Kathy Warden discusses technological advancements in the aerospace and defense industry and her perspective as a CEO in the national security arena.
The CEO Speaker Series is a unique forum for leading global CEOs to share their insights on issues at the center of commerce and foreign policy, and to discuss the changing role of business globally.
TOWNSEND: Welcome to today's Council on Foreign Relations CEO Speaker Series meeting with Kathy Warden, the chairman, CEO, and president of Northrop Grumman. I'm Frances Townsend, executive vice president of corporate affairs at Activision Blizzard and a member of the Board of Directors of the Council on Foreign Relations, and I have the privilege of presiding over today's discussion. Kathy, welcome, and thank you for doing this.
WARDEN: Thank you, Fran. It's wonderful to be here with you this morning.
TOWNSEND: So, let me ask you. You made a personal decision when you were at James Madison to switch majors. It has a dramatic impact on your career, right? You made this decision at a young age. I'm curious if you could explain to the members the decision you made and why at a point in time when cyber and computers and all of that were less prominent in our thinking?
WARDEN: Well, it takes me back many years to think about that decision. As most 18-year-olds are, I probably wasn't well equipped to make it at the time. But I had decided that while I was pursuing pre-law and thought that I would go on to law school through an internship, which was very valuable to me, I realized that that wasn't my passion. And so, I did change majors and started to study computer systems. At the time it was a novel field, as you pointed out, but it was an area that I was interested in. I had always really enjoyed math in particular. And it was a way to apply some of those skills in a field that I thought would have nice growth prospects. I had no idea at the time how significant those growth prospects would be and how central computing would be to every industry and everything that we do.
TOWNSEND: You know, we hear a lot about there are not enough women in STEM, in technical areas. And yet the aerospace and defense industry, best as I can tell, has more women leaders than any other sector I can think of. Why do you think that is?
WARDEN: You know, it's really hard to put my finger on it. As you know, many of the companies in the aerospace and defense industry have named their first female CEO over the course of the last decade. And I think that we have to look well in the last decade to understand what changed in the industry that allowed women to have the equal opportunity to succeed and reach the highest level in the company. I believe that, you know, when I started my career, in most industries, it was male-dominated at the top. And you couldn't necessarily see a path, but over the course of the last couple of decades more women have forged the path to the top. That has created inspiration for those who might follow. I also think that everyone has become more attuned to creating an inclusive culture and environment in the workplace so that fewer decisions get made in the men's room or on the golf course. There's more access for all to be part of those important discussions and to get access to the experiences that lead to career progression.
TOWNSEND: And I'll say this, I think having role models such as yourself also helps to inspire a younger generation of women so there'll be more opportunities going forward.
WARDEN: Certainly. I just want to comment that I certainly look to women who made those steps ahead of me as role models, and it does make a big difference to see women persevere and reach their career aspirations.
TOWNSEND: Kathy, let me ask you, you presided over the integration of Orbital ATK. We've seen a fair amount of integration in the aerospace and defense industry. Can you talk to us a little bit about what you expect and what you anticipate going forward? Will we see additional consolidation in the industry?
WARDEN: You know, I have said that I do expect consolidation, not necessarily at the top tier of companies. In many cases we have only two or three companies that are capable of performing some of the most sophisticated weapons systems development programs for our nation. I don't think that further consolidation at the tier would make sense, and this administration has made comments to that effect. However, I do see consolidation amongst smaller and mid-tier companies. As budgets flatten and we look at the pivot to more technologically advanced systems that will be required, there will be companies that can't necessarily invest to compete in standalone organizations and really will find a better place in consolidating with companies with deeper access to capital and more capability to innovate. I don't think that's an unhealthy thing. All industries go through those cycles and this one does and has in the past, and it's led to the strength of our defense industrial base as it exists today.
TOWNSEND: So, talk to me, one of the really flagship programs at Northrop Grumman is your space program, but we see this growing commercial, you know, the race between Bezos and Virgin to get into space and a commercialization of it. Can you talk to us? What is your take on that, and how do you view your space program, which is incredibly important to the U.S. government?
