It’s time to reassess the way we manage the defense industrial base

The proposed merger between Aerojet Rocketdyne

AJRD
and Lockheed Martin

LMT
turns heads in Washington. Letters from Congress, media headlines, and a very divided set of actors on either side of the issue made it a public debate. Much of the discussion centers on national economic variables, but it’s time to broaden the openness. America faces serious security threats today and they will only increase in the future. It is crucial to position the US defense industrial base not only to compete with these threats, but to win.

Fusion proponents argue that Aerojet Rocketdyne lacks the organic resources to keep pace at a time when demand for next-generation high-speed propulsion for space applications and hypersonic munitions increases. Incorporated into the means residing at Lockheed Martin, they claim that Aerojet Rocketdyne products will be in a much more solid position to meet the demands of high speed propulsion.

Opponents of the merger claim that another business combination in an already heavily consolidated defense sector will stifle competition, hampering product price and performance. Other concerns are that Lockheed Martin could deny its competitors access to Aerojet Rocketdyne products to strengthen their competitive advantage. Both sides have real concerns, but there is also a larger issue that extends far beyond this proposed merger: the national innovation advantage.

In the decades following the Cold War, the United States held such an outsized military and technical advantage over its competitors that military parity was never really a concern. Considerations for defense industry mergers focused primarily on market factors and domestic competitive advantage was an afterthought, if at all. Circumstances are quite different today, with China competing with and exceeding US capabilities in some areas. This is the case with one of the essential aspects of the Aerojet Rocketdyne portfolio: hypersonic. Weapons moving at more than five times the speed of sound make conventional defenses obsolete. It’s a frightening proposition that keeps Pentagon leaders from sleeping at night. Hypersonic weapons can herald a turning point in warfare. Those who have a technological advantage in this area have a disproportionate advantage over those who just react.

The military implications of parity are particularly important for the United States, because after the Cold War we reduced our military forces to historically low levels. Today the United States has fewer than 150 bombers, the lowest level in Air Force history. Combat fighters are at half of what they were at the end of the Cold War, and mobility jets are also incredibly stretched in the face of growing demand. The premise behind these reductions in strength was a technological advantage. With overwhelming competitive advantage, capacity could be reduced and victory would always be assured. What happened was that the capacity was reduced, but also the money for modernization. Two decades of war in Afghanistan and Iraq have seen money diverted to counterinsurgency conflicts, without building the advanced forces America needs to prevail against 21st threats from the peers of the century. China and Russia have observed this and have redoubled their modernization efforts. Twenty years later, we are faced with a world where what was once an asymmetric American technological advantage only exists in a few areas. The existing force structure is old and worn out after twenty years of non-stop combat – and a decade more in the case of the Air Force.

Students of history will recognize that this is a perilous position. Historically, the United States has won its major wars through mass, industrial strength, and long-term resistance. This was the experience of the Civil War, World Wars I, II and the Cold War. The United States had certain technological advantages in these conflicts, but the victory really boiled down to overwhelming strength. Today we have neither technological nor capability advantage. Look at China’s scale from the perspective of population, industrial capacity, and economic wealth and it is clear that an American victory dependent on industrial might is no longer an option.

Therefore, when looking at the defense market, it is important now to consider the relative innovation advantage that the United States needs to regain, as this is an area we will need to capitalize on for ‘prevail against modern peer threats. How regulators choose to handle issues like corporate mergers between defense companies will go a long way in determining whether we play at an advantage over potential threats. This is especially true given that Chinese defense companies may have corporate names but are in fact extensions of the state. This gives them considerable fiscal depth, the ability to take risks without having to worry about shareholder realities, and the ability to focus on long-term strategic goals that may not generate a return on investment for decades, if not. never. As Chinese expert Dr Brendan Mulvaney recently noted: “… in China it is really just one big entity, one whole government, one whole society.

These are all factors that the Federal Trade Commission reviewing cases like the proposed Aerojet Rocketdyne-Lockheed Martin merger must consider. Defense company mergers are no longer just about trade in the United States. It is about orienting oneself effectively to win in a new era of competition with one’s peers. Twelve national security figures, including former Defense Secretary Leon Panetta, recently expressed this view in a letter to Congress: “The current effort to regulate America’s biggest tech companies shouldn’t come at the expense of the economic and national security of the United States. Losing a war as we just experienced in Afghanistan can be an emotional challenge, but the existential interests of the United States were not threatened. They are with China. Their values, interests and intentions focus on one vector: Chinese domination. It is a competition we cannot afford to lose. U.S. government regulators need to incorporate these considerations into their future reviews to ensure our defense industry base is in a position to win.

About Dianne Stinson

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