United States General Accounting Office

GAO Report to Congressional Requesters

January 1997 DEFENSE INDUSTRY

Trends in DOD

Spending, Industrial

Productivity, and

Competition

GAO/PEMD-97-3

GAO United States

General Accounting Office

Washington, D.C. 20548

Program Evaluation and

Methodology Division

B-265618 

January 31, 1997

The Honorable William V. Roth

Chairman, Committee on Finance

United States Senate

The Honorable Charles E. Grassley

United States Senate

The end of the Cold War marked the continuation of a decline in most DOD

appropriations accounts from the peaks of the 1980s. Declines in

Department of Defense (DOD) spending for procurement and research,

development, test, and evaluation (RDT&E) have some effect on the broad

industries that manufacture and produce weapons for DOD. The impact of

declines in defense spending has been the focus of congressional and

executive branch initiatives and programs designed to help communities,

businesses, and workers adjust to the post-Cold War funding drawdown.

You asked us to examine several issues about defense spending and

defense industry since the end of the Cold War. In this regard, you asked

us to conduct a broad review of productivity and competition in the

defense industrial base. In this report, we describe (1) overall trends in

productivity, competition, and other financial indicators in the defense

industry over time, where possible, and (2) the relationship between these

trends and indicators of defense spending over time, where possible.

Background Victory in the Cold War brought changes in the size and resources

available to today’s armed forces. A decline in DOD budgets has been a

trend since the mid-1980’s peak in defense budgets. Since the collapse of

the Soviet Union, the range of public and private businesses, departments,

or facilities that work in the interests of U.S. national security operate in a

defense environment different from the past, where defense policy has

changed accordingly.

DOD is buying and developing fewer types of military systems and

purchasing smaller quantities of the systems it does buy. Weapons

purchased today have gained from considerable military and technological

advances made over time. In constant dollars, DOD procurement outlays in

fiscal year 1995 were 52 percent smaller than 1987 levels—the highest

level since 1946. This has an effect on the defense industrial base

(DIB)—industries that supply, manufacture, or assemble aircraft, ships,

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missiles, tanks, ammunition, weapons, and electronics and

communications equipment for national defense purposes. In fiscal year

1995, DOD procurement outlays were $55.1 billion and defense-related

industry employment was approximately 2.3 million.

As companies develop and implement strategies for survival in the new

spending environment, the Congress and the executive branch have

considered the balance between market forces that influence the structure

of the defense industrial base and the federal government’s role in

securing and meeting the nation’s defense needs. For example, DOD’s

Bottom Up Review (BUR) was designed to define the nation’s defense

strategy, force structure, modernization and infrastructure requirements

as a result of the end of the Cold War. Promoting a more efficient

post-Cold War defense industrial base is a goal of initiatives to reform

DOD’s weapons acquisition process.

While many of DOD’s recent acquisition reform efforts were embodied in

the Federal Acquisition Streamlining Act (FASA) of 1994, DOD has made

other efforts to adapt to the post-Cold War period of smaller procurement

budgets, shrinking defense industry, and increased international

competitiveness.1

 In 1994, DOD set up groups to identify, coordinate, or

implement process improvements to reduce “cost drivers” believed to

cause increases in the price DOD pays for goods and services.2 DOD’s

initiatives to aggressively pursue acquisition reform include the

elimination of some military standards and requirements, adopting

commercial practices, and the use of Integrated Product Teams (IPTs) to

continuously include government and industry stakeholders in making

program and business decisions.

A large-scale post-Cold War transition assistance program, authorized

under the National Defense Authorization Act for fiscal year 1994, and

announced in March 1993 by the executive branch, is the Defense

Reinvestment and Conversion Initiative. The initiative included funding for

(1) worker training and adjustment, (2) investments in hard-hit

communities, (3) dual-use technology and commercial integration, and

(4) conversion opportunities in new civilian technology investment. In

1

DOD’s Defense Acquisition Pilot Programs—which include the Fire Support Combined Arms Tactical

Trainer, the Joint Direct Attack Munition (JDAM), the Joint Primary Aircraft Training System (JPATS),

the Commercial Derivative Aircraft (also known as the Non-Developmental Airlift Aircraft), and the

Commercial Derivative Engine (F-117 Engine)—are examples of programs authorized under FASA.

2

See U.S. General Accounting Office, Acquisition Reform: Efforts to Reduce the Cost to Manage and

Oversee DOD Contracts, GAO/NSIAD-96-106 (Washington, D.C.: April 1996).

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fiscal year 1994, the Congress appropriated $2.5 billion for DOD’s defense

reinvestment and conversion program.

As described above, a number of issues have been addressed through

programs or legislation directed to assist the transition of the defense

industrial base in the post-Cold War era. In your request, you asked for

information on productivity and competition in the defense industrial

base. In this report, we describe the trends in available data on

productivity and competition and the related issues of trends in defense

industry employment, the status of major defense contractors in the

post-Cold War, and trends in defense budgets and outlays. We make use of

existing statistical information and supplement these data with

information collected from industry experts and defense contractors. This

work makes use of findings from studies, now just beginning to emerge,

that examine the industrial, economic, and national security implications

associated with the post-Cold War drawdown and conducted or sponsored

by DOD, as well as private research organizations or groups. We present a

broad historical overview of data about the defense industry to provide a

context for the significant changes that the defense industry has faced in

the post-Cold War period.

Results in Brief The size and nature of the defense industrial base is critically shaped by

the amount and emphasis of U.S. defense outlays. Recent debate has

centered on the effect of the post-Cold War reduction in defense spending

and its effect on the viability of the industrial base. Although this

downward trend in budget outlays and particularly in procurement

spending is sizable, it is one of four times in post-World War II history that

the industrial base has had to adjust to changes in national security

requirements. In historical perspective, defense funding drawdowns are

not unique.

With regard to trends in the actual expenditures in segments of the

defense industrial base, after adjustments for inflation, recent spending on

procurement and RDT&E prime contract awards is similar to spending just

prior to the peacetime defense buildup of the early 1980s. Over the last 20

years, DOD has consistently allocated more money for procurement and

research of aerospace products—aircraft, missiles, and electronics and

communications equipment—than for tanks, ships, ammunition, and other

weapons. Aggregate procurement and RDT&E contracts for aerospace

products out-paced spending for all other equipment by over 3 to 1. Since

the end of the Cold War, prime contract dollars for aircraft research and

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development have increased and dollars for aircraft procurement have

declined the least. The available data did not allow us to determine the

distribution of spending across industrial segments based on subcontract

award activity; rather, they allowed us to determine such information only

for prime contracts. The available data on subcontract awards indicate

that dollars allocated to businesses through DOD’s mandatory

subcontractor program began to decline after the Cold War and are

currently below the average of the last 18 years.

Aside from outlays there are other differences in today’s industrial base

compared to past periods. Today’s weapons cost more than in the past, so

fewer can be procured as defense budgets decline. Changes in complexity

and sophistication of today’s weapons, and costs associated with related

weapons manufacturing processes, have contributed to this trend. DOD and

Department of Labor (DOL) data on productivity in defense-concentrated

industries, and other studies on productivity, indicate that the value of

output has increased over time while the quantity of output has decreased.

In particular, comparative data for military aircraft show that the 1993

inflation-adjusted budgets for aircraft procurement were more than double

those in 1973, while 65-percent fewer aircraft were produced than in 1973.

Similarly, DOD expects to move from purchasing large quantities of

low-cost helicopters to fewer high-cost, more capable, helicopters. DOD’s

ship and tank procurements also show a trend toward the purchase of

fewer higher-cost units.

The business environment for defense industry has also changed over the

years. Since the end of World War II the number of aircraft contractors

dropped from 26 to 7 in 1994.3

 Missile contractors dropped from 22 to 9

and tank contractors from 16 to 2 over the same time period. Recent

defense contractor mergers and acquisitions are seen as a trend that will

perpetuate constraints on the number and nature of businesses that may

be willing and able to compete for business with DOD. These fewer

contractors are operating in an environment where DOD tends to award

more money on weapon procurement contracts using other than full and

open competition. Because of the nature of what DOD buys, substantial

amounts of procurement dollars are associated with single-source

providers. Little is known about how the ongoing reconfiguration of the

defense industrial base will affect or be affected by these trends in DOD

weapon procurement processes. This condition is aggravated by the lack

of data available for comprehensive analyses. There is no single,

3

Includes helicopter contractors.

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comprehensive source of information about competition in defense

industry. Therefore, we are limited in our ability to address this issue.

Defense industry employment is another key factor affected by changes in

the industrial base. The loss of jobs related to the reduction in defense

budgets is widely documented, although estimates and projections vary.

DOD estimates a 39-percent decrease in defense-related employment

between 1989 and 1997, or 5 percent per year. Jobs have been lost in the

funding drawdown, but job loss does not necessarily equate to

unemployment. Losses can be absorbed as individuals acquire future work

in the same or in different sectors of the economy. The Defense

Conversion Commission reported to DOD that the concept of job loss can

overstate the effect of the post-Cold War drawdown on employment

because it does not account for the ability of the economy to absorb

dislocated workers. The commission estimated that the drawdown will

account for less than 2 percent of all unemployment between 1992 and

1999. The Congressional Budget Office (CBO) reports that overall growth in

the U.S. economy is a greater factor in reemployment for displaced

defense workers than what happens in the defense sector. We found a

correlation, or statistical relationship, between an indicator of

employment in defense-concentrated industrial sectors and an indicator of

procurement outlays in those sectors for the period 1975-91 that is not

large and is less than values considered moderate in size.4

 However, the

lack of precise data on defense industry employment, differing procedures

for generating estimates, and the lack of precise figures on DOD spending

linked to defense sectors make it difficult for policymakers to make

definite determinations.

Market forces and expectations about future trends in DOD budgets have

facilitated the restructuring of the defense industrial base. Some

companies have taken action either to remain viable in the defense

business or leave it, while some top defense contractors have remained

profitable and financially stable in a time of reduced spending. Companies

have, among other things, been (1) attempting to gain market share and to

be more competitive for future defense business through mergers and

acquisitions; (2) reorganizing and restructuring internally, in ways that

involve job losses and layoffs, and reconfiguring job duties; (3) reducing

their supplier-subcontractor base; (4) engaging in team concepts or

entering joint ventures in which several firms subcontract with one

another; (5) expanding defense markets to broaden the international

4

G.V. Glass, and K.D. Hopkins, Statistical Methods in Education and Psychology (New Jersey:

Prentice-Hall, 1984).

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customer base and increase sales; and (6) selling the defense business

segments that are not core business units or that do not represent niche

markets, as well as exiting segments of the defense industry.

DOD’s industrial assessments indicate that companies have been profitable

since the funding drawdown and that its needs can be met in the segments

it has assessed.5

 These assessments do not suggest that the trend toward

more mergers and acquisitions and fewer contractors is a liability against

maintaining current industrial capabilities. They do suggest that

consolidation and other efforts to reduce overcapacity in defense industry

may generate cost-savings for DOD. Our review of research from DOD and

the private sector and our discussions with industry consultants and

defense contractors all suggest that this assumption should continue to be

studied, tested, and validated.6

For part of its current “Defense Acquisition Reform vision” and under the

FASA, DOD has recently engaged and piloted several new acquisition reform

programs intended to achieve greater efficiency and value in weapons

procurement and to reduce unnecessary costs. These reforms and

initiatives focus on the use of commercial practices, changes in the

requirements for military standards and specifications, and increased

emphasis on the tradeoff between cost and performance increases, among

other efforts. Although these efforts are aimed at addressing critical and

relevant issues for the defense industrial base, it is too early to tell what

their full effects will be.

