Monopolies are generally considered to be a bad idea. Without competition, the reasoning goes, there is no choice, and little compelling incentive to improve or innovate, but how close to a true monopoly can you get – just how few competitors are too few – before you suffer that effect?
With the Pentagon’s recent warning against further consolidation amongst large US weapons companies, issued within days of the approval of Lockheed Martin’s planned $9bn acquisition of Sikorsky Aircraft, it seems that Defence Secretary Ash Carter has been giving that question some serious thought.
A flurry of mergers and acquisitions in the wake of the Cold War saw the number of prime contractors in the sector effectively cut from 20 to just six, and these six now often form joint teams to bid on Department of Defense (DoD) programmes. It makes for a massive pooling of talent and resources, but it also pulls the teeth on traditional rivalries and threatens to take much of the edge off the contest.
Size is power
The Pentagon fears that any greater consolidation between the big players will further reduce competition within the industry, lessen innovation and lead to higher costs. Speaking at the end of September 2015, Frank Kendall, DoD undersecretary for acquisition, technology and logistics warned that "with size comes power, and the department’s experience with large defence contractors is that they are not hesitant to use this power for corporate advantage."
There is something of an echo of an earlier prophecy in his words. Half a century ago, in his 1961 farewell address – which notably catapulted the term "military-industrial complex" into the global lexicon – President Dwight D. Eisenhower had warned about the potential for the acquisition of just such "unwarranted influence." It is unlikely that he foresaw the huge mergers that would cement the positions of Lockheed Martin, Northrop Grumman and Boeing, and leave the top ten companies controlling 60% of the defence market by the turn of the millennium, but it does seem that the broad course the industry would follow was apparent even then. Indeed, within thirty years of his speech, promoting defence consolidation was to become Pentagon policy.
The "last supper"
With the high-spending of the Cold War era at an end, shortly after President Clinton took office for his first term, the then Defence Secretary Les Aspin and Deputy Secretary William Perry gathered the heads of the major arms firms together to outline their vision of the future. At the meeting – which has since come to be labelled the "last supper" – they told the assembled CEOs that before long the Pentagon would need only half of them at most, and tax dollars would not be forthcoming to support unnecessary facilities or supernumerary workers.
It fired the starting gun on an unprecedented wave of consolidation – principally by acquisition, as the industry’s big fish largely gobbled up their rivals – which only came to an end when the Pentagon reversed its stance in a bid to avoid further reduction in competition.
In 1998, DoD opposition to the proposed merger of Lockheed Martin and Northrop and General Dynamics’s acquisition of Newport News Shipbuilding finally brought the buy-out bonanza to a close. By then, however, the die was long cast and while this restructuring undoubtedly enabled the arms sector to survive the budget cuts of the 1990s, it also had significant implications for subsequent US weapons programmes, some of which remain today.
The most obvious is the sheer drop in the absolute numbers of contractors – particularly first tier ones – in the industry as a whole. It limits the Pentagon’s options for obtaining materiel in general and, for some kinds of systems in particular, it severely restricts the avenues of supply. In the case of ground combat vehicles, for instance, it effectively comes down to a two-horse race and in many other areas the choice is not much wider.
This development has been further exacerbated by the trend towards producing ‘dream teams’ to chase government programmes. The practice of prime contractors partnering with mid- to lower-tier firms is, of course, entirely understandable when those projects call for particular technologies or skill sets outside their normal portfolio. The recent US Air Force X-1 space plane, for instance, saw Boeing join with Blue Origin, and Northrop Grumman team up with Scaled Composites and Virgin Galactic, to gain the benefit of their specialised knowledge and expertise. However, in the wider defence sector, the prospect of prime/prime partnerships represents something altogether different.
Perhaps the most notable example of this was the 2008 Boeing/Lockheed Martin collaboration on the US Air Force’s Next-Generation Bomber (NGB) – originally known as the 2018 Bomber. Although the programme itself has since been superseded by the Long-Range Strike Bomber (LRS-B), the sort of teaming arrangement they formed, with Boeing acting as the prime contractor and Lockheed Martin as the primary partner, can in many ways be seen as the next logical step, short of actual merger.
Partnering with one of your two rivals means you have to split the proceeds, but it significantly ups your chance of winning in the first place – and, as in Boeing’s case, the prospect of 60% of something is clearly better than 100% of nothing.
From the US Government’s side, however, this kind of thing inevitably looks a little different. On the plus side, it constitutes a coming-together of vast wealth of experience, know-how and manufacturing expertise, but set against that is the huge political capital – and arguably Eisenhower’s "undue influence" – implicit in such a union of giants. Less abstractly too, ‘doubling up’ makes it very difficult to run a proper selection process and potentially reduces competitive incentives on pricing and delivery – precisely the problems which have repeatedly beset US arms programmes over recent decades. Small wonder the Pentagon views any further consolidation at the top of the sector as undesirable.
It is perhaps, then, more than a little ironic that Boeing/Lockheed Martin’s sole real competitor, Northrop Grumman, was awarded the development contract for the LRS-B in October 2015.
Passing the Baton
Looking at the designs for the likes of the X-1, the NGB and the LRS-B, it would seem a gross slander to suggest that they were lacking in innovation, but in the wider sense it must be true that the fewer players there are in the game, the less incentive there is to innovate. However, as the nature of weapons and warfare changes, in some respects, the inventor’s baton may be about to be passed naturally.
According to a 2012 report from consultants Booz & Co, non-traditional companies such as Apple and Dell account for around 35% of the Pentagon’s spend on procurement and services. Writing in the magazine Foreign Affairs, former Deputy Secretary of Defence William Lynn III points out that commercial technology now far exceeds what the defence sector can produce in many of the fields which will be essential tools for tomorrow’s military. In areas such as 3D printing, cloud computing, cyber security, nanotechnology, robotics and information technology, he says, "keeping up with commercial innovations will be difficult, if not impossible."
It seems tomorrow’s dream teams may look rather different.
Cost, competition and curiosity
Two decades on from the ‘last supper’, despite the similarities in the spending downturn, the type of wholesale consolidation that saved the industry then, is scarcely appropriate this time around – if only because there is little scope left to achieve it. In 1993, survival was all about getting bigger; today, efficiency rules, as the Pentagon’s new price-capping approach seeks to win the long-running battle against the inexorable growth in the cost of weapons development and procurement.
In January 1961, the departing President Eisenhower also spoke about research and innovation, but those words are rather less well remembered.
"Partly because of the huge costs involved, a government contract becomes virtually a substitute for intellectual curiosity," he warned.
Fifty-five years on, that might be about to change.