Defense reform guru Mandy Smithberger left the Project on Government Oversight (POGO) to work in Elizabeth Warren’s office in February, and if this recent exchange between the Massachusetts senator and the defense secretary is any indication, Mandy is already having a positive effect.
“Now, there's no question that inflation is raising costs across the country, but we've also seen big companies take advantage of inflation to jack up prices and to pad their profit margins. That is a particular problem in industries with lots of consolidation,” she said to Secretary Lloyd Austin in a Senate Armed Service Committee hearing last week.
"Price gouging by defense contractors has been a big problem for a long time," Warren said.
"And CEOs are already bragging to their investors that profits will be even higher this year. That kind of profiteering wastes taxpayer dollars and it hurts military readiness."
The author of the article citing Warren’s comments, Lauren C. Williams of NextGov, noted that Warren’s comments came on the heels of a Pentagon report that found that the pool of prime defense and aerospace contractors has shrunk from 51 down to five (90 percent) since the 1990s due to consolidation. From the report, “State of Competition within the Defense Industrial Base”:
As a result, DoD is increasingly reliant on a small number of contractors for critical defense capabilities. Consolidations that reduce required capability and capacity and the depth of competition would have serious consequences for national security. Over approximately the last three decades, the number of suppliers in major weapons system categories has declined substantially: tactical missile suppliers have declined from 13 to 3, fixed-wing aircraft suppliers declined from 8 to 3, and satellite suppliers have halved from 8 to 4. Today, 90% of missiles come from 3 sources.
This comes as no surprise but it is worth reminding that the five remaining “primes” — Lockheed Martin, Northrop Grumman, General Dynamics, Boeing and Raytheon — get more than 50 percent of their revenue from the government (in Lockheed’s case, 96 percent). In total, as of 2020, the companies received upwards of $200 billion in revenues through defense contracts.
"The Big Five contractors get over one out of three dollars the Pentagon hands out in contracts every year, and they also run some of the biggest cost overruns on their weapons programs," says my colleague William Hartung. They also represent the top companies engaging in mergers and acquisitions in order to dominate verticals and horizontals and squeeze out all competition.
But there is some good news. The Federal Trade Commission, in its “first outright challenge to a defense merger in decades,” filed a suit against Lockheed’s pending $4.4 billion sale of Aerojet Rocketdyne in February because it said it would give the defense giant a monopoly on jet engines, and “the ability to cut off other defense contractors from the critical components they need to build competing missiles,” according to FTC Bureau of Competition Director Holly Vedova in a statement.
“Without competitive pressure, Lockheed can jack up the price the U.S. government has to pay, while delivering lower quality and less innovation. We cannot afford to allow further concentration in markets critical to our national security and defense.”
Lockheed has since dropped the sale.
Matt Stoller in an extraordinary report for The American Conservative in 2019, warned that consolidation and monopolization has led to a complete erosion of the defense industrial base with critical parts and technology now offshored, leaving the military with few choices, super-high prices, and national security at risk because the Pentagon is now at the mercy of price gougers and foreign companies for sensitive military fulfillment.
A prime example of this is TransDigm, the subject of several DoD investigations for price manipulation, including a current case in which a Pentagon audit in 2021 determined that TransDigm owes the military an excess of $20 million in overcharges. According to Stoller in 2019:
(Transdigm) achieves (“private equity-like”) returns for its shareholders by buying up companies that are sole or single-source suppliers of obscure airplane parts that the government needs, and then increasing prices by as much as eight times the original amount. If the government balks at paying, TransDigm has no qualms daring the military to risk its mission and its crew by not buying the parts. The military, held hostage, often pays the ransom. TransDigm’s gross profit margins using this model to gouge the U.S. government are a robust 54.5 percent. To put that into perspective, Boeing and Lockheed’s profit margins are listed at 13.6 percent and 10.91 percent. In many ways, TransDigm is like the pharmaceutical company run by Martin Shkreli, which bought rare treatments and then price gouged those who could not do without the product.
Earlier this year, TransDigm recently bought the remaining supplier of chaff and one of two suppliers of flares, products identified in the Defense Department’s supply chain fragility report.
TransDigm was caught manipulating the parts market by the Department of Defense Inspector General in 2006, again in 2008, and finally again this year. It is currently facing yet another investigation by the Government Accountability Office.
Yet, TransDigm’s stock price thrives because Wall Street loves monopolies, regardless of who they are taking advantage of.
On Tuesday the government announced that inflation is up 8 percent. While most Americans will focus on the impact this has on their gas, food, and other daily spending, remember that the defense consolidation has resulted in an inflation all its own, eating away at federal buying power. While companies like Transdigm will profit, the costs rolls downhill. According to the DoD’s own report, it puts our military more at risk, with little accountability. So good on Warren for keeping the pressure on, and the FTC too.