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Despite Government’s Intentions Industrial Base Continues to Shrink

by: Matthew Potter
June 4, 2010

Category: Acquisitions, BAE Systems, Boeing, Business Line, Canada, Companies, Congress, Contract Awards, Countries, Department of Defense, development program, Events, Federal Budget Process, General Dynamics, Honeywell, Industry Analysis, Lockheed Martin, logistics, Northrop Grumman Corp., production program, Raytheon, Services | RSS 2.0

Both the Obama Administration and Congress are expressing concerns with the shrinking U.S. defense industrial base. Highlighted by the fact that there is only one American company, Boeing (BA), able to bid on the critical KC-X aerial tanker program the fact is over the last twenty years the available defense contractors has been contracting. Despite efforts by the government to spur more competition recent M&A activity only continues to shrink the supplier base.

Ideally the government wants as large an industrial base as possible to provide more competition and hopefully better prices. Congress is working on legislation to try and guide the Defense Department to consider new and innovative sources. Unfortunately as past performance ranks as one of the bigger considerations when a contract is awarded it is hard for new companies to break in, especially if they are selling hardware. The traditional suppliers like Boeing (BA), Lockheed Martin (LM), Raytheon (RTN), General Dynamics (GD) and Northrop Grumman (NOC) still dominate when it comes to aircraft, tanks and other major programs.

Over the last ten years there has been market penetration by the large European defense contractors especially by BAE Systems (BAE:L) of Great Britain. This company has made judicious acquisitions of U.S. contractors and now makes vehicles, artillery and support equipment for the U.S. military. EADS (EADS:P) through its U.S. subsidiary has some contracts with the military but is trying for the KC-X aerial tanker contract which will cement its role as a major U.S. supplier if they win.

Despite these plans M&A activity among defense contractors continues. Honeywell announced a major acquisition of the European firm, Sperian, to broaden their exposure to the personnel protection equipment market. The Canadian company, CGI, plans to acquire U.S. technical support contractor Stanley in another billion dollar deal significantly expanding their presence in the U.S. market.

These moves while good for the companies involved reduce options for the Defense Department. It is hard for a new company to break through unless they offer a significant price advantage then other contractors. Often though the military has been burned by going with the lowest price as these sometimes end up being unrealistic and the companies cannot deliver what is promised at the price awarded. This makes those evaluating bids gun shy of these situations. They end up preferring a known quantity at a higher price over an unknown one.

Unestablished suppliers sometimes have a hard time breaking through. Air Tractor, Inc. makes agricultural and utility aircraft. They are trying to bid on a new contract for Afghanistan. Since their rugged aircraft don’t have things like ejection seats or retractable landing gears they don’t meet some of the requirements. The company argues that those kind of needs are not really applicable and should be looked at again. Sometimes DoD places too many requirements on systems and that stifles innovation and prevents new products from being considered and this contract is an example.

Congress wants to use changes in policy to expand the supplier base but this may lead to risky contracts. The reflex to criticize the Defense Department and contractors when there are cost and schedule issues makes it hard to be innovative or different. The U.S. in order to gain industrial base expansion may need to spend money less efficiently.

Photo from stevecadman’s flickr photostream.

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  1. Tweets that mention Despite Government’s Intentions Industrial Base Continues to Shrink | Defense Procurement News -- Topsy.com on June 4th, 2010 2:28 am

    […] This post was mentioned on Twitter by Dagpotter, DefProcureNews. DefProcureNews said: Despite Government’s Intentions Industrial Base Continues to Shrink: Both the Obama Administration and Congress ar… http://bit.ly/cM6N9x […]

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