Objectives, Scope,

and Methodology

As stated previously, in this report we describe (1) overall trends in

productivity, competition, and other financial indicators in the defense

industry over time and (2) the relationship between these trends and

indicators of defense spending over time. To focus our review of these

issues, we developed the following six key questions, which we answer in

this report where data allowed us to.

1. What are the trends in DOD’s total, procurement, and RDT&E budgets?

5

DOD’s Office of Industrial Affairs and Installations has assessed and made available to us its

conclusions on the following industrial segments: conventional ammunition (September 1994), space

launch vehicles (January 1995), helicopters (July 1995), torpedoes (August 1995), tracked combat

vehicles (October 1995), and heavy bombers (December 1995). The September 1994 report entitled

“Building U.S. Capabilities in Flat Panel Displays” reported on a newly identified industrial segment of

important interest. We did not obtain DOD’s assessment of the Meal-Ready-to-Eat segment for this

work.

6

We describe known efforts to study savings associated with industry consolidation toward the end of

this report.

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2. What are the trends in the dollar amount of DOD procurement and RDT&E

awards to defense contractors and subcontractors over time?

3. What are the trends in indicators of employment, productivity, and

competition over time?

4. How are employment, productivity, and competition related to

indicators of defense spending?

5. What are the trends in the financial indicators of major defense

contractors over time?

6. What is the relationship between indicators of defense spending and

indicators of the financial status of major defense contractors over time?

The industries in our analysis include U.S. manufacturers of items for

major DOD procurement programs. DOD and other executive agencies have

identified them as “defense-dominated” industries, or industries in which

the output is largely purchased for defense purposes: aircraft, guided

missiles, ammunition and ordnance, tanks, ships, and electronics and

communications equipment. Where the industrial output of these

manufacturing industries is not purchased by DOD, it may be purchased by

commercial companies, other U.S. government agencies, or international

companies.

We designed a macro-level evaluation to describe overall trends and

patterns and to provide a basis for the additional phases of the work that

you requested.7

 The highly aggregated nature of much of the existing data

and information about defense industries also in part required that we

adopt a macro-level approach. Since our focus was global, we did not

examine specific disparities, differences, or nuances in the data.8

 The

aggregate nature of the data did not permit us to offer definitive

explanations for the trends these data reveal.

7

In response to your request, we have a second study in progress to compare costs and productivity in

defense and commercial manufacturing sectors.

8

For example, we calculated statistical correlations to compare trends in employment and productivity

in defense-concentrated industrial sectors to trends in the DOD budgets that are linked to those

sectors. The correlations characterize overall trends. A number of factors may explain any observed

correlation (time lags, idiosyncrasies in specific industries, idiosyncrasies in the data we received from

federal agencies, and others). Examining the range of factors that might explain observed trends or

relationships was beyond the scope of the work we were asked to do.

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We collected, integrated, and analyzed published and unpublished data

across the period 1975-95 from the executive agencies that maintain

information on defense industries—DOD, the Department of Commerce,

and DOL.

9

 This resulted in multiple data sources and multiple measures. We

used those that were the most comprehensive with respect to that time

period and the aspects of defense industry that we focused on.

We interviewed individuals and reviewed studies at Commerce, DOD, and

DOL as well as at private research and consulting organizations, Wall Street

firms, and major defense contractors. (A list of the offices we contacted is

in appendix I.)

The measures and data that were available provide a method to describe

and illustrate trends and patterns. The information that was available has

varying degrees of uncertainty and completeness. Appendix II details our

methodology and study limitations and defines our terms and concepts.

Principal Findings

Budget Trends In order to understand the context for the post-Cold War trend in declining

defense budgets, we examined trends in DOD budgets over the past 50

years. The recent downturn in defense budgets is the fourth in 50 years.

The three prior funding drawdowns came at the ends of World War II, the

Korean War, and the Vietnam War. This fourth one follows the peacetime

defense buildup of the early 1980s. Figure 1 shows DOD’s 1945-95 total,

procurement, and RDT&E budgets.

9

In answering question 1, we used DOD budget data going back to 1945.

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Figure 1: DOD’s Total, Procurement, and RDT&E Budgets, 1945-95a

World War II

Korean War Viet Nam

Reagan 

Administration

1945 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995

$0

$200

$400

$600

$800

$1,000

FY 1995 $ (billions)

Total Procurement RDT&E

aDollars are for total obligational authority. Total budget also includes military pay, operations and

maintenance, military construction, family housing, and revolving and management funds.

Average post-Cold War (1990-95) procurement outlays are 10 percent

higher than average Cold War outlays (1947-89). DOD’s yearly average

procurement outlays were $69.3 billion during the Cold War; since the

collapse of the Soviet Union, they have been $76.3 billion. Since 1990,

average yearly RDT&E outlays have been $38.5 billion, compared to the

average $24.3 billion from 1947 to 1989.

Because defense industry is most concerned with DOD’s procurement

budget, as it includes the purchase of weapon systems, we focus on broad

trends in procurement budgets specifically. The greatest 1-year percentage

decline in the procurement budget’s growth was the 80-percent decline in

1945, following World War II. The greatest increase was the 372-percent

increase in 1951, preceding the Korean War. These periods represent the

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most extreme past cases of growth increase and decrease. In post-World

War II history, the period 1985-95 represents the longest consistent decline

in the procurement budget. However, this period of decline includes fiscal

year 1987, a year marked by the highest procurement outlays since the

Korean War.10 Figure 2 shows the yearly percentage growth or decrease in

DOD’s procurement budget throughout the past 50 years.

Figure 2: Yearly Percentage Growth and Decrease in DOD’s Defense Procurement Budget, 1945-95a

1945 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995

-100

0

100

200

300

400

% real growth

aDollars are total obligational authority.

Trends in Contract Awards Examining trends in procurement and RDT&E contract awards indicates

DOD’s spending within industry segments. These data show where DOD’s

procurement and RDT&E dollars have gone in the past. They also provide an

indication of the industry segments that have experienced the most

10After 1995, further decline in procurement is not projected for the out years. DOD’s future-years

defense plan (FYDP) projects procurement increases to at least 1999.

Page 10 GAO/PEMD-97-3 Defense Industry Trends
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funding decline in DOD post-Cold War contract dollars. In the past 20 years,

DOD has spent more in procuring aircraft, guided missiles, and electronics

and communications equipment than in procuring other major hard goods

for national defense.11 (See figure 3.) In particular, expenditures for

aircraft exceeded all others during the period.

Figure 3: DOD’s Procurement Contract Awards by Major Program, 1975-94

1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994

$0

$10

$20

$30

$40

$50

FY 1995 $ (billions)

Aircraft Elec.-Comm. Missiles Tanks Weapons Ammunition Ships

DOD’s 1975-94 prime contract awards for aircraft, missiles, and electronics

and communications equipment show a trend in which spending exceeded

that on other weapon systems. Figure 3 shows that aggregate procurement

spending on aerospace products has been 65 percent greater since 1975

11Major hard goods are aircraft, missiles and space systems, ships, tanks and automotive, weapons,

ammunition, and electronics and communications equipment (these are detailed in appendix II, table

II.1, by DOD claimant program).

Page 11 GAO/PEMD-97-3 Defense Industry Trends
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than the cumulative spending on ships, tanks, weapons, and ammunition.12

Contract awards for missiles, electronics and communications equipment,

and especially aircraft peaked in the 1980s. While their levels have since

fallen, DOD’s constant dollar spending for aircraft, missiles, and electronics

and communications equipment, and for most other major hard goods, is

the same or nearly the same as just prior to the peacetime defense buildup

of the early 1980s.

The change in post-Cold War procurement contract spending has not been

constant or equal across procurement programs. While the average

post-Cold War reductions in spending for aircraft in 1990-94 were the

smallest, at 3.6 percent, reductions in spending for ammunition were the

largest, at 18.7 percent. The post-Cold War average percentage change in

the dollar amounts of DOD’s prime contract awards for procurement were

• aircraft: –3.6

• ships: –8.7

• weapons: –9.0

• tanks: –10.0

• electronics and communications equipment: –10.2

• missiles: –11.7

• ammunition: –18.7.13

Like DOD’s procurement spending, its expenditures in the aerospace

industry have dominated its RDT&E contracts. In every year of the past 20,

RDT&E investments for aircraft, missiles, and electronics and

communications equipment differed, but their trend was always to surpass

RDT&E investments in weapons, ships, and ammunition (figure 4). The

post-Cold War average percentage change in the dollar amounts of DOD’s

RDT&E contract awards from 1990 to 1994 were

12The aircraft (fixed and nonfixed wing) and guided missiles and much of the electronics and

communications equipment that DOD purchases are considered products of the broader aerospace

industry. We note that the DOD definition of “electronics and communications equipment” includes

equipment that may be installed in ships, tanks, and other “nonaerospace” products.

13This list includes funding through DOD prime contract awards and is a subset of all procurement

spending mentioned previously. Average post-Cold War spending fell in all programs, but not all

programs were reduced in every year. In some years, contract awards for aircraft, tanks, weapons, and

ships were stable or increased.

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• aircraft: +1.6

• electronics and communications equipment: –3.7

• missiles: –6.3

• weapons: –9.0

• ships: –18.3

• tanks: –18.3

• ammunition: –23.7.14

Figure 4: DOD’s RDT&E Contract Awards by Major Program, 1975-94

1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994

$0

$1

$2

$3

$4

$5

$6

$7

$8

$9

$10

$11

$12

FY 1995 $ (billions)

Missiles Elec.-Comm. Aircraft Ships Tanks Weapons Ammunition

Post-Cold War RDT&E reductions in aerospace have been the smallest

relative to other major weapon systems; spending for aircraft has even

increased approximately 1.6 percent. Post-Cold War RDT&E reductions for

ammunition have been the largest, at 23.7 percent.

14This list includes funding on DOD RDT&E prime contracts for major weapon systems and is a subset

of all RDT&E spending mentioned previously. Funding in all programs increased in one or more years

or remained the same from one year to the next.

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The only source of information available to describe trends in subcontract

awards to defense contractors, over time, is DOD’s records of participants

in its subcontracting program (see appendix II). The participants can be

small or small disadvantaged businesses or large businesses. For example,

companies like Lockheed Martin and Boeing have received subcontractor

awards under this program. DOD’s published sources did not permit us to

determine awards by weapon system or industrial segment but we were

able to observe that the trends in the dollar amounts awarded to

subcontractors are similar to those for prime contractors. Subcontractor

awards peaked in the 1980s and began a gradual decline in 1989. The

average change in post-Cold War funding available through DOD’s

subcontractor program is –6.7 percent.

A recent RAND report sponsored by the Office of the Secretary of Defense

(OSD) indicates that in the aerospace industry, small suppliers to “large

military aircraft programs” receive about 10 percent of defense dollars that

go to contractors. Therefore, in some cases, reductions in defense

spending should be expected to affect small suppliers differently relative

to large defense firms. Views that small defense subcontractors are

disproportionately affected by defense spending reductions merit further

evaluation given constraints in the macro-level information about defense

subcontractors we were able to obtain.

