Number of Foreign Companies Within Defense Supply Chain Grew Over Past Decade, Report Says

Reliance on foreign suppliers in the defense industrial base rose—notably in packaged software and IT services—even as calls for reshoring increase, according to a new report.

Reshoring the defense supply chain may reduce national security risks, but a new report detailing a heavy dependency on goods and services from foreign countries like China shows reshoring may be easier said than done. 

Researchers at Govini, a decision science company supporting the defense industry, analyzed data from over 1,000 Defense Department vendors across 100 industries to show how supply chain reliance on products from foreign countries has increased over the past decade. According to the survey, the number of Chinese suppliers in DOD’s base increased by a total of 420% since 2010. 

For cyber and information technology, two statistics stick out. The share of companies based in foreign nations in the supply chain grew the most in the packaged software and IT services between 2010 and 2019. Companies based in foreign countries made up 3% of the packaged software supplier base in 2010. That number rose to 7% in 2019. The numbers are similar for IT services: Companies based in foreign countries made up 3% of the IT services supplier base in 2010 and 7% in 2019. 

Tara Murphy Dougherty, CEO of Govini, told Nextgov increasing adoption of IT infrastructure is critical for the Defense Department, particularly as COVID-19 forced the agency’s workforce into mass telework. But that means it is imperative DOD addresses supply chain concerns for information and communications technology. 

Murphy Dougherty said these two investment areas are only going to continue to grow, which means the department needs to act to clearly define its stance on IT supply chain security. 

“What are you doing, other than responding to some of the legislation that we've seen come out of the Hill mandating investigation of this?” she said. “It would be great to see more options.”

A key mandate from Congress related to supply chain was supposed to take effect on an interim basis Thursday. Section 889 (a)(1)(b) of the 2019 National Defense Authorization Act bans agencies from contracting with companies that do business with five Chinese firms, including Huawei and ZTE. But according to a Defense News report, the Pentagon received a temporary waiver from the Director of National Intelligence pushing back the compliance date until September 30.

Defense Undersecretary for Acquisitions and Sustainment Ellen Lord said at a Professional Services Council webinar Thursday she needs feedback from industry on what’s working and what’s not when it comes to implementing the rule. 

“I know we’re all aligned in that we do not want adversaries in our supply chain. We don’t want further theft of intellectual property. We don’t want these nefarious actions going on,” Lord said. “But how do we get the language into the contracts, how do we practice the behaviors of ensuring we understand what we have in our supply chains for telecommunications equipment? What we need to do is continue to hear from you.”

It’s not yet clear how the brief deadline extension will affect the implementation process. Regardless, visibility down the supply chain remains a key concern. Murphy Dougherty said there needs to be more transparency in supply chains if the industry is going to address security risks. 

The Govini report focuses on firms in the mid-tier of the supply chain, with less visibility than a large company like Boeing. For companies further down the supply chain, U.S.-based companies make up less than half of the supplier base, according to the report. Chinese companies make up anywhere from 5% to 9% of the supplier base in the middle to lower ranges of the supply chain. 

Murphy Dougherty said it’s going to take time to see changes in the data. How to address the industrial base at a structural level remains an unanswered question, she said, and collaboration between DOD and industry will be critical in coming up with a new system to ensure supply chain security.

“It begs the question of do we have the right models in place today and the right framework for the department to get all of the goodness and partnership it possibly can out of the American commercial economy,” Murphy Dougherty said.