ACTING DEPUTY SECRETARY OF DEFENSE CHRISTINE H. FOX:  Well, good morning.  And thank you, Admiral Daly, for that very kind introduction.  And thanks to AFCEA and the Naval Institute for this invitation and opportunity to speak with all of you today.  It's so good to see so many valued colleagues and friends from the military leadership, the strategy and analyst community, as well as our industry partners.  

 

Since joining the Office of the Secretary of Defense more than four years ago now, first as CAPE and now as acting deputy secretary of defense, I have needed to be studiously neutral when it comes to the military services.  But I must admit that it's a special pleasure to address a Navy gathering.  As you know, I spent most of my professional life as an analyst working with the Navy and Marine Corps at the Center for Naval Analyses, as Admiral Daly just said.

 

At CNA, I had many opportunities to ride ships, fly in naval aircraft, and support integrated training exercises.  Rest assured, articles in Proceedings continue to get my attention.

 

But spending any length of time with the Navy invariably means spending some time in San Diego, where I had the wonderful opportunity to live for five years.  So it's a particular pleasure to be back, especially at this time of year, especially with the kind of weather we've been having in Washington.

 

But beyond the great weather and beautiful scenery here, this city has a unique place in the history of America as a maritime nation, a city that continues to be a critical home to American seapower in all of its dimensions.

 

You know, it's pretty extraordinary that in one metropolitan area that is every year we have the opportunity to see thousands of young men and women, still boys and girls in some cases, turned into United States Marines, tens of thousands of those Marines live and prepare here for their next mission, the next elite group of Navy SEALs are selected, vetted, trained, and much of the vaunted Pacific Fleet is ported, maintained, and deployed to show the flag and police the commons.

 

You know, I spent part of yesterday -- a great part of yesterday -- visiting some of San Diego's military assets and getting back in touch with my CNA roots.  I visited the Naval Air Station North Island, the Navy Special Warfare Command, and USS Freedom.  

 

So in that context, we're here today to talk about shaping the maritime strategy, how to make it work.  I would like to add, how to make it affordable.

 

For the U.S. military as a whole, this is a time of transition and corresponding uncertainty.  The past decade has been dominated by the protracted land wars in the Middle East and Central Asia.  Today, even as the fight continues in Afghanistan, we are in the process of transitioning to prepare the military to contend with a variety of interconnected threats in the 21st century.

 

Recognizing this historic inflection point, President Obama's defense strategic guidance issued two years ago contains several important priorities, from counterterrorism and counterproliferation to strategic deterrence and sustaining alliances.  None was more relevant to America's overall national interests -- security, economic, political interests -- than what's been called the rebalance to Asia.

 

The rebalance to be sure is a whole-of-government concept, not just a military one, and it is unfortunate that it's been interpreted as such in many quarters.  But there's no denying the importance of modernizing our military posture in the Asia Pacific.  Given that Pacific is a predominantly maritime theater, this has refocused attention, resources and strategic thinking into America's sea services.

 

The Defense Department has already committed to focusing 60 percent of the Navy's fleet on the Pacific Command area of responsibility.  The Marines, as you know, began rotational deployments in Australia, the first of its kind since the Korean War, and up to four littoral combat ships will deploy regularly to Singapore.

 

We're updating the U.S. force posture in Japan by moving several thousand Marines from Okinawa to Guam, and plans for relocating the [Marine Corps] air station at Futenma are making progress.  These efforts will all help maintain a well-distributed and politically sustainable force posture throughout the Pacific.  So there's some positive movement in making the Asia rebalance a reality on the military side, but also a good deal of uncertainty on two major interrelated fronts that I would like to discuss in my remaining time with you today.

 

First, the strategic environment, in particular, the emerging challenges of U.S. air-sea dominance and the implications for how we think about Navy modernization priorities.  Second, the fiscal uncertainty and continued budget austerity, where as my remarks will make clear, require that we make tough and far-sighted choices now in order to achieve a ready and modern force in the future.

