CRS Report for Congress
The U.S. Defense Industrial Base:
Trends and Current Issues
October 27, 2000
Daniel H. Else
Analyst in National Defense
Foreign Affairs, Defense, and Trade Division

Congressional Research Service The Library of Congress

The U.S. Defense Industrial Base:
Trends and Current Issues
The end of the Cold War precipitated one of the greatest reductions in U.S.
defense spending since the final months of World War II. The Department of Defense
(DOD) and U.S. defense industry have struggled coming to terms with smaller
defense budgets and ill-defined threats to U.S. security. Cold War’s end also
transformed the defense business environment, marking the rapid worldwide
globalization of economics and trade and changes in DOD policy toward the industry
itself. Technological change, especially visible in the information processing and
telecommunications industries, has forced convergence between civilian and military
research and applications. Shrinking defense budgets worldwide have forced
producers into heightened competition.
These factors compelled DOD to reassess its half-century relationship with the
U.S. defense industrial base. As a result, DOD policy has changed in two major ways.
First, because the lead in some state-of-the-art product lines had passed from defense
to the commercial sector of the economy, DOD reformed the way it buys equipment.
Second, DOD sought to reform structural aspects of the defense industrial base itself.
Instead of continuing to support excess production capacity across the board, DOD
focused on preserving “defense-unique” manufacturing capabilities, allowing other
U.S. defense firms to more freely respond to conventional market forces.
Congress has traditionally protected economically vulnerable parts of the defense
industry that are critical to U.S. national security, but global changes in the economic
and defense environments pose new issues. First, continued mergers and acquisitions
in the U.S. defense industry raise questions about maintaining competition. Some
maintain that surviving firms have emerged healthier and more competitive, but others
worry about the potential loss of technological innovation and price competition from
fewer companies. Second, defense acquisition reform has encouraged military use of
commercial products in military systems. Proponents of this cite the advantages of
rapid access to new technologies for DOD and the adoption of efficient business
practices, while others question the inappropriateness of some products to military
applications, and the ability of DOD to cope with the speed of obsolescence for
commercial products. Third, globalization has increased cross-border flows of
information and the availability of technology that could be used for military purposes.
The result has been pressure for the United States to ease defense-related
technology transfer restrictions which could increase exports of U.S. systems, and
help the U.S. defense supplier base. Critics of this logic, however, worry about the
extra vigilance needed to prevent the unauthorized transfer of U.S. defense
technology, potentially increasing U.S. vulnerabilities. And fourth, some U.S. defense
firms find it difficult to recruit and retain qualified designers and technical managers,
presaging potential problems. Some analysts note a downturn in the number of recent
U.S. science and engineering graduates and see strong competition for their talents
from commercial high-technology firms as ominous. But others observe that
perceived shortfalls seem concentrated in only some specialities, such as armored
vehicle design, while other specialty requirements, such as computer systems design,
appear able to fill their requirements.

Introduction ................................................... 1
Background .................................................... 1
Structure of the Defense Industrial Base...........................1
Factors Shaping the Defense Industrial Base.......................3
Declining Defense Spending Levels..........................3
Changing DOD Policy....................................5
Effects of Economic Globalization...............................6
Congressional Action in Recent Years............................7

104th Congress..........................................7th

105 Congress..........................................8
106th Congress..........................................8
Potential Issues For Congress......................................9
Industry Consolidation........................................9
Commercialization of Defense Technology........................10
Globalization .............................................. 12
Shortage of Technical Personnel...............................13
List of Tables
Table 1. Consolidation in U.S. Defense Firms, 1993-2000.................5