WARDEN: When I think of space as a domain it is following a similar trajectory as every other domain that we operate in. You can go back nearly a hundred years now and think about air as the domain in much the same way we see space evolving in front of us today. We had military applications of airplanes and aircraft but also commercial aspirations. Those commercial aspirations have grown significantly. Over time the assets coexist, and we leverage the knowledge that comes from development in the commercial aviation market into defense and vice versa. I very much see that happening in space as well. There will be some companies that focus primarily or solely on commercial, others that focus primarily or solely on defense, but there'll be a sharing of technologies that cut across, and we see that already happening in space. The Northrop Grumman portfolio, of course, stretches from commercial all the way through national security and classified efforts, and we benefit from that breadth of both portfolio and experience.
TOWNSEND: So, you mentioned space as a domain. We think of air, land, sea, right, all of that. Cyber is a domain and now space, but we have adversaries with whom we compete. Can you talk to us about how you see the threat to that particular domain, and who should we be most concerned about in our near-peer competitors?
WARDEN: Well, it is an interesting domain in that we have over two thousand satellites in space. About half of them are controlled by NATO countries, and therefore a significant portion of them are controlled by other nations. And we don't necessarily have the laws of order in space that exist in other domains partly because of the novelty of space operations. So, what I see is a focus for creating those norms for operating, and there'll be a period of time—and we're already operating in it today—where that will be worked out through experimentation, certainly demonstration of capabilities. We see that happening with some of what could be our adversaries, in particular China, who has been very active in the space domain. And so this was a topic of conversation amongst the NATO countries at the summit a week ago and a really important one for our governments to create some alignment on what those norms should be for space operations.
TOWNSEND: Can you give us an example? What are the areas where you think it's open to a discussion of norms that could be beneficial for our security and that of our allies?
WARDEN: Well, space is getting more crowded, and so the first issue and foremost is safety in space that the assets be both able to operate freely and be protected from an adversary's intervention. This isn't an area that's particularly mature as it hasn't been an issue previously. Assets and space were thought to be some of the most protected and resilient just because they were operating so far from the Earth's surface. That's no longer the case, and we can't take that distance as a method of security and resiliency so other ways have to be developed.
I think the other area we'll see significant investment by nations is the ability to have situational awareness in space, track not only our assets but the assets of potential adversaries and keep our knowledge base about what is occurring in space just as we have in the other domains that we've talked about. And, you know, we talked about air, but I would say the same exists on the ground, in the seas, and now in cyberspace as well.
TOWNSEND: So, you mentioned China. We've heard a lot about concern for us losing our competitive edge and technology. How do you think about that issue?
WARDEN: Well, certainly China has been investing in their military complex, and as a result, has seen a significant growth in their capacity and seeing indications of a desire to expand territorially. And as a result of this, nations, including the U.S., need to contemplate what it means to deter China from further expansion or potential military aspirations. I see deterrence as an even more important topic today than it has been historically. And deterrence not in just the context of nuclear deterrence, which continues to be important as China builds its nuclear weapons arsenal and has expressed its desires to have a triad that is as capable as the U.S., but also thinking about what deterrence means in the space domain and the cyberspace domain. And so these are important areas that this administration has highlighted as well as emphasized in the budget deliberations for this first budget that was shared by the administration a few weeks ago.
TOWNSEND: So, do you think that China has closed—certainly they're closing the gap, right, on technology and technology development—do you see them overcoming the U.S. or do you see us taking steps to, sort of, preserve at least some of the advantage we have in terms of technology?
WARDEN: Well, despite the rapid growth in both capacity and capability, I do not see them on par with the U.S. in most areas. One area that is getting particular attention is their ability to progress the state of computing and therefore leverage the computing and large-scale data that China—and specifically the government—has access to for artificial intelligence and machine learning, as well as advancements in large-scale computing. And I do see that area is one that is particularly problematic. It's not an area that the U.S. has been investing significantly in, in previous years. This administration has outlined some plans to increase that funding, and it's getting bipartisan support. Because if there were an area I would point to where that capability gap has shrunk to an alarming state that would be the one that I would highlight. But overall, I do feel that the U.S. government and its industrial complex are well-positioned in most technology areas to continue to compete.
TOWNSEND: That's great. You recently attended a White House meeting with the president. The president's focus has been, in terms of China, on supply-chain chips and semiconductors. How do you see the cooperation between the aerospace and defense sector and the U.S. government in terms of moving forward to ensure U.S. capability is superior?
