How is the Defense Drawdown Affecting Industry?
By: David Berteau
The U.S. Department of Defense (DoD) is undergoing the fourth defense spending drop since 1950. How
should DoD be measuring the impact of this latest defense drawdown on the defense industry? The CSIS National Security Program on Industry and Resources (NSPIR) has begun to analyze this question, tracking defense contract spending and analyzing both demand (what DoD is contracting for) and supply (what firms meet those contract needs). There are two trends we expect to see in the data.
First, we expect changes in market distribution (as firms consolidate, divest, or leave a declining business). Since the peak in 2009, spending on DoD contracts is down 11.0 percent. The top 20 defense contractors have seen their prime contract obligations decline 10.2 percent; overall, DoD is not disproportionately protecting its top industry partners. In fact, the top 20 R&D contractors have seen contracts drop by 25.1 percent compared to 21.8 percent DoD-wide for R&D (in part as programs graduate from R&D to Procurement funding accounts). Surprisingly, the top 20 for DoD Services contracts are down only 8.9 percent compared to 13.2 percent DoD-wide (and not because of growing health care costs—the top 3 health care contractors saw steeper declines than overall). But the top 20 contractors for Products, including weapon systems, have been largely shielded, with only a 2.0 percent decline since 2009. Overall DoD spending for products is down 6.3 percent, less than the 10.2 percent total contract decline.
Second, we expect increased competition (more bidders per contract). Preliminary results are mixed, with some counterintuitive outcomes. For example, contract awards to large and medium-sized companies for Products have seen increases in bids from five or more firms, a sign of more competition. On the other hand, the top contractors (the “Big 6” firms) share of sole-source Service contracts increased, when we expected more competition there as well.
All our data are only through 2012 contract spending. FY13 spending data, reflecting sequestration’s hit on DoD, will be available later this winter and will provide fresh insight into the impact of the drawdown on defense industry. Watch this space for news in 3 months!