The U.S. Defense Industrial Base:
Trends and Current Issues
During most of the 1990s, U.S. defense companies faced unprecedented
challenges – a shrunken domestic market for their specialized military products,
reduced defense budgets among U.S. allies in Europe and Asia, and increased
competition in export sales from overseas firms. The resulting U.S. defense industrial
base was smaller, in some ways more economically more vulnerable, and more
dependent on commercial technologies. New challenges have evolved which will have
to be addressed as Congress and the executive branch ponder future U.S. defense
policy decisions, such as developing new U.S. military capabilities.
This report briefly describes the U.S. defense industrial base, its structure and
evolution, and examines challenges and potential issues for Congress to consider.
Issue areas include competition in defense contracting, the role of commercial
technologies, and foreign participation in U.S. defense programs, and the ability of
U.S. defense firms to recruit and retain sufficient numbers of technical workers.
This report focuses primarily on the private-sector U.S. firms that design and
produce weapons, equipment, and other items for the Department of Defense (DOD).
It does not cover other elements of the nation’s defense technological and industrial
infrastructure, such as government-operated laboratories and repair depots, and
university-affiliated research and development organizations.
Structure of the Defense Industrial Base
Today’s defense industry is a multifaceted and complex sector of the national
economy, employing more than 2.3 million workers in hundreds of firms of all sizes.
Elements of the U.S. defense industry exist in every state and include many joint
ventures with foreign defense companies, especially those based in allied countries.
The structure of the U.S. defense industrial base can be imagined as a collection
of firms placed in a matrix of three dimensions: function, product, and ownership, as
depicted in Figure 1.
In the first dimension, function, enterprises are categorized as prime contractors,
subcontractors, and suppliers. Prime contractors (also known as “primes”) deal
directly with DOD and hold primary responsibility for product fabrication and overall

management in programs where more than one company is involved. Sub-contractors,
under obligation to the primes, create some portion of the final product, such as an
electronics suite for a ship, or the engines for an aircraft. Suppliers provide lower-tier
parts or processed materials to sub- and prime contractors. Traditionally, this lowest
layer of business was referred to as the “dual-use sector” because much of its product
line could be used for both defense and non-defense purposes. In recent years,
though, a significant number of the components provided by sub-contractors for use
in military products has been made to “commercial, off-the-shelf”(COTS)
specifications. These are also considered “dual-use.”
Adapted from Jacques S. Gansler, The Defense Industry, Cambridge: MIT Press, 1980, p. 3
Figure 1
The second dimension, product, indicates the separate industrial sectors
(aerospace, ships, armaments, etc.) within which firms operate. Any individual
enterprise may conduct business in several sectors, but each sector retains its own
very specific characteristics. For example, aircraft and ships are built individually but
uniforms and rifles are assembled by mass production processes, while electronics
manufacturers fund more research and development than do boot and shoe makers.
The third dimension, ownership, shows production facilities in private hands, in
the public domain, or in some mixture of the two. Arsenals used for the final assembly
of munitions are publicly owned and operated by government employees. A significant
portion of the facilities and production equipment used to manufacture military
aircraft are government-owned but staffed by private corporations. All U.S. new-
construction shipyards used for building warships are privately owned and operated.
DOD funding of the industrial base is concentrated in three of the defense
budget’s appropriations titles. These are Operation and Maintenance (O&M:
fuel, ship operations, training, equipment maintenance and overhauls, etc.),
Procurement (acquisition of weapons and components, communications equipment,
munitions, modernizations, and upgrade kits), and Research, Development, Test,
and Evaluation (RDT&E: development and testing of equipment, prototypes,
technology demonstration devices, and basic research for potential military
applications). In 1999, outlays for O&M, procurement, and RDT&E were $62.4,

$48.6, and $38.0 billion (in constant FY2001 dollars), respectively.1 For the top two
U.S. defense firms in 1999, Lockheed Martin Corp. and Boeing Co., DOD contracts
resulted in $17.8 and $16.3 billion in revenue, or 69.8% and 28.0% of their annual2
Factors Shaping the Defense Industrial Base
Until the end of the Korean War, the United States had no distinct, identifiable
defense industrial base. Industry organized itself around civilian needs, mobilized to
meet war or crisis, and demobilized afterward, reconverting to the manufacture of
civilian products.
The onset of the Cold War changed this. With the Soviet Union and its satellites
presenting a constant threat to the United States and its allies, U.S. defense spending
remained at a considerably higher level than in previous times of peace, and a portion
of the U.S. industry consequently found itself permanently organized around meeting
DOD needs. As a result, many firms gravitated toward DOD as their principal, or
even sole, customer, and an identifiable U.S. defense industrial base began to emerge.
The end of the Cold War in 1991 led to a significant reduction in defense
spending as a whole, and an even more significant reduction in the procurement
portion of DOD’s budget. These developments – together with reductions in defense
budgets among allies in Europe and Asia, increased competition in export sales from
overseas firms, and other economic and technological changes – have prompted
changes in the U.S. defense industrial base in several areas, including the following:
consolidation, diversification, commercialization, teaming arrangements, globalization,
and the availability of skilled technical workers. Each of these is discussed below.
Declining Defense Spending Levels. Defense spending during the Cold
War, though high, was inconsistent (see Figure 2). Of the budget titles considered
here, expenditures on defense research and development (RTD&E) and in support of
operations and maintenance (O&M) generally rose in real terms each year, peaking
late in the Reagan Administration. Procurement spending (weapon purchases,
communications gear, munitions, spare parts, etc.) fluctuated widely, hitting highs and
lows at irregular intervals. Market prospects for U.S. weapons manufacturers
mirrored these changes, rising in the early 1960s and again during the Vietnam War.
Even after the post-Vietnam fall in procurement spending, continuing superpower
rivalry offered the potential for a turnaround that was realized in 1976 and which
continued through the late 1980s.

