The Military Industrial is more of a problem today than ever before.
The Pentagon is currently falling victim to massive price gauging from U.S. defense contractors. So much so that the U.S. Congress is undergoing a bipartisan effort to address the problem.
In a “60 Minutes” interview, Shay Assad, who is a former VP and Chief Contract Negotiator at Raytheon and later served as a DoD Contract Negotiator said, “the roots of the problem can be traced to 1993, when the Pentagon, looking to reduce costs, urged defense companies to merge and 51 major contractors consolidated to five giants.”
The five giants that dominate the defense contract industry today are:
- Lockheed Martin
- Raytheon
- General Dynamic
- Boeing
- Northrop Grumman
Assad went on to say that the Pentagon overpays for almost everything. Radar, Missiles, helicopters, planes, submarines, everything down to the nuts and bolts. For example, NASA paid $10,000 for an oil pressure switch that cost $328 to make.
The agreed upon profit margin between the DoD and defense contractors is supposed to be 12-15 percent, but a Pentagon study found that the average profit margin is over 40 percent today.
This is simply a competition problem. When a product is badly needed and there are only five companies that provide the product, it creates an environment where the provider has all the leverage. In 2021, only 52 percent of all Defense Contracts had a competing contract.
It’s clear that more competition is needed, but the defense industry in unique in the sense that there’s tremendous startup cost and a massive learning curve. Some potential solutions would be for the government to offer tax incentives to companies that attempt to compete in the market. Another option would be for the government to force the five big contractors to split up, citing the price gauging as a threat to national security.
To put a number on this problem, the U.S. spends roughly $900 billion per year on defense and more than half of that goes to defense contractors. This means that U.S. taxpayers are being overcharged by hundreds of billions of dollars.
In conclusion, as we recently observed with the public pushback against ESG, change can happen in a big way if enough people show that they are upset with something.
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