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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

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the partnership
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
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
slide4

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)

slide6

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

slide7

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

slide8

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

slide9

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

slide10

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
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
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
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
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
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