They say that everything is bigger in America. That is certainly true when it comes to defence spending. The prime minister recently announced an increase in UK military expenditure of £16.5 billion over four years, which seems like a lot of money: but then remember that the Pentagon’s annual budget for this year is a whisker under $700 billion. This is money of a different order.
The US Senate, currently engaged in trying former president Donald Trump, recently confirmed Dr Kathleen Hicks, a veteran of previous Democratic administrations, as deputy secretary of defense. The post is often regarded as a kind of COO for the Pentagon, but Dr Hicks will assume a particularly heavy burden: the secretary of defense himself, General Lloyd Austin, is a former director of Raytheon, a major player in the US defence industry, and has recused himself for any decisions involving them for the whole of his term.
The relationship between purchaser and provider in the US, between the Department of Defense and the defence industry, is a very closely knit one. It was President Eisenhower in his farewell address in 1961 who coined the phrase “the military-industrial complex”, and it is even more true today; as budgets have spiralled and procurement has become more and more expensive, individual companies have merged and been bought and sold.
Northrop and Grumman combined in 1994; Lockheed Martin was created in 1995; and the British giant BAE Systems brings together Marconi and British Aerospace but can trace its lineage back through BAC, Hawker Siddeley, Supermarine, Vickers and AV Roe, among others. Economies of scale have driven these combinations, and they may continue, as there are recurring rumours of BAE being merged with one of the American “big four”.
This potential problem is no secret, and Dr Hicks put her finger on it when appearing before the Senate Armed Services Committee: “Consolidation creates challenges to innovation. We have to look at key parts of the industry base and ensure there’s a healthy supply chain… Some consolidation is probably inevitable but we need competition.”
How does the Pentagon, or the UK Ministry of Defence, for that matter, square that circle? Competition drives down cost, which is desperately needed, especially in this country. But the current state of affairs, in which some companies have a virtual monopoly on certain systems, turns the traditional customer-supplier relationship on its head: defence contractors know that procurement bodies often have no “plan B”, and so will and must continue to pay whatever is required, over whatever time period.
For one of the worst examples of procurement mismanagement, look at the British Army’s acquisition of what began as the Future Rapid Effect System (FRES), a series of wheeled, armoured vehicles for infantry battalions.
The programme dates from the late 1990s, and was initially to be an Anglo-German joint project, but the MoD withdrew from that partnership in 2003 before reassessing its options in 2007. There was a restructuring in 2008 followed by a new announcement in 2010, which was then rescinded. The FRES capability remains unfilled as of 2021.
It is unfair to attribute all of the failings of FRES to industrial monopolies, but it is emblematic of the relative powerlessness of procurement bodies faced with a powerful, well-entrenched, interlinked industrial sector. But identifying the problem is only half of the battle. Solving it will require both US and UK administrations to look deep into their souls and make choices about their fundamental identity.
A wholly free market, with government intervention anathema, would drive the defence industry towards more mergers, more economies of scale, more monopoly power and less competition. Yet both governments preach the virtues of competition and the role of private-sector innovation; indeed, Dr Hicks pointed towards lifting restrictions on companies not currently supplying the Pentagon from entering the supply chain in new sectors, such as the freshly minted US Space Force.
At the same time, the Department of Defense has indicated it will scrutinise very carefully any mergers or alliances in the defence sector. But it seems implausible that any economic activism would go so far as, for example, the French model, in which the state owns significant stakes in some defence companies. (Thales Group is ¼ owned by the French government, while both France and Spain have holdings in Airbus Group.)
So it is a philosophical and existential question as much as it is an economic one. What is to be the relationship between government and private contractors in the 2020s? As long as defence procurement remains the arena for major projects like ballistic missile submarines, aircraft carriers and high-tech fighter aircraft, it is not practical to shop around to any meaningful extent. Not only are there few manufacturers of such specialised products, there is also the question of sovereign capability: no nuclear-armed state, for example, would buy its boats from another country.
Further down the chain, however, perhaps technology will begin to have an impact. The encroachment of cyber warfare places a premium on human expertise and sheer computing power rather than highly specialised equipment, and increasingly modular components in armoured fighting vehicles or drones will allow the civilian sector to enter the fray as never before. Certainly, high-level mergers must be scrutinised carefully for their potential strategic impact, but it may in fact be diversity driven through technology which is the saviour of competition in the military sphere.