Defense Department Trying to Tackle Industry Consolidation
The Defense Department needs to find ways to foster competition and innovation in an era where the industrial base is consolidating, according to a Pentagon official and independent analysts.
The number of “platform” prime contractors has shrunk from about 300 in the 1980s to five today, noted Andre Gudger, acting deputy assistant secretary of defense for manufacturing and industrial base policy.
“The department is looking at that in a way that we haven’t had to before,” he said during a panel discussion at the Center for Strategic and International Studies on Nov. 16.
Consolidation is also happening among service providers, the panelists noted.
“We now have a lot of single points of failure in the supply chain because we are left with only one company that is of medium size doing something critical,” said Denis Bovin, senior advisor at Evercore Partners, a New York-based consulting firm.
The Pentagon has seen more consolidation in industry, in dollar terms, this past year than it has since the mid 1990s, Gudger noted.
“That’s eye opening,” he said. “Everyone is thinking about what’s next and … we have to put tools in place that allow for the competition and competitive forces.”
The Defense Department needs to embrace commercial firms and foreign suppliers, he said. “Now we’re looking at how can we get more people in,” Gudger said. The Pentagon is reaching out to executives in Silicon Valley as it looks to maintain its technological edge, he noted.
Trying to do business with more commercial companies is a wise idea, but dreams of bringing companies like Google on board might be difficult to realize, said William Lynn, CEO of Finmeccanica North America and former deputy secretary of defense.
“I think it’s unlikely that you’re going to get the big technology companies very interested in the defense market,” he said. “The market is too small relative to what else they can do and the barriers are too high.”
Linking up with smaller start-ups and venture capital funded companies would be a more promising move, he said.
“We ought to look at the smaller guys and we ought to look at the traditional defense primes for pulling in technologies through their resources and expertise,” Lynn said.
There are also challenges involved with trying to do more business with overseas manufacturers, Lynn noted.
“One of the antidotes to consolidation is … looking globally,” he said. “At the prime contracting level we still, I think, have enormous [regulatory and other] barriers to that global industrial base, and that’s one of the things I think we need to tackle.”
The Defense Department also needs better regulatory tools for managing the industrial base, Gudger said.
“Right now we just don’t have those tools available to us in the law to go and do that and view transactions on a more broad basis,” he said. “Now we can raise concerns of those things and take them through the anti-trust or the [review] committee process, but the fact is things are looked at now on a case-by-case basis on their own merit.”
The Pentagon needs to be able to examine “trends” across the industrial base, he said.
“Right now… [there’s] very little visibility into a series of transactions or vertical or horizontal integration,” Gudger said. “A bunch of small companies come together and you realize that 10 small transactions now means that somebody has 80 percent market share, but on their own merit they [the smaller transactions] would not be considered” moves that raise anti-trust issues.