On 15 February 2022, the Department of Defense (DoD) released a 30-page report titled State of Competition within the Defense Industrial Base (“Report“) surveying the state of competition across key defense sectors and laying out recommendations to spur increased competition in the defense industrial base (DIB). The Report is one of many required by numerous agencies in response to Biden’s July 2021 Executive Order, previously reported on here.
- Merger oversight
- Intellectual property limitations
- Increasing new entrants, increasing opportunities for small businesses and reducing barriers to entry
- Sector-specific supply chain resiliency plans in priority industrial base sectors
The term DIB refers to the large network of companies that provide goods and services to the DoD. These companies make up a significant part of our economy, ranging from small businesses and start-ups to some of the biggest corporations in the world. They provide products ranging from intercontinental ballistic missiles and highly specialized military satellites to everyday commercial products like batteries and laptops.
The Report addresses the need to promote competition, particularly in the defense procurement process. Increased competition will incentivize innovation in the DIB, thus enabling the sector to offer better products and supply chain quality with lower costs. The Report emphasizes that lack of competition in this sector may create gaps in services and products needed by the DoD, which could contribute to national security risks and undermine its mission.
The Report makes five broad recommendations:
- Strengthening merger oversight:
- The Report highlights that the defense industry has been “historically consolidated” and that the trend of increased consolidation requires “heightened review” for any future mergers and acquisitions in the defense industry.
- Addressing intellectual property limitations:
- The DoD should implement best practices on its long-term intellectual property (IP) needs and ensure that IP-related procedures included in its procurement do not result in unnecessary anticompetitive consequences.
- Increasing new entrants:
- In light of the overall shrinking of the DIB, the DoD should strive to remove any barriers to entry for new entrants to the defense marketplace. This involves dedicating resources to attracting new entrants through small business outreach, support, and cooperation with acquisition authorities.
- Increasing opportunities for small businesses:
- The DoD should increase small business participation in defense procurement, focusing on women-owned, minority-owned, and veteran-owned small businesses.
- Implementing sector-specific supply chain resiliency plans:
- The DoD should create and execute a resiliency plan for the following five priority sectors: casting and forgings, missiles and munitions, energy storage and batteries, strategic and critical materials, and microelectronics.1
The Report analyzes the trend of increased consolidations in the defense industry. For example, since the 1990s, the number of aerospace and defense prime contractors decreased from 51 to just five, and 90% of missiles come from only three sources today. This consolidation leaves the DoD reliant on only a handful of companies for many products and services, which in turn hurts innovation and lessens competition. The Report also analyzes additional concerns associated with the consolidation, including risks in sourcing, supply chain, and economic security. As such, the Report recommends increased oversight of future mergers and continued collaboration with the antitrust agencies on these deals.
Intellectual property limitations
Addressing exclusive IP rights, the Report identifies two practices that can be used to limit competition in the defense industry, with proposals on how to confront these challenges:
- No compulsory licensing beyond the regulatory standard rights:
- The DoD should: (1) Ensure that IP exclusive rights are part of the evaluation factors when awarding contracts and (2) encourage contractors to provide the required licensing rights and data as a way of securing a contract.
- Tying or bundling:
- To mitigate and prevent IP-based restrictions on proprietary products, the DoD should use a modular open systems approach, which allows systems to integrate with components manufactured by outside vendors and prevents closed proprietary systems. Together with the open systems approach, the DoD should negotiate specialized license agreements to address the issue of IP restrictions on proprietary components.
Increasing new entrants, increasing opportunities for small businesses and reducing barriers to entry
According to the Report, in the last ten years, there has been a 40% decrease of small businesses in the DIB. If this trend continues, the DoD is predicted to lose 15,000 suppliers over the next ten years, which will greatly impact domestic capabilities relating to national and economic security.2 The invigorated focus on expanding the entrants of small businesses will consist mainly of the DoD investing in outreach and engagement, including offering extra support to small businesses that seek to enter the defense marketplace. This includes reaching out to industry associations, participating in outreach events, and streamlining information. The DoD will also be using market intelligence to help identify potential entrants to the market, looking to expand small business programs, and using commercial technology and innovation to engage small businesses to enter the DIB.
Sector-specific supply chain resiliency plans in priority industrial base sectors
The DoD commits to “developing alternatives to the use of strategic and critical minerals to increase supply resilience for defense programs and national security, and to reinvigorate the supply chain.” In addition, the Report highlights the need to coordinate closely with the industry on investing in research and development and developing the workforce. Together with the goals and proposed recommendations,3 the Report encourages a whole-of-government approach to address the challenges within these priority sub-sectors.
In sum, DoD established in this Report it would implement the following actions intended to achieve the goals of the Biden Executive Order:
- Review how it is evaluating vertical and horizontal mergers, with an increased focus on the risks to national security.
- Collaborate with interagency colleagues at the Department of Justice and Federal Trade Commission to evaluate the effect of increased consolidation in the defense market.
- Implement the interagency recommendations outlined in Executive Order 14017, with respect to the Supply Chains, in the five priority sectors.
- Support the development of skilled workers in manufacturing and technical trades in order to maintain the workforce of defense-specific skills needed for the development and support of the DoD and its systems and equipment.
The Report reinforces the renewed commitment by the DoD to establish changes and set priorities for increasing competition in the defense market and the DIB. These efforts include increased scrutiny of potential M&A, attracting new entrants, encouraging and increasing the participation of the small business vendor base, and implementing initiatives to acquire the IP and associated rights to support greater competition.
1 Detailed recommendations are included in the DoD’s report on Executive Order 14017, America’s Supply Chains.
3 Detailed recommendations are included in the DoD’s report on Executive Order 14017, America’s Supply Chains.