Pentagon Warning on Consolidating Corporate Power May be Too Late

Posted October 5, 2015 at 4:24pm

A Pentagon warning last week about excessive consolidation in the defense industry comes ahead of a multibillion-dollar contract award for a new bomber that, depending on who wins, could make the problem worse, some analysts say.

In other words, the warning may prove to have come too late.

“If the trend to smaller and smaller numbers of weapon system prime contractors continues, one can foresee a future in which the department has, at most, two or three very large suppliers for all the major weapons systems that we acquire,” the Pentagon’s acquisition chief, Frank Kendall, told reporters. “The department would not consider this to be a positive development and the American public should not either. … With size comes power, and the department’s experience with large defense contractors is that they are not hesitant to use this power for corporate advantage.”

Kendall’s comments come as the defense industry awaits word on which company will develop and procure 80 to 100 Long Range Strike Bombers, which will probably be called B-3s. A team of corporations led by Boeing Co. and Lockheed Martin Corp. is competing against a squad led by Northrop Grumman Corp. for the contract. The planes will cost more than $100 billion, experts say.

Kendall told reporters his comments about consolidation in the defense industry were about “the general situation” and were not made with the bomber announcement or any particular forthcoming deal in mind. But the bomber was not far from the minds of experts as they read his remarks.

If Lockheed Martin’s team wins the bomber deal, the company will have designed all three of the latest manned U.S. warplanes: the F-22 and F-35 fighter jets, plus the B-3.

That would give Lockheed Martin extraordinary clout with the government and further consolidate U.S. aviation brainpower and industrial might, some critics warn. If Lockheed Martin wins, the government may not have another company with comparable experience to turn to in a few years, when it comes time to design the next generation of fighters and bombers. Also a concern is cybersecurity — the risk that centralizing computers in one company could make them more vulnerable to hacking, as happened in Lockheed Martin’s F-35 program.

“The reality is a Lockheed Martin victory on the bomber program will pose a risk for all future manned aircraft programs, because it will be difficult to have credible competitions,” said John Young, who was the Pentagon’s acquisition under secretary from 2007 to 2009, in an interview.

Dan Grazier, an analyst with the Project on Government Oversight, said the trend toward fewer competitors is troubling.

“In the absence of real competition, the surviving defense contractors would have no motivation to deliver anything on time or on budget,” Grazier said. “Different teams working independently will often come up with wildly separate solutions to the same problem.”

A senior Senate Armed Services aide said, “This is something the committee will be closely monitoring.”


A Question of Leverage

Lockheed Martin rejects any characterization that its vastness is a threat to innovation or competition.

“We understand and respect the Department’s concern about maintaining a proper balance between an efficient and competitive industrial base,” said a company spokeswoman, Katherine Trinidad. “However, we believe that defense contractors should continue to be assessed based on the performance and effectiveness of the products and solutions offered, not on the size of their company.”

Kendall is not going to make the bomber contract decision. That call will be made by an official whose identity is not revealed during the so-called source selection process.

Moreover, when a contract decision such as the bomber one is weighed, its effect on competition in the industry is not supposed to be among the criteria, experts say.

Kendall is not advocating any change to that, his spokeswoman said.

However, there are ways to structure an acquisition prior to a contract selection process that ensure competition, experts say. These include barring certain corporations from teaming or divvying up the procurements so two companies can compete over time for market share in the same weapon program.

Kendall stated a different aim last week. He wants to work with Congress to give the Pentagon and its national security concerns more of a say when the Department of Justice reviews proposed mergers and acquisitions in the defense sector.

Lawmakers are open to what he has to say about altering oversight of corporate marriages.

“Maintaining a competitive environment in the Defense Industrial Base is an important priority for our national security and our budget, and I am open to any input the DoD has for Congress as we work to protect that competition,” said Rep. Joe Courtney of Connecticut, the top Democrat on the House Armed Services panel that oversees the bomber program.


Fallout Ahead

The bomber announcement is months behind schedule. This week, Air Force Lt. Gen. Arnold Bunch, military deputy to the service’s assistant secretary for acquisition, told a House Armed Services panel the decision would come “within the next couple of months.” Deputy Secretary of Defense Robert O. Work has indicated the Pentagon may wait until after its appropriations bill is enacted before unveiling the bomber decision.

No matter who wins the B-3 deal, the industry may be in for a shakeup and possibly more consolidation.

A Lockheed Martin win could not only give it unrivaled power but also could lead to the dismantlement of Northrop Grumman as a major company, leaving one fewer strong player in the field, some analysts have said.

If, on the other hand, Northrop Grumman wins the bomber competition, it could set in motion any of several different scenarios in the industry, potentially including Boeing’s departure from the military aircraft business.