1Economic data, unless otherwise noted, are extracted from the Office of the Under Secretary
of Defense (Comptroller) National Defense Budget Estimates for FY2001. O&M figures used
in this report exclude salaries to federal workers in order to more accurately reflect funds paid
to private enterprises.
2Defense News, August 14, 2000, p. 17.

Source: OSD, National Defense Budget Estimates for FY2001
Figure 2
The disappearance of the Soviet Union broke this cyclic spending pattern. After
peaking in real (i.e., inflation-adjusted) terms in FY1987, defense outlays as a whole
decreased 31.8% in real terms, with the procurement portion decreasing 55.3%, by
FY1998. Defense-related civilian industrial employment shrank by 28% (see
Figure 3). Most significantly, with no immediate external threat, any expectation of
a spending upswing vanished. Procurement expenditures appeared to enter an
indefinite period of decline.

Source: OSD, National Defense Budget Estimates for FY2001
Figure 3

Changing DOD Policy. During 1993, then-Deputy Defense Secretary
William Perry addressed a gathering of business executives at what has become
known as “The Last Supper.” He told them that the defense budget could no longer
support unused production capacity, and that DOD would not hamper, but would
monitor, any corporate mergers or acquisitions they felt it advantageous to make.
However, he went on to say, and later outlined with greater clarity, that DOD would
protect (and the Department continues to protect) domestic facilities possessing what
he termed “defense-unique” industrial capabilities, such as the construction of nuclear
submarines or the production of heavy armored vehicles.3
A rapid vertical (buyout of parts suppliers and sub-contractors by primes) and
horizontal (mergers between primes) consolidation began among U.S. firms. Some
of the most prominent names in the defense business soon disappeared. By 1995, for
example, Ford Aerospace, the defense division of Unisys, and the Fort Worth division
of General Dynamics (builders of the F-16 fighter) had been absorbed by Loral. Two
years later, Loral became part of Lockheed Martin, which itself was the product of
a four-year series of 17 individual corporate mergers. Boeing acquired fellow defense
giants Rockwell in 1996 and McDonnell Douglas in 1997. In 1998, Litton Industries
capped its own series of acquisitions by buying rival shipbuilder Avondale Industries.
Table 1 indicates some results of the major consolidations of the 1990s.
Table 1. Consolidation in U.S. Defense Firms, 1993-2000
Corporation/Division (1993)Corporation (2000)
Boeing Boeing
McDonnell Douglas
Litton IndustriesLitton Industries
Avondale Industries
LockeedLockheed Martin
Martin Marietta
Ford Aerospace
General Dynamics (Fort Worth)
NorthropNorthrop Grumman
LTV (Aircraft)
Westinghouse (Electronic Defense)
General Dynamics (Space)
Raytheon Raytheon
General Dynamics (Missiles)
Hughes Electronics
Texas Instruments (Electronics)
Source: Aviation Week and Space Technology, May 8, 2000, p. 23.

3See Anthony L. Velocci, Jr., “Perry Forges New Shape for Industry.” Aviation Week and
Space Technology, November 15, 1993, pp. 52-54; and Jeff Cole, “Defense Industry
Regroups,” Wall Street Journal (European edition), December 9, 1996, p. 1. For detail on
the development of defense consolidation during the 1990s, see CRS Issue Brief IB92122,
Defense Industry in Transition: Issues and Options for Congress, by Gary J. Pagliano.

