VITAL SIGNS 2020 The Health and Readiness of the Defense Industrial Base

The state of competition between firms within the defense industrial base exerts a powerful influence on the productive
performance of firms within industry. A large population of firms of varying sizes, product and service specializations, and even
national origins competes for the same defense contracts. While such competition occurs, trends in financial performance
indicate the financial health of the involved firms. The competition between firms for contracts results in a pattern of market
concentration that illustrates the extent to which relatively few firms dominate defense contracting dollars. The entry of firms into
defense contracting provides insight into the openness of the defense contracting market to new sources of competition. This
section of the report informs our understanding of the health of competitive dynamics within the defense industrial base, partially
relying on the evaluation of financial data from the top 100 publicly traded defense contractors.

Production Inputs
The cost and availability of the inputs used in the production of goods and services also shape the performance of the defense
industrial base. Defense industry production relies heavily on inputs, including a wide variety of intermediate goods and services,
highly skilled labor, and rare raw materials. Trends in the cost and availability of these resources shed light on the ability of
defense contractors to acquire the inputs necessary for production.

The scale of defense contracting opportunities shapes the defense industrial base’s health. Companies in the defense
contracting market compete to provide goods and services to defense agencies and the military services. These contracts are
critical sources of capital for defense companies who use them to initiate R&D and production processes. The stability of this
demand affects the ability of companies to commit to and plan for defense-related production. This section of the report shows
trends in aggregate defense procurement and the distribution of contracting awards among different product categories.

For decades, the National Defense Strategy has looked to the defense industrial base as an important source of technological
innovation. The manufacturing and services industries associated with the most technology-intensive goods and services
acquired by the Defense Department provide significant amounts of capital for research and development. They also generate
significant innovation productivity. Trends in industrial R&D investment and patenting activity help form a picture of the state of
private sector defense innovation.

Industrial Security
The security of industrial operations against information threats also contributes to a comprehensive portrait of the health of
the defense industrial base. American industry faces persistent, increasing threats of intellectual property theft, economic
espionage, cybercrime, and other forms of attacks to include the corruption of data necessary for production integrity or
operational security. Trends in the scale and severity of these threats indicate the intensity of industrial security challenges.

Supply Chain
The performance of the corporate supply chains that support industry’s supplier networks also factors into assessments of
the health of the defense industrial base. Defense supplier networks rely on well-functioning relationships among companies to
deliver products and services to government clients. The overall competency of these networks comes from the combination
of their track record of contract delivery, product flow, and speed of operation. This section of the report studies trends in
industry’s contract performance failures, inventory assets, program schedule integrity, and speed of operation.

Political and Regulatory
More than most industries, legislative and regulatory processes have a direct impact on defense industry productivity. Public
attitudes toward defense spending shape congressional interest in defense acquisition, ultimately affecting congressional
budgets. The time that Congress takes to authorize a budget for national defense programs affects capital availability and
the product delivery schedule of defense supply chains. Similarly, changes to defense acquisition regulations affect defense
contractors’ eligibility and administrative costs. In this way, policymakers can have a significant impact on the defense industry
in terms of the demand for goods and services, availability of inputs, conditions in related and supporting industries, and
structure of industry competition. This section of the report assesses political and regulatory trends that shape defense
industrial productivity.

Productive Capacity and Surge Readiness
Industrial productive capacity and surge readiness provide another important lens through which we can evaluate the health
of the defense industrial base. Conflicts often start suddenly, leaving defense suppliers little time to prepare and fulfill a surge
in demand for goods, services, or materials. Meeting surge demand requires leveraging the latent excess productive industrial
capacity in the national economy. In manufacturing industries, firms must activate unused industrial capital assets to reach
necessary levels of productivity. However, the complex structure of industrial supply chains means that flows of goods and
services between industries will limit the extent to which an increase in demand for industrial end-products translates into an
increase in industrial output. This section of the report analyzes trends in indicators of potential output, capacity utilization, and
the output of major defense platforms and systems.

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