 

With respect to the geostrategic environment in the Pacific, there's no avoiding the tremendous impact of the rise of China.  U.S. defense leaders are frequently asked if our rebalance is really all about China.  In reality, it's not about any one country, but about ensuring that stability and growing prosperity that the Asia Pacific has enjoyed for more than 60 years.

 

Clearly, China's economic dynamism has been a welcome development in terms of rising standards of living for the Chinese people and the resulting growth in commerce in the region and globally.  The Sino-American leadership is one that needs to be managed carefully, with every opportunity taken to strengthen transparency and establish measures of trust where they can exist.  All three defense secretaries I have worked for sought to forge a military-to-military relationship with China and have those defense ties reach the level of our bilateral, political and economic relationship.

 

Improving that defense relationship, and understanding China's intentions, is so important because of the comprehensive military modernization program being pursued by the People's Liberation Army.  It is no secret that China is developing its military capabilities designed to thwart the freedom of movement of others in the region and to expand their influence, the so-called anti-access/area-denial.

 

Irrespective of the ebbs and flows of America's relationship with any country, those of us entrusted with leadership positions at the Department of Defense do not wish to see the U.S. lose its decisive advantage or end up in a situation of parity against any military power.  If either of those possibilities came to pass, the United States would lose influence, regional rivalries and security dilemmas would increase, as would the possibility, however remote, of a conflict due to a miscalculation.

 

The U.S. military may also face exported versions of these modern systems in other regions and situations where conflict is more likely.  Yet in an era where China's defense budget is increasing at around 10 percent each year, the United States, due to a variety of political and fiscal factors, is disproportionately reducing the very investments that are intended to sustain our technological superiority.

 

As a result of sequester in 2013, for example, the Defense Department cut nearly $16 billion from its modernization accounts, procurement, research, development, and testing.  This year looked to be even worse, until the department received some relief in the form of the Bipartisan Budget Act.

 

With defense dollars, investment dollars in particular, growing scarcer, it is all the more of an imperative for defense leaders to make strategically sound choices when it comes to the military's modernization priorities.  The U.S. Navy is unique amongst the military services in never having been seriously challenged in direct at-sea combat since the end of the Second World War.  The U.S. enjoys a margin of military superiority today in the Pacific, but we cannot ignore the reality that American dominance on the seas, in the skies, and even in space can no longer be taken for granted going forward.

 

As we confront the implications of this new reality, I'd like to share two major points.  First, as the military transitions from a decade of fighting insurgents and terrorists, we don't have the luxury going forward of assuming a permissive environment for U.S. naval air or sea assets, whether for fighters, close air support, UAVs, amphibious landings, or surface combatants.

 

With respect to the Navy, as I alluded to a moment ago, the threats to surface combatants continue to grow, not just from advanced military powers, but from the proliferation of more advanced, precise anti-ship munitions around the globe.  Clearly, this puts a premium on undersea capabilities, submarines, that can deploy and strike with relative freedom of movement.

 

For aerial platforms, we need the ability to strike from over the horizon from secure locations, whether that capability comes from missiles, bombers, tactical aircraft, manned or unmanned.

 

But with limited resources and global responsibilities, we simply can't afford to build a Navy tailored for one region or one kind of fight.  We need a flexible portfolio of capabilities that can operate along the full spectrum of conflict and military operations.  

 

Nonetheless, given more advanced anti-ship munitions being developed by potential adversaries, I believe it is an imperative to devote increasing focus and resources to the survivability of our battle fleet.  Niche platforms that can conduct a certain mission in a permissive environment have a valuable place in the Navy's inventory, yet we need more ships with the protection and firepower to survive against a more advanced military adversary.  Presence is important, presence with a purpose and with capability. 

 

Second, when defense budgets decline, there is a natural tendency to hang on to combat forces at the expense of enablers, yet we all know that enablers can be decisive force-multipliers.  With the U.S. Navy able to outgun any and all comers, potential adversaries will look to take away our inherent military advantages, to include the use of electronic warfare and other countermeasures.  Capabilities that can overcome these threats represent critical enablers that we neglect at our peril.  

