In April 2022,  Kathleen Hicks, Deputy Secretary of Defense, raised serious concerns about the United State defense industry. The competition in the defense industry is decreasing with the passage of time. One of the reports from February 2022, highlighted that the number of defense contractors had dropped. Due to the year of the merger, the figure was reduced to 10 from 51. This has led to monopolies or near-monopolies in certain parts of the defense market. In political lines, these concerns are also shared. Even former president Donald Trump mentioned in 2019 that negotiations became tough due to lack of competition. 

Beyond consolidation, another issue often overlooked is how separated the defense industry is from the commercial economy. This separation makes it harder to attract investments in defense technology, limits the Pentagon’s access to new innovations, and increases the power of traditional defense companies over government contracts, worsening the competitive landscape.

In 2024, the United States national security agencies, including the Department of Defense (DOD), are planning to spend more than $800 billion in the defense sector. This decision makes defense a huge part of the economy. However, this huge spending makes the defense sector more isolated from the rest of the United States economy than ever before. 

Nowadays, the United States is facing many new global and technological challenges. But it is also important to know that its defense industry is different from others that assisted in winning the Cold War. Back then, many commercial companies worked in both defense and nondefense areas.

Now most of the spending of the Department of Defense goes to small defense contractors. In reality the companies whose major focus only on defense are controlled 61% of the major defense programs. This is a big jump from just 6% in 1989. When adding aerospace companies like Boeing, traditional defense firms make up 86% of the spending, while companies with broader commercial interests are barely involved.

What are the impacts of budget cuts on the US defense industry?

After the Cold War when the budgets were cut, the major shift in the United State defense industry happened. Many organizations which had commercial and defense operations, decided to sell their defense divisions. For example, in 1990 , Ford sold Ford Aerospace and left the defense market. The government stands in favor of this with the fear that a smaller defense budget could not handle the large industry. This was built in 1980.  

Even when defense spending increased by 50% after 9/11, the trend of selling off defense divisions continued. Kodak, for instance, sold its national security business in 2004, and it changed hands several times before becoming part of L3 Harris. This consolidation meant fewer, but larger, defense companies now dominate the industry, maintaining its strength despite these changes.

Defense contractors are experts at selling to the government because they have well trained team members that handle the system work efficiently. This competition makes it hard for the new companies to enter in the market. Even for basic services, defense companies lead because of their government knowledge.

Furthermore, General Dynamics offers many services to the government such as IT services and military equipment. Some defense firms also work in commercial aviation, benefiting from their defense expertise.

Due to government strict rules and low profits, many businesses prefer to avoid their contracts. 

For example, the profit margin of Lockheed Martin’s is about 10.9%. This figure is much lower as compared to Apple’s 44% profit margin. 

Despite these issues, new industries like space technology are being transformed by commercial innovations, and the government is increasingly looking for expertise in areas like AI and cloud computing.

The defense industry is struggling with two major conflicts. One is financial stability and the other is the push for innovation. The Department of Defense wants to introduce new technologies. But the major focus of the defense industries is to ensure stable returns and minimize risks. 

They rely on cost-plus contracts, which shield them from budget overruns and project delays, and they benefit from the DOD’s consistent payments. This financial security leads companies to invest less in their own research and development since the DOD often funds these advancements.