Defense Industry

The end of the Cold War saw a continuing decline in most Defense Department (DOD) appropriations accounts from their peaks in the 1980s. Declines in military spending for procurement and research, development, test, and evaluation have some effect on the industries that manufacture weapons for DOD. The impact of shrinking defense budgets has been the focus of congressional and executive branch initiatives designed to help communities, businesses, and workers adjust to military downsizing in the post-Cold War era. This report is a broad review of productivity and competition in the defense industrial base. GAO describes (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.

GAO found that: (1) the size and nature of the defense industrial base is critically shaped by the amount and emphasis of U.S. defense outlays; (2) 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 contract awards is similar to spending just prior to the peacetime defense buildup of the early 1980s; (3) aside from outlays there are other differences in today's industrial base compared to past periods; (4) Department of Defense (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; (5) the business environment for defense industry has also changed over the years; (6) 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; (7) 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; (8) 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; (9) defense industry employment is another key factor affected by changes in the industrial base; (10) the loss of jobs related to the reduction in defense budgets is widely documented, although estimates and projections vary; (11) GAO 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; (12) market forces and expectations about future trends in DOD budgets have facilitated the restructuring of the defense industrial base; (13) 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; (14) as part of its current "Defense Acquisition Reform vision" and under the Federal Acquisition Streamlining Act, 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; and (15) 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.