Trends in Employment,

Productivity, and

Competition

Employment Our ability to examine relationships between defense spending and

employment, and to generate conclusions, is complicated by the fact that

employment data are often derived from models or estimation procedures

that have degrees of uncertainty. Post-Cold War cutbacks in defense

spending have been associated with declining employment in military

force levels, federal defense-related civilian employment, and

defense-related employment in private industry. On the one hand, DOD

estimates show a 39-percent decrease in defense-related employment

between 1989 and 1997—approximately 5 percent per year. DOL reports

that private employment generated by defense spending fell by 600,000

jobs between 1987 and 1992 and projects at least an additional 1.2 million

job losses by 1997. Between 1989 and 1994, McDonnell-Douglas

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Corporation reduced its total corporate staff by approximately 70,000

people.

On the other hand, the Defense Conversion Commission reported to DOD

that the concept of job loss can overstate the effect of the post-Cold War

drawdown on employment because it does not account for the ability of

the economy to absorb dislocated workers. The commission estimated

that the drawdown will account for less than 2 percent of all

unemployment between 1992 and 1999. In a report to the U.S. Senate

Budget Committee, CBO found that cuts in defense spending, or in any type

of federal spending, will temporarily reduce employment. However, it

notes that defense cuts that are matched by increases in public-sector

investment, or nondefense spending, can offset the short-term effects of

spending reductions. CBO reports that overall growth in the U.S. economy

is a greater factor in reemployment for displaced defense workers than

what happens in the defense sector. CBO reports, as well as other reports

we reviewed, also indicate that the effect of reduced defense spending on

employment varies by regions of the country, whereas those that are less

dependent on defense spending are generally affected to a lesser extent.

We analyzed available indicators of defense sector employment and an

indicator of DOD procurement outlays linked to those sectors over the

period of our study to determine the strength of the relationship between

the two (see appendix II for methods discussion). We found a statistical

relationship between the available indicators of employment levels and

procurement outlays for the period 1975-91 that was not large in size and

is less than values considered moderate in size (r =.27 to .36, depending

upon the indicator used). (See appendix III.) Because the available

indicators of defense sector employment and DOD spending are estimates,

they are subject to possible error that may come from the estimating

procedures and “operational” errors, or errors in the primary data

collection reporting or coding procedures of the offices that collected the

data. Moreover, the limitations of correlational analysis also introduce

uncertainty that does not permit definitive conclusions regarding the exact

nature of the relationship between defense sector employment and

defense spending.

Productivity DOD, Commerce, and DOL maintain or collect some information related to

productivity in defense industries, some of which overlaps and some of

which is unique. All the information on defense industry productivity that

we obtained from these agencies was based on economic models or

methodologies that have some degree of uncertainty. From this

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information and data from others such as the Aerospace Industries

Association (AIA), we observed the following trends.

The value of production output in most defense-concentrated industries

has risen while defense budgets, as well as subsequent contract spending

for major hard goods, have fallen (see appendix III, figure III.2).15 When AIA

data on unit production are plotted with trends in DOD’s aircraft

procurement budget, there is a trend between 1969 and 1986 in which

more aircraft procurement money is associated with the production of

fewer aircraft. From about 1986 to 1993, the trend shows a relatively

constant number of aircraft being produced while aircraft procurement

budgets have declined.16

In other segments of the aerospace industry, in its 1995 assessment of the

helicopter industry DOD projects that the unit cost for military helicopters

will increase while the number of units produced will remain relatively flat

through 2004. DOD expects to procure fewer, “more capable,” higher-cost

helicopters rather than larger quantities of lower-cost helicopters. Other

DOD data on trends in ship and tank procurement indicate that DOD is

purchasing fewer units at higher costs. One explanation for this trend is

that the complexity and sophistication of weapons, and related weapons

manufacturing processes, have increased over time. We were unable to

locate research that could address this issue systematically and

comprehensively for the range of weapon systems within the scope of our

work.

Competition Long-Term Trends in DOD Contracting. Within the scope of this report, and

where data were available, we studied longitudinal trends in competition.

There is little consensus on how to measure competition. Consequently,

we chose to base our analysis on the concept of competition embodied in

the Competition in Contracting Act of 1984 and the Federal Acquisition

Regulation.

15“Value of production” is a standard DOL measure of productivity. Whenever possible, DOL uses

actual physical quantities as the unit of measurement; when this information is not available, as in this

case, it uses a constant-dollar value of shipments, sales, or revenues. (See also appendix II.)

16During this period, AIA data show that in 1989 and 1993 the numbers of military aircraft that U.S.

defense manufacturers have produced for export surpassed the numbers produced for domestic use.

Consultants at Booz-Allen and Hamilton indicate that if it were not for international business, many

U.S. production lines would be closed, and, in fact, DOD views international business as one means of

ensuring DOD’s future helicopter requirements.

Page 16 GAO/PEMD-97-3 Defense Industry Trends
B-265618 

DOD collects a variety of information on contracting actions. The dollar

value of the contracts and the solicitation procedures used are recorded in

DOD’s DD350 database. It provided us with trend data on where the defense

dollar was being spent and in what solicitation category it was being spent,

such as “full and open competition” and “other than full and open

competition.” Hence, using the DD350 data, we measured one aspect of

competition: the total dollars awarded in each solicitation category.

The shortcoming of this database is that it does not fully capture the

number of offers received in response to solicitations in each solicitation

category, which could be another indicator of competition.

The DD350 serves as a basis for internal reports and reports to other

agencies and the Congress and contains the only available data on the

dollar amounts of contract actions for full and open and other than full

and open competition. The “other than full and open competition”

category captures instances where DOD uses various authorities to limit

competition such as soliciting only one source when awarding follow-on

contracts or when a “unique source” exists (see table III.1 for a complete

list of authorities).

Among all the legal authorities for using other than full and open

competition, dollars awarded under the broad category “only one source”

accounted for 80 percent of the total contract dollars between 1986 and

1994. Included in this broad category are “follow-on contracts” (17 percent

of the total), awards to a “unique source” (37 percent of the total), and

awards categorized as “only one source-other” (25 percent of the total).

DOD’s data on competition in contracting reveal that in the categories of

major hard goods we looked at, over the past 18 years, the money

associated with major systems procurement has been greater for contracts

awarded using other than competitive methods than for those awarded

using competitive ones. We found this trend as an 18-year average (see

figure 5 and figure 6) and in each individual year for most programs in the

period. (See also appendix III.3, figure III.16.)

DOD’s definition of its competitive and other than competitive contracting

procedures on the DD350, used as guides in our work, are shown in

appendix III, table III.1. Figure 5 shows the DD350 competition data we

were able to obtain for the period 1977-85, or “pre-CICA” (Competition in

Contracting Act) data. Figure 6 shows “post-CICA” data, for 1986-94. We

note that pre- and post-CICA data are based on different categories of

Page 17 GAO/PEMD-97-3 Defense Industry Trends
B-265618 

required information that DOD collected concerning the use of competitive

or other than competitive procedures used to award procurement

contracts. Differences between pre- and post-CICA data stem from the 1984

enactment of CICA. In our work for this request, we did not audit the preand post-CICA data derived from the DD350. Therefore, the full extent of

differences between pre- and post-CICA data and the accuracy of DOD’s

reported data for both time periods would require more evaluation.17

In general figures 5 and 6 show similar findings, although the data

presented are different measures of competition used in pre- and post-CICA

periods. The portion of average contract dollars awarded using

noncompetitive methods ranged from 66 percent for ships to 80 percent

for aircraft (figure 5). For the post-CICA period, the range for other than full

and open competition was 58 percent for ships and 81 percent for

ammunition (figure 6).

17See appendix III for additional discussion and definition of the data elements extracted from the

DD350 database for the pre- and post-CICA time periods.

Page 18 GAO/PEMD-97-3 Defense Industry Trends
B-265618 

Figure 5: Average Dollars DOD Awarded Using Competitive and Noncompetitive Procurement Methods, 1977-85

Pre-CICA Data: Extent of Competition in Negotiation

Aircraft Missiles Elec.-Comm. Ships Ammunition Tanks Weapons

$0

$5

$10

$15

$20

$25

$6.64

$5.75 $5.76

$4.53

$1.23 $0.93 $0.69

$26.1

$15.62 $16.02

$8.81

$3.27 $3.25

$1.93

FY 1995 $ (billions)

Competitive Noncompetitive

Page 19 GAO/PEMD-97-3 Defense Industry Trends
B-265618 

Figure 6: Average Dollars DOD Awarded Using Full and Open Competition and Other Than Full and Open Competition,

1986-94

Post-CICA Data: Solicitation Procedures

Aircraft Missiles Elec.-Comm. Ships Ammunition Tanks Weapons

$0

$5

$10

$15

$20

$5.24

$3.8

$5.64

$3.6

$0.66 $1.15

$0.41

$14.32

$9.73

$8.35

$4.92

$2.87

$1.98

$1.11

FY 1995 $ (billions)

Full and open competition Other than full-open competition

Post-Cold War Restructuring and Reform. The major defense contractors

we spoke with indicated that in the post-Cold War drawdown, defense

companies have been acting to improve production efficiency, reduce

costs and overhead, streamline operations, and reorient themselves

toward a more cost-conscious customer. One outcome of changes in the

way defense firms have been doing business since the Cold War, with

relevance for competition, is a reduction in the number of independent

defense firms by company mergers and acquisitions or by companies

leaving the defense business. Notable examples include the March 1995

merger of Lockheed and Martin Marietta, Lockheed Martin’s acquisition of

Loral’s defense electronics and systems integration business, the intended

Boeing-McDonnell-Douglas merger, Raytheon’s purchase of Texas

Instruments defense unit, and Northrop-Grumman’s acquisition of

Page 20 GAO/PEMD-97-3 Defense Industry Trends
B-265618 

Westinghouse defense electronics.18 In other areas of defense industry, the

January 1994 agreement between FMC Corporation’s Defense Systems

Group and Harsco’s BMY-Combat Systems Division to form United

Defense Limited Partnership (UDLP) changed three major competitors in

the light and medium armored vehicle market to two: UDLP and General

Dynamics Land Systems.

A goal of business restructuring in the post-Cold War environment is to

enhance or at least maintain a competitive position in the marketplace. We

did not evaluate the effect of the recent trend in mergers and acquisitions

on competition. However, in its 1996 annual report, while supportive of

consolidations, DOD has concluded that “Consolidation carries the risk that

DOD will no longer benefit from the competition that encourages defense

suppliers to reduce costs, improve quality, and stimulate innovation.”

Moreover, in its assessment of the conventional ammunition segment, DOD

concluded that a reduction in the number of suppliers has reduced

competition.

The number of contractors will continue to decrease, according to DOD’s

published findings, officials we interviewed at Booz-Allen and Hamilton

and TASC, and projections from officials at McDonnell-Douglas. They

expect more mergers in some segments of the defense industry, such as

helicopters and missiles, and expect some companies to keep the

possibility of acquisition within their long-term strategies. Moreover, at

least one noted defense industry expert has reported that barriers to

entering the defense business—created by the need for large amounts of

capital for preparing contract proposals and by the need to gain access to

scientific and engineering talent and to specialized, expensive, production

equipment—will continue to lessen the likelihood that new defense

companies will enter the market in the near future.

This post-Cold War process of defense industry consolidation and

restructuring may reduce some segments of the defense industry to one

major provider. For example, one possible avenue DOD sees to achieve its

stated goal of reducing costs for medium and heavy space launches is to

consolidate the medium and heavy launcher booster families and “evolve”

18This does not include the additional reductions in the number of defense contractors resulting from

acquisitions that Loral made before its agreement with Lockheed Martin. For example, in May 1995

Loral acquired the Defense Systems Operations of Unisys Corporation.