WARDEN: This is a really important area, and it goes to the topic we were just discussing about advancements in computing. Having the ability to control a supply chain in semiconductor and chip production, in my view, could become a national imperative. And we don't want to wait until the conflict puts us into a position where it is a national imperative to realize that we don't have the necessary capacity under U.S. control. That doesn't mean it needs to all be onshored, but we do need to have clear access deep into the supply chain for semiconductors. So, there is a CHIPS Act that has been passed, and now funding is being identified to support the development and the incentivization of onshore semiconductor production. I think this is a really important step forward. The secretary of commerce, Gina Raimondo, has been really championing this effort, and I see strong progress being made.
TOWNSEND: So, Senator Schumer has introduced a bill and got it through the Senate. It's not clear that the same bill would make it through the House, right, and so there'll be some sort of discussions, negotiations between the House and Senate. The Schumer bill increases dramatically government spending on technology R&D. Does that need to be government spending? Why isn't that part of, kind of, the normal technology R&D in the private sector? And again, right, how should that sort of unfold so that the U.S. is getting the advantage of it but it's not all being done with tax dollars.
WARDEN: Well, certainly there is a role for both government and private investment in developing the technologies that fuel our national and economic security. But if you look at the percentage of R&D spending that the government is doing today as a percentage of GDP, it's actually lower than it's been for a very long period of time. And if you look back to the '50s and '60s, in particular, that investment that government was making into core technologies that led to global positioning, that led to today's compute, that led to today's internet and the connection of articles. That really has all found a source through government investment and then private-industry investment has layered on top of those technology advancements to create commercial applications that impact our everyday lives.
I would submit to you that those would not have matured at the rate they would have if we didn't have strong government R&D spending. And we certainly wouldn't have found competitive differentiation from a national security perspective through advancing those technologies before other countries if they had all originated in the commercial space because they would have been in the hands of all nations more simultaneously. So, I think if we want to look forward at these investments both finding their way into paths for commercial application and commercial investment but also into the keys for military superiority for our nation and our allies, we need to look at robust R&D spending by the government that's complemented by private industry and not expect to rely solely on private industry to make up that funding shortfall from government.
TOWNSEND: Let me sort of shift the conversation. The other big national security threat at the moment is from Russia, who has become very, very aggressive in the cyber realm. Talk to me about, post the Biden-Putin summit, what are the most important things we need to see going forward in terms of our relationship, very scratchy as it is, with Russia?
WARDEN: Well, certainly, as we think about current capability for weapons of mass destruction, Russia is the country that we would be most concerned about. And so the importance of the deterrent that I mentioned earlier, particularly for nuclear weapon deterrence, is paced by the Russia threat. And we have seen activity, particularly in the polar region and in Eastern Europe, that's quite troubling and indicates that Russia is in an expansionary mode. Therefore, I think, as we look at the nuclear deterrence that we have as a nation, the recapitalization and modernization is absolutely essential.
The second thing that I would point out in terms of relations is that this administration, as well as the past two, has had to deal simultaneously with very different threats. We just talked about Russia, we've talked a bit about China, but we also need to be thinking about nuclear deterrence with North Korea and Iran. And so this really is a period where a deterrent has to be effective across many different nations with different interests, different abilities to resource their aspirations. And while I would put Russia at the forefront of those thoughts from a nuclear deterrence perspective, we need a deterrent that works across a wide variety of threats.
TOWNSEND: I couldn't agree more. There's been much written about our framework for the nuclear deterrent that worked extremely well over many decades, but it doesn't fit quite as well in terms of the cyber realm. Can you give us your thoughts on how do we deter Russia or any adversary in the cyber realm such that they are reluctant to post criminal groups to act from their territory or state actors acting on their own?
WARDEN: I say two things are essential in deterring in the cyberspace. The first is a whole-of-government approach to taking action when we see adversary behavior in cyberspace that's outside what we believe is the norms. Now, first of all, as we discussed earlier, there aren't a set of agreed upon norms for operating in cyberspace, but those in my view will only get constructed as we see activities that we believe are out of bounds and we take action. That requires a whole-of-government approach because our national security apparatus is operating in cyberspace in a way to detect and take action against some of these behaviors where our government, through the Department of Justice, has the mandate for taking the judiciary actions to hold adversaries accountable for those behaviors. We clearly need to work the bounds of what's happening outside the U.S. and what's happening inside. So involving NSA, FBI, the Department of Justice, and the Department of Homeland Security in a very integrated way to hold adversaries accountable for their behaviors in cyberspace is essential.
