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, 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. 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. 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 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. 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? 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. 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. The aggregate nature of the data did not permit us to offer definitive explanations for the trends these data reveal. 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. 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. 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. 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 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. Figure 2 shows the yearly percentage growth or decrease in DOD’s procurement budget throughout the past 50 years. 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 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. (See figure 3.) In particular, expenditures for aircraft exceeded all others during the period. 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 than the cumulative spending on ships, tanks, weapons, and ammunition.Contract awards for missiles, electronics and communications equipment, and especially aircraft peaked in the 1980s.