Page 21 GAO/PEMD-97-3 Defense Industry Trends
B-265618 

a new family of launch vehicles. DOD’s procurement plan for this Evolved

Expendable Launch Vehicle (EELV) is to have a single provider by 1998.19

While not taking a position on consolidation and mergers, the Defense

Science Board’s 1994 report to DOD on the antitrust aspects of defense

industry consolidation states that reducing the number of firms capable of

developing a suitable design for a new weapon system may lead to higher

prices, poorer products, smaller advances in technology, and a reduction

in the number, variety, or quality of the proposals that companies submit

to DOD. The report further states that congressional findings, industry

opinion, and a large body of literature lead to the conclusion that DOD’s

regulatory and auditing procedures cannot substitute for competition as a

way of ensuring the best mix of price and quality.

Within its current Defense Acquisition Reform vision, DOD has recently

implemented several new acquisition reform programs intended to

increase efficiency and value in weapons procurement and to reduce

unnecessary costs. DOD’s cost as an independent variable (CAIV) reform

represents a move toward making cost the significant driver in system

design, compared to the Cold War era in which the emphasis was on

systems that could outperform or overwhelm Soviet threats. The fiscal

year 1996 Defense Authorization Act simplifies the processes for

commercial item acquisition by exempting procurements for commercial

items from cost or pricing data requirements. DOD created the Defense

Standards Improvement Council to carry out policies mandated in

June 1994 by the Secretary of Defense to develop performance-based

solicitation requirements and expand the use of nongovernment standards

or specifications.

An assessment of the effect of recent acquisition reforms on DOD’s

weapons procurement process and the broader defense industrial base

would supplement the information presented here. To date, however, an

independent assessment of the effect of DOD acquisition reform initiatives

or programs on the issues discussed in this report has not been

19DOD awarded Alliant Tech Systems, Boeing, Lockheed Martin, and McDonnell-Douglas $30 million

each to develop a concept for the EELV, within some specific boundaries it has defined. In

December 1996, DOD selected Lockheed Martin and McDonnell-Douglas to proceed to preengineering

manufacturing, scheduled to last 15 to 17 months, at the end of which DOD will select a single

provider. DOD stated that a single provider may be defined as a consortium, joint venture, or a teaming

arrangement.

Page 22 GAO/PEMD-97-3 Defense Industry Trends
B-265618 

conducted.20 We believe this is an important area for future evaluation,

given the potential for reform initiatives to reduce or contain costs and

facilitate efficiency improvements.

Defense Companies After

the Cold War

Some defense contractors among the top 100 receiving the largest dollar

amount of DOD prime contract awards in 1994 have grown in the post-Cold

War budget environment, while others have not shown growth. (We detail

the financial indicators in appendix IV.) DOD finds that most of the defense

firms it has assessed have been profitable in the drawdown.21 Assessments

of a random sample of small California aerospace businesses that supply

goods or services to large military aircraft programs show that between

1992 and 1995, 94 percent were still in business while 3 percent had either

merged or been acquired.

Officials at the major defense contractors we visited, the defense industry

experts we interviewed, and the annual reports from major defense

contractors we reviewed indicate that, in order to survive and remain

viable in the funding drawdown, the top companies have, among other

things, been (1) attempting to gain market share and to be more

competitive for future defense business through mergers and acquisitions;

(2) reorganizing and restructuring internally, in ways that involve job

losses and layoffs, and reconfiguring job duties; (3) reducing their

supplier-subcontractor base; (4) engaging in team concepts or entering

joint ventures in which several firms subcontract with one another;

(5) expanding defense markets to broaden the international customer base

and increase sales; or (6) selling the defense business segments that are

not core business units or that do not represent niche markets, as well as

exiting segments of the defense industry.22

20Examples of recent GAO acquisition reform work is reported in U.S. General Accounting Office,

Acquisition Reform: Comparison of Army’s Commercial Helicopter Buy and Private Sector Buys,

GAO/NSIAD-95-54 (Washington, D.C.: March 1995); Acquisition Reform: Military-Commercial Pilot

Program Offers Benefits but Faces Challenges, GAO/NSIAD-96-53 (Washington, D.C.: June 1996);

Acquisition Reform: Regulatory Implementation of the Federal Acquisition Streamlining Act of 1994,

GAO/NSIAD-96-139 (Washington, D.C.: June 1996).

21In DOD’s assessment of companies in the conventional ammunition segment, it found that they were

not profitable. However, in its report, DOD stated that the nature of the analysis used would overstate

companies that were not profitable.

22For item 4, examples of existing team arrangements and joint ventures include the production and

development of the F-22 fighter aircraft (Lockheed Martin and Boeing); the V-22 Osprey tilt-rotor

transport rotorcraft (Bell and Boeing); and the Crusader, a tracked self-propelled artillery system

(UDLP as prime contractor with General Dynamics, Lockheed Martin, Perkins Engines, and Teledyne

Industries). For item 6, see also U.S. General Accounting Office, Defense Contractors: Pay, Benefits,

and Restructuring During Defense Downsizing, GAO/NSIAD-96-19BR (Washington, D.C.:

October 1995).

Page 23 GAO/PEMD-97-3 Defense Industry Trends
B-265618 

For various reasons, defense manufacturers have not given emphasis to

converting their products or capabilities to commercial ones.23 Officials at

Lockheed Martin have noted that if defense businesses understand

commercial markets, they may be able to produce competitive commercial

products, but officials at Booz-Allen and Hamilton have emphasized that

producing competitively for the commercial sector is different from

producing for the defense sector. The production process and

infrastructure that have been set up to serve DOD’s customers are markedly

different from those of commercial companies manufacturing competitive

products for the average consumer. Further, some industry experts

suggest that there are no commercial markets for converted military

products. However, an official at a large defense firm noted that Rockwell

International corporation achieved success in establishing a commercial

market for Global Positioning System (GPS) receivers. In responding to this

issue, however, some top defense firms have survived by investing in

mergers and acquisitions and by reorganizing and downsizing their

companies.

The defense industry experts and major defense contractors we spoke

with agreed that companies that choose to stay in a post-Cold War defense

industry must remain viable and competitive. They indicated that while

industry consolidation can help them do this, the heart of consolidation is

the reduction of overcapacity. Overcapacity increases costs through

excess, underutilized overhead. When fewer dollars are available,

companies must reduce costs in order to remain competitive. DOD also

views the elimination of excess capacity as a means of achieving some

cost-savings.

Booz-Allen and Hamilton has pointed out that while mergers and

acquisitions have the potential to produce cost savings, particularly

administrative savings, cost-savings benefits associated with consolidation

are limited if excess production capacity is not reduced. They note that

reduction of excess product design capability, as well as general

production capacity, should be addressed in consolidation decisions.

Booz-Allen and Hamilton also notes that cost-savings are minimized to the

degree that merging companies or segments have dissimilar business.

Similarly, internal company reorganization, teaming, and joint ventures

may not result in any real savings if excess production capacity is not

eliminated. Increasing foreign military sales might help spread out

overhead costs normally charged to DOD but only as long as production

23See U.S. General Accounting Office, Defense Conversion: Capital Conditions Have Improved for

Small- and Medium-Sized Firms, GAO/NSIAD-94-224 (Washington, D.C.: July 1994).

Page 24 GAO/PEMD-97-3 Defense Industry Trends
B-265618 

lines remain open for weapons to be purchased by international

customers.

Although DOD’s industrial assessments have all claimed that consolidating

the defense industry will produce cost-savings, our past work, our review

of research from DOD and the private sector, and our discussions with

industry consultants and defense contractors all suggest that this

assumption should continue to be studied, tested, and validated.

There are efforts to study costs and savings associated with specific

defense business combinations. Section 818 of Public Law 103-337

requires DOD to provide the Congress with the projected amounts of costs

and savings for defense contractor mergers or acquisitions when DOD is

asked to reimburse the contractor for the costs associated with company

restructuring. At the time we completed our work, under this provision,

DOD had so far certified restructuring payment for three business

combinations: United Defense Limited Partnership between FMC

Corporation, Defense Systems Group, and Harsco Corporation, BMY

Combat Systems Division; Martin Marietta Corporation purchase of

multiple business entities of GE Aerospace; and Northrop Corporation

purchase of Grumman Corporation. Further, under section 818, GAO has a

requirement to report to the Congress on restructuring costs. At the time

we completed our work, we had issued two reports under this provision.24

Aside from reimbursements for restructuring costs, section 818 does not

provide for analysis and validation of the type of broad cost-savings claims

that appear in some of DOD’s published industrial assessment reports.

Moreover, in both reports, we found that defense contractor’s estimates of

savings associated with business consolidation activity, submitted for

official DOD review and certification, were greater than the estimates DOD

could later verify. Finally, we have also reported that although contractors

have been reducing overhead rates by consolidating facilities and by other

means, they have been projecting future increases in overhead rates.25

Vertical integration in defense industry was pointed out, by one external

reviewer and DOD officials who reviewed a draft of this report, as an

emerging issue of interest or concern for the defense industry linked to

recent defense industry consolidation activity. Vertical integration can

24See Defense Contractor Restructuring: First Application of Cost and Savings Regulations,

GAO/NSIAD-96-80 (Washington, D.C.: April 1996), and Defense Contractor Restructuring Costs:

Projected and Actual Savings From Martin-Marietta Acquisition of GE Aerospace, GAO/NSIAD-96-191

(Washington, D.C.: September 1996).

25See Overhead Costs: Defense Industry Initiatives to Control Overhead Rates, GAO/NSIAD-95-115

(Washington, D.C.: May 1995).

Page 25 GAO/PEMD-97-3 Defense Industry Trends
B-265618 

occur in multiple ways. Vertical integration that occurs when major prime

contractors acquire control of key components that make up the systems

they sell has recently received attention. Industrial concentration that

occurs through the acquisition of lower-tier firms by prime contractors

can create the opportunity for contractors to freeze out of the market

competitors that do not have access to these particular components. An

external reviewer noted that vertical integration can allow prime

contractors to shut out as sellers traditional second- and third-tier

component suppliers who normally sell to the prime contractors.

A DSB task force on vertical integration convened in September 1996, at the

request of the Under Secretary of Defense for Acquisition and Technology.

The task force is expected to issue a report in 1997.26 We note that the

effect on lower-tier smaller suppliers is considered by one industry leader

as a relevant issue in assessing vertical integration. In our work, we were

limited in our ability to obtain comprehensive data about smaller

subcontractors in the post-Cold War defense industry. However, we

believe that the effect of defense industry consolidation is fully

understood by reviewing the state of the smaller defense subcontractors in

addition to the larger prime contractors. Given that small suppliers may

typically concentrate on making one or a handful of products, compared

to a broader mix among the primes, industry activity that limits the market

for small suppliers may exert a disproportionate impact on them.

Agency Comments We provided copies of a draft of this report to the Department of Defense.

To obtain DOD’s comments, we met with officials from the Offices of

Deputy Under Secretary of Defense for Industrial Affairs and Installations;

Under Secretary of Defense, Comptroller; Secretary of the Air Force,

Acquisition Research and Engineering; and Assistant Secretary of the

Navy, Research Development and Acquisition. Further, we conducted

follow-up work on DOD’s comments with officials from the Office of

Program Evaluation and Analysis; Directorate of Defense Procurement;

and Office of the Assistant Secretary of the Army, Research, Development,

and Acquisition.

