With its recent "State of Competition within the Defense Industrial Base" study, the Office of the Undersecretary of Defense for Acquisition and Sustainment (USD/A&S) has turned out a pointless status report. Furthermore, the data is dated and of little value as a roadmap for fixing the industrial base competition ills the USD/A&S seems to believe exist. A fundamental yet flawed policy view underpins the study: Competition is essential, and, without it, all defense acquisition is doomed to being over cost, behind schedule, and failing to perform. Such thinking is silly. Unfortunately, this DOD commentary on competition within the defense industry will lead to pundits echoing this nonsense.
For example, Joe Gould refers to the Pentagon report in his article for Defense News. He explains, "…the Pentagon report warns of large hypersonic weapons vendors acquiring their suppliers, in the vein of Lockheed's 2020 purchase of the company i3's hypersonic business. It argues the trend could eventually lead to sole-source contracting."
The report is guilty of a logical fallacy called "hypothesis contrary to fact." Prime contractors acquiring their suppliers does not necessarily mean a "sole source" prime vendor will be the result, or that the outcome will be necessarily bad. Prime contractors acquiring their vendors has the benefit of manufacturing and supply chain efficiency. There is more likely a reduction of prime contractor profit on top of supplier profit costs to the government. Taxpayers like manufacturing efficiencies and reduced costs; those are good things.
One statement in the report is simply wrong. "The consolidation trend is even more pronounced in the hypersonic weapon systems sector, which currently has only one prime contractor," the authors warn. This would come as news to Lockheed Martin, Northrop Grumman, and Raytheon Missiles and Defense. The Missile Defense Agency recently awarded contracts to all three companies "to design the Glide Phase Interceptor for regional hypersonic missile defense," again according to Defense News.
To emphasize what the study claims is a decrease in the number of prime contractors for major weapons categories, the report includes a table comparing total U.S. contractors participating in weapons categories. As the narrative explains, "Table 1 captures examples of the reduction of suppliers over the past twenty years for major weapons categories." The narrative makes the point "Consolidation, and market concentration reduces competition and creates sourcing risk." Two examples from the table point to inaccuracies. In one of the major weapons categories, Expendable Launch Vehicles, the study maintained there were six companies producing such rockets in 1990, two in 1998, and still two in 2020: Lockheed Martin and Boeing. The table is wrong. Boeing and Lockheed Martin are not separate U.S. contractors, but participate in a joint venture United Launch Alliance (ULA). Furthermore, "The Space and Missile Systems Center (SMC), in partnership with the National Reconnaissance Office (NRO), competitively awarded two Firm-Fixed-Price, Indefinite Delivery Requirement Contracts for National Security Space launch services today [August 7, 2020] to ULA and SpaceX," according to Space Force News. Leaving SpaceX off the table is a significant oversight.
The second example is the category of "Surface Ships," where the report says there were eight contractors in 1990. In 1998 the number was five. In 2020, according to the table, there were just two, General Dynamics and Huntington Ingalls. However, the list neglects Lockheed Martin, one of the producers of the Littoral Combat Ship, and VT Halter Marine, the company building the new generation of ice breakers. Additionally, U.S. companies as subsidiaries of international corporations include Austal (Australian) and U.S.-Based Fincantieri Marine Group (Italian). Both competed and won U.S. Navy contracts. These omissions diminish the importance of the report.
Others have noticed the study’s failings. As David Berteau, president of the Professional Services Council, explained, "…the report misses an important step by failing to articulate clearly the problems its recommendations are trying to fix. As a result, its recommendation cannot, by themselves, produce the results needed for better national defense." Berteau points out that the Defense Department's system stymies the competition it's supposed to stimulate. "New entrants face a federal procurement system that is too slow and unpredictable," he complains. Additionally, small business contracting policies and practices don't encourage innovation. Instead, the DOD business sector regulations "punish growth rather than reward it."
The impression the USD/A&S report on competition leaves is that it was a superficial bureaucratic gesture. Such studies and analyses should be accurate, helpful, and informative for the defense industry and achieve value for the taxpayer. Unfortunately, "State of Competition within the Defense Industrial Base" falls woefully short.
The views expressed are those of the author and not of any other affiliation.
~ Read more from Dave Patterson.
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