But I think the other thing that is really important as we consider operations in the cyber domain is that the critical infrastructure, which is not government controlled, needs to invest in its own defenses and also be very open in information sharing with the federal government so that we can behave as not only a whole of government but an integrated critical infrastructure, which is held in the private sector and government approach, to dealing with adversary behavior in cyberspace.
TOWNSEND: So, Northrop Grumman has many very important, sensitive, classified—highly classified—national security programs, which is both a risk, right, from a cyber perspective. How do you think about that risk to your own networks, and how do you protect it in an age of SolarWinds and ransomware and Colonial Pipeline?
WARDEN: We are a significant target for adversaries, nation states, as well as criminal behavior. So we invest in this area. It is a boardroom topic. Our cybersecurity posture, our plans for not only monitoring but continuing to stay ahead of the advanced threat, which we feel is essential for our company's operations, and maintaining the trust that we have with the government. So, in order to do that it does require a top-down commitment to cybersecurity as a priority and putting some of our best resources on that area. Also, looking at that risk is one that we put priority to financially invest in.
And I just noted a very open approach to sharing information, which has been essential for our industry to be able to have agreements with other, what would be competitors on one day, but in the case of cyberspace our collaborators. So the other companies that operate in the aerospace and defense industry have nondisclosure agreements between ourselves to share openly what we're seeing in our networks. I encourage all industry executives if you aren't doing that within your industry to do so. It's nice to share information with those outside of your industry, but what we have seen is that adversaries are so sophisticated that they're using different tactics, techniques, and procedures by industry, knowing where those industries are most vulnerable and what the attack vectors are. So it's really then a critical part of our defense to have this broad information sharing framework in place within the defense industrial base.
TOWNSEND: It's an incredible model as you suggest for other sectors. Can you talk about how did it come together, how long is it been in place?
WARDEN: It's been in place about a decade, and it came together as a result of organization inside the Department of Homeland Security around cyber to have cells where information is collected on an industry-specific basis. Most companies now are not only aware that that exists but leveraging the information that the federal government is providing to critical infrastructure providers. But, of course, for the defense industrial base, we were one of the first areas of focus for partnership with the federal government because we were under attack by nation states to get access not only for the purposes of, in our case, getting Northrop Grumman data, but because we house some of the government's most sensitive data in the weapon systems that we're developing.
And so we worked in partnership with the federal government first and then realized that having those same types of information-sharing agreements in place directly instead of going in a hub-spoke model through the federal government, being able to have all the spokes—the companies in the industry—communicate directly would be even more valuable and more timely. Because when you're fighting cyber warfare—and I do call it that—on a daily basis, speed is essential. Getting access to that information about how others may be under attack and what you need to do to defend yourself is essential.
TOWNSEND: So, we have extraordinary capability, cyber capability, in our military. Do we have the resources we need? You mentioned DHS. I can remember when I was back in government it was always a struggle to attract those resources, those cyber resources into the civilian part of government, one, because of salaries, right, the differentiation between the private sector and the public sector. Do we have enough resources on the civilian side of the federal government, and if not, how would you advise the civilian side of the federal government to better attract those resources?
WARDEN: It's a challenge because we're all competing for a pool of talent that is too limited. And so, you know, the first thing we all need to do is think about how do we help to create a bigger pool of talent, people who have the skills and passion around STEM fields getting attracted to cybersecurity as a profession of choice and doing our part in that early because, you know, people choose their career paths either by intent or default by choices they make on what to study and how to engage with their choices early in life. And so what we have found is we need to reach down into K-12 education and create programs that create an interest in pursuing cybersecurity as a profession. And then we each obviously need to compete from the perspective of compensation and benefits.
