By law, the Secretary of Defense must submit an annual report to the congressional armed services committees on the actions, investments, and assessments conducted in support of the U.S. defense industrial base (DIB). The FY 2020 Industrial Capabilities Report satisfies the requirements pursuant to title 10, U.S. Code., Section 2504, and provides context to the challenges facing the U.S. DIB. It is published as a convenience to those who may wish to have a quality professionally printed copy of the manual.

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.

In light of Section 881 of the National Defense Authorization Act for Fiscal Year 2017, which expanded the legal definition of the National Technology and Industrial Base (NTIB) to include the United Kingdom and Australia, this report informs NTIB partners on barriers and opportunities for effective integration. The expansion of the NTIB is based on the principle that defense trade between the United States and its closest allies enables a host of benefits, including increased access to innovation, economies of scale, and interoperability. In order to reap the greatest benefits of a new era of NTIB, this report uses the lessons learned from study of the present state of integration to identify areas of opportunity for policy reforms and greater cooperation.

The United States’ National Technology and Industrial Base (NTIB) is a congressionally-mandated policy framework that is intended to foster a defence free-trade area among the defence-related research and development sectors of the United States, Canada, Australia and the United Kingdom. To date, however, the NTIB has only managed to facilitate limited bilateral cooperation between some members, falling well short of its goal. The US defence export control regime is one of the biggest barriers to NTIB integration. Specifically, bureaucratic fragmentation, its failure to treat trusted allies differently from other partners and its leaders’ reluctance to attempt politically costly reform are significant barriers to progress. Canberra’s ability to maintain its own competitive military advantage and to serve as an effective ally of the United States in the Indo-Pacific is threatened by real and growing opportunity costs in an age of rapid strategic and technological change that Australia and Australian industry face as a result of slow NTIB implementation. Australian leaders should elevate NTIB progress to the political level and accelerate efforts to make a strategic case in Washington as to why extensive and ambitious implementation of NTIB’s original vision is urgently needed.