 

In many respects, the U.S. Navy has been so dominant for so long at sea that I worry we never really embraced these solutions at all.  The time to start investing in the next generation of electronic warfare is now.

 

However, the resources will be only available to buy these and other modern capabilities our military needs on land, sea and in the air if we start reshaping and rebalancing all of America's defense institutions, and soon.  Let me provide some context.

 

As you know, early next month, the president will submit a budget request for the Defense Department.  At this point, I obviously can't share any particular program decisions, including the ones you have probably already read stories about in the press, but I can provide the fiscal and budgetary context that shaped our recommendations.

 

Today, we are in the midst of America's fifth defense drawdown in the past 70 years.  The first three came after the end of wars, World War II, Korea, and Vietnam.  The fourth came at the end of the Cold War.  All of these drawdowns resulted in a force that led to a disproportionate loss in readiness and capability.  

 

The reason was that in each case the United States military kept more force structure than could be adequately trained, maintained, and equipped, given defense budgets at the time.  In general, the force was used more often than planned, and it's operating and overhead costs stayed high.  The Defense Department was thus forced to cut disproportionately into accounts that fund readiness and modernization.  The worst example of this phenomenon was the hollow military of the 1970s.  Afterward, when conflicts loomed again, budgets rose or strategic priorities changed, it has always required a large infusion of money to restore the health of the force.

 

As we speak, the department is finishing the 2014 Quadrennial Defense Review.  And, no, I can't share any particulars today, but suffice it to say that this QDR will show that the world has gotten no less turbulent, complex, or in need of American leadership even as the U.S. military resets after a decade of war there is no "peace dividend" in the offing.

 

Last summer Secretary Hagel decided it was time for the Pentagon to begin preparing for the possibility that we would have significantly less funding than we wanted or needed for a defense strategy to contend with this global security environment.  The result was the Strategic Choices and Management Review.  

 

Since then, the department's financial outlook has improved somewhat, as the Bipartisan Budget Act provided substantial sequester relief for fiscal year 2014.  But the BBA provides much less relief, only $9.5 billion above sequestration, for fiscal year 2015, and sequestration level funding continues to be the law of the land starting in 2016.  So given these fiscal realities, the department cannot postpone further difficult decisions about the military's size and operating costs.  

 

The SCMR results provided a guide to how much can be saved where and how fast.  What we found is that achieving savings in the military's proverbial tail by reducing overhead and slimming the bureaucracy takes several years and produces significantly less in bankable savings than is commonly believed.

 

So far, Congress has shown little interest in launching another Base Realignment and Closure process, and we need a BRAC, but even if it started tomorrow, the savings would begin four to five years from now at the earliest, and it would actually cost us money upfront.

 

Zeroing in on the vaunted Pentagon bureaucracy that I live every day, the Office of the Secretary of Defense, service headquarters, Joint Staff, defense agencies, and field activities, some reductions are, indeed, necessary, and some savings are possible.  Yet when all is said and done, an enterprise of the U.S. military's size, complexity and global reach requires a substantial administrative and support operation.  Much of the bureaucracy is actually there for a reason.  It performs tasks that need to be done, though these tasks can be done more efficiently, with less duplication, fewer contractors, and with fewer executives, generals and admirals and their associated staffs.

 

That is why Secretary Hagel last summer announced that he would cut civilian and contractor personnel from all headquarters by 20 percent.  It will be disruptive and affect some missions, but on balance, this is the right thing to do.  Yet the total savings from this are a fraction of the reductions required by a return to sequestration over the next decade.

 

Going where the real money is invariably leads us to compensation.  About half of all defense spending broadly defined as pay and benefits, military and civilian, current and retirees, direct and in-kind, such as DOD schools and commissaries, is in compensation.  The 2000s saw substantial military pay and benefit increases, and that was justified.  But the result now is a compensation package that will be difficult for us to sustain onto today's budget circumstances, at least without making truly damaging and potentially dangerous cuts elsewhere.