But one of the things that I think is most important for agencies in the federal government to leverage in that competition is the purpose and the sense of being able to contribute to national security in a very clear and direct way by working through the federal government agencies that have an opportunity to impact cyber operations that the private sector does not. You know, we don't engage in offensive behavior. We don't have the resources to scan and surveil cyberspace the way the federal government does. We do what we can, but we are required, in many ways, to work through the federal government. And so the pointy end of the sphere in cyberspace really are those federal jobs where you can be engaged through either the National Security Agency, the Department of Homeland Security, the FBI, all playing a really critical role to support the private sector in this area.
TOWNSEND: So, last question before I open it up to the members. Talk to me. You mentioned North Korea. What do you see—and we've discussed China and Russia—what are the other sort of biggest national security threats you see? What are the opinions that you share with your other CEO colleagues? What do CEOs see is the biggest national security threats right now?
WARDEN: Well, I would say it's not a single threat, and that's the largest threat in and of itself. The fact that we have to as a nation and with our allies spread the resources of our intelligence and military apparatus across a wide spectrum of threats. And we need to, on one hand, when thinking about Russia and China, have the ability to operate against highly sophisticated adversarial capabilities, but at the same time viewing those conflicts as less likely and through more of a deterrence lens, while realizing that terrorist activity is still a real and present threat and perhaps more likely on any given day, and yet requires a very different set of capabilities to counter because those adversaries are not as sophisticated but could be highly effective if we aren't thoughtful about also being able to identify and defend against them. And so the breadth of areas that we need to invest in as an industry, that we need to remain innovative is growing. The resources are not. Budgets are basically flat. I talked about how research and development as a percent of GDP is lower in the last two decades than it was in the earlier part of the twentieth century. So, when we look at these issues in combination it's not any one capability area that worries me, it's the breadth and the speed at which we need to operate to stay ahead on so many fronts.
TOWNSEND: Thank you. At this time I would like to invite members to join our conversation with their questions. A reminder that this meeting is on the record, and the operator will remind you how to join the question queue. Operator?
STAFF: [Gives queuing instructions] We'll take the first question from Colette Shulman. Ms. Shulman, please accept the “unmute now” prompt.
Q: Ms. Warden, I hope you'll be open if I asked a fairly forthright question? Is it right, is it wise in the long run that so many people in our northwestern states depend for their whole livelihood on weapons that can create nuclear winter, that can destroy life on Earth? Is this the kind of world that would be really safer for your son to grow up in? We have the intelligence to create these weapons. Your company also has the intelligence to develop other kinds of livelihood in coordination of the federal government and the private sector. Some of our brightest military people, like James Mattis and Bill Perry, have said we don't really need the triad any longer. We have plenty of nuclear weapons under the water and in the air. We certainly don't need these gigantic weapons that you're planning to build, so I would very much appreciate your addressing that question.
WARDEN: Well, thank you for the question. In thinking about the nuclear triad, you point out that there are three legs to the triad. The most resilient of those is the ground-based leg and that is the root of your question: why do we need it and why would I feel that this country is safer as a result of having it? And what we have found over the last seven decades since we invested in the current Minuteman III system is that we have been effective as a nation with our allies in deterring nuclear conflict. I think I speak for all of us in that our desire is not to have a World War III. And certainly the fact that we have kept global peace on a relative basis since the Second World War, many military advisors suggest as a result of having the triad in all three legs of it.
I believe this. It's why our company supports the modernization of that leg of the triad because that is the world that I want my children to grow up in, one that they don't have to hide under their desks and worry of nuclear conflict and nation states that would first attack the U.S. And so when I think about this leg of the triad, I rely heavily on military leadership who have studied this problem far longer than I have. And while you've pointed out a few military leaders who may have made statements that you've interpreted as a lack of support, the leaders in military today are highly aligned, including the head of the Strategic Command who has the primary responsibility for protecting the United States as to the fact that the triad is an important element of our nuclear deterrence.
TOWNSEND: Operator, next question.
STAFF: We'll take the next question from Daniel Silverberg.
Q: Morning, Ms. Warden. Thanks so much for joining us. I'm Daniel Silverberg with Capstone Advisors. I'm curious if you could comment on Northrop's approach on climate policy and environmental issues? This also seems to be a major threat and concern for your defense prime peers, and I'm curious how you are thinking about it. Thanks.
