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 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. 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. What are the trends in DOD’s total, procurement, and RDT&E budgets? 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. This fourth one follows the peacetime defense buildup of the early 1980s. 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). There is little consensus on how to measure competition. 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. 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. DOD finds that most of the defense firms it has assessed have been profitable in the drawdown. 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. For productivity, they included the value of production output in defense-concentrated industries from DOL’s Bureau of Labor Statistics (BLS). These data provide an indication of the processes DOD uses (that is, competitive or noncompetitive) in awarding weapon procurement contracts to defense contractors. A number correlated with itself returns a correlation of 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).
Why GAO Did This Study

Pursuant to a congressional request, GAO reviewed productivity and competition in the defense industrial base since the end of the Cold War, focusing on: (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.

What GAO Found

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.