With industrial base review underway, new report finds significant decline in DOD's prime vendors

By Marjorie Censer, Tony Bertuca  / December 14, 2017

The number of vendors receiving prime contracts from the Pentagon shrank by 17,000 during the defense drawdown, according to a new report commissioned by the Aerospace Industries Association and undertaken by the Center for Strategic and International Studies.

The study, according to an executive summary released today, found the number of prime vendors totaled about 78,500 in the period before the drawdown, which began in FY-11. In the FY-13 to FY-15 period, that figure fell to about 61,700.

"Although the number of overall DOD first tier prime vendors was already declining slowly prior to the drawdown, the market shock of sequestration and the budget caps accelerated those trends," the report's executive summary reads. "In total, the number of prime vendors was reduced by roughly 20 percent."

CSIS found that reduction occurred across all defense sectors, except the ships and submarines and space systems markets. Indeed, the total number of ship and submarine prime vendors grew to about 6,775 at the start of the drawdown, up from about 6,500 before the drawdown, and then remained steady from FY-13 to FY-15, the report finds.

Still, the report concedes CSIS cannot be sure what happened to these 17,000 vendors, questioning whether they exited the market or perhaps remained as lower-tier suppliers.

"There is no doubt that a huge portion of the recent turbulence in the defense industrial base has taken place among subcontractors, who are less equipped to tolerate the defense marketplace's funding uncertainty and often onerous regulatory regime -- yet it remains extremely difficult to determine the real impact of these conditions on subcontractors," the document notes.

CSIS contends the "effect of the defense drawdown on industry was substantial" but that the toll it took varied. In general, the assessment finds, the market share for small companies and top-five vendors remained steady, but medium and large vendors saw "more volatile" effects.

The land vehicles sector saw "a serious decline as a result of sequestration," CSIS writes.

That market "lost almost a third of its prime contractors," the executive summary continues. "[T]his sector is the most vulnerable of the major sectors of the industrial base and will remain so until funding for Army modernization recovers."

As the Trump administration prepares a new review of the defense industrial base, AIA is hoping the CSIS report will help inform those efforts.

The Pentagon is leading the assessment, which was spurred by a July executive order by President Trump. The review is slated to result in a report, due in April, that includes recommendations.

During remarks at AIA's annual media luncheon today, David Melcher, AIA's chief executive, praised the assessment as "starting to ask the right questions."

He told reporters during a briefing after the lunch he is especially worried about industrial base "surge" capacity.

"I worry about the ability to surge quickly because a lot of old tooling for things was sold or harvested or given away," he said. "When companies consolidate and reduce footprint . . . you don't hang on to stuff and make it Grandma's Attic of capabilities that are just going to be there when everybody calls on it unless you have a specific contract with the government to do that."

Melcher pointed to the munitions sector as an area of concern. "You're down to just a couple factories that produce certain types of ammunition and munitions," he said.

Melcher said AIA has formed an industrial base working group comprised of member companies to address the review.

"We intend to make sure that our industry input -- unvarnished -- goes to the department, and they can merge it with what they've looked at from studies, what they've looked at possibly from some surveys or interactions point-by-point with industry to get some clarity on what's the health of the industrial base," Melcher said. "I'm hoping that all that comes together in a very clear picture of what we need to do."

Though some companies are concerned about sharing proprietary data, most see it as worthwhile to contribute, he said.

"Companies don't like to provide proprietary data or too much information about their supply chain," Melcher said. But, "given the right conditions and the right approaches from DOD, [contractors] are going to be willing to do that because they know this is maybe a once-in-a-decade opportunity to talk about what are the issues with the supply chain."