Trends in the DoD Industrial Base Nancy Young Moore, Clifford A. Grammich, and Judith D. Mele May 5, 2016 1
Industry Consolidation Has Been a Trend for Many Years Industries tend to consolidate over time - faster in recent years¹ Globally, Merger and Acquisition (M&A) activity reached a volume of $4.3 trillion, barely beating the record set in 2007² 2015 M&A driven by² Pressure to become more efficient in a slow-growth economy Increased boardroom confidence Cheap debt Desire to keep up with consolidating rivals ¹Deans, Graeme K., Kroeger, Fritz, and Zeisel, Stefan, The Consolidation Curve, Harvard Business Review, December 2002. ²Farrell, Maureen, 2015 Becomes the Biggest M&A Year Ever, The Wall Street Journal, Dec. 3, 2015, as of April 4, 2016 at http://www.wsj.com/articles/2015-becomes-the-biggest-m-a-year-ever-1449187101 2
Purchases Have Increased while Procurement Funding Has Varied in DoD Budget 90 75 % of budget $sb (FY 2017) Purchases % Procurement $s Spending Last supper peak 300 250 60 200 45 150 30 100 15 Consolidation More 50 0 1948 1953 1958 1963 1968 1973 1978 1983 1988 1993 1998 2003 2008 2013 0 Sources: OUSD(Comptroller), National Defense Budget Estimates for FY 2017, March 2016, Table 6-1, 6-2, http://comptroller.defense.gov/portals/45/documents/defbudget/fy2017/fy17_green_book.pdf. 3
Procurement Is Projected to Increase, then Decrease, and then Increase Slightly in Future Budgets $ B (FY2017) Actual Planned 350 300 250 O&M 200 150 100 50 Procurement RDT&E Family Housing 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 Fiscal Year Source: OUSD(Comptroller), National Defense Budget Estimates for FY 2017, March 2016, Table 6-1 http://comptroller.defense.gov/portals/45/documents/defbudget/fy2017/fy17_green_book.pdf NOTE: Data in Constant FY2017 Dollars. MILCON 4
Leading Industries for DoD Procurement Dollars NAICS Procure $sb Total DoD $sb Total Industry $Bs Code Name 2012 2015 2012 2015 2012 336411 Aircraft Manufacturing 23.6 20.5 46.7 34.5 113.0 336611 Ship Building and Repairing 11.8 9.3 16.6 13.9 24.9 336414 Missile & Space Veh. Mfg. 6.1 5.0 10.7 8.8 19.7 541330 Engineering Services 5.5 3.8 28.8 22.8 208.1 336413 Other Aircraft Pts./Equip. Mfg. 4.1 2.9 13.5 11.3 34.3 334511 Search Instrument Mfg. 3.9 3.9 9.1 8.8 47.0 336992 Armored Vehicle & Tank Mfg. 3.4 1.3 6.5 3.3 5.6 541710-2 R&D in Sciences 3.0 2.0 25.4 20.6 110.7 332993 Ammo. (not small-arms) Mfg. 2.2 1.5 2.8 1.9 3.6 336412 Acft. Engines & Engine Parts 2.1 2.3 5.3 4.5 37.1 334220 Radio/TV Broadcast Equip. 2.1 0.8 4.9 2.3 30.3 332410 Boiler and Heat Exch. Mfg. 1.2 1.6 1.2 1.6 7.1 Source: Federal Procurement Data System Next Generation FY2012 and FY2015, Economic Census CY2012 5
Procurement Share of DoD Dollars and DoD Share of Industry Dollars NAICS Procure Share of DoD $s DoD Share of Industry $s Code Name 2012 2015 2012 336411 Aircraft Manufacturing 51 59 41 336611 Ship Building and Repairing 71 67 66 336414 Missile & Space Veh. Mfg. 58 57 54 541330 Engineering Services 19 17 14 336413 Other Aircraft Pts./Equip. Mfg. 30 26 39 334511 Search Instrument Mfg. 43 45 19 336992 Armored Vehicle & Tank Mfg. 52 40 117 541710-2 R&D in Sciences 12 10 23 332993 Ammo. (not small-arms) Mfg. 79 77 79 336412 Acft. Engines & Engine Pts. 40 50 14 334220 Radio/TV Broadcast Equip. 43 36 16 332410 Boiler and Heat Exch. Mfg. 99 99 18 Source: Federal Procurement Data System Next Generation FY2012 and FY2015, Economic Census CY2012 6
NAICS Codes Are Often Very Broad Aircraft Manufacturing Example Airplane(military, civilian, general aviation) Manufacturing Conversions Overhauling Rebuilding Prototype development Other aircraft mfg. Autogiro Blimp Drone Glider Helicopter Ultralight 7
Herfindahl-Hirschman Index of Market Concentration by Industry, 1997-2012 Herfindahl-Hirschman Index 3,500 3,000 2,500 2,000 1,500 1,000 500 1997 2002 2007 2012 Industry concentration¹ High Moderate None 0 Acft. Mfg. (336411) Ship Build and Repair (336611) Other Acft. Parts Mfg. (336413) Instrument Mfg. (334511) Armored Veh. Mfg. (336992) Ammo. Mfg. (not Small Arms) (332993) Acft. Engine Pts. Mfg. (336412) ¹As defined U.S. Department of Justice and Federal Trade Commission, Horizontal Merger Guidelines, August 19, 2010, p. 19. Radio/TV equip. mfg. (334220) Boiler and Heat Exch. Mfg. (332410) Source: Economic Census. Data not available for years not shown. 8
Registered Firms by Industry and Size NAICS code 336411 336611 336414 541330 336413 334511 336992 541710-2 332993 336412 334220 332410 Aircraft Manufacturing Ship Building and Repairing Missile & Space Veh. Mfg. Other Aircraft Pts./Equip. Mfg. Search Instrument Mfg. Armored Vehicle & Tank Mfg. Ammo. (not small-arms) Mfg. Acft. Engines & Engine Pts. Radio/TV Broadcast Equip. Boiler and Heat Exch. Mfg. R&D in Sciences Small Other Engineering Services 0 10,000 20,000 30,000 40,000 Number of firms Source: System for Award Management 2016 9
