Defense Expenditures

Since the World War II drawdown, defense spending has experienced three peaks associated with the Korean War, the Vietnam War, and the Reagan administration military buildup. As shown in table 1, the current decline is only 2 percentage points greater than the Vietnam War drawdown, which was spread over an 8-year period, whereas the post-Cold War drawdown is currently projected over a 10-year period. However, unlike the Vietnam War drawdown, defense contractors view the current decline as permanent, not cyclical. We compared the peak sales by these business units during the mid-to-late 1980s with their sales in 1993 and the latest year projected.Measured from their peak sales years, we found that the business units’ sales decreases ranged from 21 percent to 54 percent through 1993 and that the units were estimating decreases ranging from 50 percent to 73 percent through the latest year projected. Through 1993, the units’ workforce reductions ranged from 30 percent to 76 percent. Through the latest projected year, the units’ estimated reductions ranged between 44 percent to 79 percent. Table 3 compares projected employment with the 1976 and 1980 levels. Declines in IR&D/B&P Expenditures

Similar to the reductions in employment levels, the six business units had made substantial cuts in their IR&D/B&P expenditures. Between their peak spending years and 1993, these units had reduced IR&D/B&P expenditures ranging from 31 percent to 71 percent and projected reductions ranging from 41 percent to 84 percent through the latest year projected. The units projected a weighted average reduction of 76 percent in their capital expenditures. Reductions in Facilities

Measured from their peak years, five of the business units had reduced their total square footage by as much as 34 percent through 1993, and five units projected reductions ranging from 6 percent to 43 percent, or an average of 26 percent, through the latest projected year. We focused our work on these five elements because we believed they were most representative of the impact of reduced defense spending on defense contractor business units.
Why GAO Did This Study

Pursuant to a congressional request, GAO examined the impact of the recent decline in defense expenditures on individual business units of major defense contractors, focusing on a comparison of defense expenditures over a number of years and changes in the business units': (1) sales and employment levels; and (2) spending on independent research and development and bid and proposal (IR&D/B&P) preparation, capital improvements, and facilities.

What GAO Found

GAO found that: (1) measured from their peak years, the six business units GAO visited had experienced sales decreases ranging from 21 percent to 54 percent through 1993 and estimated declines ranging from 50 percent to 73 percent through the latest year projected; (2) the resulting employment reductions ranged from 30 percent to 76 percent through 1993 and planned reductions ranging from 44 percent to 79 percent through the latest year projected; (3) from their peak year spending levels through 1993, the six units had reduced IR&D/B&P spending ranging from 31 percent to 71 percent and projected reductions ranging from 41 percent to 84 percent through the latest year projected; (4) the six units had also reduced expenditures for capital improvements by an average of 80 percent through 1993 and, through the latest year projected, estimated an average reduction of 76 percent in these expenditures; (5) although these business units have significantly reduced spending in these areas, projections by some of the units are still higher than their: (a) 1976 levels, the lowest peacetime defense spending level since the Korean War buildup; and (b) 1980 levels, the year before the Reagan administration military buildup; (6) the defense industry has adjusted to previous spending reductions; (7) the current post-Cold War reduction is only 2 percentage points greater than the reduction after the Vietnam War and is taking place over a period that is 2 years longer; and (8) however, unlike other drawdowns, defense contractors view the current decline as permanent and have developed a variety of strategies to deal with reduced defense spending.