Corporate consolidations, both vertical and horizontal, are expected to continue.4
Although their effects are always difficult to assess, further reduction of the number
of producers in the defense base raises questions about the continued viability of
technological innovation and price competition. U.S. military forces are the world’s
most technologically advanced, and future force structures assume a continual
integration of rapidly evolving weapon and command and control system technology.
As a move to expand the pool of potential bidders on defense projects, reduce costs,
and gain access to the latest technologies, DOD began to reform its acquisition
practices during the mid-1990s. Central to this reform have been the adoption of
commercial (rather than military) specifications in some product designs, the adoption
of some commercial-like acquisition practices, and the reduction of regulatory barriers5
to commercial firms attempting to enter the defense market.
Even with acquisition reform, there are some sectors within the industrial base
where a lowest acceptable limit on numbers of firms competing may have been
reached, and DOD appears to be rethinking its policy of encouragement to mergers
and acquisitions. For example, the Department cited competition concerns in 1997
when it did not permit Lockheed Martin to complete a proposed $11.2 billion buyout
of Northrop Grumman, and for the same reason it is currently reviewing the proposed
purchase of Lockheed Martin’s Aerospace Electronics Division by BAE Systems
North America.6
Effects of Economic Globalization
An additional post-Cold War phenomenon affecting U.S. defense is economic
globalization--the integration of national and regional economies that were previously7
separated by political, economic, or cultural boundaries. Globalization has been
accelerated in the 1990s by advances in computers, the advent of the Internet, and
other developments in information and telecommunication technologies. Central to
this is the “information revolution,” which has helped to precipitate and sustain the
post-Cold War reduction of physical and political obstacles between communities.
The effect of globalization on the U.S. defense industrial base has been two-fold.
First, faced with a reduced level of defense spending, many defense firms have

4For examples of statements of corporate intentions, see Anthony L. Velocci, Jr., “Northrop
Grumman Chief Renews Aggressive Acquisition Strategy,” Aviation Week and Space
Technology, August 7, 2000, p. 53, and Robert Wall, “Lockheed Martin Ends No-Acquisition
Mode,” Aviation Week and Space Technology, August 14, 2000, p. 47.
5For a detailed discussion of background and recent actions taken by DOD and Congress, see
Valerie Bailey Grasso, Defense Acquisition Reform: Status and Current Issues (IB 96022),
Washington: Congressional Research Service.
6See Reed Landberg, “Defence Industry Fights for Its Future,” The Independent, July 6, 1997,
p. 2; and Bryan Bender, “Special Watch by U.S. DOD on BAE-Lockheed Deal,” Jane’s
Defence Weekly, August 9, 2000, p. 2.
7Office of the Under Secretary of Defense for Acquisition and Technology, Final Report of
the Defense Science Board Task Force on Globalization and Security, Washington:
Department of Defense, 1999, p. 1.

broadened their focus to include a more commercial orientation. Those companies
which have remained within the traditional defense sector have begun to bring
commercially-developed technologies into military applications, have expanded the
number of joint ventures and strategic partnerships in which they have engaged with
their European counterparts, and have increased their reliance on commercial sector
business and defense exports. Second, the revolution in information technology (IT)
has resulted in an increased emphasis on “capability-amplifying” information
integration products such as telecommunications and computer-based systems.
The worldwide proliferation of computers and the ease with which data can pass
between them has greatly expanded the quantity and the types of information available
to virtually anyone equipped with a modem and a mouse. Much unclassified
government information and almost any commercial product (such as reasonably
detailed satellite imagery) is readily obtainable from any Internet-connected computer.
Indeed, the kind of technology upon which DOD is building its future “information-
centric” warfare cannot be kept from potential adversaries precisely because it is
largely commercial in nature and accessible from anywhere on the globe. A recent
Defense Science Board task force report stated that:
From a long-term strategic standpoint, globalization’s most significant
manifestation is the irresistible leveling effect it is having on the international
military technological environment in which DOD must compete. ... The
technology DOD [anticipates being able to leverage most] to maintain military
dominance is that which the United States is least capable of denying its potential
competitors. Access to commercial technology is virtually universal, and its
exploitation for both civil and military ends is largely unconstrained. ... Indeed,
owing to the proliferation of military technology, the commercialization of former
military-specific technology, and the increasing reliance of militaries worldwide
on commercially-developed technology, and the general diffusion of technology
and know-how, the majority of militarily useful technology is or eventually will8
be available commercially and/or from non-U.S. defense companies. [emphasis
in the original]
Congressional Action in Recent Years
Congress in recent years has enacted legislation in response to some of the
previously mentioned developments affecting the U.S. defense industrial base. These
actions have included steps--such as annual decisions to keep certain defense
manufacturing lines “warm”--intended in large part to protect defense sectors or firms
that were deemed economically vulnerable. The discussion below provides a few
examples of some of these actions during the 104th, 105th, and 106th Congresses.
104th Congress. During the 104th Congress, the House Committee on National
Security (HNSC)9 pressed DOD to request increased authorization on a range of
projects “to stabilize the modernization accounts and key elements of the defense