Officials conveyed to us that DOD planning, execution, and review of these

matters is routinely at much lower levels of detail. From these levels, DOD

26The Department of Justice and the Federal Trade Commission have a role in reviewing proposed

mergers and acquisitions for antitrust activity. In the proposed merger of Lockheed and Martin

Marietta, for example, the FTC saw potential anticompetitive effects from the vertical integration in

the production of navigation devices and military aircraft and, as a result, the companies agreed to

restrictions on the merger with the intent of maintaining competition.

Page 26 GAO/PEMD-97-3 Defense Industry Trends
B-265618 

determines that a particular issue may be indicative of a broader problem.

DOD officials stated that there were differences between the level and type

of analysis we used to depict the data trends and the level and type of

information they readily have at hand to manage and evaluate the agency’s

programs, which hampered their ability to provide a complete and timely

review.

The scope of the work we report here is consistent with the terms of the

congressional request. Our ability to present the data trends was greatly

challenged by the fact that neither DOD nor other executive agencies

maintain in a single office or location the information required to address

the issues raised by the congressional request. It was necessary for us to

obtain data and information from multiple executive agencies and to adopt

methodologies based on existing or commonly used practices of executive

agency offices and other knowledgeable groups so that we could furnish

and present the data. DOD officials did not disagree with the data sources

we used. However, where they identified additional data sources relevant

to the issues discussed in the report, or had questions that we could

resolve concerning the information presented, appropriate changes were

incorporated in the text.

DOD officials indicated that their office of Program Analysis and Evaluation

compiled reports that would have been useful in determining the

disbursement of procurement dollars across industry, although we did not

use them. We determined that the data referred to were produced under

the Defense Economic Impact Modeling System. During our earlier data

collection work, we determined that data from this source were

insufficient in scope relative to other survey-based data collected by DOD’s

Washington Headquarter’s Services on DOD procurement outlays.

DOD noted that the pre- and post-CICA DD350 data we report are based on

different measures that DOD collected about the use of competitive

procedures in DOD procurement contracting. DOD’s pre-CICA data we

present (1977-85) are data DOD collected, consistent with the reporting

requirements and data elements relevant to track competitive contracting

procedures within the period (see appendix III, table III.1). Similarly, DOD’s

available post-CICA data (1986-94) are those consistent with and relevant to

track DOD’s results pertaining to the current laws and regulations

governing competitive procurement procedures (see table III.1). We

believe it is relevant and informative to present the data elements that are

consistent with and representative of the laws and reporting requirements

Page 27 GAO/PEMD-97-3 Defense Industry Trends
B-265618 

to track competition that were in place in the pre-CICA time period and in

the post-CICA time period.

Major contributors to this report are listed in appendix V. If you have any

questions concerning this report or need additional information, please

call me at (202) 512-3092.

Kwai-Cheung Chan

Director of Program Evaluation in Physical

 Systems Areas

Page 28 GAO/PEMD-97-3 Defense Industry Trends
Page 29 GAO/PEMD-97-3 Defense Industry Trends
Contents

Letter 1

Appendix I 

The Government,

Industry, and

Research Contacts We

Made

34

Appendix II 

Objectives, Scope,

and Methodology

36

The Data Analysis 36

The Data Limitations 43

Appendix III 

Data on Employment,

Productivity, and

Competition

44

Employment 44

Productivity 47

Competition 48

Appendix IV 

U.S. Defense

Companies After the

Cold War

65

Appendix V 

Major Contributors to

This Report

70

Tables Table II.1: Major Hard Goods Defined by DOD Claimant Program 37

Table III.1: Pre- and Post-CICA Measures from the DD350 Used 49

Figures Figure 1: DOD’s Total, Procurement, and RDT&E Budgets,

1945-95

9

Figure 2: Yearly Percentage Growth and Decrease in DOD’s

Defense Procurement Budget, 1945-95

10

Page 30 GAO/PEMD-97-3 Defense Industry Trends
Contents

Figure 3: DOD’s Procurement Contract Awards by Major

Program, 1975-94

11

Figure 4: DOD’s RDT&E Contract Awards by Major Program,

1975-94

13

Figure 5: Average Dollars DOD Awarded Using Competitive and

Noncompetitive Procurement Methods, 1977-85

19

Figure 6: Average Dollars DOD Awarded Using Full and Open

Competition and Other Than Full and Open Competition, 1986-94

20

Figure III.1: Ratio of Nonproduction to Production Workers in

Defense-Concentrated Industries, 1975-92

46

Figure III.2: The Relationship Between DOD Budgets and

Productivity in Defense-Concentrated Industries, 1975-91a

47

Figure III.3: Dollars Awarded Using Competitive and

Noncompetitive Procurement Methods for Electronics and

Communications Equipment, 1977-85

50

Figure III.4: Dollars Awarded Using Full and Open Competition

and Other Than Full and Open Competition for Electronics and

Communications Equipment, 1986-94

51

Figure III.5: Dollars Awarded Using Competitive and

Noncompetitive Procurement Methods for Ammunition, 1977-85

52

Figure III.6: Dollars Awarded Using Full and Open Competition

and Other Than Full and Open Competition for Ammunition,

1986-94

53

Figure III.7: Dollars Awarded Using Competitive and

Noncompetitive Procurement Methods for Weapons, 1977-85

54

Figure III.8: Dollars Awarded Using Full and Open Competition

and Other Than Full and Open Competition for Weapons, 1986-94

55

Figure III.9: Dollars Awarded Using Competitive and

Noncompetitive Procurement Methods for Aircraft, 1977-85

56

Figure III.10: Dollars Awarded Using Full and Open Competition

and Other Than Full and Open Competition for Aircraft, 1986-94

57

Figure III.11: Dollars Awarded Using Competitive and

Noncompetitive Procurement Methods for Missiles, 1977-85

58

Figure III.12: Dollars Awarded Using Full and Open Competition

and Other Than Full and Open Competition for Missiles, 1986-94

59

Figure III.13: Dollars Awarded Using Competitive and

Noncompetitive Procurement Methods for Tanks, 1977-85

60

Figure III.14: Dollars Awarded Using Full and Open Competition

and Other Than Full and Open Competition for Tanks, 1986-94

61

Figure III.15: Dollars Awarded Using Competitive and

Noncompetitive Procurement Methods for Ships, 1977-85

62

Page 31 GAO/PEMD-97-3 Defense Industry Trends
Contents

Figure III.16: Dollars Awarded Using Full and Open Competition

and Other Than Full and Open Competition for Ships, 1986-94

63

Figure III.17: Number of Defense Contractors From the End of

World War II to 1994

64

Figure IV.1: Financial Indicators of Three Top Defense

Contractors: Falling Corporate Sales, 1975-95

66

Figure IV.2: Financial Indicators of Three Top Defense

Contractors: Falling Cash Flow, 1975-95

67

Figure IV.3: Financial Indicators of Four Top Defense

Contractors: Rising Corporate Sales, 1975-95

68

Figure IV.4: Financial Indicators of Four Top Defense

Contractors: Rising Cash Flow, 1975-95

69

Abbreviations

AIA Aerospace Industries Association

BLS Bureau of Labor Statistics

BUR Bottom Up Review

CAIV Cost as an independent variable

CBO Congressional Budget Office

CICA Competition in Contracting Act

DIB Defense industrial base

DOD Department of Defense

DOL Department of Labor

DSB Defense Science Board

EELV Evolved Expendable Launch Vehicle

FASA Federal Acquisition Streamlining Act

FTC Federal Trade Commission

FYDP Future-years defense plan

GPS Global Positioning System

IPT Integrated product team

JDAM Joint direct attack munition

JPATS Joint Primary Aircraft Training System

OSD Office of the Secretary of Defense

PA&E Office of Program Analysis and Evaluation

RDT&E Research, development, test, and evaluation

TASC The Analytic Sciences Corporation

TOA Total obligational authority

UDLP United Defense Limited Partnership

WHS Washington Headquarters Service

Page 32 GAO/PEMD-97-3 Defense Industry Trends
Page 33 GAO/PEMD-97-3 Defense Industry Trends
Appendix I 

The Government, Industry, and Research

Contacts We Made

Government Offices Bureau of Labor Statistics

 Employment Projections

 Producer Price Indexes

 Productivity and Technology

Congressional Budget Office

Congressional Research Service

Department of Commerce

 Bureau of the Census

 Business and Industrial Analysis

 Industrial Resource Administration

Department of Defense

 Defense Contract Audit Agency

 Defense Contract Management Command

 Defense Logistics Agency

 Directorate for Information Operation and Reports

 Economic Security/Industrial Affairs

 Office of the Comptroller

 Program Analysis and Evaluation

Defense Contractors Lockheed-Martin

McDonnell-Douglas

Teledyne Industries

Industry Associations Aerospace Industries Association

American League for Exports and Security Assistance

Electronics Industry Association

National Association of Manufacturers

National Coalition for Advanced Manufacturing

National Security Industrial Association

Research Groups and

Consultants

Booz-Allen & Hamilton

Brookings Institution

Business Executives for National Security

Center for Strategic and Budgetary Assessments1

1

Formerly known as the Defense Budget Project.

Page 34 GAO/PEMD-97-3 Defense Industry Trends
Appendix I 

The Government, Industry, and Research

Contacts We Made

Center for Strategic and International Studies

Lehman Brothers

Office of Technology Assessment

Rand Corporation

The Analytic Sciences Corporation

Page 35 GAO/PEMD-97-3 Defense Industry Trends
Appendix II 

Objectives, Scope, and Methodology

The six key questions and the data we used to answer them are outlined in

this appendix. Because our approach was at a macro-level, we used as a

general rule the data sources that were the most comprehensive with

respect to 1975-95 and the defense industries we examined (aircraft,

guided missiles, tanks, shipbuilding, ammunition and ordnance, and

electronics and communications equipment).

The Data Analysis 1. What are the trends in DOD’s total, procurement, and RDT&E budgets?

We obtained our information on DOD’s budgets from DOD’s Office of the

Comptroller and from DOD’s Future Years Defense Plan (FYDP). We present

the budget figures in terms of either total obligational authority or outlays,

depending upon availability. We used outlays when they could be made

available to us in a timely manner. They generally represent cash

payments. “Total obligational authority” is a financial term that DOD uses to

express the value of the direct defense program for a fiscal year. We

transformed all FYDP budget figures from current dollars to constant-year

dollars to correct for inflation, using 1995 as the base year. We used DOD

deflators in adjusting current-year dollars to constant dollars. Where DOD’s

Office of the Comptroller sources reported constant dollar (fiscal year

1995) budget figures, we used them.

Budget figures from 1945 to 1995 reflect both peacetime and wartime

spending. DOD’s Office of the Comptroller could provide the incremental

costs (that is, outlays) associated only with the Vietnam War and the

Desert Shield and Desert Storm conflicts. The aggregate incremental costs

for Vietnam were $110.6 billion from 1965 to 1976 and include the

transition period. The aggregate incremental costs for Desert Shield and

Desert Storm were $1.9 billion from 1990, projected to 1998. That they

appear to have been considerably less than those for Vietnam may be

partly because the Persian Gulf war was much shorter but also because

DOD received for it offset payments from foreign nations that totaled at

least $48.4 billion.

2. What are the trends in the dollar amount of DOD procurement and RDT&E

awards to defense manufacturers and subcontractors over time?

We used data from publicly available reports provided by DOD’s

Directorate for Information, Operations, and Reports, Washington

Headquarters Service (WHS), on the dollar amounts of obligations for prime

Page 36 GAO/PEMD-97-3 Defense Industry Trends
Appendix II 

Objectives, Scope, and Methodology

contract awards and RDT&E awards for each category of major hard goods

that DOD purchased. (See table I.1.)

