At the Defense Reform 2001 Conference organized by the American Institute of Aeronautics and Astronautics, the industry environment was discussed by top industry and government officials, who called for the following changes (Velocci, 2001):

• An immediate increase in the progress payment system from the current 75 percent, which constrains cash flow, to 85 to 90 percent;

• Changing the export control process, which inadvertently penalizes U.S. companies and enables potential adversaries to acquire restricted military technologies from other sources;

• Making it easier to use commercial technologies; and

• Making it easier to retain design teams.

The studies discussed so far reflect the broad consensus of the defense industrial community. The results of the committee’s own investigations substantiated their findings and recommendations. The recommendations in these studies are summarized below:

• The partnership between DoD and industry must be strengthened.

• Programs and funding must be stabilized.

• Creative incentives must be provided for the industrial base to rationalize capacity.

• Single providers must be carefully selected and managed.

• The spirit of innovation must be encouraged.

• Industry concerns must be considered in the DoD acquisition process.

• Industry metrics must be better understood.

• Export control processes must be streamlined.

• Human resources issues must be addressed.

Even though the defense industry has been dramatically consolidated since the end of the Cold War and the relationship between the industry and DoD has changed dramatically, the fundamental policies of DoD have not changed. DoD’s share in the aerospace market is shrinking as a result of an increase in nondefense sales and a decrease in DoD procurements. In 1989, DoD accounted for 51 percent of aerospace sales in the United States (see Table 4–1). Since then, DoD’s spending on aerospace items has returned to pre-Reagan levels. In 1999, DoD accounted for only 30 percent of aerospace sales (AIA, 2000, 2001a).

In 1977, 15 percent of the national investment in R&D was spent on aerospace. Today, as more and more R&D dollars are spent in other fields (e.g., pharmaceuticals, information systems, biotechnology), the proportion of investment

in aerospace has dropped to less than 7 percent (NSF, 2001). The full extent of these influences is shown in Figure 4–1.

In addition, the U.S. share in the world aerospace market declined from 70 percent in the mid-1980s to 55 percent in 1997 (NRC, 1999). In constant FY01 dollars, it went from $160 billion in 1985 to $146 billion in 1997, a 9 percent decrease (AIA, 2001b).

The environment in the commercial aerospace sector is being shaped by a rapidly expanding economy and by strong free-market forces. Growth in revenue and earnings is strong, the financial markets are supportive, and market capitalization for many industries has never been higher. The aerospace industry is now competing in a market with many technological opportunities and growing financial returns.

DoD is a monopsony (i.e., the only buyer) in the defense aerospace sector. A monopsonistic industry operates much differently than a competitive industry because the single customer ultimately provides the resources that attract workers and capital. There are few, if any, perfectly free markets anywhere with many suppliers and many buyers, perfect information, and no applied restraints. The DoD as a monopsony, or single buyer, for the defense industry cannot be said to operate in anything like a free market. This, however, does not mean that there is no competition, just that the competitions are established and controlled by DoD. The DoD has widely varying relationships with its suppliers, ranging from open competitions to what are essentially permanent single sources and everything in between. Since DoD sets the rules, it is responsible for the effects of these rules on its supplier base whether it recognizes this explicitly or not. Therefore, DoD is ultimately