Analysts see dynamic, changing defense industry

However, long lists of contractors can mislead the market analyst

While Defense Department officials are watching for conflicts of interest among corporations adjusting to market trends, a new study says the defense industrial base isn’t consolidating into a few mega-companies getting all of DOD’s business.

“There is little evidence in the data that the defense industry is consolidating into an oligopoly dominated by a small number of incumbent firms,” the Center for Strategic and International Studies’ (CSIS) Defense Industrial Initiatives Group wrote in a report released on May 6. The report analyzed figures on DOD’s contract spending and its supplier base.

In fact, the report states, contractors have been coming and going throughout in the past decade, despite the top five defense contractors overall having retained their position from 1999 to 2009

“There were dynamic changes in the composition of the top 20 contractors in the industry” during the past decade, the report said.


Related stories:

Shifting market keeps DOD alert for conflicts of interest


However, another expert said it can be misleading to do market analysis by looking at a list of leading contractors. Instead, the true makeup of the market emerges by digging down to the specific types of goods and services. he said. Trends in competition and contractors will come forward when looking at the number of companies capable of handling projects to build, such as unmanned aerial vehicles or surveillance satellites.

“Gross tabulations like ranking lists have never been effective predictors of the erosion happening to the defense industrial base,” said Bruce Williamson, an economist at the National Defense Business Institute at the University of Tennessee in Knoxville.

Either way, defense officials are concerned about the consolidation of companies.

“The department [DOD] is very conscious that the top tiers of the defense industry have already consolidated significantly,” Frank Kendall, principal deputy undersecretary of defense for acquisition, technology, and logistics, told the Senate Armed Services Committee on Emerging Threats and Capabilities Subcommittee on May 3.

And officials are predicting more buying and merging.

“We do expect some increased activity at the middle and lower tiers — activity that we will monitor closely,” Kendall said.

In further studying procurement data, the CSIS found heath care companies rose closer to the top of DOD's suppliers with the strong overall services contracts and energy companies and ground vehicle producers grew in the products side.

The services sector was the fastest growing sector, and the list of contractors changed significantly from 1999 to 2009.

"This indicates that there is a healthy circulation of contractors in and out of the top positions by value of contracts awarded,” the report states.

CSIS also found the mid-sized companies still were squeezed by larger corporations and small firms.

About the Author

Matthew Weigelt is a freelance journalist who writes about acquisition and procurement.

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