Budget Uncertainty Takes Toll on Defense Market

Washington Report

(December 19, 2017) The inability of Congress to pass budgets on time or roll back mandatory spending caps may have convinced about 17,000 companies to call it quits when supplying the defense market, according to a study by the Center for Strategic and International Studies.

The study by the Washington, D.C.-based think tank will be released in January, but an executive summary provided last week says the figure represents about 20 percent of defense vendors, all of whom left between 2011 and 2015. Defense News reported on the summary last week.

The Aerospace Industries Association also helped produce the study.

The authors found that the affected companies are mainly subcontractors “who are less equipped to tolerate the defense marketplace’s funding uncertainty.” The implementation of sequestration and the resulting budget reduction in 2013 “marked a severe market shock that had a considerable impact on the defense industry,” the study’s authors write.

Defense contract obligations dropped 15 percent in fiscal 2013 from the previous year. And the average annual defense contract obligations dropped 23 percent from 2013 to 2015.

Marillyn Hewson, the CEO of Lockheed Martin, agreed with the study’s findings, saying budget uncertainty has made the industry “more fragile and less flexible.”

Hewson added, “We see some of our small and medium-sized business, some of the components that we need, there’s one, maybe two suppliers in that field where there were many, many more before.”

Retired Brig. Gen. Roy Robinson, the NGAUS president, said the report is alarming.

“Competition is stifled when fewer contractors are supplying the defense needs of this country, which means costs inevitably rise,” he said. “We’ve pushed Congress time and again to provide timely and predictable budgets and eliminate the budget caps, describing it all as a readiness issue. This study points out another casualty of this unfortunate process.”