Concentration Indexes for Aircraft Manufacturing (NAICS Code 336411) 1997 2002 2007 2012 % of total value of shipments 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Four largest firms Eight largest firms 20 largest firms 50 largest firms Source: Economic Census 10
Aircraft Manufacturing (NAICS Code 336411) Firms by Number of Employees 250 200 Number of Firms 150 100 50 # of employees <500 500+ 0 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Year SBA size standard = 1,500 employees Source: Statistics of U.S. Businesses 11
Concentration Indexes for Ship Building and Repairing (NAICS Code 336611) % of total value of shipments 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 1997 2002 2007 2012 Four largest firms Eight largest firms 20 largest firms 50 largest firms Source: Economic Census 12
Ship Building and Repairing (NAICS Code 336611) Firms by Number of Employees 700 600 Number of Firms 500 400 300 200 100 # of employees <500 500+ 0 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Year SBA size standard = 1,250 employees Source: Statistics of U.S. Businesses 13
Concentration Indexes for Guided Missile and Space Vehicle Manufacturing (NAICS Code 336414) % of total value of shipments 100% 98% 96% 94% 92% 90% 88% 86% 84% 82% 1997 2002 2007 2012 Four largest firms Eight largest firms Source: Economic Census. In no year of Economic Census since 1997 has industry had 20 firms. 14
Guided Missile and Space Vehicle Manufacturing (NAICS Code 336414) Firms by Number of Employees 12 10 Number of Firms 8 6 4 2 # of employees <500 500+ 0 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Year SBA size standard = 1,250 employees Source: Statistics of U.S. Businesses 15
Findings DoD is a dominant or major buyer in some, but not all, top procurement industries Because some NAICS codes cover very broad activities; they may need refinement to provide better data One top DoD industries by total Procurement dollars is already highly concentrated and several more are close to being so Since 1997 industry concentration has improved for a number of top defense industries Most industries have many small firms, but these firms may not provide the goods or services DoD needs 16
Questions? 17
Concentration Indexes for Engineering Services (NAICS Code 541330) % of total value of shipments 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 1997 2002 2007 2012 Four largest firms Eight largest firms 20 largest firms 50 largest firms Source: Economic Census 18
Engineering Services (NAICS Code 541330) Firms by Number of Employees Number of Firms 50000 45000 40000 35000 30000 # of 25000 employees <500 20000 500+ 15000 10000 5000 0 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Year SBA size standard = $15 million in revenue except Military and Aerospace Equipment and Military Weapons, Contracts and Subcontracts for Engineering Services Awarded Under the National Energy Policy Act of 1992, and Marine Engineering and Naval Architecture = $38.5 million in revenue Source: Statistics of U.S. Businesses 19
Engineering Services (NAICS Code 541330) Firms by Annual Receipts Number of firms 50,000 45,000 40,000 35,000 30,000 25,000 20,000 15,000 10,000 5,000 0 <$15,000,000 $15,000,000+ 2007 2012 Source: Economic Census 20
Concentration Indexes for Other Aircraft Parts and Auxiliary Equipment Manufacturing (NAICS Code 336413) % of total value of shipments 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 1997 2002 2007 2012 Four largest firms Eight largest firms 20 largest firms 50 largest firms Source: Economic Census 21
Other Aircraft Parts and Auxiliary Equipment Manufacturing (NAICS Code 336413) Firms by Number of Employees Number of Firms 1000 900 800 700 600 500 400 300 200 100 # of employees <500 500+ 0 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Year SBA size standard = 1,250 employees Source: Statistics of U.S. Businesses 22
Concentration Indexes for Search, Detection, Navigation, Guidance, Aeronautical, and Nautical System and Instrument Manufacturing (NAICS Code 334511) % of total value of shipments 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 1997 2002 2007 2012 Four largest firms Eight largest firms 20 largest firms 50 largest firms Source: Economic Census 23
Search, Detection, Navigation, Guidance, Aeronautical, and Nautical System and Instrument Manufacturing (NAICS Code 334511) Firms by Number of Employees 600 500 Number of Firms 400 300 200 100 # of employees <500 500+ 0 19971998199920002001200220032004200520062007200820092010201120122013 Year SBA size standard = 1,250 employees Source: Statistics of U.S. Businesses. NAICS code 334511 is in concordance with SIC code 3812. 24