 

In all, what the SCMR showed was that managerial savings typically accumulate slowly and take years to realize, at least if done in a sound legal and humane way, and in the meantime, without tough choices, based on strategic priorities, like the maritime strategy, readiness and modernization will continue to suffer as security threats grow and multiply.

 

All of these factors -- the strategic environment, the fiscal environment, the political environment, and bureaucratic realities of the defense enterprise point to the conclusion that the military must get smaller over the next five years.

 

It is not an ideal course of action.  It contains real risks.  A smaller force, no matter how ready or technologically advanced, can go fewer places and do fewer things.  But given current realities, it is the only plausible way to generate the savings necessary to adequately fund training, readiness, modernization, and avoid the prospect of a hollow force in the future.  It also puts the department in the best position to accomplish the highest priority military missions associated with the current defense strategy.  

 

I would close by noting that, to be quite honest, we don't really know what the future will bring in terms of defense budgets or global geopolitics.  Today's political environment, however, gives us little comfort or certainty.  I'd like to think that returning to sequestration-level budgets in 2016, with the $50 billion across-the-board annual cuts, is highly unlikely, given the consequences I just described to our military and our national security, but I worry.  And I think we should worry together.

 

And here I'm talking, as well, to our partners in industry.  We must work even more closely together as a team to figure out how we can get through these trying times.  It will require addressing, are there more ways we can make modernization affordable?  Are there ways to reduce the growth in the cost of our people in industry and increase our buying power?  How can we reduce the operating and support costs for new and existing systems to relieve some pressure on the operating accounts?  What are the most vulnerable parts of our industrial base?  How likely is it that we could reverse course and build up our force again if we get this wrong or we get into an unanticipated crisis?

 

And I would like to see more critical and creative thinking on, for example, how to develop technology and then keep it on the shelf, so to speak, ready to be turned into procurement when there is a change in either defense budgets or strategic needs.  These are really difficult questions.  The answers have to be doable, not just sound bites or assertions that sound good but don't really add up in the real world.  

 

Finally, I would like to thank all of you for what you do.  These are trying times for everyone, especially and including our partners in industry.  You are vital members of the team.  We should not lose sight of the fact that we are doing something vitally important for our country.  Whether uniform, government, civilian, or industry, you are the best at what you do.  These trying times will pass.  I'm sure of it.  Somehow we always figure it out.  Or, as Churchill once said, you can always count on the Americans to do the right thing, after they've exhausted all other alternatives.

 

And while the American political system exhausts all of its alternatives, it is up to us to get prepared and make the tough choices for the men and women in uniform, for our country's security and credibility as a global power.

 

Thank you again for the opportunity to talk with you today, and now I look forward to your questions. (Applause.)

 

Q:  Good morning, ma'am.  First question.  What steps can the Naval Institute and AFCEA take with DOD to facilitate public-private cooperation?

 

DEP. SEC. FOX:  Well, I would say that public-private cooperation really does need to involve more dialogue.  So every time I've had the opportunity to talk about this kind of an issue in a group like this, I get excellent questions from industry of, we want to team with you, how can we plug in?  

 

And the fact of life is, is that -- at least from my vantage point, those of us in the Pentagon, it's hard to plug in.  I think our folks in acquisition, technology and logistics and Undersecretary Kendall does a superb job of trying to engage with industry and have avenues, and he and I just engaged recently with AIA.  

 

But those levels of dialogue, they hit wavetop issues, if you will, the big things.  And what we need is partnership on a more routine basis to try to address the kinds of questions that I talked about in my speech.  So I think that would be a way that they could contribute and help facilitate these dialogues.

 

Q:  Thank you.  The next question.  You mentioned affordability.  Are we getting at a strategically driven posture?  Or is it really budget-driven?

