Measuring the Impact of Sequestration and the Drawdown on the Defense Industrial Base

Abstract

The United States has long recognized the importance of supporting and sustaining an advanced defense industrial base for maintaining global technological superiority. Maintaining a technologically superior industrial base requires a wide vendor pool from which to produce products, conduct research and development (R&D), and provide services for the Department of Defense (DoD). However, the implementation of the 2011 Budget Control Act's (BCA) enforced reductions to the federal budget, as shown in Figure 0-1 below, has prompted Congressional, DoD, government oversight, and industry officials all to express concerns over the health and future of the defense industrial base. Overseas Contingency Operations (OCO) funding associated with the wars in Iraq and Afghanistan is exempt from these caps, but has also declined steeply since 2011. The combined effect of these reductions is referred to as the current defense drawdown, or the drawdown, for this study. CSIS analysis showed that buried within the substantial decline in defense contract obligations were significant variations from sector to sector, with declines varying from catastrophic (Land Vehicles), to steep (Facilities and Construction, Space Systems), to relatively modest (Ships and Submarines). Other sectors suffered a whipsaw effect in which solid business growth suddenly switched to sharp decline (Aircraft). Due to the limitations in the subcontract database, CSIS cannot say whether these companies have exited the industrial base entirely, or still perform work at the lower tiers. The shape of the supporting industrial base was significantly restructured in some sectors, although the size of losing and gaining vendors varied substantially across industry. However, in general, small firms mostly succeeded in holding market share, and the Big 5 saw the composition of their work shift away from R&D and towards products and services.1 The most complex dynamic occurred in competition. Overall effective competition remained fairly steady, but there were notable declines in sectors where competition was already fairly limited (Aircraft; Ordnance and Missiles; Air and Missile Defense). The size of a platform portfolio's decline had little explanatory effect. Different sectors experienced similar levels of decline while experiencing very different trends in the rate of effective competition within the sector. Sectors where the DoD vendor base may strongly overlap with robust commercial markets, such as Facilities and Construction; and Electronics, Communications and Sensors (EC&S); showed little decrease in competition despite large declines in obligations and vendors.