WARDEN: Thank you. It is an incredibly important topic. Environment, social, and governance issues are ones that we talk about frequently around our board table, as well as in our management organization so that we can identify risks to our company but also risks that we may be contributing to through our actions through the ESG lens. And particularly as we look at climate, we have been active in setting goals for reducing greenhouse gas emissions through our operations. We have also set goals for water conservation and solid-waste disposal. So all of those goals contribute to our footprint as an industrial company having less environmental impact on a go-forward basis. We believe that we have a responsibility to do that. Oftentimes in the climate world those emissions are talked about as scope one or scope two what we can directly influence through how we operate and the energy sources that we utilize.
What we are now working on is conversations with our government customers about how the systems we build are also designed to be more climate friendly. And certainly there are elements of what we build that are first and foremost focused on the performance of the system. There are steps we can take to make them have a lesser climate impact. We are doing that as we think about the nuclear triad recapitalization and the two legs that we lead, the next-generation bomber, and the ground-based strategic deterrent. Both have design elements that will make those replacement systems far more eco-friendly than the systems that they're replacing.
TOWNSEND: Operator, next question, please.
STAFF: We'll take the next question from Debra Valentine.
Q: Good morning and thanks. I'm a director of an energy company, and perhaps I'm also broadening out to some more corporate questions. You talk both about the scarcity of talent or the need to grow the talent pool and the value of purpose in attracting folks to government. But you've got to be in a real war for talent with the IBM's, with a lot of the tech companies. And I'm wondering how you really try to compete in and win that war for talent? Is there now a purpose that your employees are seeking and that you try to promote for them? At times does their desire for purpose come into conflict with what your investors might want? We're seeing that a fair amount in the high-tech sphere, but I'm not hearing about that much in the defense space.
WARDEN: Yes, you hit on a key element of how we differentiate as we recruit talent and retain talent in this industry. And that is that we're working on technologies that make the world safer and that advance human understanding of the world in which we live in. And those two missions can be very compelling for people who see their job not just as a place to go and earn money, but as a place to have an impact on future generations. And so when we do employee surveys—and we ask our employees what attracts them to our company—it is first and foremost the purpose of the company that both attracts and retains people to Northrop Grumman.
And you asked a second part of that question, which is how does that then align with our investor interests? Certainly, we look at investors and their desire to have in their portfolios companies that are doing good. And I would put it that generally because in each industry that's interpreted slightly differently as to what that means. But we have investors who understand that the role of defense is to support national and economic security and that that is in the interest globally of all corporations and all governments. And so the work that we do is really meant to be a stabilizing force around the globe. And when looked at through that lens that's good for capital markets, that's good for investment priorities, and the companies that choose to invest in defense seem to be very clear eyed on that issue.
TOWNSEND: Operator, next question, please.
STAFF: As a reminder to ask a question, please click on the “raise hand” icon on your Zoom window. We will take the next question from Jesse Klempner.
Q: Kathy, Jesse Klempner from McKinsey. Thank you for making the time this morning. I was wondering if you could talk a bit about digital engineering. It appears to be a pretty significant competitive advantage for Northrop Grumman cited in the winds and B-21 and GBSD. Do you think that your customer is going to force that competitive advantage to erode as it becomes the standard across all suppliers in the industry?
WARDEN: I see most competitive differentiators eroding over time because a market leader will be viewed as doing something that others want to replicate. And so I don't see that as driven by actions the government will take necessarily. In this case the government absolutely is encouraging industry to adopt digital engineering as well as full digital thread for the manufacturing and sustainment of product. And that's in my view an area that Northrop Grumman has moved into a leadership position through a few of the programs that we're executing. But that isn't the reason others will do it. They'll do it because it makes sense and that the advantages that it affords to the companies will be worth the investment to get there.
And so we see this as a first-mover advantage in some areas but not necessarily a desire to create barriers for others to move in this direction with us. As a matter of fact, quite to the contrary, we are bringing our supply chain along with us on this journey and allowing them to operate in our digital ecosystem, very freely exchanging information about how we are creating our digital ecosystem so that they can be successful and executing alongside of us. So we think that in this case a rising tide lifts all boats.
Q: Thank you.
TOWNSEND: Operator, next question, please.
STAFF: We'll take the next question from Carolyn Wagner.