8Ibid., pp. v-vi.
9In the 106th Congress, this body was renamed the House Committee on Armed Services.

industrial base.”10 Congress funded procurement above levels proposed by the
Clinton Administration for tactical aircraft, ships, small arms, and precision guided
munitions. The Senate Committee on Armed Services (SASC) expressed strong
interest in forcing the Army to utilize multiyear contracts for the purchase of tracked
combat vehicles, and in maintaining competition through the judicious allocation of
funds for submarine and warship construction.11 Defense authorization acts crafted
during both sessions included language designed to ensure that “technology and
industrial base considerations [continue to be] given appropriate consideration in the
programming and budgeting process in the Department of Defense.”12
105th Congress. Legislation passed during the 105th Congress funded
purchases above those requested by DOD in order to, as the SASC put it, “support
the industrial base until end-state requirements can be identified after the [1997]
Quadrennial Defense Review process is complete”13 and to guide the preservation of
production capacity in specific programs (such as the B-2 Spirit heavy bomber).
HNSC urged “the Secretary of the Army to identify and evaluate processes and
economical practices that would enable [federal] arsenals to remain viable and critical
components of the defense industrial base,” and in the matter of ship overhaul and
repair, directed “the Secretary of the Navy to apply no less than 50% of any additional
funding above the budget request to the private sector.”14 SASC indicated its
dissatisfaction with several aspects of the various services’ procurement plans and
devoted considerable attention to the continued domestic manufacture of small arms
ammunition, to increasing the production of Army helicopters, and to the rapidity of
corporate mergers within the defense sector.15
106th Congress. The 106th Congress took steps to secure continued
competition in the procurement of small arms ammunition, aircraft engines and
aircraft ejection seat development, and created a new office within the Office of the
Secretary of Defense having specific responsibility for monitoring and reporting on
the health of and competition within the defense industrial base.16 Congress debated

10H.Rept. 104-131, June 1, 1995.
11S.Rept. 104-112, July 12, 1995.
12S.Rept. 104-267, May 13, 1996.
13S.Rept. 105-29, June 17, 1997. The Quadrennial Defense Review (QDR) is a comprehensive
analysis of the nation’s national security requirements undertaken every four years by the
Department of Defense. The next QDR is scheduled for release in early 2001.
14H.Rept. 105-532, May 12, 1998.
15S.Rept. 105-29, June 17, 1997.
16Congress created the position of Under Secretary of Defense for Acquisition, Technology,
and Logistics in order to bring an experienced private sector manager into defense acquisition.
That individual is to supervise defense procurement and set policy for the management of the
defense industrial base while reporting to the Congress on those actions necessary to promote
long-term research and technological development (H.Rept. 106-162, May 24, 1999).
Congress also considered establishing a separate Defense Technology Security Agency under
a Deputy Under Secretary of Defense, responsible for advising the Secretary on industrial