Table II.1: Major Hard Goods Defined

by DOD Claimant Program Program What it includes

Aircraft Complete aircraft, including helicopters;

Airframe assemblies and spares;

Aircraft engines and parts, propellers and hubs,

 instruments and parts, jet engines and parts used

 without major modification on guided missiles;

Electrical equipment;

Accessories including gun turrets, bomb racks and

 releases, rocket launchers, fuel tanks, droppable

 aircraft tanks, tires and tubes, control wires,

 servo and other control mechanisms; 

Special jigs, dies, and fixtures for fabricating only a

 specific model;

Maintenance tools peculiar to the aircraft and to the

 engine;

Ground handling equipment;

Assist takeoff other than droppable units;

Mobile training units;

Flight simulators

Missiles and space systems All missile and space system parts and related equipment

 procured from prime contractors;

GFE electronic equipment;

Special jigs, dies, and fixtures;

Booster cases;

Ground handling and launching equipment;

Target drones

Ships Construction of vessels of all types, including assault

 boats and tracked amphibious vehicles such as LVTs;

Ship parts;

Ship armor not procured as weapons;

Shipborne deperming and degaussing equipment;

Aircraft catapults and arresting gear;

Floating cranes, floating drydocks, bridge erection boats,

 and production equipment procured as part of and

 mounted on floating equipment;

Special jigs, dies, and fixtures;

Total cost of services, civilian labor, and ship parts used

 in conversion, repair, overhaul, and modernization

Tanks/automotive: combat

vehicles

Tanks and self-propelled gun motor carriages;

Other combat vehicles;

Combat vehicle parts;

Special jigs, dies, and fixtures;

Modification, private or government

(continued)

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Objectives, Scope, and Methodology

Program What it includes

Tanks/automotive:

noncombat vehicles

Trucks, ambulances, passenger cars, buses,

 motorcycles, and other motorized vehicles, including

 wheeled amphibious vehicles;

Power-driven decontaminating trucks;

Trailers and semi-trailers;

Truck tractors;

Repair, maintenance, and other special-purpose

 noncombat vehicles;

Bicycles;

Prime-contractor-furnished repair, rebuild, production,

 and service equipment;

Special jigs, dies, and fixtures;

Other accessories and parts;

Modification, private or public

Weapons Small arms, automatic weapons, mortars, artillery, guns,

 rocket and grenade launchers, and pyrotechnic

 projectors, including those mounted on vehicles, ships,

 and aircraft;

Flame throwers;

Smoke generators, land;

Torpedo tubes;

Harpoon protection nets and depth-charge protectors;

Wholly optical, electrical, or mechanical fire control

 equipment, including binoculars, bomb sights, other

 optical equipment, stop watches, and fire control

 mounts;

Nonelectronic portions of electronic fire control equipment;

Special jigs, dies, and fixtures;

Deperming and degaussing equipment

Ammunition Rockets, bombs, mines, grenades, torpedoes, depth

 charges, and other ammunition and demolition material

 and pyrotechnics;

ATO units (droppable only) and fuel;

Rocket and guided-missile fuel;

Machine-gun links;

Ammunition parts;

Chemicals used in bombs, flame throwers, smoke

 generators, and ammunition;

Special jigs, dies, and fixtures

(continued)

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Appendix II 

Objectives, Scope, and Methodology

Program What it includes

Electronics and

communications

equipment

Electromagnetic radiating and nonradiating

 equipment except that which radiates in the visible

 spectrum,including radio equipment used

 for telegraph, telephone, teletype, facsimile,

 television, and IFF signals;

Radar equipment, Radiac, and Infrared;

Electronic and electro-mechanical computers;

Radiation aids to aircraft control and navigation, including

 control of guided missiles, fire bombing,

 armament, and related electro-mechanical types;

Radiation countermeasures;

Meteorological and sonar equipment;

Equipment for magnetic amplifiers, detecting noise and

 interference, and transmitting and receiving

 intelligence and ancillary equipment such as

 antennas and headphones;

VT fuzes and guided bombs such as Tarzon and Razon;

Special jigs, dies, and fixtures;

Electronic fire control equipment

Source: Adapted from Department of Defense, “Commodities and Services Reported on DD Form

350,” Procurement Coding Manual (Washington, D.C.: October 1994).

WHS collects information on DOD prime contracts and RDT&E (contract

obligations) awards from Department of Defense Form 350 (DD350),

“Individual Contract Action Report.” The DD350 form is used to collect

data on contract statistics within DOD. The data gathered by means of the

DD350 are used for reporting the size and distribution of DOD contracting

actions; types of contracts used; numbers and amount of contracts placed

with categories of contractors such as small, small disadvantaged, and

women-owned small business concerns; the extent competed and other

essential facts about contract actions. Prior to 1982, the DD350 was

completed only on contracts greater than $10,000. Since 1982, it has been

completed for contract actions greater than $25,000. The data reported on

the DD350 may be subject to operational errors in reporting, collecting, or

coding the data for entry into database or other electronic formats. We did

not assess possible operational errors or other errors in the reporting

procedures followed by WHS.

WHS publishes information on awards to subcontractors from the

information it receives from participants in DOD’s mandated

subcontracting program. This information is collected on Standard Form

(SF) 295. The 1978 Amendments to the Small Business Investment Act of

1958 (15 U.S.C. 637(d) (1994)) require business firms that have received a

contract in excess of $500,000, or a contract in excess of $1 million for

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Appendix II 

Objectives, Scope, and Methodology

construction, to establish a small business and small-disadvantaged

business subcontracting program. The nature of DOD’s reporting

procedures makes it possible to determine aggregate amounts of awards

to subcontractors but not what the awards are made for. These data are

not classified by procurement program or weapon system in published

sources that aggregate the data. Because DOD subcontractor awards are

given to large and small businesses, this information cannot be used to

make generalizations about a given “tier” of the defense industry. In

addition, as stated above, we did not assess operational errors or other

possible errors in the data collection and reporting procedures followed

by WHS.

3. What are the trends in indicators of employment, productivity, and

competition over time?

In developing methods to address these issues, we interviewed and

consulted with knowledgeable experts in the defense industry from the

private and federal sectors as well as defense contractors on trends in

employment, productivity, and competition. Given the scope of our work,

the most comprehensive employment data were available from the Annual

Survey of Manufacturers series published by the Bureau of the Census.

The macro-level quantitative data we used were indicators of productivity

and data that are relevant to the evaluation of competition. For

productivity, they included the value of production output in

defense-concentrated industries from DOL’s Bureau of Labor Statistics

(BLS). From DOD offices and AIA records, we obtained limited information

on units produced for some defense sectors. For competition, it included

dollars spent on procurement contracts awarded using competitive and

other than competitive procedures identified on the DD350 form and

retrieved from DOD’s DD350 database. We describe these measures in

detail.

The employment and productivity data were defined according to separate

defense-concentrated industry groups—a cluster of one or more

manufacturing industries identified by a four-digit Standard Industrial

Classification code.1 DOD, Commerce, and DOL, as well as private research

firms that study trends in defense industry, refer to them as

“defense-dependent” or “dominant” industries because a large proportion

of their output is purchased for defense purposes. For example, in 1985,

shipbuilding, ammunition (except small arms ammunition), ordnance (not

elsewhere classified), and aircraft and missile engines industries produced

1

Excluding data from AIA and DOD’s Office of Program Analysis and Evaluation (PA&E).

Page 40 GAO/PEMD-97-3 Defense Industry Trends
Appendix II 

Objectives, Scope, and Methodology

75 percent or more of their output for defense. Nondefense related output

produced by these industries may be purchased by commercial

companies, other U.S. government offices, or international companies.

When we conducted our work for this report, aircraft, guided missiles,

ammunition and ordnance, tanks, electronics and communications

equipment, and shipbuilding and repairing were the principal

defense-concentrated industry groups identified by defense industry

researchers in federal agencies and private research organizations.

The value of production output in defense-concentrated industries is

measured by productivity indexes that we obtained from the Bureau of

Labor Statistics (BLS) Office of Productivity and Technology. The index BLS

provided—the constant-dollar value of production output per hour—is

derived by dividing an index of the value of production (shipments,

revenue, or sales) in each of the manufacturing industries by an index of

aggregate employee hours. This is a standard measure of productivity used

in BLS’ program of productivity measurement and technology studies. The

limited data on procurement or production rates we used came from

reports prepared by AIA and DOD’s Office of Economic Security and PA&E.

Extant data from DOD’s DD350 database gave us information about the

competitive nature of procurement contracts awarded for major weapon

systems or components. We retrieved and analyzed data from the blocks

of information on the DD350 that specifically indicated the extent of

competitive procedures used to award contracts in pre- and post-CICA time

periods (see table III.1). These data provide an indication of the processes

DOD uses (that is, competitive or noncompetitive) in awarding weapon

procurement contracts to defense contractors. We did not determine the

degree to which these processes are reliable indicators of competition or

noncompetition within the defense industry.

4. How are employment productivity and competition related to indicators

of defense spending?

The available quantitative data permitted us to provide a limited response

to this question. We developed methods that made use of existing

information and we supplemented the quantitative data with information

we collected from the experts we spoke to and our review of existing

literature.

Our quantitative method for examining the relationship between

indicators of defense spending and productivity over time involved

Page 41 GAO/PEMD-97-3 Defense Industry Trends
Appendix II 

Objectives, Scope, and Methodology

generating correlation coefficients between available measures of defense

budgets and the BLS productivity indexes.2

 For example, we correlated the

productivity indexes for the tank industry with DOD’s budgets for tank

procurement for the years available. We used the same approach in

examining the relationship between indicators of defense spending and

defense-related employment: correlating the available measures of total

employment in the defense-concentrated industrial sectors from Census

with the total dollar amount of contracts awarded for procuring major

hard goods (see table I.1 for the categories of major hard goods) over the

period of our study (data were available only for the period 1975-91). We

also conducted the analysis using DOD budgets (FYDP, TOA) as an indicator

of DOD spending linked to defense-concentrated industrial sectors.

An important issue in selecting appropriate measures of employment in

defense-concentrated industrial sectors and an indicator of spending (that

is, outlays) linked to those sectors was selecting measures that were

independent from one another. For example, in the course of our work we

discovered that data on defense-related industry employment reported in

DOD’s series of reports on national defense budget estimates (also known

as the “green book”) is not independent from data on procurement outlays

also reported in these series. The lack of independence between the two

data sets calls into question the validity, or accuracy, of any correlational

analysis done using this data and, of course, any resultant correlation

coefficient observed.

Given available data, we were unable to develop a comparable quantitative

method for addressing the relationship between competition and levels of

defense spending over time. Our interviews on these relationships with

defense contractors and defense industry experts supplemented the

quantitative information on defense industry competition that we were

able to obtain.

5. What are the trends in the financial indicators of major defense

contractors over time?

Considerable variability characterizes the methods used to determine

appropriate financial indicators or financial viability. For example, defense

industry analysts at the Center for Strategic and Budgetary Assessments

indicate that there are at least 12 ways to conduct financial assessments of

2

Correlational analysis provides one indication of how two or more variables are related. A correlation

coefficient provides an indication of the strength and direction of a linear relationship. The procedures

used to generate a correlation coefficient make it impossible to determine whether changes in one

variable cause changes in another variable. More analysis is required to reach such conclusions.

