Trekking Through That Valley of Death--The Defense Production Act

June / July 2005 By: Rich Mirsky Volume 3 Number 3

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For over 50 years, Title III of the Defense Production Act (DPA) has given the federal government the ability to create, maintain or expand a domestic production capability needed for national defense. Enacted to support the rapid buildup of domestic materials production needed for the Korean War and the emerging Cold War, Title III investments played a vital role in the establishment of the domestic aluminum and titanium industries.

The act has changed over the years but the thrust of Title III, ensuring the productive resources needed to achieve national security objectives, has remained constant. By 1992, the DPA mission had evolved from a Cold War military mobilization mission to production of critical technology items needed for advanced weapon systems. Since 1990, Title III has invested in a wide range of technologies including silicon carbide, indium phosphide, and gallium arsenide wafers for electronics, microwave power tubes, radiation hardened microelectronics, superconducting wire and metal matrix composites.

Although used primarily by the Department of Defense, Title III authority is available to all federal agencies. This year, the definition of national defense was expanded to include critical infrastructure protection and restoration, giving the act greater scope. Critical infrastructure is defined as "—€¦any systems and assets, whether physical or cyber-based, so vital to the United States that the degradation or destruction of such systems and assets would have a debilitating impact on national security, including, but not limited to, national economic security and national public health or safety."

Title III ensures the availability of required production capabilities by providing incentives in the form of loans, loan guarantees, purchases or purchase commitments; however, DOD has not used loan or loan guarantees since the early 1980s. In addition to the purchase of materials, section 303 of Title III provides for the purchase of capital equipment for installation in a private facility, a provision recently used to establish two foundries for next generation radiation hardened microelectronics (RHM). RHM is essential for ensuring the survivability of space and missile systems in various radiation environments. Using Title III authority, DOD provided over $160 million to purchase semiconductor manufacturing equipment needed to establish the two foundries. Title III authority was employed because the market for radiation hardened microelectronics is relatively small and the two contractors selected for the project would not have made the capital investments required to establish the foundries on their own.

Another effort, to be completed this year, is establishing a production capability for silicon carbide wafers. This semiconductor material is an enabling technology for a variety of high-frequency, high-power radar, communications and electronic warfare applications. This Title III project increased material availability, improved wafer quality, reduced production cost and enabled the transition to full scale manufacturing by establishing the capability to produce 75mm diameter substrates for device fabrication.

Title III authority is especially appropriate for small companies lacking the capital needed to bring a good idea to market, a situation some have termed the Valley of Death. A promising new technology is developed and demonstrated for a customer. The customer wants to buy, but is unwilling to commit to a product that has yet to be produced in volume. The supplier wants to sell, but is either unwilling or unable to commit to the investment needed to establish production. Neither customer nor supplier can accept the risk they've been asked to take. As a result, the technology gets caught in limbo between development and production, and nobody wins.

The Title III process can be an effective way to address this problem. While there are many government organizations that fund research and development and many others that buy high-tech items, only the Title III Program has the authorities sometimes needed to help suppliers bridge the gap from prototype to full-scale production.

A company that successfully traverses the Valley of Death becomes part of the manufacturing base, marketing products, generating revenue and creating jobs. In fact, one company has reported the creation of 108 jobs and revenue of over $30 million so far from the manufacturing base created as a result of Title III assistance.

DOD is currently using Title III authority to establish a production capability for two promising technologies, rigid rod polymeric materials, a revolutionary plastic having extraordinary strength and stiffness properties, and aerogels, considered the most effective insulating material available. Without Title III assistance the two small companies responsible for developing these technologies would be hard-pressed to establish a production capability and DOD would not get access to products offering potentially tremendous advantages for future weapons programs.

By law, each Title III project must meet the following four criteria:

—€ The industrial resource or critical technology item is essential to the national defense

—€ Without presidential action under Title III, industry cannot reasonably be expected to provide the capability for the needed industrial resource or critical technology item in a timely manner

—€ Purchases, purchase commitments or other action pursuant to Title III are the most cost effective, expedient, and practical alternative method for meeting the need

—€ The combination of national defense demand and foreseeable non-defense demand for the industrial resource or critical technology item is not less than the output of domestic industrial capability, including the output to be established through the purchase, purchase commitment, or other action.

The intent of Title III assistance is to establish an economically viable production capability so the company can remain in business without having to rely on further financial assistance from the government. Therefore, each Title III project includes a business plan and analysis. Among the factors evaluated are the contractor's management capabilities, financial strength, marketing resources, customer base, technical capabilities and operational capabilities as well as the overall dynamics of the respective industry. A well-thought-out business plan is absolutely crucial for ensuring economic viability, especially for small, young companies.

Although the Title III Program has a military heritage, it has recently started to forge partnerships with non-military agencies. A project intended to help scale up production capacity for superconducting wire is being done in partnership with the Department of Energy, two national laboratories and two domestic supplier companies. The Department of Homeland Security is now working with Title III to define projects that will establish affordable production of technologies needed to protect America from biological and chemical attacks.

Title III of the Defense Production Act has provided Defense with powerful incentives for establishing a production capability that would not have otherwise been available. Although not widely known, the act can be used by any federal agency.

Rich Mirsky is the recently retired program manager of the Defense Production Act Title III program at the Department of Defense.