Q: Hi, yes, thanks for this very interesting session. And thank you, Mr. Warden, for presenting today. I'm Caroline Wagner from the John Glenn School of Public Affairs at The Ohio State University. My question is related to my studies, and I look at scientific strength around the world. I note that increasingly scientific capabilities are spread across the globe, especially as we see in China. China has rapidly risen in quality of their scientific capabilities. And I wonder how that affects a company like yours that is very reliant on a science base? Do you view the science base from which you draw to be increasingly global, or do you rely on U.S.-related science? And has that changed or been influenced by strengths or weaknesses within the U.S. science capability?
WARDEN: We absolutely open our aperture to the developments globally in science. And as a result, we have partnerships with organizations outside the United States. And we also rely heavily on the U.S.-based academia institutions that have broad global networks to have a pipeline into developments outside the U.S. in science. What we have found is that we at a point need to neck down in certain areas where we're applying that science to only U.S. citizens. That is a limitation in our industry, necessarily so, to protect some of the most important and sophisticated technologies that we're developing for the U.S. government and our allies. But it doesn't mean that we don't start by drawing on a broad source of science and research and development that is global.
TOWNSEND: Kathy, let me jump in here and ask a question. It occurs to me given the risk surface of Northrop Grumman because of your sensitive programs, you're only as strong as your weakest link and defense companies like yourself rely on small suppliers of millions of parts, right, that you have to pull together. How do you assure yourself in Northrop Grumman that your smaller vendors and suppliers are as secure as you need them to be to protect your own network?
WARDEN: Well, Fran, we share with our suppliers information that helps them to understand requirements that we flow to them contractually. I note those two things in conjunction because it's not sufficient. We've found to just tell our suppliers, “You need to agree to do these things to meet a standard for your cybersecurity program,” because they may or may not fully understand what each of those requirements entails. So we couple it with education and a very open approach to sharing our practices so that they can learn and build upon that knowledge base.
But the second thing that we do is increasingly bring our suppliers into our digital ecosystem. I was just referring to that in answering Jesse's question about digital engineering. Because we're sharing models and we're working within a singular digital set of models, we bring our suppliers into that ecosystem rather than pushing that information out to them that then they have to separately secure. And we've found that that is a better solution both in terms of how to work together, and it gives us better peace of mind that we are securing those digital ecosystems.
TOWNSEND: Operator, next question, please.
STAFF: We'll take the next question from Katie Nelson Thomson.
Q: Hi, this is Katie Thomson with HBO and PBS. I'm wondering how you feel about the Biden administration's proposed level of defense spending and if it's sufficient to keep us competitive?
WARDEN: So, certainly we have spoken about the broad number of threats that we are working to support, both technology advancement as well as the production of weapons systems to have the capacity and capability that our intelligence and military require. However, we also recognize that we need to be responsible in how deficits are growing and make spending priorities. So this administration is balancing all of those demands in looking at how much to allocate toward defense spending. And a flat to slightly increasing budget projection is what we're expecting. We've at this point seen FY22 budget but not a longer-term budget that would reflect what '23 and beyond might hold, but what we're hearing is that that's likely to be in line with inflation. And if that's the case, you know, that's a very reasonable level of defense spending but it will require prioritization because all of the modernization and research and development priorities that have been outlined, in particular the Department of Defense, can't be supported with that kind of top-line budget growth.
TOWNSEND: Kathy, let me ask you, you know, taking your question out of recent headlines. One of the real, sort of, issues that all CEOs are confronting is how you deal with a ransomware attack? Do you notify the U.S. government? How quickly should you be required if you are to notify the government? And then what do you do? Do you pay ransom? What are your thoughts on responses to ransomware?
WARDEN: So, Fran, as you're aware, we, as a member of the defense-industrial base, have a requirement to notify the government in the event that we are attacked. It's not related specifically to having a ransomware request. It's any vulnerability that we identify in our networks and operations we would disclose in a timely manner. And we believe that that makes us and our partners in this industry stronger as a result of having those disclosure requirements. I know that it is difficult in running a company to think about that level of disclosure requirement as one that a company might embrace, but we have because we think that over time it will enhance our ability to defend ourselves and make those attacks less likely.
