December 10, 2015
Back in September, Under Secretary of Defense Frank Kendall, the Pentagon's procurement chief, took the trouble to make a rather forceful on-the-record statement about Lockheed Martin’s then-pending purchase of Sikorsky. He admitted that the deal posed no classical anti-trust concerns, but he worried about how even this dissimilar restructuring in industry could affect the conduct of the firms involved:

     With size comes power, and the [Defense] Department's experience with large defense contractors is that they are not hesitant to use this power for corporate advantage. The trend toward fewer and larger prime contractors has the potential to affect innovation, limit the supply base, pose entry barriers to small, medium and large businesses, and ultimately reduce competition—resulting in higher prices to be paid by the American taxpayer in order to support our warfighters.

At an event at the CSIS on Monday, Pierre Chao of Renaissance Strategic Advisors remarked that “the top players in the [defense] industry have not changed for 100 years,” so perhaps Kendall’s nemeses have been at it for a long time. Actually, I was pretty sure that Pierre was exaggerating—over the past fifteen years, sure, but the structure of the industries we call defense was rather different in 1915. This morning I happened across a 1959 copy of the Defense Department's list of its Top 100 contractors, which the Pentagon has been compiling for at least that long. I then compared that to the most recent list available—for 2014. The two sets of names and numbers are perhaps as different as they are similar:

Fiscal Year 1959, dollar-percentage of military contracts by contractor:
7.2     General Dynamics Corp.
5.2     Boeing Airplane Company
4.5     North American Aviation, Inc.
4.1     General Electric Corp.
3.9     Lockheed Aircraft Corp.
3.0     Douglas Aircraft Co.
2.4     United Aircraft Corporation (later renamed UTC; see below)
2.3     The Martin Co.
2.2     Hughes Aircraft Co.
2.1     American Telephone & Telegraph Co.

Fiscal Year 2014, dollar-percentage of military contracts by contractor:
8.8     Lockheed Martin Corp.
6.4     Boeing Company
4.8     General Dynamics Corp.
4.2     Raytheon Company
3.3     Northrop Grumman Corp.
2.2     United Technologies Corp.
1.9     L-3 Communications Holdings Inc.
1.7     BAE Systems plc
1.4     Huntington Ingalls Industries Inc.
1.3     SAIC / Leidos (before their split)

Think first about the numbers as a gross measure of buyer dependence. After running out the rounding errors, it’s apparent that the top ten received 36.9 percent of the gross value of all new military contracts in 1959, and 35.7 percent of the gross value in 2014. The Pentagon’s dependence on the top five did increase from 1959 to 2014, but only from 25.0 to 27.8 percent. That’s not dramatic. Moreover, in 1959, at the height of the Cold War, the value of new military contracts awarded represented 4.3 percent of US gross domestic product; in 2014, that was just 1.7 percent. By this similarly gross measure, the political influence of those companies has probably greatly waned.

But next, think about the names. On the 1959 list, all but two of the top ten companies were making their money basically from aircraft—the military budget at the time devoted about half of all spending to the Air Force. Each new aircraft contract thus attracted a bevy of bidders. By 2014, the list had a more diverse and diversified set of business models, as not all the consolidation has been horizontal. Some of the vertical integration has resulted from corporate needs for systems integration; more complex electronic content may require wider knowledge within each company. On the 2014 list, only Huntington Ingalls and SAIC/Leidos could be described as relatively focused firms, and shipbuilders, information technologists, and intelligence analysts don’t really figure into the 1959 list. More of those big companies are now bidding on contracts across a wider base of the Pentagon’s business. The bad news is that the far fewer aircraft contracts are attracting fewer bidders each.

The lesson here is that some of the problem can be attributed to perception and preference at the Pentagon. The American military’s dependence on a small set of companies is about the same as it was at the height of the Cold War, when a truly massive commitment of national resources could sustain multiple big competitors in most market niches. If the current situation is a problem, that’s relative to what? The United States in 1959, or say, the United Kingdom today? But buying patterns have also profoundly restructured the industry in the intervening years. If the US still emphasized airpower like it did during the New Look, or if the US didn’t bundle its buying into joint, massive, multi-decade programs, the number of aircraft manufacturers could be considerably greater. The US military today has a much more balanced, flexible, and integrated force, but that has had consequences for industrial structure. It’s possible, though, that the structure is not as obviously bad as the secretary thinks.

James Hasík is a senior fellow at the Brent Scowcroft Center on International Security.