Commercialization in Defense Sourcing and Other Responses to Post-Cold War Defense Industry Transformation

Article excerpt

INTRODUCTION

The global defense industry, centuries in the making, has undergone a fundamental transformation in the last 15 years. This transformation is characterized by two key phenomena: First, there has been an unprecedented consolidation (1) in the defense industry itself precipitated by the dramatic drop in defense budgets following the end of the Cold War. (2) In addition to mere consolidation, the industry has transformed from one consisting of specialty manufacturers to a two-tiered structure of giant "systems integrators" and supporting, much smaller, specialty manufacturers. Second, the rapidly evolving, fast-paced, network- centric battlespace has driven astounding advances in military technology. (3) Sometimes, the pace of technological change has been so rapid that it even outstrips the ability of the defense industry to deliver the weapons and systems incorporating those advances before they are obsolete. (4)

Section I first examines the post-Cold War global transformation of the defense industry, and the underlying reasons for that transformation. It then discusses the impact this transformation has had on government defense procurement, principally in the United States, the United Kingdom and Australia. Section II analyses how those governments have responded to the changes in the defense industry. The Article concludes in Section III by reasoning that although all of the government responses examined in Section II will be helpful in counteracting the diminution of competition in today's defense market, commercialization initiatives will be the most effective in increasing competition, lowering procurement cycle times, and minimizing costs. These trends, and the concomitant changes they have caused in the defense industry, are discussed in turn below.

I. POST-COLD WAR DEFENSE INDUSTRY CONSOLIDATION

Section I.A briefly recounts the history of the modern defense industry. Prior to the sixteenth century, nations maintained only part-time armed forces that were supported, if at all, in an ad hoc manner. However, the rapid rise of world trade required the European powers to maintain large standing fleets and specialized industrial facilities to build and maintain them. For hundreds of years, wars resulted in the creation of new defense firms, many of which merged or went out of business in the succeeding peace; overall, the industry remained one of specialty manufacturers. Section I.B recounts a fundamental shift in this pattern following the Cold War, in which an industry of more than 50 specialty manufacturers became a highly concentrated industry of just five system integrators that broadly cut across the all sectors of the defense industry. Section I provides the backdrop for Section II, which postulates that competitive procurement (which governments have relied upon for technical innovation and economic savings in defense purchases) has suffered as a result of this consolidation, causing governments to resort to substitute strategies to deliver the benefits that they could previously obtain through vigorous competition between defense firms.

A. Development of the Defense Industry, from Early Origins to the Cold War

The modern defense industry traces its practical roots in the rise of the Royal Navy and other European naval and para-military fleets, such as those maintained by the Netherlands and the Dutch East Indies Company, in the 1500s. (5) Prior to about 1550, global trade was virtually non-existent and navies, to the extent that they existed at all, consisted of a few state warships and ad hoc collections of commercial vessels assembled for a particular purpose. (6) With the rise in global trade in the 1600s, European nations needed standing navies both to protect that trade and to attack the trading vessels of their competitors. (7) This gave rise to the development of a large infrastructure of royal forests for providing "naval stores" such as timber, tar and pitch, timber mills, textile mills for producing vast quantities of sail and line, docks and shipyards, foundries for cannon, shot, anchors, chain and other metal fittings and rudimentary chemical plants for the production of gunpowder, caulking, tar and pitch. …