the establishment of a loan guarantee program for the steel industry, “a critical
element of the U.S. defense industrial base ... necessary to the defense readiness of the
United States.”17 Finally, though its heated discussions of funding requested by DOD
for initial production of the F-22 Raptor and continued development of the
multiservice, multinational Joint Strike Fighter aircraft program, Congress appeared
to enter into more direct management of DOD procurement programs.18
Potential Issues For Congress
Congress continues to face a variety of issues regarding the defense industrial base.
The remainder of this report will touch upon four which are of potential congressional
concern: continued corporate consolidation; commercialization of defense technology;
globalization of the defense industry; and a perceived technical manpower shortage.
Industry Consolidation
Horizontal consolidation among well-known and economically important prime
contractors has been perhaps the most visible post-Cold War industry development.
Mergers and acquisitions have yielded fewer and larger companies to which DOD can
turn for the equipment it needs. For example, today there are but five U.S. companies
able to construct Navy surface warships, three military airframe manufacturers, and
two builders of tracked combat vehicles where eight, eight, and three companies,
respectively, existed in 1990.19
Vertical consolidation between the primes and their subcontractors and suppliers20
has been less evident, and its impact is more difficult to assess. Nevertheless, the
decrease in the number of companies, combined with the recent practice of “bundling”
numerous defense contracts into fewer, larger offerings, has generated concerns about
the health of the lower tier of the defense industry.21

base, competitiveness, foreign acquisition, and munitions export policy (H.Rept. 106-166,
May 27, 1999), and wrote into the Export Administration Act of 2000 the creation of an
Office of Technology Evaluation within the Department of Commerce, tasking it with writing
technical studies of those U.S. industrial sectors critical to the defense industrial base (S.Rept.

106-180, October 8, 1999).

17S.Rept. 106-8, March 4, 1999.
18Harvey M. Sapolsky and Eugene Gholz, “The Defense Monopoly,” Regulation 22/3, 1999,
pp. 39-43.
19David E. Cooper, Defense Industry Consolidation and Options for Preserving Competition
(GAO/NSIAD-98-141), Washington: General Accounting Office, 1998.
20David E. Cooper, Defense Industry Consolidation: Competitive Effects of Mergers and
Acquisitions (GAOT-NSIAD-98-112), Washington: General Accounting Office, 1998.
21“Oliver Launching Study of Contract Bundling’s Small-Business Impact,” Inside the
Pentagon, November 7, 1999, pp. 7-8; also Peter Behr, “Contract Woes for Small Firms:

Although proponents of continued consolidation maintain that the surviving firms
will emerge healthier and more competitive against each other and foreign defense
firms, critics focus their concerns on issues of technological innovation and price
Some analysts view continued corporate acquisitions as economically
inevitable,22 and have suggested several methods by which both innovation and
competition might be preserved in an environment where few companies, or even a
single source, remain.23 Among suggestions offered are: requiring that prime
contractors compete contracts to their sub-tier suppliers and use open-system (non-
proprietary) architectures to permit wider competition; taking measures to encourage
commercial firms to enter the defense market; promoting the use of alternative (i.e.,
soft-kill, information-based, etc.) technologies; competing missions rather than
platforms (i.e., using unmanned vehicles instead of manned); or opening competition
to foreign suppliers.
Commercialization of Defense Technology
Commercialization of the defense industrial base reflects a convergence of
military and civilian technologies in research and in application. In some fields, most
visibly in information systems and telecommunications, the cutting edge of
technological advancement lies in the commercial sector.
The federal share of the total U.S. investment in research and development has
shrunk steadily over the last several decades. This is in part due to a steep rise in
funding from private sources and a concurrent decline in federal dollars (see
Figure 4). With the most advanced technology in many fields now residing in the
commercial sector, DOD has become more willing to rely on non-defense industry to
supply its needs.

‘Bundling’ Found to Undermine Minority-Owned Businesses,” The Washington Post, July
20, 2000, p. A23, “SBA Final Rule on ‘Contract Bundling’ Gives Small Firms Strong
Protection,” M2 Presswire, July 28, 2000, and Peter Behr, “Air Force Bidding Worries Small
Firms,” The Washington Post, September 22, 2000, p. E2.
22See Anthony L. Velocci, Jr., "Further Consolidation Looms Over Industry," Aviation Week
and Space Technology, May 8, 2000, p. 22; also Robert Wall, "Lockheed Martin Ends No-
Acquisition Mode." Aviation Week and Space Technology, August 14, 2000, p. 47.
23 See William E. Kovacic, “Competition Policy in the Postconsolidation Defense Industry,”
Antitrust Bulletin 44/2 (Summer, 1999), pp. 421-487.

