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more institutional knowledge many of the remaining staff. The departure of one or several of these employees can have a large impact on operations.

Employment Concerns

The decline in the size of the U.S. defense sector since the late-1980s has led to a decline in the number of new workers in the HPE and HPEC workforces. When a company in these industries has to reduce its workforce, often the first to go are the less experienced employees. More experienced workers are retained, which in the short term is rarely a problem. In the long term, however, there is a need to pass on critical scientific and production knowledge to a younger generation of managers, researchers, and production workers.

The impact of an aging workforce may be more significant in the scientific and engineering sectors. According to the NSWC Indian Head staff, to fully train a college graduate with a science and engineering degree to work with energetic materials can take five years or longer. Such lead-time, coupled with the anticipated retirements in the next 10 to 15 years, portends the development of a knowledge gap.

The organizations that responded to the survey voiced concerns about finding skilled workers in the future. Company managers noted that they have had difficulties in hiring skilled production workers and engineering staff (See Table 5 below).

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One manufacturer mentioned during a site visit that it is difficult to attract young professionals to their firm because of its rural location. Since many facilities in these industries are located in rural areas, the problem of attracting young professionals may affect others in these industries. Companies have to compete for employees against high tech firms in urban locations that offer competitive salaries and stock options. The decline of the defense industry appears to have exacerbated this situation. Respondents say that when there is a perception that the defense business is stagnant, it is difficult to convince potential employees to join and stay with the defense industry.

The majority of respondents expect to hire and train new workers to replace departing employees. One organization is using search firms to find critically skilled employees and is offering hiring bonuses and stock options to entice potential employees. Another company is working with state agencies and the local chamber of commerce to improve the skills of local high school students and recent graduates, creating a pool of potential employees.

The supply of skilled labor is critical to the ability of firms to sustain production capabilities into the future and to increase manufacturing output for wartime or replenishment. Respondents identified overall labor supply, labor training, and availability of explosives-related expertise (chemists, process engineers, etc.) as principal bottlenecks that could hinder any effort to rapidly expand U.S. production. The problems were not seen as insurmountable, but resolving them will take time and some investment. Respondents estimated that the cost to address these issues for their companies is approximately $4.3 million (See Table 6 below).

In a national emergency, cost would be less of an obstacle than would the lead-time needed to fulfill these labor needs. The availability of expertise, a finite resource, is the labor bottleneck requiring the longest total and average times for resolution. If the munitions industry were to mobilize, demand for the same kinds of trained professionals from a finite labor pool would create an even more acute shortage of expertise.

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Some firms did not give a cost to correct or weeks needed to correct. Averages are based on the number of firms that provided estimates for this questions.

To respond to the challenge of maintaining employee skills, responding organizations have increased their spending on training. The survey respondents report spending approximately $2,500 per employee on training. Almost 74 percent of the responding firms have increased dollars spent on training in the past five years. One firm's training spending has gone down while four firms, or 17.4 percent, held spending flat (See Table 7 below). The expenditures ranged from less than two dollars to $25,000.

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*Two firms were removed in the second row because they spent significantly more per employee, which more than doubled the mean amount spent on training.

Other Influences on Employment

The military budget has been the major factor in the rise and fall of employment in the HPE and HPEC industries. According to the DoD publication National Defense Budget Estimates for FY 2001, the U.S. Government's overall spending on national defense decreased $108.6 billion (in constant 1996 dollars) or 29.4 percent from 1987 to 1998.

An important point to consider is that procurement of new systems has fallen at a sharper rate than the overall decline in national defense spending. According to the 2000 Annual Report to the President and the Congress, procurement dropped from $138 billion to $45 billion from 1985 to 1996 (in constant FY2001 dollars), a drop of 67 percent.

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The procurement budget for munitions has seen an even more dramatic drop in funding (See Chart 5 below). ?' From its high point in 1986 to its low point in 1998, procurement for munitions fell 81 percent in constant FY2001 dollars.

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Budget tables were not included in the 2001 Annual Report to the President and Congress.
Dollars for missile defense programs have been removed from Chart 5.

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Source: Office of the Secretary of Defense (Acquisitions, Technology, and Logistics) Strategic and
Tactical Systems, Munitions

Some relief in the procurement area may be on the way. The defense budget is forecasted to grow in the next several years, with procurement accounts receiving some of that growth. Procurement expenditures for munitions by DoD are expected to stabilize at between $4.3 and $4.6 billion a year from 2002 to 2005. This level of spending should help stabilize the remaining firms in both the U.S. HPE and HPEC industries as long as the majority of contracts are awarded within the U.S. industrial base.

Another factor that may have contributed to the downturn in employment is productivity rate (output per man-hour). Since 1977 and especially since the early 1990s, there have been large productivity increases, allowing manufacturers to do more with fewer employees. The National Association of Manufacturers reports that productivity for all manufacturing grew at an average annual rate of 3.7 percent per year from 1991-1998.22

One respondent stated it was implementing “lean management” to increase its competitiveness. Such action is typical of business trends in computer-aided drawing/manufacturing (CAD/CAM), just-in-time (JIT) inventory, lean manufacturing, and other current manufacturing techniques, which allow manufacturers to produce higher quality products with fewer employees. It appears that the HPE and HPEC industries are beginning to embrace these initiatives.

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Please see The Revolution in Growth and Productivity: American Manufacturing in the 1990s, National Association of Manufacturers, July 1999. Last visited 6/19/01. http://205.229.234. 180/manu90s.html

Investment in Operations

One important measure of an industry's health is the level of new investment in operations. Growing industries invest heavily in new equipment and technologies that allow them to produce lower-cost products of higher utility and quality. Information collected by BXA and the Census Bureau suggests that investment in the HPE, and in particular the HPEC industries, is not keeping up with U.S. manufacturing in general.

In historical terms, since the late-1980s, investment in operations in the HPEC industry has been shrinking, while investment for the rest of U.S. manufacturing has been growing. The decline in investment is not surprising considering the overall drop in the defense budget. Firms will not invest in markets where there is little or no chance for a return on their capital. However, if little investment is made, then the ability of firms within this sector to innovate and produce in the future, or even maintain current capabilities, could be compromised.

Investment Statistics from the Bureau of the Census for SIC 3483

Census Bureau data indicates that capital expenditures made by firms that produce items for SIC 3483 (ammunition over 30mm in diameter) have dropped substantially in absolute terms from 1988 to 1997. Investment per employee in this sector did not keep pace with the rest of manufacturing from 1988 to 1997.

According to the Census Bureau, since 1988 the level of capital expenditures for SIC 3483-oriented firms declined 84 percent before a modest recovery starting in 1997. Chart 6 below illustrates capital investment in SIC 3483 from 1985 to 1999. 23

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Census Bureau information is collected in actual dollars, not inflation corrected dollars. Capital expenditure data collected by the Census Bureau does not include new facilities owned by the federal government, but operated under contract by private companies. Plant and equipment furnished to the manufacturer by communities and nonprofit organizations are not included in this data. The result is that Chart 6 shows private investment in private facilities and excludes government investment.

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