One of the legendary events in the history of U.S. defense planning is a dinner that was held in 1993 between senior officials of the Department of Defense and some fifteen CEOs of the major U.S. defense industries. The story, as recounted by Norm Augustine, then chief executive of Martin Marietta, is that then-Secretary of Defense Les Aspin told the assembled titans of industry that with the fall of the Soviet Union and planned decreases in defense spending that there would not be enough money for all of them to survive. Consequently, Aspin announced, they needed to merge. The CEOs got the message; Augustine presided over a merger of his company with another major defense player, Lockheed, to create the highly successful Lockheed Martin. Soon the fifteen defense companies had become five.
Earlier this year, the Pentagon’s leadership held another meeting with senior defense company executives and financiers, this time a breakfast, a sort of non-Last Supper. At this meeting, Under Secretary of Defense for AT&L Ashton Carter informed the assemblage that although defense spending was expected to flatten out or even decline in the coming years as the conflicts in Iraq and Afghanistan wound down, that the department did not see the need for further consolidation among the major defense companies. In addition, Carter wanted to assure both the defense industry and the financial sector that efforts to reform the Pentagon’s acquisition process would not come at the expense of returns to industry.
Fast forward another ten months. Defense spending is scheduled to decline over the next decade by at least $350 billion. If sequestration actually occurs, that number could rise to around a trillion dollars. As Secretary of Defense Leon Panetta warned, every major weapons program will be disrupted. It is clear that most major programs will either be eliminated or dramatically reduced in size, duration and value.
In addition, and despite Secretary Carter’s assurances to industry and Wall Street that efforts to reform defense acquisition would not hit the companies’ bottom lines, the contracting environment has become increasingly hostile to the private sector. The search for cost savings has resulted in efforts by DoD to treat defense products, including major platforms, as commoditized products that can be bought for the lowest possible cost. In a number of instances DoD officials are demanding defense companies provide access to proprietary information for major commercial end items that were produced without government funds. This is information that the companies do not provide to their best commercial customers. Then there are efforts to make defense companies liable for additional overrun charges on major programs even while taking no responsibility for providing a stable procurement plan. If this isn’t a war on industry it is certainly an insurgency.
If these trends continue and budgets decline precipitously, it will make a new Last Supper all but inevitable. This next Last Supper will be the last Last Supper. If the defense industrial base consolidates further the results will be to create national champions in critical areas. There is no alternative when there are so few companies left. Moreover, DoD contracting policies, if continued, virtually guarantee that companies, including possibly several of the remaining major players, will exit the sector.
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