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Stewardship of the Defense Industrial Base NCMA July 2004
The Partnership • Industrial Might Underlies Military and Diplomatic Strength • The Nation’s Policies, Resource Commitments and Institutional Interaction Underlie Industry’s Strength • A Strong (Defense) Industrial Base Requires Close Cooperation Between Industry and Government
Fair & Reasonable vs. Best Value • What’s the difference? • Best value encourages consideration of price and other factors • Fair and reasonable requires a balance between driving a hard bargain and nurturing the supplier base • Not an alternative to full and open competition • Applies to negotiation and policy development
Declining Experience Levels Military Aircraft Programs Vertical Bars: Military Aircraft Program Starts 40 Year Career Span Retired Retired XP5Y XFY A2D F8U XC120 F6M1 F4D U2 F3H SY3 B52 F105 A3D X13 X3 C133 S2F F107 X2 B58 F10F F106 F2Y F5D F100 X14 B57 C140 F102 T2 R3Y1 F4 F104 A5 A4D T39 B66 T38 F11F AQ1 C130 X15 F101 F5A T37 X1B Retiring Experience: 6+ Programs Experience: 1-2 Programs Mid Career Very Few Experience: 1 Program A6 B52 SR71 SC4A X21 X19 C141 B70 XC142 F111 A7 OV10 X22 X26B X5A X24 “We believe that a declining experience level has been a contributing factor to the problems we observe in many recent aircraft programs.” RAND F14 S8 YA9 A10 F15 F18 YF-17 B1 YC15 YC14 AV8b F/A18F-16 F117 F20 X29 T46 T45 B2 V22 F22 EMD YF22 YF23 JSF X36 JSF X37 C17 JSF EMD UCAV BX 1950s 1960s 1970s 1980s 1990s 2000s 2010s 2020s 2030s Ref: RAND Study (chart by Northrop Grumman)
DoD Fixed Wing Combat Aircraft Programs Ref: RAND Study
R&DScientists & Engineers Employment in Aerospace andas % of All Industries 160 35% 140 30% 120 25% 100 20% (in Thousands) 80 Aerospace as % of All Industries 15% 60 10% 40 5% 20 R&D Scientists & Engineers % of All Industries 0 0% 1963 1966 1972 1978 1981 1984 1999 1957 1960 1969 1975 1987 1990 1993 1996 2002
1,200 Aircraft & Parts Guided Missiles, Space Vehicles, & Parts Search, Detection & Navigation Instruments 1,000 800 (in thousands) 600 400 200 0 1994 1990 1992 1996 1998 2000 2002 2003 Mar-04 "Aerospace" Employment
Rockwell Boeing Argo Systems Litton Precision Gear McDonnell Douglas Hughes Electronics Satellite Jeppesen Sanderson Honeywell-Electro-Optics Fairchild Weston Systems Inc. Loral Ford Aerospace BDM International Inc. Librascope LTV–Missile Business IBM–Federal Systems Unisys Defense General Dynamics–Ft. Worth MEL Lockheed Martin Marietta Gould Ocean System Division General Electric–Aerospace COMSAT Corp. Affiliated Computer Services Inc. (ACS) Logicon General Dynamics Space Business Northrop LTV–Aircraft Operations Grumman Corp. Westinghouse El. Defense Ryan Aeronautical Kistler Aerospace Corp. Alvis Logistics–EDD Business Taratin TASC (Primark) PRC (Black & Decker) General Instruments–Defense Varian–Solid State Devices Litton Industries Avandale Industries Newport News Shipbuilding TRW Hughes General Motors BET PLC's Rediffusion Simulation General Dynamics Missile Division Raytheon – Flight Simulation Raython Co-Plant, Quincy Magnavox REMCO SA Raytheon STC PLC–Navigation Systems TRW-LSI Products Inc. Corporate Jets Eng & Const. Int’l Aircraft Integration Systems Segment Vertex Aerospace E-Systems Chrysler Techn. Airborne Texas Instr. El. Defense Veridian Corp GM Defense Motorola Integrated Info Sys Galaxy Aerospace Primex Technologies Santa Barbara GTE Government Systems Corp. Units Gulfstream Aerospace NASSCO Holdings, Inc. Computing Devices International, Inc Lucent Advanced Technology Systems Lockheed Martin Defense Sys, Armament Sys Bath Iron Works Chrysler Defense, Inc General Dynamics Space Propulsions Missile Operations Electronics Division Fort Worth Div. Space Systems 2003 2004 2002 2001 2000 Over Two Decades of Consolidation... Boeing Lockheed Martin Loral BDM (Carlyle) Aerospace Electronic Systems Commercial Aerostructures Northrop – West Virginia NorthropGrumman Teledyne Ryan Aeronautical Federal Data Corp. Raytheon Hughes Electronics General Dynamics 1980 1988 1982 1984 1986 1990 1992 1994 1996 1997 1998 1999 First Wave Second Wave Source: SDC, DACIS DM&A
Defense Industry Margins Have Improved… Industry Average Operating Margin (weighted by revenue) 12% 10% 8% CSIS Defense 6% Index 4% 2% 0% 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2002 2001
But, The Industry Has the Lowest Returns of its Peers… Industry Average Operating Margin (weighted by revenue) 30% CSIS Defense Index 25% S&P 500 20% S&P Capital Goods 15% S&P Pharm & Biotech 10% S&P Technical Hardware S&P Software & 5% Services Publicly Owned 0% Electric Utilities 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 Sources: FactSet, S&P Compustat, Energy Information Administration, CSIS Analysis Notes: 1) CSIS Defense Index comprises 36 publicly-traded companies with majority revenues derived from US defense business. (2) S&P Sub-sector constituents accurate back to 1994; composition held constant for years 1980 to 1993.
Profitability Indicator • Return on Assets (after taxes) • Company #1 – 6.84% • Company #2 – 4.28% • Company #3 – 3.47% • Company #4 – 2.19% • Company #5 – 2.56% • Tax Free Municipals • 20 year – 4.56 • 10 year – 3.74 • 5 year – 2.82 Source: Yahoo Finance June 24, 2004
Quote from 2000 Defense Science Board Study “………….There was no one event that made the business unattractive, but eventually things were screwed down so tight that it was no longer providing attractive returns………” Source: Senior executive of a company that exited the defense market.
Things We Need To Avoid • Stricter Revolving Door Legislation • Asking Industry to Pay for Inherently Government Activities • Background Investigations, Patent Processing • Shifting unfair risk to contractors • Fixed Price R&D • Buy American Legislation • Rigid Export Licensing
Things We Need To Pursue • Favorable Tax Laws • Responsible Trade Agreements • Adequate Export Licensing • Stable Program Funding • Share-in-Savings • Reasonable Profit Policies • In a Changed Economic Environment • Commercial Practices • Workforce Education and Training
Summary • Government creates the economic environment within which industry must operate • Friendly or unfriendly • We need to refocus on ensuring a balance between the best interests of the Government and those of industry in the interest of national defense and the American taxpayers. • Provide a business environment that adequately supports the global competitiveness of the U.S. industrial base