Source: National Science Foundation, National Patterns of R&D Resources: 1999 Data
Figure 4
Proponents of using more commercial products emphasize the rapid access to
current technology, the exposure of the defense community to modern business
practices, and the ability of DOD to purchase new products in significantly reduced
time. The Defense Science Board has indicated that there are probable benefits to
DOD in cost and capability which are available in at least six product areas, including
information systems, communications, air and sea lift, logistics, space-based24
surveillance, and high-efficiency ground transportation.
Some critics of the move to commercialize more of the defense acquisition
process cite examples of high modification costs and delivery delays when DOD
program managers have failed to appreciate gaps between military requirements and
COTS equipment capabilities. They also point out that commercial products are not
appropriate to all military applications, and that it is possible that forcing commercial
products into military niches can be inappropriate, expensive, and may result in
modification of the military requirement rather than improvement to the commercial
equipment itself.25
Others see a systematic aversion on the part of some DOD acquisition managers
and prime contractors to the use of commercial components. This is due in part to a
perception that machines built to civilian specifications may fail under extreme test or
operational conditions, increasing cost and potentially placing larger programs at

24Office of the Under Secretary of Defense for Acquisition and Technology, Final Report of
the Defense Science Board Task Force on Globalization and Security, Washington: Office
of the Secretary of Defense, 1999, p. 14.
25 See Office of the Secretary of Defense, Commercial Item Acquisition: Considerations and
Lessons Learned, Washington: Department of Defense, June 26, 2000.

risk.26 Once purchased and placed in service, commercial products can rapidly become
obsolete. The civilian market moves rapidly, especially in the information technology
and telecommunications fields. Some critics fear that vital equipment could go out of27
production and may not be available in quantity when needed. Moreover, new
versions of commercial products and components may not be “backward compatible”
and able to operate with existing equipment.
The globalization of industry translates into the lowering of barriers to trade,
financial movement, and access to information. Companies with a global outlook seek
opportunity for acquisitions and markets with little regard for national boundaries. In
the defense industry, this trend can raise concerns regarding the transfer of sensitive
technology and of foreign corporate control.
Those who support a more globalized defense industry, particularly in
transatlantic relationships, point out that the reduction of controls on the transfer of
defense-related technology can help increase exports of U.S. products to friends and
allies. Such a relaxation can increase the number of individual units sold (offsetting
to some degree the post-Cold War shrinkage in domestic defense procurement), make
the equipment used by different national military establishments interoperable
(enhancing the ability of U.S. forces to operate in conjunction with foreign units),
increase the scope of work in which U.S. industry engages, and effectively counter
competitive sales of equivalent foreign technology. In addition, globalized industries
foster cross-border collaboration on projects, can spread the financial risk of new
system development and production, and can assist in gaining U.S. access to foreign
Those who criticize the easing of technology export restrictions cite the need to
prevent unauthorized transfer of U.S. defense technology.28 Critics also maintain that
any reliance on globalized production carries with it the danger of being unable to
maintain adequate supply of materiel and components during times of crisis or
heightened need. Defense companies are acutely aware of government sensitivity to
the sharing of militarily-useful technology across national borders. Statements by
industry executives in both the United States and Europe, where the European
Aeronautic Defense and Space Co. (EADS) was recently created by the merger of
German, French, and Spanish defense firms, indicate a strong desire to pursue

26Bryan Bender, “DOD in Search for COTS Despite Mixed Results,” Jane’s Defence Week,
August 9, 2000, pp. 20-21.
27There is a discussion of the challenge posed by obsolete and out-of-production parts in the
F-22 program in David A. Fulghum, “USAF Maps Solution to Rapidly Aging Parts,”
Aviation Week and Space Technology, June 12, 2000, pp. 51-53.
28Michael A. Taverna, "Thomson Cautious On U.S. Defense Links." Aviation Week and
Space Technology, July 31, 2000, p. 54. For a fuller discussion of a specific technology
export control issue, see CRS Report RL30273, Encryption Export Controls, by Jeanne J.

