supply chain disruptions or the reason that the PRC is outpacing the US, exploring the definitions, and connecting the supply rifts in industrial commodities will showcase the concerns.

Unlike the PRC, the DIB and Organic Industrial Base (OIB) have distinct meanings in the United States. At the origin, the terms Defense and Organic instantly separates the two industries. The US distinguishes the two industries through laws and regulations. Alternatively, the PRC’s outlook on the Industrial Base views it as a single entity and leads the industrial base through political affiliation and government appointees. These appointees secure all commodities, especially critical minerals and control current global economic growth.

The US government does not have a set definition for the DIB versus OIB. Depending on which organization in the government or civilian sector is discussing the topic, a different definition is offered. For instance, the recently published National Defense Industrial Base Strategy (NDIS) published in January 2024 defines the DIB as formal defense cooperation government companies.[1] Rather, the OIB is commonly referred to when discussing Government Owned Contractor Operated (GOCO) or Government Owned Government Operated (GOGO) facilities. The OIB’s are often referred to even in the NDIS as secondary to the DIB, though some of the OIB facilities make similar items to what the Defense market companies are making[2] Although the NDIS definitions offered are vague at best, they offer a foundation versus the inconsistent definitions found elsewhere.

The PRC defines the DIB by action and does not refer to an OIB at all. A RAND report on the Chinese Defense Industrial Base states: China’s manufacturing accounts for 25% of the worlds manufacturing output; 50% of that can be considered dual use.[3] China focuses on the defense industry because their connection to industry is always for the defense of China. The PRC does not define DIB and OIB like the US does mainly due to the fact that they are not obligated by regulatory guidance. The PRC does have government versus public/private sector distinctions and contractual obligations, but they are fluid and not rigid nor do they have a document with a thousand subparagraphs regulating what industry can and cannot do. They do have a separation, but there is not a strict separation between the defense and civilian sectors or a defense contractor and military end user like the US.

It is important to briefly explain historically what transpired in the US and in China to give context to the current state of the Defense Industry. At the end of the Cold War in the US, industry companies were given the option to merge with other industrial partners or to shut down their factories. The surge had been so great due to the demand of the war, there was so much uncertainty looming with the rumors of the end of the war. The rumors turned into the truth and the government passed bills closing most of the manufacturing facilities within the US.[4]

The lingering sting of the 90s for defense industry companies in the US still exists today with the hesitation and distrust from industry and industrial stakeholders.  Tier 2 and tier 3 level defense companies are making some profits, but the workforce is not surging at the rate needed to keep up with manufacturing the current rate of supply and demand especially in munitions and supply chain redundancy is not resilient according to the NDIS These issues are addressed in the four lines of effort in the NDIS in publication of the January of 2024 and further expanded in the NDIS Implementation Plan published in the fall of 2024. The four lines of effort are: resilient supply chains, workforce readiness, flexible acquisition, and economic deterrence.

After going to certain symposiums and wargames in my tenure as the DIB Chief, I hear the same whispers and rhetoric that the US government has historically been unable to give a clear demand signals or long-range plan for what is needed so that certain companies can make needed items. Congress not passing an appropriations bill is severely hurting industry and affecting long term programming for the Department of Defense. This rhetoric has created distrust among industrial partners because they have no security in knowing when appropriated money will pass through Congress. Being reliant on a system that is not dependable creates distrust.

The distrust is not widely held with the private sectors because their revenue streams are not dependent on government contracts. The private sectors can choose which supply commodities they align with and are not bound to sole-sourcing or majority of their revenue being supplied by government contracts. Essentially, the current export control on certain critical minerals is not affecting them as they are not tied to only supply chain sourcing requirements. As research and development has emerged since the Cold War, an example of research privatization in partnership with the DoD would be the Defense Advanced Research Projects Agency (DARPA).[5] DARPA is considered a defense industrial partner yet; they do not disclose information to the public nor do they compete for a governmental contract. Other private sectors, or those that seem privatized or propitiatory in nature, like an Ames laboratory that specializes in critical minerals, or other Department of Energy contracted agencies that every 10 years must re-compete for their contracts, within the government, are different. Research and Development is considered one of the heartbeats of the US to advance precision strike, intelligence, surveillance, and reconnaissance materials, yet depending on the level of emphasis on the supply category — munition or critical mineral — it is placed in a private research agency or a research development category that can be re-competed every 10 years? Perhaps even the private sector within the government can be misgiving.

The US DIB and OIB are governed by laws that currently are causing rifts and dispelling forward advancement of opportunities for expanded growth for industry. The FAR governs what industry can and cannot do contractually. These “rules” or regulatory guidance that tether the DIB and OIB to the government are currently causing significant issues especially with the current concerns with the procurement of critical rare earth metals. The FAR governs that some OIBs are government owned entities. One example is expanded on below naming an Army Depot. Army Depots are considered a part of the OIB and are government owned. The FAR explores that OIBs are allowed to obtain, buy, perform, sell to the government for a profit. The OIB itself is unable to surge to a specific capacity because their capital is tied to government regulatory guidance for profit.