But at the same time there are many things for CEOs to consider if you find yourself in that situation of whether to pay ransomware. Now, first and foremost, is the ongoing operational impact, and I know that that was top of mind as companies have dealt with this in the past. But I think it's also important to think about reputational impact. I think it's important to think about future impact in terms of if you pay ransomware then it reduces the deterrent from those actors to act again. And so we have seen a 300-plus percent increase in ransomware in the last two years. I think that is largely in part to companies wanting to pay and be able to move on and get back to their full operations. But at the end of the day if that's increasing the threat surface for everyone, is that the right thing to do? These are really tough questions. I certainly wouldn't second guess any company's decision because if you're not in that boardroom you don't know what situation they're facing. But these are just some of the things that we certainly would think about before making that decision for Northrop Grumman.
TOWNSEND: So, it is required in the defense industrial base to report to the government. But should that be a requirement more broadly? And then in terms of paying the ransom, should the government have a role there? In other words, should the government regulate or have a role with the private sector in determining when and how ransoms can be paid?
WARDEN: Well, as I said, I'm a supporter of disclosure requirements because I think it makes our collective defense as a nation stronger. In particular, for critical infrastructure companies, we see the impact of these attacks, and it can be incredibly disruptive both to our national security and our economic security as a nation. So the government does have a role to play in providing for the collective defense as outlined in the Constitution. And I think that only as companies are willing to share information that helps them to perform that role will we be at our strongest.
So I'm an advocate for it in terms of what companies choose to disclose until that becomes mandatory. I just encourage all companies to think about the collective good in this case and not just the interest of their singular company because our adversaries aren't thinking about the threat surface as each independent company acting alone. They will attack the weakest link, and if we can help each other to make our collective defense stronger I think these attacks become less likely to be successful.
TOWNSEND: Let me ask you, in a time of either flattening or only cost-of-living increases to the defense budget how do you think about the U.S. aerospace and defense industries competitiveness versus your usual kind of European competitors?
WARDEN: Well, the U.S. defense industry, I believe, continues to be the strongest around the globe. And that becomes as a result of the investment that's been made in the industry, both the private investment as well as government spending. We have seen the Chinese defense industrial base grow significantly in the last decade because defense spending in China has been on the up take, and so these things are highly correlated. We know that across Europe defense spending has not been as strongly prioritized, some movement by NATO countries to get back to 2 percent spent of their GDP on defense. Those are good movements that will help to strengthen the defense industrial base in Europe, but that consistent funding stream is essential for an industry to do well.
But we also in the U.S. have access to some of the best and brightest minds. And I believe that is at the core of our ability to stay competitive and to be at the forefront of innovation. And our university system certainly is a key to that ongoing success, and so investments in our education, and particularly higher education, continue to be a cornerstone for what's making not only our industry but many industries as successful as we are.
TOWNSEND: Operator, next question.
STAFF: We'll take the next question from Eddie Mandhry.
Q: Thank you very much for a really engaging conversation. Eddie Mandhry with Yale University. On February 24, the White House issued an executive order to review the supply chain and the National Security Commission on AI highlighted the precariousness of our over dependence on the production of cutting-edge chips from Taiwan, the TSMC. How critical is our semiconductor shortage and what strategic challenges does it presents to U.S. defense capabilities?
WARDEN: I'd really look at our challenges in semiconductor production in two categories. One, you note, is a supply-chain challenge, which I see as temporal. It likely will last a couple of years. But still, nonetheless, it is a temporal challenge just based on the economic shock that we had as a result of the pandemic with declining demand then turning into surging demand. These things can be worked through additional production, investment, and largely could be solved by private-industry investment.
I think the second and more important issue for us to unpack is the R&D and the fact that advanced both production of chips as well as packaging is largely outside the U.S. for anything less than fourteen nanometers. That is a key to our further advancement in computing and our ability to use these smaller sized chip form factors in advanced computing application. And so I would love to see us as a nation go back to not only having some onshore capacity and production to balance that reliance that you talked about, but most importantly that we also are focused on the forefront of capability with development and packaging of those smaller form factors that are key to innovation in this country.
TOWNSEND: So, we pride ourselves on promptly ending on time. So, I want to thank all the members for joining today's virtual meeting. Thank you, Kathy, for your time. This has been a great conversation. Please note that the video of today's meeting will be posted on the CFR website. Thank you, everybody.