Air defense oligopoly
According to an article in Air Force
magazine (“What's Left of the Defense Industry”, July, 2005), many in
the defense community are asking whether consolidation in the defense
industry has gone too far. As the author notes:
Once, the US military industry comprised dozens of major
manufacturers and subcontractors, lineal descendants of the vast
“Arsenal of Democracy” of World War II. Today, after a major market
shakeout, only a handful of industrial giants remain. In the aerospace
field, the amount of military business is sufficient to support only
three major aircraft manufacturers.
In specific, here is concern from the US Air Force now that there
are too few aircraft makers to ensure American leadership in air power.
'”What in 1980 was a field of roughly 75 major aerospace-related
companies had by 2001 been transformed by consolidations and mergers
into a slimmed-down group of five prime contractors. In 1990, the
Pentagon had eight major military aircraft suppliers. Today, it has three.” These are Boeing, Lockheed-Martin, and Northrop Grumman.
And there might have been only two, except that the government refused
to OK a proposed 1997 merger between Lockheed Martin and Northrop
Grumman. That attempted merger came in the wake of the successful 1996
merger of McDonnell-Douglas and Boeing.
And if you want to get
into subspecialties, the article points out, it's even worse. Lockheed
Martin has a near stranglehold on fighters, for example, so that
government is ever more dependent on the whims of one company. And
companies like Boeing can demand special deals (like the overpriced refueling aircraft)
simply because the government cannot afford for them to fail or even drop
out of the military market. The government has to bend over backward to
keep all three airplane makers in business, which constrains the
bidding process. After all, the Penatgon is unlikely to buy big-ticket
systems from foreign manufacturers.
This problem of consolidation, of course, exists through the whole military, as the article states:
The truly major defense contractors that remain-Lockheed Martin, Boeing, Northrop Grumman, General Dynamics, and Raytheon-now account for 46 percent of the top 100 defense contracts.
Lack of competition leads to higher prices and more fraud, it seems.
Even worse, it also leads to reduced innovation, since there is no need
to out-innovate the others.
A Rand study is quoted as saying that “Periods
of technological innovation in the aerospace industry, such as the
stealth revolution, are almost always led by “second-rank” prime
contractors.” In other words, companies that were hungry enough to innovate “What companies in the future will play the role [played by] the second-rank firms in the past?”
US, which prides itself on its technological superiority to maintain
its military lead, will see that wellspring dry up as complacent
companies with limited competition see no competitive need to deliver
more than moderate upgrades to what already exists. [Oligopoly Watch]