More Defense Vendors, Please

(Compiler's note: More evidence that the gov't should keep their hand out of business.)

By Jay Hancock

In 1993, Defense Secretary Les Aspin invited more than a dozen CEOs of big weapons and aerospace companies to dinner at the Pentagon. In what has become known as the Last Supper, he shocked them by saying that, with the end of the Cold War, America had too many defense contractors and that the companies needed to merge or die.

Merge they did. But 15 years later, as the fiasco with the Air Force's tanker contract and widespread Pentagon procurement dysfunction demonstrate, it's not clear that fewer contractors is better. Monopoly-like power exercised by a few dominant vendors is no better, it turns out, in the defense industry than it is in software, electricity or cable TV.

The next president ought to consider undoing what Aspin wrought and spurring a Ma Bell-like breakup of dominant defense companies.

The tanker contract, which could eventually be worth $100 billion, wouldn't have even been nominally competitive without the participation of the European Aeronautic Defence and Space Co., which teamed up with finalist Northrop Grumman.
Boeing, the loser in the competition, protested the Air Force's decision to award the deal to Northrop and EADS, the parent of Airbus. The Government Accountability Office upheld Boeing's appeal based on what it said were flawed procedures by the Air Force.

But the larger point is that the United States couldn't even field a full team at the bidding table.

Outsourcing and globalization may be fine for TVs and tomatoes, but it's another matter for key hardware needed to defend the country.

Since the Last Supper the number of major defense contractors has shrunk from more than two dozen to half a dozen.

Fewer vendors usually means higher prices and shoddy service. Pentagon procurement has never been a model of efficiency and alacrity, but things are as bad as ever despite years of reform efforts.

The Defense Department "is not receiving expected returns on its large investment in weapons systems," the Government Accountability Office found this year after evaluating dozens of major programs and finding most were over budget and years behind schedule. "The final result is lost buying power and opportunities to recapitalize the force."

Why work hard to please your customer when you know you'll get the business anyway?

Fueled by the war in Iraq and the homeland security boondoggle, profits at Northrop, which has a big electronics operation in Linthicum, have more than doubled in five years. Bethesda-based Lockheed Martin's profits have tripled. Boeing's are up nearly sixfold.

Faced with the lack of competition and failure of a functioning market in defense procurement, the Pentagon has installed endless rules and bidding procedures to try to create the illusion of a market.

It's similar to what's going on in electricity, where grid managers and public utility commissions conduct highly stylized "auctions" that are tilted in favor of the vendors and whose results surprise nobody but the customers paying the price.

"Because we are pretending like we have a competitive system, we are putting myriad rules and regulations in place to actually compensate for the fact that it's not true competition," Sen. Claire McCaskill, a Missouri Democrat, said of defense procurement at a hearing last month.

The thicket of rules deters bids from outside companies interested in breaking into the defense business, she said, adding, "it's almost surreal how ridiculous it is."

While mostly praising results of defense consolidation in a column in Defense News two years ago, former Lockheed Martin boss Norman Augustine warned that, in cases where only one company provides a crucial product (an example is aircraft carriers, made only by Northrop Grumman), "it is simply a stroke of the pen away from de facto nationalization of the industry."

That may not be such a terrible idea. Many countries handle defense purchases through state-owned companies.

But better we try to make the private defense base more diversified and competitive.

"We need a bold strategy to reverse consolidation and a vigorous debate on the consequences of globalization for U.S. security," former Undersecretary of Defense Dov Zakheim and former Missile Defense Agency chief Ronald Kadish wrote in TheWashington Post this year.

Aspin and the other hosts of the Last Supper were trying to help taxpayers by getting contractors to streamline overhead costs through mergers. But in the long run, by cutting competition, they may have hurt taxpayers instead.

Augustine suggested in his column that Aspin should have served Rolaids at the famous meal. From defense company shareholders' point of view, champagne might have been more appropriate.