Ensuring Future of Defense Industry

Article excerpt

With the end of the cold war, the threats to national security surely have not evaporated, but they have changed in many significant ways. So we must update our response, especially in maintaining at moderate cost the industrial base needed for the development and production of new high-tech military systems and equipment. Many knowledgeable analysts of defense industry trends agree on these policy directions:

The conventional antitrust approach to consolidating and restructuring the defense industrial base is incompatible with the realities of the military marketplace. This expense-saving consolidation reflects a trend toward corporate restructuring.

Failing to have merged and downsized could have resulted in pressure for government support of defense firms through direct subsidy. The needed consolidation in the defense industry is not complete and therefore should not be inhibited by continuing the policies of the past. Our NATO allies also would benefit from consolidating their defense industries. There still are defense-oriented companies - both in manufacturing and services - whose size and scope of business are insufficient to allow them to be fully competitive in the defense business in the 21st century. These smaller, less well-capitalized firms - both primes such as Northrop-Grumman as well as subcontractors - lack the resources to maintain a competitive position in the development of new technologies. There is no realistic possibility, however, that any of the remaining defense contractors will act like the monopolist that antitrust economists write about - raising profits by restricting output. That is so because the military market is monopsonistic, dominated by the one governmental customer. The concern for maintaining adequate competition does require broadening the defense industrial base by including that vast array ofcommercially-oriented high-tech firms that can design and produce components key to weapon system innovation. Broadening the procurement base requires shifting away from a mind-set and acquisition system designed for the cold war. Defense companies should be spared costly and counterproductive oversight and regulation. …