Pentagon acquisition chief Ashton Carter is encouraging lower-tier suppliers to consider consolidation, though the Pentagon will not support further mergers and acquisitions among the few prime contractors left in the defense sector.
“While companies may be lower-tier, . . . they are not of lower importance,” Carter told an audience of financial experts at a Cowen and Company conference in New York, noting that components and parts from these suppliers are critical to building defense hardware. “The department will not likely support further consolidation of principal weapon system prime contractors.”
While Carter did not name the top-tier primes, they are traditionally considered to include Lockheed Martin, Boeing, Northrop Grumman, General Dynamics and Raytheon.
At the root of this new push is a hope to achieve productivity and process efficiencies, which could produce savings for the Pentagon’s bottom line. The fiscal 2012 budget is expected to grow slightly, but the defense topline will shrink in the next two years and eventually flatten. The Pentagon is trying to prepare for this reality by trimming fat from its operations in the near term.
“The Defense Department would not want to see its industrial base experience what has happened in other sectors of our economy—poor risk management, unnecessary leverage and excessively short-term behavior at the expense of long-term” goals, Carter says. “The interest of the taxpayer and the warfighter will be foremost in our minds as we review proposals that may result in the creation of weaker, standalone firms less likely to thrive without the necessary capital structure that their larger parent company [would] provide.”
Carter notes that up to 75 cents of every dollar spent by the Pentagon goes to subcontractors. He says support for midsized companies, which he calls a “conveyer belt” of ideas and skilled workers, is critical. “They can grow into new sources of innovation and competition,” he says.
Also in Carter’s initiative is an emphasis on dealing with the realities of globalization in the defense marketplace, including a need to boost U.S. stature through export reform and supporting foreign companies when they offer the best technology. “Globalization of our market is not an option; it is a reality,” he says.
Carter also says that the Pentagon plans to lower the barriers of entry into the market to encourage more competition. Barriers to entry have been a complaint of companies such as Space Exploration Technologies Corp. (SpaceX) that are not traditional Pentagon contractors but are trying to sell high technology to a military accustomed to buying from the major primes.
Deputy Defense Secretary Bill Lynn has commissioned a sweeping review of various sectors of the industrial base, including space, shipbuilding and stealth technologies. Additionally, Pentagon industrial base chief Brett Lambert says he is trying to consolidate the bevy of industrial base studies into a more cohesive review; he notes that too much disparate work has already been done on the topic.
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