 

DEP. SEC. FOX:  I get this question all the time.  I'm sure you're not surprised to hear it, given my background and the approach we took in SCMR.  You know, it's a nice idea that we would go off and we would do what we need strategically and then the money would just flow.  But, you know, that just isn't the way we live in the world.  There is a resource constraint that is put on us, and we have to understand what those resources will appropriately buy in a balanced way, balanced meaning the size of the force that we have, given the money that we have to fund it allows for appropriate readiness and modernization.

 

And if you don't consider that reality and what the budget will buy, it's hard to envision a strategy that is meaningful and realizable.  So I personally believe -- now, I'm biased.  I lived through this.  I did this work.  But the policy relationship with CAPE and the budget planning that we did two years ago and that's going on in the department right now with the QDR and the program budget submission for 2015 is the right kind of loop.  It's a feedback process.

 

The money comes.  We do an assessment of what it will buy, where you have choices.  Then the strategy work is done, and then we bring it back together again.  I think the tight partnership between strategy and fiscally informed resource and program design is the right way to develop strategy going forward.

 

So it's not a budget-driven strategy, nor is it a budget-blind strategy.  Similarly, the strategy informs where we make some of the hard choices that I described in my talk.  So I hope that that helps put this in context.  I think it has to be a feedback loop.  We have to work together, strategy, budget, resources, to understand what our options are and, again, bringing industry into that question, understanding what our options are for modernization in a budget-constrained environment.

 

Q:  Thank you, ma'am.  Next question.  Could you provide your thoughts on the readiness of our defense workforce as we face the challenges you describe?  And how do we retain the best in the face of personnel and program reductions?

 

DEP. SEC. FOX:  Well, I think this is a big concern.  It's something I'm very worried about, and I thank you for asking the question. 

 

I think there's two parts of our defense workforce, and I'm worried about both parts of them.  There's our civilians, and there's our industry.  And, of course, worried about our military and uniformed side, but I think that on the uniformed side, on the military side, there's a lot of work and focus going on to try to make sure we're able to do this drawdown in a way that sustains the best of the best, which is what we enjoy and have enjoyed for a long time in this country.

 

On the civilian side, the government civilians have not enjoyed that focus.  They have not enjoyed that appreciation.  And last year, our defense civilians suffered furloughs and a government shutdown after three years of no raises.  And so what you see -- and I see it every day -- are people leaving the department, good people that we need as partners, and they're saying, you know, I've had enough.  I'm not appreciated.  Nobody sees what I do as valued.  And they're leaving.

 

That can't be.  We have to embrace our government civilians.  And I'm also concerned about it on the industry side.  The interactions I have had with industry leaders are worried about their ability to attract a young, vibrant, talented workforce into a declining budget situation.  So we have to all work together to find ways to keep our work vibrant, because, let's face it, yes, budgets are going down, but still this is the coolest work in the world.  And we have the opportunity to tackle incredibly important problems and make a difference.

 

And we've just got to find a way to keep that in the forefront, and we have to fight for our people.  We have to fight for our government civilians.  I know I'm trying to do that, but Secretary Hagel has really been trying hard to do that.  And I have a sense that the Congress is hearing us on this at this point, and I look forward to reinvigorating both the defense, civilian and industry workforces.

 

Q:  Thank you.  Next question.  When will DOD begin to use the instruction of engagement to achieve cost-wise readiness?

 

DEP. SEC. FOX:  So I'm not sure I understand what the instruction of engagement is, so I apologize.  I'm just -- I'm not familiar, but if we're talking about using engagement to achieve readiness -- I'm sorry.  I don't think I understand the question.  Perhaps someone can help me.

 

Q:  Ma'am, we'll just move to the next question.

 

DEP. SEC. FOX:  Sorry.

 

Q:  Could you discuss your views on the importance of preserving a competitive industrial base?  Specifically, should DOD keep the Hornet/Growler line open as a hedge and to ensure competition for F/A-XX?

 

DEP. SEC. FOX:  So competition is clearly really important for our industrial base.  We have to sustain competition and the ability to contribute.  I can't make any comments on the -- on the Hornet/Growler line, although certainly the Hornet and the Growler is going to play a very important role in our force for a long time to come.