Page 42 GAO/PEMD-97-3 Defense Industry Trends
Appendix II 

Objectives, Scope, and Methodology

the defense industrial base. We interviewed Wall Street business analysts,

reviewed the procedures DOD recommends for conducting financial

assessments, and spoke with defense contractors and industry experts.

They agreed that financial viability is best assessed with multiple

indicators. We used sales and cash flow because they are conventional

indicators and because information on them could easily be retrieved from

Standard and Poor’s COMPUSTAT database.3

 Other measures or variables

from company income statements that can be used to analyze financial

viability include gross income, operating income, and net income.

Our sample of defense companies included those among the top 100 that

received the largest dollar amount of DOD prime contract awards in 1994.

So that most of the defense industries would be represented, we included

companies that have business units in one or more of the defense industry

segments.

6. What is the relationship between indicators of defense spending and

indicators of the financial status of major defense contractors over time?

Our focus was predominantly on trends in the financial status of

companies in the last several years of the recent defense spending

reduction. We supplemented the information on corporate sales and cash

flow from Standard and Poor’s database with reviews of DOD’s

assessments of the financial state of major defense companies since the

end of the Cold War. We also incorporated into our review the

perspectives of Wall Street experts and defense contractors.

The Data Limitations When we collected our information, data for all years and industries in our

study were not available; our depiction of trends in some years and

industries may therefore be incomplete. Existing data sources do not

collect or specifically identify comprehensive data on DOD’s

subcontractors or large defense contractors. Therefore, unless we have

indicated otherwise, we could not define the data by the size of a business

or its position in the defense industry “hierarchy.” Unless noted otherwise,

potential error introduced by estimation or modeling procedures or in the

data collection or reporting procedures used by the offices that provided

original data used in our work may be reflected in findings generated with

those data.

3

DOD told us that it prefers operating income (after depreciation) as a performance measure relative

to cash flow.

Page 43 GAO/PEMD-97-3 Defense Industry Trends
Appendix III 

Data on Employment, Productivity, and

Competition

Employment In this section, we present the results of the correlational analysis

conducted on the available measures of employment in

defense-concentrated industrial sectors obtained from Census and defense

spending linked to those sectors obtained from DOD’s records of contract

awards for major hard goods procurement.

Correlational analysis provides one indication of how two or more

variables are related. The possible range of a correlation is –1 to +1. A

correlation of zero means that two numbers (variables) are not correlated.

A negative correlation means that large values of one number are

associated with small values of another number. A number correlated with

itself returns a correlation of 1. A correlation coefficient provides an

indication of the strength and direction of a linear relationship. In this

case, the observed correlation coefficient allows us to determine the

strength of the relationship between indicators of defense industry

employment and defense spending over a specific time period. The

procedures used to generate a correlation coefficient, by themselves,

make it impossible to determine whether changes in one variable cause

changes in another variable. More analysis is required to reach such

conclusions.

Declining defense-related employment since the post-Cold War spending

reduction began has been described.1

 We statistically compared total

employment in the defense-concentrated industrial sectors where data

were available (aircraft, ammunition and ordnance, shipbuilding,

electronics and communications equipment, and tank manufacturing) to

an indicator of defense spending linked to those sectors (total amount of

contract awards for major hard goods procurement) for the years data

were available (1975-91). The observed correlation, r = .27, indicates that

the strength of the relationship is not large and is less than values

considered moderate in size.2

In addition to the limits of correlational analysis stated above, other

factors limit the ability to generate definite determinations or

generalizations about the relationship between defense spending and

defense industry employment. At minimum, they include the absence of

fully comprehensive data on DOD spending specifically attributed to the

1

See U.S. General Accounting Office, Defense Sector: Trends in Employment and Spending,

GAO/NSIAD-95-105BR (Washington, D.C.: April 1995).

2

We also conducted analysis using defense budgets (FYDP, TOA) as a second indicator. The resultant

correlation was slightly higher (r = .36).

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Data on Employment, Productivity, and

Competition

“defense industrial base” and the use of estimation or modeling

procedures to generate defense industry employment data.

Census documents provided additional data about employment trends in

defense-concentrated industrial sectors from their annual surveys of

manufacturers, which include numbers of all employees as well as

production workers in defense-concentrated industries.3

 From these data,

we calculated the ratio of nonproduction employees to production

workers. Figure III.1 shows the trends in these ratios for 1975-92.

3

Commerce defines “all employees” as “all full-time and part-time employees on the payrolls of

operating manufacturing establishments.” Production workers are “workers (up through the

line-supervisor level) engaged in fabricating, processing, assembling, inspecting, receiving, storing,

handling, packing, warehousing, shipping (but not delivering), maintenance, repair, janitorial and

guard services, product development, auxiliary production for plant’s own use (power plant, etc.),

recordkeeping, and other services closely associated with these production operations” at the

establishments covered by its survey. The available Census reports did not separately report figures

for nonproduction workers. To arrive at a figure for nonproduction workers, we subtracted the

number of production workers from the number of all employees.

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Competition

Figure III.1: Ratio of Nonproduction to Production Workers in Defense-Concentrated Industries, 1975-92a

1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992

0

0.5

1

1.5

2

2.5

Ratio

Missiles Aircraft Elec.-Comm. Tanks Ships Ammunition

aRatios greater than 1 indicate more nonproduction workers relative to production workers. As

ratios approach 1, the number of nonproduction and production workers is more equal.

Production workers have consistently been fewer than nonproduction

workers in the guided missile industry: in all years, the ratios of

nonproduction to production employees are consistently greater than 1.

Moreover, ratios of production to nonproduction workers in the guided

missile industry are considerably higher than in all other industries. In

more recent years, the ratios have increased in the missile, aircraft, tank,

and ammunition manufacturing industries, indicating that the split

between production and nonproduction workers is widening. In 1993, TASC

reported that the defense sector employed a high proportion of engineers

and technicians and relatively few production workers. Officials whom we

interviewed at Lockheed-Martin also indicated that there are no major

defense companies in the manufacturing business anymore.

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Competition

Productivity To provide an indication of the relationship between trends in BLS’

productivity indexes (value of production) and trends in DOD’s budgets, we

compared them statistically through a correlational analysis. Figure III.2

shows the correlation between BLS indexes of productivity and trends in

DOD’s procurement budgets for five industries. During 1975-86, budgets

increased along with the value of production (the correlation coefficients

are all positive). For more recent years for which data were available

(1987-91), the value of production continued to increase but defense

budgets did not (the correlation coefficients are all negative).4

Figure III.2: The Relationship Between DOD Budgets and Productivity in Defense-Concentrated Industries, 1975-91a

Aircraft Ammunition-ordnance Elec.-Comm. Ships Tanks

-1

-0.5

0

0.5

1

Correlation coefficient

Increasing budgets, 1975-86 Decreasing budgets, 1987-91

aThe productivity index is based on all employees.

4

The data for shipbuilding are an exception.

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Competition

The shipbuilding and repairing industry data differ from those of the other

industry groups. The strength of the relationship between budgets and

productivity is weaker, and the direction of the relationship in recent years

is positive. There could be any number of reasons for this, ranging from

disparities in the data to unique aspects of shipbuilding. However, the

nature of the data we were provided and the statistical technique we

applied do not permit us to specify explanations. We simply note that

there is some apparent difference.

Competition There are multiple ways of defining, conceptualizing, and measuring

competition. The data that were available on competition permit a limited

discussion and presentation of information about this issue. We were able

to develop methods that allow us to address the extent of the use of

competitive and noncompetitive procedures used in major systems

procurement from data reported on the DD350. From the available

information, we determined the total dollar amounts associated with these

processes for procurement of the major hard goods listed in table I.1 for

the time period and scope covered in our work.

Among other data elements, the DD350 provides data on the processes

(competitive or noncompetitive) that DOD has used in awarding

procurement contracts for weapons. Because DOD is the primary, and in

some cases only, buyer of weapons produced by U.S. defense contractors,

the processes and patterns it uses in purchasing goods and services are

relevant to understanding the potential effect on business practices of

defense firms and the broader defense industrial base. However, because

competition is a multifaceted concept, and we did not determine the

extent to which the DD350 measures of competition are reliable or valid,

this information should be considered an indicator of DOD’s use of

competitive or other than competitive processes.

As reported on the DD350, DOD’s pre- and post-CICA definitions, used as

guides in our work, are shown in table III.1.5

 Pre- and post-CICA definitions

and categories differ because of the 1985 enactment of CICA.

6

5

The data elements described in table III.1 were the primary retrieval criteria used to extract data from

the DD350 database. Secondary criteria included the DOD claimant program numbers for the

categories of major hard goods listed in table I.1 (that is, aircraft; missile and space systems; ships;

tanks/automotive; weapons; ammunition; and electronics and communication equipment).

6

In 1985, the Competition in Contracting Act (CICA) was passed, producing changes in the way goods

and services are procured in DOD and other federal agencies. Fiscal year 1986 is the first full year for

which the DD350 database contains information on the new categories of information required by

CICA provisions.

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Competition

Table III.1: Pre- and Post-CICA

Measures from the DD350 Used Period Procedure Definition

Pre-CICA

(data

available,

1977-85)

Extent of

competition in

negotiation

Competitivea Design technical competition;

Price competition

Noncompetitiveb Catalog or market price;

Follow-on to design and

 technical competition; 

Follow-on to price competition; 

Other

Post-CICA

(data

available,

1986-94)

Solicitation

procedures

Full-and-open

competitionc

Competitive proposal;

Sealed bid;

Combination

Other-than-full-andopen competitiondAuthorized by statute;

Authorized resale;

Essential research and

 development capability;

Follow-on contract;

International agreement;

Mobilization;

National security;

Patent and data rights;

Public interest;

Standardization;

Unique source;

Only one source, other;

Unsolicited research proposal;

Urgency;

Utilities

aData for this category were extracted from data element 18, “Extent of Competition in

Negotiation,” subitems 1 and 2 for competitive, on a pre-1983 version of the DD350. This data

element is the same as data element C5, “Extent of Competition in Negotiation,” on the

October 1983 version of the DD350.

bData for this category were extracted from data element 18, “Extent of Competition in

Negotiation,” subitems 3 through 6 for noncompetitive, on a pre-1983 version of the DD350. This

data element is same as data element C5, “Extent of Competition in Negotiation,” on the

October 1983 version of the DD350.

cData for this category were extracted from data element C9, “Solicitation Procedures,” subitems

A-C for full and open competition, on the May 1985 version of the DD350.

dData for this category were extracted from data element C9, “Solicitation Procedures,” subitem

N, other than full and open competition, on the May 1985 version of the DD350.

The DOD data show that, on average, in 1977-94, more money was

associated with major systems procurements that were awarded using

DOD’s other than competitive procedures compared to competitive ones

(see figures 5 and 6). In our analysis, we found not only greater average

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Data on Employment, Productivity, and

Competition

dollar amounts associated with other than competitive procurement

procedures but also more money spent on other than competitive

contracts for electronics and communications equipment, ammunition,

weapons, and aircraft in every year of the past 18. With exceptions in a few

years, we found the same trend for procurement contracts for missiles,

tanks, and ships. These trends are detailed in figures III.3 through III.16 for

each procurement program and separately for pre- and post-CICA time

periods.

