WASHINGTON — The defense industry enjoyed nearly a decade of explosive growth following the Sept. 11, 2001, attacks, but while revenue and profit went through the roof, investment in company-funded research and development stagnated.
A Defense News analysis of R&D spending by top defense contractors shows independent R&D spending declined by nearly a third in percentage terms from 1999 to 2012.
Capital Alpha Partners, a Washington-based financial analysis group, released a report earlier this month containing R&D figures for five of the largest US defense firms covering that 14-year window. Any analysis of R&D investment is difficult because reporting is not standard. For example, some companies include the cost of bidding on contracts; others do not.
But while an imperfect picture, the numbers do show a clear trend away from company-funded or independent R&D (IRAD).
In 1999, Boeing’s defense unit, L-3 Communications, Lockheed Martin, Northrop Grumman and Raytheon spent a combined $2.4 billion on IRAD representing 3.3 percent of sales. By 2012, that combined figure had reached $3.3 billion, almost perfectly matching inflation, which was 40 percent during that period.
But while the R&D dollars matched inflation, they came nowhere near matching the ballooning defense revenues. In 1999, the five firms reported sales of $70.8 billion, but by 2012 that figure was $142.6 billion, more than doubling.
As a percentage of sales, R&D began to drop right as the industry expanded in 2002. Actual spending didn’t fall, but as more money poured in very little was directed toward IRAD.
But the block of five companies employed different tactics. Lockheed spent $822 million in 1999, only to see that number fall to $616 million in 2012. To match inflation, 2012’s spending would have had to rise to $1.15 billion.
"None are more hopelessly enslaved than those who falsely believe they are free." -Johann Wolfgang von Goethe
I'm not sure I understand the issue. Real spending on independent research and development (IRAD), adjusted for inflation, did not decline. That it paid off in higher revenue and profit is what it is supposed to do ... helped along by increased DoD demand to support wars in Afghanistan, Iraq, and the GWOT.
That IRAD remained relatively constant in real terms during the period might well suggest that the defense industry is operating at the cusp of capacity and need ... and perhaps hedging a bit against a rainy day ... such as sequestration. Only governments and stupid people spend like there is no tomorrow.
Not sure what to make of thread title. Just how much are the defense contracts supposed to invest in IRAD?
Are these the same contractors that some pound on for approaching the government with non-solicited proposals? Are these the same contractors that are continually berated for gouging? Is this the same industry that contracted extensively after the end of the Cold War? Why is long term R&D tied to short term revenue? Since these are publicly traded companies, do figures take that into account?
NSNN curious...is thread title yours or was it title of article. I cannot find in public areas of defense news.
But while Boeing is an exception, the overall trend in IRAD follows larger concerns about defense spending, and uncertainty as to where that money will be invested.
“Any company with any sense is going to invest in things that have a market,” said Jacques Gansler, a former Pentagon acquisition chief during the Clinton administration. “If there’s not a market for it, and you’re trying to cut your costs, it’s a reason why companies are cutting back.”
Gansler said one of the biggest shifts has been in the amount of research being done in the commercial sector.
“Today, there’s a spin on effect coming from commercial to defense, there’s a huge amount of investment being made in the commercial world, which we can take advantage of in the defense world,” he said.
... and ...
Defense Department officials are becoming more vocal in their focus on making sure companies spend money on R&D, with Pentagon acquisition chief Frank Kendall telling Defense News earlier this month that more focus needs to be given to IRAD.
Gansler, however, said industry has responded with skepticism. “When DoD says to the companies, ‘Why don’t you spend more of your money,’ the companies say, ‘Well, why don’t you spend more of yours?’ ” he said. “It’s a fair reaction.”