The distrust between DIB and OIB has been created by happenstance. The OIB is vast, and an Army Depot is only one small portion. There are many others within other services. The Depots are not allowed to make bids on certain contracts unless they are named on the contract from the originating source. This allows for fair competition for small businesses to bid on contracts, but it is equally problematic because there are millions of dollars in unawarded contracts at one unnamed echelon. The contracts being solicited have not been awarded because the DIB companies, to include small businesses, did not accept the work and the OIB (in this example — arsenals/depots) are not allowed to bid on the work because they were not named originally on the contracts. This is written explicitly in the FAR. There is no clause written to remedy this and one of many problems that are not being addressed. The policies within the FAR cause regulatory problems that tie up capital investments, cause unnecessary supply chain bottlenecks, and ultimately cause the Warfighter to not have the necessary parts and equipment needed for their missions.

Historically, China’s industrial base has thrived.  After the Cold War, China did not shutdown industrial factories or consolidate. The PRC is not tied to the same rules, governmental procedures, contractual obligations, or private agreements (laws) like the US is bonded to. There are no recompetes for contracts or even an OIB or DIB distinction in literature tied to the PRC.  The PRCs Defense Industry is tied to political parties. According to a 2023 chart, all the industrial industries were tied to a political cabinet. At the head, a state council was broken out into a Ministry of Industry and Information Technology (MITT) and a State-owned Assets Supervision & Administration Commission (SASAC).  There are nine other political cabinets underneath that control defense issues and tie financial assets.[6]

During an approximate seven-year span ranging from 2013 to the early 2020s, China’s funding security increased due to the defense firms tapping into the domestic stock market and state investors raising funds. For example, China’s shipbuilding Industry Corporation comparative to the US’s private share placement undertook $8.5B compared to the US $1.38B.[7] Among other examples, China’s focus on funding critical defense sectors continues to grow. Though the statistics show 2020’s statistics, China’s industrial base being tied to political parties’ weave through the RAND study with the US and other countries being reliant on them for critical mineral production as far back as the early 90s.

China deliberately uses all resources at their disposal to advance. They have been slowly innovating to gain accesses, especially on the Critical Materials frontier. China exploits funding gaps from other nations and continues moving forward innovatively. The RAND study states that 18 of the 37 defense critical minerals are sourced from the PRC. From the assessment, there is no current plan for the DoD to outsource those requirements from another country.[8] China’s recent deterrence to the US has been a series of holds placed on exporting of critical minerals for both the civilian sector and defense sector to attempt to cripple our economy.

In a time that there are conflicts abroad being actively fought (i.e., Ukraine and Russia, African bombings, and the Middle East missile strikes), the world is not at peace or even at a state of rest. Dr. Seth Jones, at CSIS, in a recent article for Foreign Affairs continues in his rhetoric that the US is operating on peacetime standards when the rest of the world is in conflict.  Dr. Jones believes this is a mistake. The last wargame I attended explored the OIB and one critical mineral. The example was given that the mineral could not be supplied to the US anymore due to a congestion in transportation. All the courses of action that were given did not suffice. One Soldier commented for industry to make more, but industry cannot produce more of the item without the materials (raw minerals) components. The DIB and OIB need better caveats in the FAR and industry needs a better way to communicate requirements for what they need monetarily to the government to address supply chain concerns.

The views expressed in this article are those of the author and do not necessarily reflect the official policy or position of the Air Force, the Department of Defense, or the US Government. 

About the Author:

LTC Sandra R. Thomas is the Joint Staff J-4 Defense Industrial Base Chief.  She works with industrial partners, interagency, and the Offices of the Secretary of Defense bridging gaps for the Joint Staff on capability requirements.  She has a BA in Spanish Literature and an MA in Criminal Justice-Legal Studies. She recently published a research paper through the Department of Homeland Security Information and Assurance (DHS I&A) with a team of public/private data analysts on the Threat to US limited Critical Resources Materials (CRM) and has been selected to scope developing a tool for Preventing Violent Extremism. She just finalized a report on a Future Environmental Effects on Logistics (FEEL) with a project scoping Additive Manufacturing/Advanced Manufacturing/ and the Vacuum Induction Melting/Vacuum Arc Remelting (VIM/VAR) steel process.  [Contact Info:  sandra.r.thomas14.mil@mail.mil]

Works Cited

[1] Department of Defense. 2023. National Defense Industrial Strategy, pg 53

[2] Department of Defense. 2023. National Defense Industrial Strategy, pg 57

[3] Weinbaum, Courtney. Et al., Assessing Systematic Strengths and Vulnerabilities of China’s Defense Industrial Base, 2022, pg 2

[4] Robertson, Noah. 2024. The Pentagon Wants Industry to Transform Again to Meet Demand. Can it?, pg.2

[5]Cheung, Tai Ming & Mahnken, Thomas G., The Decisive Decade, 2024, pg 2

[6] Cheung, Tai Ming & Mahnken, Thomas G., The Decisive Decade, 2024, pg 18

[7] Cheung, Tai Ming & Mahnken, Thomas G., The Decisive Decade, 2024, pg 20

[8] Weinbaum, Courtney. Et al., Assessing Systematic Strengths and Vulnerabilities of China’s Defense Industrial Base, 2022, pg 4