Bayard & Holmes
~ Jay Holmes
With so many deadly conflicts brewing around the globe, it’s easy to lose sight of less spectacular defense news at home. Changes in the defense industry and their impacts on taxpayers are not likely to generate front page headlines with so many air strikes, battles and terrorist strikes filling the daily news reports. But sometimes, the bomb-free battles inside the Beltway can impact our national security more than anything that will ever happen in Syria or Ukraine.
One particular event in the defense industry might generate more impacts then were intended by the defense contractors involved. Lockheed Martin’s pending purchase of Sikorsky Aircraft for nine billion dollars has set off a ripple effect in the US defense community.
Last week, Undersecretary of Defense for Acquisition, Technology, and Logistics Frank Kendall stated that in the future, he would seek to deter consolidation of top tier defense contractors. Kendall explained that, “Mergers such as this, combined with significant financial resources of the largest defense companies, strategically position the acquiring companies to dominate large parts of the defense industry.”
I can understand Kendall’s concerns. With the current number of large defense contractors, we are paying high prices for our high-tech military gear. In some cases, we are paying high prices for very low-tech gear, as well. Having fewer contractors might lead to less innovation and higher prices.
Kendall’s comments only surprised me because he was open and frank. In the Pentagon, that can be more dangerous than vacationing in Syria.
I am guessing that Kendall must have reason to believe that the White House shares his concerns. Not surprisingly, his comments generated what we might refer to as Unsourced Flying Opinions. To save space, let’s just call them UFOs.
A variety of “defense analysts” have been responding loudly to anyone who will listen that Kendall is creating “uncertainty” in the defense industry. According to some analysts, since large defense contractors will be uncertain about the viability of future mergers, they will be impaired in doing business.
Perhaps they will, and perhaps that’s a good thing. There has been all too much “certainty” in the defense contracting market. Certainly the manufacturing of complex high-tech defense items such as the F-35 fighter or the Gerald Ford supercarrier require a high degree of certainty once production starts, but the selection process should be an open field where the best ideas and greatest efficiencies can compete for contracts.
As Kendall pointed out, “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. The trend toward fewer and larger prime contractors has the potential to affect innovation, limit the supply base, pose entry barriers to small, medium, and large businesses, and ultimately reduce competition, resulting in higher prices to be paid by the American taxpayer in order to support our war fighters.”
With so much money at stake, taxpayers should expect an increase in UFOs concerning defense spending and any further restrictions on defense contractor mergers. When reading the opinions of defense or national security “think tanks,” it’s a good idea to find out who funds them. You can bet that think tanks that are funded by large defense contractors are not going to think highly of Frank Kendall. As a taxpayer, I am starting to grow fond of him.
So far, the Department of Justice is wisely staying out of the debate on future defense acquisitions. Kendall has indicated that the Pentagon will work with Congress to set new policies governing defense contractors. As much as I agree with Frank Kendall’s intent, I disagree with his optimism for possible congressional action. I can easily imagine the sound of industrial strength shredders in the basement of the Capital building as underpaid staffers work overtime handling all those proposed defense contractor rules. But that doesn’t mean that Kendall’s concerns won’t have a real impact.
Kendall and his cohorts in the Pentagon have one very large ace up their sleeve.
If you want to do business in the defense market, you need happy customers, and the biggest customer of all is the Pentagon. In theory, it is only one customer, but in practice, the Pentagon can block anything involving publicly funded research and technology from sale to foreign customers. That leaves large defense contractors with a very small list of customers.
So what does this quiet and largely unnoticed battle in the Beltway mean?
My best guess is that the Pentagon, with the approval of the White House, is simply saying that it will not allow the US defense market to be too heavily influenced by any single competitor. Getting action for something this complex and this political from Congress is unlikely. Getting a defense contract from an unhappy Pentagon is even less likely. Let’s give kudos to Frank Kendall for standing up for the taxpayers and for national security.