Battle-Ready: Stagnancy & Anti-Competition In America's Defense Industry

Ships and submarines representing 15 international partner nations in the Pacific Ocean (Reuters)

By Jonny Rothberg

In his 1961 farewell speech, President Eisenhower warned the nation against the perils of its own armament industry, which had emerged during the Second World War to become an immense establishment, wielding “total influence in every city, every statehouse, every office of the federal government”. Unchecked, this rapidly-growing private industry, the President cautioned, would upend the power balance between our nation’s military, the government that funds it, and the armament suppliers—the Military Industrial Complex. He believed it would fundamentally jeopardize our national battle-readiness.

When the President made this speech, the arms industry he cautioned against was still in its relative infancy, championed by automobile manufacturers like Jeep, Ford, Studebaker, and GM, who had produced the tanks, bombers, and troop carriers used to win the Second World War, and who had decided to simply keep producing for the Korean War and beyond. The arms race with the Soviet Union was heating up, and players like McDonnell Douglas, Martin Marietta, Lockheed, and dozens more were joining the arms frenzy, spurring innovations like supersonic and hypersonic flight, stealth bombers, and air dominance fighters that fundamentally changed how wars were fought. The industry grew, innovated rapidly, and proliferated. By 1980, there were over 80 firms designated as ‘primary contractors’—those the government signed contracts with directly—in the aerospace field alone. 

Starting in the mid-80’s, however, the unstoppable rise in national defense spending that had fueled this industry growth began declining, from a peak of 6.5% of US GDP in 1982, to 6% two years later, before falling off a cliff with the end of the Cold War and eventually bottoming out at 3% in 2000. The immediate effect was that the easy years for the defense industry, when money flowed freely, innovation was practically state-subsidized, and upstarts abounded, had ended. As the heady days faded, incumbents began combining to cut costs and survive—Northrup & Grumman in 1994, Lockheed & Martin Marietta in 1995, Boeing & McDonnell Douglas in 1996, Raytheon & Hughes in 1997. Many more simply failed and broke into pieces—Fairchild, an aviation heavyweight, Rockwell, once the largest of them all, and dozens of others. For a while, with the industry tempered, it seemed like President Eisenhower’s final warning had been heeded: the ascent of the Complex was checked. 

But when Flight 11 flew into the North Tower on September 11th, 2001 and the War on Terror began, suddenly the prior decade’s consolidation went from being the mechanisms of a struggling industry to shrewd posturing that positioned the firms perfectly for the coming tsunami of spending. The spending surge following 9/11 did not precipitate nearly the rush of innovation or upstarts that it had for the Cold War. This time around, the industry was in the grips of a handful of surviving behemoths who now had to compete only amongst themselves for contracts, and who knew that, as long as ‘terror’ yet existed for the government to wage its new wars against, they could take as much time as they wanted and charge as much as they wanted for projects. There were now no alternative players for the Pentagon to go to if they found the cost overruns and delays unreasonable, and with both pressure from above to ensure the country was able to wage its new wars, and pressures from below via unprecedented defense lobbying—which increased 103% from 2005 to 2010—the Pentagon didn’t have as much incentive to search for one anymore.

As a result of this, spending exploded, increasing by 420 billion dollars from 2001 to 2011, peaking at 752 billion dollars by the end of the Iraq War, and staying near there ever since. At the same time, and partly to blame for this explosion, program development costs and delays increased handily too: in 2006, the DOD estimated that 36 of its high-profile weapons systems were now experiencing cost overruns, with 25 of those experiencing overruns of over 50% of initial budget. The number and cost of cancellations increased, as well: in 2011, 46 billion dollars was wasted on projects that were ultimately canceled before advanced procurement stages, and countless more wasted past these stages.

Flash forward to today, and the defense industry is unrecognizable from the one of President Eisenhower’s days. It is clubbier, stagnant, and magnitudes richer. The costs and overruns described above for the prior decade, obscene in their own right, are dwarfed by today’s, like the Littoral Combat Ship, which cost 250% more than budgeted before being deemed a failure; the Gerald Ford-class supercarriers, now expected to cost 3 billion dollars more per carrier (there will be 12) than budgeted; the F-35 fighter jet, which is currently 8 years behind schedule and 165 billion dollars over the 1.2-trillion-dollar budget; the list goes on. The industry has shrunk further still, with the number of primary contractors declining from 80 in 1980 to 51 in 1990 to just 5 today. According to a Pentagon competition assessment in February, 90% of all missiles are now sourced from only three companies; all fixed-wing aircraft, rotary wing aircraft, tactical wheeled vehicles, and tactical missiles are also sourced from at most three companies. Not only has this posed a risk of ever-greater cost inflation, but also more project delays and failures, and year-on-year declines in supply chain strength, productive surge capacity (the ability to rapidly increase capacity in the event of war), and the overall stock of armaments—which will be further depleted by the Ukraine Lend-Lease Act. Net-net, the merger spree seen thirty years ago as prudent machinations designed to reduce contractor bloat and thus drive down cost, has produced the opposite and has materially contributed to a decline in American battle-readiness—as President Eisenhower warned.

But is that the end of it? Is the world’s most powerful military condemned to have its armament chain forever mired in delays, cost overruns, and cancellations, commanded by an ossified military-industrial complex? Maybe, but maybe not. 

In February, the Federal Trade Commission blocked Lockheed Martin’s attempted takeover of Aerojet Rocketdyne, maker of some of our nation’s most powerful rocket and jet engines, citing the battle-readiness concerns raised in the Pentagon’s competition report—a step in the right direction. But it is not enough. Indeed, even as this attempt at further consolidation was blocked, Raytheon’s gargantuan 135-billion-dollar merger with United Technologies in 2020 was not, nor was L3 and Harris’ 35-billion-dollar merger. Eyeing these deals and Northrup Grumman’s approved 9-billion-dollar takeover of Orbital ATK, which is essentially a larger Aerojet, Lockheed may decide in the future to have another crack at the consolidation game that it has played so well before. It is therefore up to the FTC, Congress, and the Pentagon to make sure Lockheed and the whole Complex knows: going forth, Aerojet is a precedent, not a one-off event.

The same Pentagon report also sets forth an ambitious plan to fortify supply chains and revive competition, chiefly by spurring more small-business participation across R&D, production of crucial parts in supply chains, and project competition bids. This, too, has the potential to rejuvenate parts of the defense-industrial base, but alone is also not enough: there are still many fronts—most, in fact—where small businesses, regardless of Pentagon support, cannot compete economically with their larger brethren. This also fails to address the main issues that have gotten the military into this position to begin with, namely the failure of the Pentagon to initially prevent this consolidation from taking place—in fact, they supported it at first; the failure of the Pentagon to properly safeguard projects against cost, deadline, and scope creep (Bradley Fighting Vehicle); the resistance of the Pentagon to writing off failed projects (Zumwalt-class- destroyers and Future Combat Systems); and the tendency for Congress to approve programs, suddenly disapprove, then reapprove, and then dramatically reduce funding for, until cost overruns and development hell are inevitable (Littoral Combat Ship).

To truly revive the competitive environment that birthed many of the military’s greatest weapons and assets, the Pentagon and Congress must drill down to these base structural issues, something they are loath to do. But if they wish to fulfill the final request of President Eisenhower, and preserve the battle-readiness of the world’s strongest nation, it is these deeper maladies that must first be fixed.