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Break Up Big Defense

Lawmakers should harness rising concerns about corporate power to reform the defense industry.

America is again in a trust-busting mood. Concern over too much power in too few hands has hit levels unseen since the Progressive Era, and legislators on both sides of the aisle have increasingly trained their fire on big business. Last fall, the Democrat-controlled House Judiciary Committee issued a sweeping, 450-page report lambasting the market dominance of Silicon Valley’s big four; and in April, Senator Josh Hawley introduced a bill to block these same companies from further expansion.

But while these efforts have tended, naturally enough, to focus on the country’s behemoth tech industry, there is another vital area in which consolidation threatens to overwhelm the interests of the American people. This is the defense industry, where a handful of enormous firms dominate the production and sale of everything from fighter aircraft to cyber-security services. These increasingly monopolistic conditions come at a high cost: fleecing the American taxpayer, stifling innovation, and ultimately undercutting national security.

The problem of consolidation among defense contractors isn’t entirely new. From the emergence of the first great arms manufacturers in the late 19th century, the sheer scale and expense of the business has tended to favor large, well-capitalized companies over scrappy underdogs. It wasn’t until the 1990s, however, that the defense landscape began to assume its present contours. The end of the Cold War led to shrinking budgets, and at a dinner sardonically dubbed “the Last Supper,” Clinton’s Deputy Secretary of Defense William Perry spelled out the implications to defense executives: In a resource-constrained environment, firms would need to combine or die.

This message was heard loud and clear, unleashing a fevered spate of mergers and acquisitions. By the early 2000s, a space which had been occupied by dozens of companies was reduced to just five prime contractors. But the lean years proved short indeed—spending rocketed back with the global war on terror, and this smaller collection of companies reaped massive profits.

Today, the industry is dominated by the same handful of players: Lockheed-Martin, Boeing, General Dynamics, Northrop Grumman, and Raytheon. And, despite increased defense spending, high-value mergers continue to narrow the field. In 2018, Northrop Grumman acquired rocket-maker Orbital ATK; in 2019, companies L3 and Harris merged to create the sixth largest U.S. contractor by total revenues; and in 2020, the fourth largest contractor, Raytheon, combined with the tenth largest contractor, United Technologies Corporation.

Given the outcomes economic concentration inexorably produces, the end result has been predictable. Fewer suppliers means higher prices, worse contract outcomes, and a far shakier defense industrial base. According to a 2019 Government Accountability Office report, only one third of major weapons contracts had more than one bidder, and almost half of all awards went to the five largest defense companies. The performance of contracts has suffered as well; according to another recent study, industry concentration has led to a significantly higher incidence of premature contract terminations. And when a major system is delivered, it is typically disappointing—there is a reason the F-35, with its mind-boggling cost overruns and persistent performance issues, has become the poster child of the current acquisition process.

Equally worrying is the effect of such concentrated power on policy. As long ago as 1982, Admiral Hyman Rickover—the father of the nuclear Navy—warned that the enormous resources of defense giants often enabled them to “exercise greater power than elected or appointed government officials,” but with far less transparency or accountability. To influence government decision-making, contractors also pour tens of millions of dollars into lobbying annually, with the five largest companies accounting for over 50 percent of that (and the top 15 accounting for 75 percent). Moreover, the well-documented “revolving door” between industry and government creates additional obstacles to objective policymaking—and with fewer companies dominating the field, the chances for conflicts of interest are correspondingly higher.

So what are the options? One potential solution could be a more rigorous antitrust regime, allowing Washington to block future mergers and break up contractors which are already too big. Of course, industry advocates have vigorously objected to that approach, arguing that only large, consolidated companies are able to handle the scale and complexity of today’s defense needs. But even if this dubious premise is granted, it doesn’t follow that the status quo is the only option.

Nationalization—full or partial—should also be on the table. State ownership of defense companies has gone well for many European countries, and if we’re not going to get the benefits of competition either way, it makes more sense to treat defense production as a public utility than a series of private monopolies. Even senior Pentagon officials have acknowledged as much, even if they’re less than enthusiastic about the prospect: last summer, Air Force acquisition head Will Roper warned that if the industrial base eroded any further, the U.S. may need to nationalize advanced aviation.

In addition to the radical options, there are also less dramatic reforms to consider. A persistent feature of new Pentagon programs, for instance, is a significant lag between initial funding for prototyping and the decision to contract for mass production. Because this so-called “valley of death” dissuades smaller companies from competing, speeding up the process could help diversify the industry, at least to a limited extent.

The causes of monopolization have long been contested, with many critics understanding it as the logical culmination of unrestricted free enterprise (“monopoly is business at the end of its journey,” as one 19th-century populist put it). But what is striking about the consolidation of the defense sector is the degree to which it is dependent on government. Washington is the sole buyer, empowered to set the rules, assess performance, and referee the players. So if the process is broken—if the current defense titans are too large and too few to effectively supply the country’s needs without distorting its decision-making—then it necessarily falls to government to fix. Lawmakers concerned about the consolidation of corporate power should take heed.

Luke Nicastro is a defense analyst based in Northern Virginia.

This article was supported by the Ewing Marion Kauffman Foundation. The contents of this publication are solely the responsibility of the authors.