Deputy Secretary of Defense Kathleen Hicks speaks to troops at the U.S. Indo-Pacific Command headquarters.

Deputy Secretary of Defense Kathleen Hicks speaks to troops at the U.S. Indo-Pacific Command headquarters. U.S. Navy / Mass Communication Specialist 1st Class Anthony J. Rivera

The U.S. Needs More Military Arms Makers, Says Pentagon No. 2

Defense firm consolidations have killed competition for government contracts, a White House-ordered study finds. The industrial base must expand, says Hicks.

Just days after the U.S. Federal Trade Commission scuttled a high-profile defense acquisition on antitrust grounds, Pentagon leaders underlined their own concerns about waning competition in the defense industrial base.

On Tuesday, Deputy Defense Secretary Kathleen Hicks released “State of Competition in the Defense Industrial Base,” fulfilling an executive order signed last July by President Joe Biden. The 30-page report says decades of industry consolidation have reduced beneficial competition for contracts, and lays out five recommendations: strengthen merger oversight; address intellectual property limitations; increase new entrants; increase opportunities for small business; and implement sector-specific supply chain resiliency plans.

“A vibrant, competitive and diverse defense industrial base will be critical to our success," Hicks said in a prepared statement. "As DOD works to innovate, bring new technologies into our supplier base, and develop the workforce of the future, American small businesses and our U.S. industrial base must expand not only to improve resiliency, but to ensure we are able to meet the needs of our warfighters for tomorrow's high-tech challenges."

The report cites the consolidation of the defense sector going back to the 1990s, when the United States had 51 prime aerospace and defense contractors and now only has five: Lockheed Martin, Raytheon, General Dynamics, Northrop Grumman, and Boeing.

This consolidation means there is less competition and more of a risk regarding supplies of equipment and weapons. In 1990, 13 contractors supplied tactical missiles; now there are three. Only one contractor, General Dynamics, makes tracked combat vehicles, down from three in 1990. Just two companies still build surface warships—General Dynamics and Huntington Ingalls—down from eight in 1990.

“Such consolidation leaves DOD increasingly reliant on a handful of companies for critical defense capabilities,” a White House statement on the report said. “It also hurts taxpayers, as companies no longer feel the competitive pressure to innovate or perform at the highest level to win contracts.”

One major merger that fell through recently was between Lockheed Martin and Aerojet Rocketdyne after a Federal Trade Commission lawsuit tried to block the $4.4 billion deal. 

For now, the report says the Defense Department will “assess” how it evaluates mergers “with adequate attention to risks to national security.”And the Defense Department will work with the FTC and Department of Justice “to further examine the impact of consolidation on the functioning of the defense market.".   

Small businesses have struggled to win defense contracts. Their presence in the defense industrial base has shrunk by over 40 percent in the past decade, Hicks has said previously.

“The data shows that if we continue along the same trend, we could lose an additional 15,000 suppliers over the next 10 years,” she said.

The last recommendation is for the department to work on ensuring resilience in the supply chain for five priority industrial base sectors: casting and forgings, missiles and munitions, energy storage and batteries, strategic and critical materials, and microelectronics.