The Incredible Shrinking Defense Industrial Base

June 16, 2015
By M. Thomas Davis

The long-term decline has snuck up on the nation, and it must be reversed.

A few weeks ago, current DRS CEO and former Deputy Defense Secretary William J. Lynn gave a presentation at the Center for Strategic and International Studies (CSIS) titled “Globalization vs. the Culture of National Security.” The major point of his address was that with an increasingly globalized economy—Lynn’s company DRS is owned by Italian defense manufacturer Finmeccanica—many issues and restrictions regarding technology, intellectual property and supply chains increasingly are “quaint.”

It was an important observation. But many in the audience were surprised when Lynn made the smaller, passing point that Apple could buy nearly half the current top tier defense companies with the cash balance currently reflected on its balance sheet. This point nicely reinforces one I frequently make: that currently the current annual revenue of the five top tier defense companies is less than half that of Walmart.

But, let us put that comment into some additional perspective. Two weeks ago, the business magazine Fortune released the latest compilation of its annual Fortune 500—the top 500 companies in the United States. Just as it was in 2014, Walmart was number one with annual revenue of a staggering $485 billion—nearly the size of a sequester-constrained defense budget—with profits of $16 billion. Exxon Mobil was number two with revenues of $382 billion and profits of $32 billion. For its part, Apple was number five with revenues of $183 billion and profits of nearly $40 billion, showing information technology remains much more profitable than either retail sales or petroleum.

But, what about the defense industry? When Fortune compiled the 500 listing in 1961, the year of President Dwight Eisenhower’s famous warning about the “military industrial complex,” 15 defense companies were in the top 100 of the Fortune 500. The highest ranked among them was General Dynamics at number 15. The 2015 listing of the top 100 contains only four aerospace and defense companies; and General Dynamics barely made the list, being ranked number 100. The three other companies on the 2015 list are Boeing at number 27, and two-thirds of Boeing’s revenue comes from its commercial aircraft; United Technologies at number 45—the company currently is indicating it may sell its Sikorsky Helicopter Division because of decreasing sales and low margins; and Lockheed Martin at number 64. Of the four defense companies making the top 100, only two—Lockheed Martin and General Dynamics—are primarily defense enterprises.

In 1961, the defense companies in the Fortune 100 accounted for nearly 30 percent of the group’s total revenue. Today, as reflected in the 2015 ranking, that number is less than 7 percent—much of it actually coming from commercial activities. For the companies that are primarily defense— Lockheed Martin and General Dynamics—the number is less than 2.4 percent, and some of that is commercial. This means that over the past 54 years, defense has been displaced as a major presence on the national economic scene and replaced in the top 100 by healthcare, 17 companies; financials and insurance, 16 companies; petroleum and chemicals, 15 companies; and information technologies, 14 companies.

This dramatic change in the size and scope of the defense industrial base largely is unrecognized by the public and even the government itself. Senior defense leaders want more competition in the defense marketplace along with the cost control that flows from it, and they want more innovation, which comes from intellectual and technological competition. However, these leaders seem unwilling to embrace the reality that many government policies and procedures discourage firms from entering the defense market, and other policies—such as limiting profit margins—encourage many to leave.

Since 1961, the Fortune 100 companies, in constant dollars, have seen annual revenues and earnings increase about seven times. During the same period, defense companies’ revenue and earnings barely have doubled. This illustrates that defense is not keeping pace with overall economic performance measured in numerous ways. At a moment of great strategic instability and challenge, one in which the United States will need to rely increasingly on technology to substitute for manpower, these are worrisome trends that need to be addressed. The first step toward developing a solution always comes with recognizing there is a problem, and this problem needs much wider recognition.

M. Thomas Davis is a former corporate vice president with General Dynamics Corporation and a past assistant professor of economics at West Point, the U.S. Military Academy.

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