transnational joint ventures and business alliances while satisfying governments that
critical information is not being compromised.29
Shortage of Technical Personnel
Finally, some defense companies appear to be facing current and projected
shortages of junior and middle-level scientists and engineers within the more
sophisticated and complex programs.30 Several causes seem to contribute to the
shortfall. In the military aircraft industry, for example, there are relatively few
aerospace engineers in the 40-49 year age bracket, reflecting the industry’s downturn
during the 1970s. Likewise, an insufficient number of recent engineering and science
graduates aged 25-30 are employed in defense, reflecting both the drawdown in
defense budgets during the ten years prior to 1998 and the intense compensation
competition for skilled personnel coming from computer and Internet companies.
This shortfall is felt to be especially acute in the electrical, software, and systems
engineering disciplines, where competition with commercial firms is the most severe.
An additional challenge for defense companies is the fact that many advanced students
(master and doctoral candidates) in U.S. engineering schools are foreign nationals
who are less likely than U.S. citizens to be able to work in fields requiring access to
classified information.
According to top-level managers, a critical factor in the recruitment and retention
of high-quality personnel is the industry’s ability to maintain vitality and vibrancy in
technically challenging programs. During the 1940s, 1950s, and 1960s, jet aircraft,
ships, and advanced ground vehicles were at the forefront of technology, and young
engineers saw rewarding futures in their design and construction. Today, relatively
few defense-related programs are focused on building “platforms;” the greater
emphasis lies in electronics and systems integration. The bulk of industry complaints
about personnel shortfalls seem concentrated in the platform industries, particularly
airframe manufacturers, while programs stressing information technology appear to
be better able to recruit new talent. For example, Raytheon, a defense company with
a heavy focus on electronics and IT, has hired 3,000 engineers during the last 18
months, with 70% of those offered positions accepting them.31 Northrop Grumman,
a defense firm which is shifting its efforts away from aircraft manufacture and into

29John D. Morrocco, "EADS, Northrop Grumman Broaden Cooperative Links," Aviation
Week and Space Technology, June 12, 2000, p. 35-36.
30William B. Scott, “Industry’s Loss of Expertise Spurs Counterattack,” Aviation Week and
Space Technology, March 13, 2000, pp. 160-161; Anthony L. Velocci, “Loss of Intellectual
Capital Challenges Company Ingenuity,” Aviation Week and Space Technology, April 24,
2000, p. 26; Robert Wall and Anthony L. Velocci, “Pentagon Board Urges Fix for Defense
Industrial Base,” Aviation Week and Space Technology, April 24, 2000, p. 28; and Anthony
Velocci, "Industry Prognosis Flags Ominous Trends," Aviation Week and Space Technology,
July 17, 2000, pp. 28-30. See also Kimberly Ann Harokopus, “Reforming Defense
Procurement: The Politics and Practices of Weapons Acquisition,” Ph.D. dissertation, Boston
College, 1999.
31See Robert Holzer, “One-on-One: Louise Francesconi, Raytheon Co. Vice President and
Raytheon Guided Missile Systems General Manager,” Defense News, October 23, 2000,
p. 94.

electronics and IT, appears to face recruiting and retention challenges in product lines
tied to platforms, but not in those areas where “young people ... see a future.”32
For those firms that are having difficulty, staffing problems among middle- and
senior-level engineers and program managers pose challenges different in quality but
similar in effect. In the aerospace industry, for example, some of the larger defense
corporations will soon face the retirement of a large number of technical managers
who entered their careers during the late 1950s and the 1960s. One major Pentagon
program managed by a large defense contractor is noted by an observer as expecting
more than 80% of its engineering staff to retire before the end of September of
2002.33 The scarcity of mid-career engineers already noted means that an insufficient
number of experienced managers is available to fill the ranks of the retiring. Analysts
note that of those who are available for promotion into program management, few
have worked on enough major systems development projects to develop the same
breadth of experience as those they will replace.

32Unattributed, “One-on-One: Kent Kresta, Chairman, CEO, Northrop Grumman
Corp.,”Defense News, October 16, 2000, p. 30.
33 Anthony L. Velocci, “Brain Drain Threatens Aerospace Vitality,” Aviation Week and Space
Technology, April 24, 2000, p. 24.