Concentration Indexes for Military Armored Vehicle, Tank, and Tank Component Manufacturing (NAICS Code 336992) % of total value of shipments 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 1997 2002 2007 2012 Four largest firms Eight largest firms 20 largest firms 50 largest firms Source: Economic Census. 25
Military Armored Vehicle, Tank, and Tank Component Manufacturing (NAICS Code 336992) Firms by Number of Employees 60 50 Number of Firms 40 30 20 10 # of employees <500 500+ 0 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Year SBA size standard = 1,500 employees Source: Statistics of U.S. Businesses. 26
Concentration Indexes for Research and Development in the Physical, Engineering, and Life Sciences (except Biotechnology) (NAICS Code 541712) % of total value of shipments 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 1997 2002 2007 2012 Four largest firms Eight largest firms 20 largest firms 50 largest firms Source: Economic Census. Current definition of industry implemented in 2007. 27
Research and Development in the Physical, Engineering, and Life Sciences (except Biotechnology) (NAICS Code 541712) Firms by Number of Employees Number of Firms 10000 9000 8000 7000 6000 5000 4000 3000 2000 1000 # of employees <500 500+ 0 2008 2009 2010 2011 2012 2013 Year SBA size standard = 1,000 employees except Aircraft Engine and Engine Parts = 1,500 employees and Other Aircraft Parts and Auxiliary Equipment and Guided Missiles and Space Vehicles, Their Propulsion Units and Propulsion Parts = 1,250 employees Source: Statistics of U.S. Businesses. Current definition of industry implemented in 2007. 28
Concentration Indexes for Ammunition (except Small Arms) Manufacturing (NAICS Code 332993) % of total value of shipments 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 1997 2002 2007 2012 Four largest firms Eight largest firms 20 largest firms Source: Economic Census. In no year of Economic Census since 1997 has industry had 20 firms. 29
Ammunition (except Small Arms) Manufacturing (NAICS Code 332993) Firms by Number of Employees Number of Firms 45 40 35 30 25 20 15 10 5 0 19971998199920002001200220032004200520062007200820092010201120122013 Year SBA size standard = 1,500 employees Source: Statistics of U.S. Businesses. NAICS code 332993 is in concordance with SIC code 3483. # of employees <500 500+ 30
Concentration Indexes for Aircraft Engine and Engine Parts Manufacturing (NAICS Code 336412) 1997 2002 2007 2012 % of total value of shipments 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Four largest firms Eight largest firms 20 largest firms 50 largest firms Source: Economic Census. 31
Aircraft Engine and Engine Parts Manufacturing (NAICS Code 336412) Firms by Number of Employees 350 300 Number of Firms 250 200 150 100 50 # of employees <500 500+ 0 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Year SBA size standard = 1,500 employees Source: Statistics of U.S. Businesses. 32
Concentration Indexes for Radio and Television Broadcasting and Wireless Communications Equipment Manufacturing (NAICS Code 334220) % of total value of shipments 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 1997 2002 2007 2012 Four largest firms Eight largest firms 20 largest firms 50 largest firms Source: Economic Census. Current definition of industry implemented in 2007. 33
Radio and Television Broadcasting and Wireless Communications Equipment Manufacturing (NAICS Code 334220) Firms by Number of Employees Number of Firms 900 800 700 600 500 # of employees 400 <500 300 500+ 200 100 0 2007 2008 2009 2010 2011 2012 2013 Year SBA size standard = 1,250 employees Source: Statistics of U.S. Businesses. Current definition of industry implemented in 2007. 34
Concentration Indexes for Power Boiler and Heat Exchanger Manufacturing (NAICS Code 332410) 1997 2002 2007 2012 % of total value of shipments 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Four largest firms Eight largest firms 20 largest firms 50 largest firms Source: Economic Census. 35
Power Boiler and Heat Exchanger Manufacturing (NAICS Code 332410) Firms by Number of Employees Number of Firms 450 400 350 300 250 200 150 100 50 0 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Year SBA size standard = 750 employees # of employees <500 500+ Source: Statistics of U.S. Businesses. 36
Herfindahl-Hirshman Index (HHI) Sum of the squared market shares of all the firms in the industry The Federal Trade Commission (FTC) used the following cutoffs for the HHI* in 1997 Less than 1,000: unconcentrated 1,000 to 1,800: moderately concentrated Above 1,800: highly concentrated *FTC Horizontal Merger Guidelines, revised April 8, 1997, pp. 14-15. 37