The Greater Phoenix Economic Council today released findings and recommendations from its Aerospace and Defense Market Intelligence Program, a two-phase initiative that took an in-depth look at the region’s aerospace and defense companies to determine their strengths, weaknesses and readiness for the sequestration, federally-mandated automatic spending cuts scheduled to take place on March 1 unless Congress intervenes.
As a result of the sequestration, the Department of Defense (DoD) must cut $1 trillion from its budget. Arizona has the sixth largest share of DoD contracts, and stands to lose as much as $2.3 billion in annual revenue on account of sequestration-based cuts. Until it happens, however, the size or effects of the cuts in Arizona remain ambiguous.
In anticipation of these massive cuts, the Greater Phoenix Economic Council (GPEC) – along with its Economic Development Directors Team and the Greater Phoenix Chamber of Commerce – last year undertook a major market intelligence initiative to determine the existing strengths and weaknesses of Arizona’s aerospace and defense companies. Based on this data snapshot, the analysis also sought to understand the potential impact of sequestration on our local companies, communities, workforce and innovation base.
“As part of GPEC’s program, I personally sat down with several aerospace and defense companies located in Phoenix. The message I heard from them was resoundingly clear – the uncertainty over the timing and severity of these cuts has many of them paralyzed, and they want guidance,” said Phoenix Mayor Greg Stanton. “With 49,000 Arizona aerospace and defense jobs at stake, it’s critical that our federal leaders work together to avert this crisis or at least provide a strategic direction for where we go on March 2 and beyond.”
“Sequestration is a bad way to budget. Local companies and individuals get caught up in a political game that does little to solve our nation’s long-term financial challenges,” Mesa Mayor Scott Smith said. “Washington should follow the example of cities and make smart cuts to fix the budget rather than making arbitrary cuts that do more harm than good.”
The program consisted of two main components. The first developed an in-depth profile and analysis of 114 local companies identified by GPEC using data from the Office of Management and Budget. The second was an extensive door-to-door outreach effort to these companies, conducted by mayors, local chambers of commerce, GPEC Ambassadors (volunteers from GEC’s member companies) and municipal economic development directors and their teams.
“As a top-ranked defense state, Arizona has much to lose with the budget cuts associated with the 2011 Budget Control Act. The West Valley, proud home to Luke Air Force Base, has worked tirelessly to protect the mission of the base and to secure the F-35 aircraft,” Avondale Mayor Marie Lopez Rogers said. “Sequestration and the drastic budget cuts to defense and aerospace will undermine the efforts of the communities in the West Valley and negatively impact our local economy, which is tied closely to Luke Air Force Base and the defense-related industry.”
It’s also important to note that nearly 75 percent of the state’s research and development expenditures are housed within Arizona’s corporate infrastructure – companies like Intel, Boeing, Raytheon and Honeywell. As such, drastic reductions in their DoD contracts could result in losses in some of the state’s most significant research programs, which affect Arizona’s science position, its universities, and opportunities for increased investments and exports.
“These looming cuts represent a crossroads for our region,” GPEC President and CEO Barry Broome said. “The region’s corporate, science, civic and government partners must convene to not only mitigate job loss but also to support and protect the region’s physical assets, workforce talent and innovation from being moved out of the market.”
The findings represent a snapshot of the Greater Phoenix region’s aerospace and defense industry for a specific period of time, from May through December 2012 when the data was collected. During this time period, sequestration was considered more of a threat and less of a reality.
Top-line analysis revealed that 76 percent of the companies reported to be either stable (52 percent) or expanding (24 percent). Twenty-six percent reported that their businesses were contracting – primarily companies and operations where DoD contracts represent the largest share of their revenue base. Those that were expanding focused on diversification, including commercial and international markets, or DoD growth areas like intelligence, surveillance and reconnaissance, cyber technology, space technology and counterterrorism.
Because 2,000 companies throughout Arizona were awarded $13 billion in defense contacts in 2012 – and the industry represents 43,000 direct jobs – even a 25 percent contraction could be detrimental to one of the state’s major employment bases. For larger, Tier 1 companies, the short-term outlook is more stable as many have expanded products and services in anticipation of the cuts. However, Tier 2 companies that generally represent the industry’s supply chain are less likely to withstand the cuts due to their reliance on Tier 1 companies for contracts and subcontracts. Some of these companies have neither the access to capital or the working capital to wait it out – meaning they could be forced to lay off workers or cease operations.
Based on the program’s findings, GPEC’s five recommendations include:
1. A federal-level strategy from Arizona’s congressional leadership to either fully reverse sequestration or provide a “go forward” strategy to ensure Arizona’s aerospace and defense assets – including R&D and skilled workforce – are retained and redeployed.
2. Public and bilateral support for Governor Brewer and the Arizona Commerce Authority in their efforts to secure an FAA-designated test site.
3. A major commitment to science and technology to ensure the aerospace and defense industry’s existing knowledge and technology assets are leveraged to generate new and higher-value economic growth opportunities for our existing workforce talent while also attracting new, skill ed workers to Greater Phoenix.
4. Increased support for regional export opportunities from state and regional leaders.
5. An ongoing commitment to business retention and expansion, particularly with regards to sequestration.
To view the Aerospace and Defense Market Intelligence Report in its entirety, as well as all five recommendations, please visit http://www.gpec.org/aerospace.