Recently, Lockheed Martin announced its intent to acquire Aerojet Rocketdyne to create a vertically integrated company that would, in effect, corner the hypersonic propulsion market. For Lockheed. this may be a good idea. However, in defending America, other factors must be considered.
It would be wise for the Department of Defense and the Federal Trade Commission, which must approve the acquisition, to give consideration for the U.S. taxpayer, competition, innovation and, most importantly, our national security.
History tells us that consolidation of the defense industry limits competition, ultimately driving up costs. Under President Bill Clinton, then-Secretary of Defense Les Aspin forced consolidation of defense contractors in the belief that it would reduce costs and make contracting more manageable for the Pentagon. What followed were multiple mergers within defense suppliers that resulted in opposite outcomes. Compare the size of the Pentagon workforce today and the rising costs of major weapons systems and it is clear to see that consolidation via mergers haven’t benefited our military.
As in any industry, innovation thrives through competition, not vertical integration. Historically, there are many examples of innovation through competitions, from the lightbulb to space travel. However, vertical integration restricts innovation, especially in the limited corporate space of the defense industry. This often leads to sole-source contracts. Competitors simply decide not to participate for various reasons, including limited sharing of technical specifications, unequal subcontract prices and loss of proprietary information. As a consequence, our national security suffers.
In the defense contracting world, where vertical integration limits competition, companies claim a “firewall” will protect competitors. Theoretically, the firewall is intended to segregate a portion of a company so it can participate in multiple bids as a subcontractor to a competitor. As an example, Northrop Grumman purchased Orbital ATK in a vertical integration in 2018, then firewalled Orbital during the competition for the $80 billion Ground Based Strategic Deterrent program. The firewall was supposed to protect competitors so they could bid against Northrop and use Orbital as a supplier, but that failed. There were no competitors; they simply opted out, and GBSD was awarded a sole-source contract in September of last year.
In reality, there are few if any guarantees with a firewall. Confidence fades as large corporations share too much legroom within corporate policies, proprietary information, geographical locations, communication systems and budgets. The results is that no bids come from competitors, resulting in sole-source contracts and leading to higher costs and less innovation for our national security, which should be considered by the DoD and the FTC.
Curiously, Lockheed’s president and CEO made the case for vertical integration during his company’s 2020 fourth-quarter earnings call by citing the structure of China’s defense industry. The Chinese Communist Party owns everything in China’s defense manufacturing, making it technically vertically integrated. But in America, that does not apply. In fact, manufacturers in the U.S. have chosen a different path for a financial reason. Car companies, airplane enterprises and major manufacturers once followed the vertical integrated model, but since the 1980s these companies divested to improve management of expenses. Today, they’ve become assemblers of their final products supplied by subcontractors. It is simply a better cost model.
So why would Lockheed point to the Chinese model? At the end of the day, it is about cornering the market, not controlling costs, which ultimately fall upon taxpayers.
With the acquisition of Aerojet Rocketdyne, hypersonic competition no longer becomes a variable for Lockheed. Instead, as the Northrop-Orbital outcome suggests, sole-source contracting becomes the norm along with inevitable Class I changes (which require the renegotiation of contracts), delays and rising costs.
Rightful concerns about defense company mergers came from new Defense Secretary Lloyd Austin through advance policy questions from the Senate Armed Services Committee. Secretary Austin wrote that reliance on sole- or single-source suppliers, among other issues, creates a weakness in the defense-industrial base. His concerns are widely shared at the Pentagon because limiting competition and diminishing innovation restricts the ability to secure our nation.
Mergers in the confined space of defense contractors are not always the best outcome for the security of America. Costs are a factor, as is the peril to innovation in a critical area of hypersonic development — especially considering the fact that the United States has already fallen behind China and Russia in this area. The risks to our national security are real, and the DoD and the FTC must deny this acquisition to avoid limiting the competitiveness of our defense sector.
Author: Former Rep. Todd Tiahrt
Source: DefenseNews