 

But on competition, I think that it is important.  And that's one of these critical industry partnering things that we have to get right.  We have to understand where we're making choices based on resources and what we see in the department level that has a downstream impact on industry's ability to remain in the game and to keep competition strong.  So it's a very important part of going forward.

 

Q:  Thank you, ma'am.  Next question.  You mentioned that the Pacific rebalance has unfortunately been primarily a military discussion.  What are some of the whole-of-government elements that this administration has put in place?  And how effective have they been?

 

DEP. SEC. FOX:  Actually, there's been quite a lot of activity in the whole-of-government world.  This is outside of my day-to-day focus, but I know from meetings in the White House and the NSS, the State Department is doing a lot to think about how to change engagement.  We partner very well, DOD and the State Department, in this administration, which is great.  It's a privilege.  And it gives us a lot of opportunities to work together, to decide, is this something State should lead?  Is this something DOD can help with?  They're leading the international engagement, obviously, as they should, but they are leading, and they are doing a lot in the Asia Pacific AOR.

 

It has been a strong focus of our national security adviser, first Tom Donilon, now Susan Rice.  Ambassador Rice is very focused on this.  So there's a lot of interagency conversations about how Treasury can play, for example, or Commerce, trying to work foreign military sales.  So there's a lot of activity going on that we and DOD don't really see and that somehow the media hasn't picked up on as much.  But there -- there is a lot going on there that we should try to, I think, on the administration side, share more broadly, and I encourage our friends in the media to pick up on that, as well, because it's going, and it's exciting.

 

Q:  Thank you, ma'am.  We have time for two more questions.  The first will be, what kind of research and engineering should be allocated to steady state-shaping humanitarian assistance and stability ops?  And how can these be given adequate priority?

 

DEP. SEC. FOX:  Yeah.  So the strategy makes it very clear that engagement shaping in the sense of assurance of our allies and deterrence of our adversaries and engagement to try to do partnering and help build up partner capabilities is a critical part of our strategy.  Nobody wants a conflict, right?

 

And so it's those kinds of activities that we believe play a very vital role in making sure that -- or at least limiting any possibility of a future conflict.  So that's a very important part of our strategic dialogue and the defense strategy.

 

So R&D does need to help us with that.  How can we do those things, have more impact?  And the challenge there is an awful lot of those activities, of course, are on the lower end.  And I just gave a talk about the important of the high end of technology.  And so when you look out at the world and you look out at what's needed, you constantly see this spectrum.  We need to be active in technology development, in R&D, military activities, and strategic thinking across the entire spectrum, and we need to be flexible.

 

So I do think it's an important part of the strategy, and we should not lose sight of it.  So I think that that's a good question.  On the other hand, I will point out, they tend to be less expensive kinds of R&D than the high-tech, so it's just a question, I think, of not losing focus in that case more than it is about affordability.

 

Q:  Thank you, ma'am.  Last question.  You and colleagues at CNA recently completed a superb study on graduate education for military officers and senior personnel to unlock their intellects and develop critical thinking skills.  Will you pursue the objectives of that study as DEPSECDEF?

 

DEP. SEC. FOX:  Wow, somebody remembers the education strategy study.  Thank you, whoever that is.

 

You know, as DEPSECDEF, what I can do is encourage the services to continue to place a premium on education and graduate education and just general education and development.  And I certainly try to do that.  But I think our service chiefs are very focused on that.  I think all four of our service chiefs are very focused on continuing education and graduate education.

 

I think the opportunity to partner with universities throughout the country to do more distance learning and offer degrees for our military members, wherever they're deployed, whatever they're doing, has been a real boom, and that's been a nice development since I worked on the education strategy.

 

So I do think that we've made some advances.  We do need to continue to do so.  I will certainly try to do my part to keep the focus on those issues, but it's our service chiefs that I think are leading the charge.  And I do think they're leading the charge.

 

OK.  Thank you very much.  It's been a real pleasure to be with you today. (Applause.)