Gaining altitude in the aerospace industry: Report on Arizona

The aerospace and defense industry is an established engine of growth in Arizona, contributing $8.8 billion to the state economy and providing almost 100,000 jobs. But with competition from other states growing and the military's technological requirements changing, the state needs a coordinated approach if it wants to maintain a thriving aerospace and defense industry, according to a recently released study by the L. William Seidman Research Institute at the W. P. Carey School of Business. Institute Director Dennis Hoffman and W. P. Carey Dean Robert Mittelstaedt comment.

The aerospace and defense industry is an established engine of growth in Arizona, contributing $8.8 billion to the state economy and providing almost 100,000 jobs. But with competition from other states growing and the military's technological requirements changing, the state needs a coordinated approach if it wants to maintain a thriving aerospace and defense industry, according to a recently released study by the L. William Seidman Research Institute at the W. P. Carey School of Business.

"The overarching goal of these collaborative efforts is to obtain larger, more lucrative contracts and grants, thereby enabling the production of cutting-edge, commercially-viable solutions of significant value to the military," the report states.

The study recommends that an aerospace institute be established to coordinate the activities of Arizona's research institutions, large manufacturers, and small and mid-sized firms. The institute could monitor the needs of the military and function as an information clearinghouse, according to the report.

"Having an entity that is looking out for the industry rather than any particular firm is something that could be very important for the growth and stability of the industry in Arizona," said Dennis Hoffman, director of the Seidman Institute and a professor of economics at the W. P. Carey School. Alex Castelazo, senior research associate and lead author of the report, said, "There is a need to link research, industry and the military itself, which is the end customer of all of this effort."

Leading with the Arizona's strength

Science Foundation Arizona, a public-private partnership that promotes a diversified economy and research and development investment, last year commissioned the Seidman Institute to undertake the study, which includes a detailed picture of the aerospace industry in Arizona and also assesses its potential for growth.

Retired Lieutenant General John F. Regni, director of Science Foundation Arizona's Aerospace and Defense Initiative, funded by a grant from the Governor’s Office of Economic Recovery, said the report provides a well-conceived blueprint for how to promote the industry.

"Aerospace and defense are already a large part of Arizona's economy," General Regni said. "We need to build on Arizona's rock solid foundations." Robert E. Mittelstaedt, Jr., dean of the W. P. Carey School of Business, said that promoting aerospace and defense can be an effective development strategy.

"When one looks at the history of successful economic development, most of it evolves through the extension of existing capabilities through volume growth or new applications," Mittelstaedt said. "It makes sense for us to focus on the concentration of special capabilities that already exist here."

The report cites several key advantages Arizona holds in competing with other states and regions. The state is home to major operations of four of the nation's largest defense contractors -- Raytheon Missile Systems, Honeywell Aerospace, the Boeing Company, and General Dynamics C-4 System. The state also has four institutions that are national leaders in aerospace research—Arizona State University, University of Arizona, Northern Arizona University, and Embry Riddle Aeronautical University.

A coordinated approach to promoting industry

General Regni said he fully supports the conclusions of the Seidman study, including one key message of establishing an Aerospace & Defense Institute.

"We need an enterprise operation that bands together all the players across the state, and builds a coordinated strategy involving academia, research, industry, economic development groups and government to position Arizona for even greater impact supporting our nation’s defense requirements,” he said. "There does need to be a statewide initiative to pull our strengths together," he said.

Castelazo said an institute could take any number of forms, from an organization located in one place to a virtual organization with offices distributed in many different sites. Researchers from the Seidman Institute gathered and analyzed industry data for the 50-page report earlier this year. The project also involved analyzing strategies in other states and interviewing key executives in the industry in Arizona.

The report assesses weaknesses of the industry in Arizona, as well as the strengths and opportunities for expansion. An important conclusion of the report is that Arizona holds some significant advantages as it seeks to promote aerospace and defense. In addition to the presence of major contractors and leading research institutions, Arizona has extensive restricted air space, which is highly valued for testing of new aerospace products and technologies.

"Restricted airspace is hard to come by," Castelazo said. "You can't just declare airspace restricted. It's a federal process and it takes a long time to achieve." Arizona's existing military bases also give the state an edge in the competition for aerospace and defense business, according to Castelazo. "We have an infrastructure that is already in place," he said.

A weak link in the supply chain

A weakness for the state appears to be not having enough small and mid-sized firms to supply or provide services to the big manufacturing firms, according to the report.

"It doesn't seem that we have a good supply chain here," Castelazo said. "The money flows in to the large manufacturers, but when they subcontract work, a lot of that money goes out of state. We don't really know why. It could be that the big companies have really strong relationships with certain companies elsewhere, or maybe there's not a good substitute in Arizona."

Lack of coordination among the various players is another weakness of the industry in Arizona, according to the report. Firms that are accustomed to competing with each other tend to have difficulty cooperating to promote the industry as a whole, the report states. An aerospace institute could function as a neutral third party that could promote the interests of all of the companies, according to the report.

Castelazo said another advantage of an institute is that it could take a broad view of the industry, from research and development to manufacturing. When the military signals its need for a new technology, the institute could deliver information to research institutions and also prepare manufacturers for what might be coming out of the research laboratories, he said.

"The institute would serve as a hub for information that would flow from the military's needs to all of the different institutions, which then could plan and organize," Castelazo said. An institute also would bring more efficient dealings with the military, according to Castelazo.

"It gives the Department of Defense a one-stop shopping solution," he said. "It could do everything right here instead of having to go to a research lab in Massachusetts or Florida to develop the technology, and then somewhere else to actually fabricate it."

Bringing dollars to Arizona

The report also recommends that Arizona's congressional delegation lobby harder for contracts to be awarded to manufacturers in the state. Castelazo said that this theme was echoed by most of the business executives interviewed for the report. "The lack of support from Arizona's congressional delegation is a major disadvantage compared to other states," the report states.

While much of the emphasis in economic development today is on emerging industries, such as biotechnology or solar energy, it is the established industry of aerospace and defense that accounts for much of Arizona's economic well-being, according to Hoffman.

"Compensation packages in this industry are in the vicinity of six figures, which is a scale that unfortunately is not reached by many other businesses in Arizona," Hoffman said. Another advantage of aerospace and defense for the state is that that the goods and services the industry produces are sent out of state and are purchased with money that comes from outside Arizona, according to Hoffman.

"Regional economists get excited about industries that inject income from outside the state," Hoffman said. "If you picture a regional economy as a swirl of activity, you need injections from outside the region to augment the volume of the economic activity."

Bottom line:

• The aerospace and defense industry is a major contributor to the Arizona economy, producing thousands of very high paying jobs and supporting other businesses.
• Large defense contractors based in Arizona give the state a big advantage over other states and regions in attracting the aerospace and defense industry, but Arizona often loses some of the benefits when the large manufacturers subcontract to firms elsewhere in the United States.
• To compete effectively against other states and regions looking to promote aerospace and defense, Arizona needs a coordinated strategy involving large manufacturers, small and mid-sized firms, and research institutions.
• A proposed aerospace institute could facilitate dealings with the US Department of Defense and represent the interests of the many different players in state's aerospace industry. The institute could be a formal organization set in one location or an informal or virtual organization with offices or representatives in many different places.
• Arizona's congressional delegation needs to take a more aggressive approach to securing aerospace and defense contracts for the state, according to industry leaders in Arizona.