Figure III.3: Dollars Awarded Using Competitive and Noncompetitive Procurement Methods for Electronics and

Communications Equipment, 1977-85

Pre-CICA Data: Extent of Competition in Negotiation

1977 1978 1979 1980 1981 1982 1983 1984 1985

$0

$5

$10

$15

$20

FY 1995 $ (billions)

Competitive Noncompetitive

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Competition

Figure III.4: Dollars Awarded Using Full and Open Competition and Other Than Full and Open Competition for Electronics

and Communications Equipment, 1986-94

Post-CICA Data: Solicitation Procedures

1986 1987 1988 1989 1990 1991 1992 1993 1994

$0

$5

$10

$15

$20

FY 1995 $ (billions)

Full and Open Competition Other Than Full Competition

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Figure III.5: Dollars Awarded Using Competitive and Noncompetitive Procurement Methods for Ammunition, 1977-85

Pre-CICA Data: Extent of Competition in Negotiation

1977 1978 1979 1980 1981 1982 1983 1984 1985

$0

$1

$2

$3

$4

$5

FY 1995 $ (billions)

Competitive Non-Competitive

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Figure III.6: Dollars Awarded Using Full and Open Competition and Other Than Full and Open Competition for Ammunition,

1986-94

Post-CICA Data: Solicitation Procedures

1986 1987 1988 1989 1990 1991 1992 1993 1994

$0

$1

$2

$3

$4

FY 1995 $ (billions)

Full and open competition Other Than Full Competition

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Figure III.7: Dollars Awarded Using Competitive and Noncompetitive Procurement Methods for Weapons, 1977-85

Pre-CICA Data: Extent of Competition in Negotiation

1977 1978 1979 1980 1981 1982 1983 1984 1985

$0

$0.5

$1

$1.5

$2

$2.5

$3

FY 1995 $ (billions)

Competitive Noncompetitive

Page 54 GAO/PEMD-97-3 Defense Industry Trends
Appendix III 

Data on Employment, Productivity, and

Competition

Figure III.8: Dollars Awarded Using Full and Open Competition and Other Than Full and Open Competition for Weapons,

1986-94

Post-CICA Data: Solicitation Procedures

1986 1987 1988 1989 1990 1991 1992 1993 1994

$0

$0.5

$1

$1.5

$2

FY 1995 $ (billions)

Full and open competition Other than full competition

Page 55 GAO/PEMD-97-3 Defense Industry Trends
Appendix III 

Data on Employment, Productivity, and

Competition

Figure III.9: Dollars Awarded Using Competitive and Noncompetitive Procurement Methods for Aircraft, 1977-85

Pre-CICA Data: Extent of Competition in Negotiation

1977 1978 1979 1980 1981 1982 1983 1984 1985

$0

$5

$10

$15

$20

$25

$30

$35

$40

FY 1995 $ (billions)

Competitive Noncompetitive

Page 56 GAO/PEMD-97-3 Defense Industry Trends
Appendix III 

Data on Employment, Productivity, and

Competition

Figure III.10: Dollars Awarded Using Full and Open Competition and Other Than Full and Open Competition for Aircraft,

1986-94

Post-CICA Data: Solicitation Procedures

1986 1987 1988 1989 1990 1991 1992 1993 1994

$0

$5

$10

$15

$20

$25

FY 1995 $ (billions)

Full and open competition Other Than Full Competition

Page 57 GAO/PEMD-97-3 Defense Industry Trends
Appendix III 

Data on Employment, Productivity, and

Competition

Figure III.11: Dollars Awarded Using Competitive and Noncompetitive Procurement Methods for Missiles, 1977-85

Pre-CICA Data: Extent of Competition in Negotiation

1977 1978 1979 1980 1981 1982 1983 1984 1985

$0

$5

$10

$15

$20

$25

FY 1995 $ (billions)

Competitive Noncompetitive

Page 58 GAO/PEMD-97-3 Defense Industry Trends
Appendix III 

Data on Employment, Productivity, and

Competition

Figure III.12: Dollars Awarded Using Full and Open Competition and Other Than Full and Open Competition for Missiles,

1986-94

Post-CICA Data: Solicitation Procedures

1986 1987 1988 1989 1990 1991 1992 1993 1994

$0

$2

$4

$6

$8

$10

$12

$14

FY 1995 $ (billions)

Full and open competition Other than full competition

Page 59 GAO/PEMD-97-3 Defense Industry Trends
Appendix III 

Data on Employment, Productivity, and

Competition

Figure III.13: Dollars Awarded Using Competitive and Noncompetitive Procurement Methods for Tanks, 1977-85

Pre-CICA Data: Extent of Competition in Negotiation

1977 1978 1979 1980 1981 1982 1983 1984 1985

$0

$1

$2

$3

$4

$5

$6

FY 1975 $ (billions)

Competitive Noncompetitive

Page 60 GAO/PEMD-97-3 Defense Industry Trends
Appendix III 

Data on Employment, Productivity, and

Competition

Figure III.14: Dollars Awarded Using Full and Open Competition and Other Than Full and Open Competition for Tanks,

1986-94

Post-CICA Data: Solicitation Procedures

1986 1987 1988 1989 1990 1991 1992 1993 1994

$0

$1

$2

$3

$4

FY 1975 $ (billions)

Full and open competition Other than full competition

Page 61 GAO/PEMD-97-3 Defense Industry Trends
Appendix III 

Data on Employment, Productivity, and

Competition

Figure III.15: Dollars Awarded Using Competitive and Noncompetitive Procurement Methods for Ships, 1977-85

Pre-CICA Data: Extent of Competition in Negotiation

1977 1978 1979 1980 1981 1982 1983 1984 1985

$0

$2

$4

$6

$8

$10

$12

$14

FY 1995 $ (billions)

Competitive Noncompetitive

Page 62 GAO/PEMD-97-3 Defense Industry Trends
Appendix III 

Data on Employment, Productivity, and

Competition

Figure III.16: Dollars Awarded Using Full and Open Competition and Other Than Full and Open Competition for Ships,

1986-94

Post-CICA Data: Solicitation Procedures

1986 1987 1988 1989 1990 1991 1992 1993 1994

$0

$2

$4

$6

$8

$10

$12

$14

FY 1995 $ (billions)

Full and open competition Other than full competition

In recent years, the amount of money associated with DOD competitive and

other than competitive contracts has declined for most procurement

programs. At the same time, the gap between money awarded on

competitive and other than competitive contracts is getting smaller. The

only exception to this is contract dollars DOD spent on aircraft

procurement, as shown in figure III.10. The split between dollars spent for

competitive and other than competitive aircraft procurement has actually

increased in recent years, such that increasingly greater amounts of money

are associated with aircraft procurement contracts that DOD awards with

procedures it defines as other than competitive.

In addition to data trends on the processes DOD uses to award

procurement contracts, another indicator related to understanding

competition in defense industry is the number of businesses available to

enter into competition. In the post-Cold War, there has been a decline in

the number of independent defense contracting businesses, either through

business combinations or exiting the defense business. From a broader

Page 63 GAO/PEMD-97-3 Defense Industry Trends
Appendix III 

Data on Employment, Productivity, and

Competition

historical view, figure III.17 shows that there are clearly fewer contractors

today than 50 years ago, at the end of World War II.

Figure III.17: Number of Defense Contractors From the End of World War II to 1994a

 

Missiles Aircraft Ships and submarines Tanks

0

10

20

30

40

22

26

36

16

9

7

5

2

Number of contractors

End WW II 1994

aThe data for missile contractors are from about 1960 to the present. All information obtained from

Lockheed Martin.

Page 64 GAO/PEMD-97-3 Defense Industry Trends
Appendix IV 

U.S. Defense Companies After the Cold War

There is some consensus that the top defense firms have come through the

post-Cold War funding reduction well and that they remain profitable. The

Wall Street analysts whom we spoke with indicated that the forecasts for

defense companies are not as bad as the companies perceive. Analysts at

Lehman Brothers indicated that companies are more pessimistic than

necessary about future growth, given DOD’s plans to increase defense

spending in the outyears. It is important to note, however, that many

companies have suffered difficult reorganization and employee loss as

they have made the transition to decreased defense spending.

Still, companies have not all been equally affected, and some variability in

the financial indicators of the top companies suggests that the period of

reduction has been less painful for some companies than for others. We

selected financial indicators to examine—sales and cash flow—after our

discussions with Wall Street defense business analysts, defense

contractors, and experts from the private sector and after reviewing DOD’s

work in this area. Other measures or variables from company income

statements that can be used to analyze financial viability include gross

income, operating income, and net income.

The companies that we report data for are companies among the top 100

that received the largest dollar volume of DOD prime contract awards in

1994. Figures IV.1 and IV.2 show multiyear trends for five top defense

contractors whose corporate sales and cash flow fell, while figures IV.3

and IV.4 show multiyear trends for four top defense contractors whose

corporate sales and cash flow rose or remained stable.

Page 65 GAO/PEMD-97-3 Defense Industry Trends
Appendix IV 

U.S. Defense Companies After the Cold War

Figure IV.1: Financial Indicators of Three Top Defense Contractors: Falling Corporate Sales, 1975-95

1975 1980 1985 1990 1995

$0

$2

$4

$6

$8

$10

$12

$ (billions)

Avondale General Dynamics Litton

Page 66 GAO/PEMD-97-3 Defense Industry Trends
Appendix IV 

U.S. Defense Companies After the Cold War

Figure IV.2: Financial Indicators of Three Top Defense Contractors: Falling Cash Flow, 1975-95

1975 1980 1985 1990 1995

-$1

-$0.5

$0

$0.5

$1

$1.5

$2

$ (billions)

General Dynamics United Technologies Westinghouse

Page 67 GAO/PEMD-97-3 Defense Industry Trends
Appendix IV 

U.S. Defense Companies After the Cold War

Figure IV.3: Financial Indicators of Four Top Defense Contractors: Rising Corporate Sales, 1975-95

1975 1980 1985 1990 1995

$0

$5

$10

$15

$20

$25

$ (billions)

FMC LM Loral Northrop

Page 68 GAO/PEMD-97-3 Defense Industry Trends
Appendix IV 

U.S. Defense Companies After the Cold War

Figure IV.4: Financial Indicators of Four Top Defense Contractors: Rising Cash Flow, 1975-95

1975 1980 1985 1990 1995

$0

$0.5

$1

$1.5

$2

$ (billions)

FMC LM Loral Raytheon

The sales and cash flow figures shown are the amounts reported for that

year. Sales and cash flow may appear to be better for some companies

than for others for many reasons. A detailed assessment of this issue was

beyond the scope of our work. However, we can suggest explanations

such as how diversified a company is, the range and number of defense

segments that some companies have (for example, General Dynamics is

involved in shipbuilding and tank manufacturing), transactions associated

with business combination or divestiture activity (for example, Lockheed

Martin; Northrop-Grumman; General Dynamics; other acquisitions by

Raytheon, Loral, FMC), and other profitable business segments companies

have with other federal agencies or offices, commercial clients, and

foreign companies. Some of the largest changes shown in the figures

reflect merger and acquisition activity, such as the growth in sales and

cash flow for Lockheed Martin and the declining sales and cash flow for

General Dynamics.

Page 69 GAO/PEMD-97-3 Defense Industry Trends
Appendix V 

Major Contributors to This Report

Program Evaluation

and Methodology

Division

Carolyn M. Copper, Project Manager

Penny Pickett, Communications Analyst

Venkareddy Chennareddy, Referencer

Acknowledgments Other noteworthy contributions to the work were made by Winslow

Wheeler, who contributed to the project’s early direction, and Robert

Copeland, who contributed to the study design.

(973421) Page 70 GAO/PEMD-97-3 Defense Industry Trends
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