Warren, Garamendi Urge DoD to Review Excessive Consolidation’s Risks to Defense Industrial Base

Letter

Dear Secretary Austin,
We write regarding our ongoing concerns with the U.S. Department of Defense’s (the
Department, or DoD) insufficient review of consolidation in the defense industrial base and
the resulting impacts on innovation, supply chains, and national security. A strong and
resilient industrial base is vital to enable the development, maintenance, and deployment of
military assets, but the domestic supply chain is already struggling to meet demands and
defense consolidation further exacerbates these concerning dynamics. The current major
conflicts around the globe are exposing supply chain gaps and the Department must fulfill
its obligation to ensure our defense industrial base remains resilient.
The Defense Supply Chain Has Critical Weaknesses
The unjustified invasion by Russia into Ukraine on February 24, 2022 and the competition
posed by China on the global stage have increased the demand for defense systems,
ammunition, and other military equipment. The United States and our allies are struggling
to meet the demand required by these events as the industrial base has become stretched to
its limits.
The recently-released and first-ever National Defense Industrial Strategy found that the U.S.
defense industrial base is falling behind and DoD needs to focus on “increasing our
production capacity and strengthening our supply chains.”The report’s findings on the need
for “capacity to produce… capabilities at speed and scale” and DoD’s current lack of a
“comprehensive effort for mitigating supply chain risk” raise concerns of the industrial
base’s ability to meet demand and ensure supply chain resilience. For example, customers
for the National Advanced Surface-to-Air Missile System will have to wait two years for it
to be manufactured.
Last May, DoD directed the task force on 21st Century Industrial Base for National Defense
to “‘refocus’ its efforts on improving the resilience of the U.S. defense industrial base.” As
part of that effort, the task force was charged with cataloguing all critical foreign imports to
the industrial base and identifying alternatives to the sources DoD currently depends on.
Overall, the task force’s mission was to “increase the resilience and capacity in the defense
industrial base and associated supply chains.” An essential component of increasing this
resiliency and capacity is a robust and competitive defense industry. The work is critical as
the DoD’s own state of competition report states “[w]hen markets are competitive…
benefits [come] through improved cost, schedule, and performance” as well as effective and
efficient performance for all of DoD’s equipment requirements.

Supply Chain Threats from Industry Consolidation and GAO Findings on DoD’s Inability to Assess and Address Risky Mergers
Excessive consolidation of the defense industrial base is one of the main factors contributing
to the industrial base’s fragile supply chain and inability to meet demand. The consolidation
often leaves DoD with only one or two suppliers that can meet its needs. With only one
available supplier for a contract, DoD is unable to compare offers to ensure fairness and has
to provide a non-compete award, undermining the intention of the bidding process. Following Northrop Grumman’s acquisition of Orbital ATK, Boeing withdrew from bidding for the Sentinel (formerly known as the Ground Base Strategic Deterrent) program and claimed that Northrop delayed negotiations necessary for Orbital to work with Boeing. This withdrawal left Northrop Grumman as the sole bidder for the Sentinel program. DoD’s state of competition report warned that “[i]nsufficient competition may leave gaps in filling… needs, remove pressures to innovate to outpace other firms, result in higher costs to taxpayers as leading firms leverage their market position to charge more, and raise barriers for new entrants.” Additionally, the report warned how “a single source or a small number of sources for a defense need can pose mission risk and… significant national security risks.” With hundreds of mergers and acquisitions (M&A) each year in the defense space, the DoD has found consolidation is “a key risk imperiling the health and resilience of the defense industrial base.”
To address the threats posed by consolidation, the DoD established a process to assess the
potential effects of defense-related M&A and provide input to federal antitrust agencies
when necessary. But the Government Accountability Office (GAO) recently released a
report that found deficiencies in the DoD’s process, including that DoD does not
“effectively align… its concerns… with the resources and robustness of its efforts to assess
M&A risks.” Although around 400 defense M&A occur annually, DoD only assessed an
average of 40 for potential risks each year. This leaves hundreds of consolidations
unchecked and vulnerable to produce unfavorable outcomes that “reduce competition and
increase the risk of higher costs and reduced innovation.” The GAO also found DoD did
“not proactively monitor the effects of M&A to determine if the potential risks they assessed
were realized,” even in instances where industrial base policy or DoD officials
“determined during the assessment that further monitoring was warranted because potential
risks existed.” The lack of monitoring and follow up by DoD and stakeholders means the
government cannot know if identified risks or advantages ever materialize. Without that
information DoD cannot assess whether its own processes are sufficient or whether
additional measures need to be put in place to mitigate a realized risk – or ensure a promised
benefit.
DoD’s Failure to Address Supply Chain Risks from the L3Harris-Aerojet Merger

DoD’s failure to provide thorough oversight on defense M&A is even more concerning
given the recent approval of the merger between L3Harris Technologies and Aerojet
Rocketdyne. Last year, Senator Warren wrote to the Federal Trade Commission (FTC)
urging the agency to oppose the merger which would allow L3Harris to take ownership of
the last remaining independent U.S. supplier of missile propulsion systems. Senator
Warren and Representative Garamendi also sent a letter to DoD urging it to do a full
assessment of the merger risks and provide as much public transparency as possible around
that review. According to press reports, DoD ultimately allowed the merger to close with “assurances” from the L3Harris CEO Chris Kubasik that the merger would bring benefits to
the industrial base.
It remains unclear what, if any, assurances were actually made. On November 3rd, 2023,
DoD provided a briefing to Senator Warren’s and Representative Garamendi’s staff that
confirmed DoD imposed no conditions on the merger. One simple condition would be a
signed consent agreement ensuring the company would continue to supply missile
propulsion systems to other companies, such as in the Northrop Grumman-Orbital ATK
merger. However, such an agreement was never made. There was also no indication that
the impacts of this merger would be monitored, making it difficult to validate whether the
promised merger benefits would take place. Finally, the briefing revealed the DoD officials
could not provide a clear roadmap of engagement they had with antitrust offices at FTC and
the U.S. Department of Justice (DOJ) on this matter. These specific gaps in the DoD’s
review of the L3Harris-Aerojet are serious flaws that the GAO report indicates may be
systemic lapses, requiring DoD to completely reassess its approach major defense industry
mergers moving forward.
These concerns are not unique to the L3Harris-Aerojet merger. The assessments DoD
conducts on M&A lack basic public transparency which might otherwise provide useful
insight and accountability. The DoD does not provide public comments or disclose its
findings related to defense mergers. Without transparency the public cannot know DoD’s
assessment of whether a merger might affect defense contracts, prices, supply chain gaps,
innovation, and national security. This makes it more difficult to oversee and mitigate the
risks of mergers, or to assess the sufficiency of DoD’s review process. Given the importance
of ensuring a robust defense industrial base and diversified supply chains, it is concerning
that the DoD does not appear to be conducting robust oversight of even some of the largest
mergers.
Merger Provisions in the National Defense Authorization Act of 2024
Congress recently strengthened DoD’s ability to assess potential mergers and acquisitions.
Section 857 of the National Defense Authorization Act for Fiscal Year 2024 (FY24 NDAA) requires defense companies that are parties of a potential merger or acquisition to simultaneously notify and provide the same information to DoD that they are already required to provide to DOJ and FTC. This will allow DoD to proactively assess potential threats to the industrial base rather than being forced to rely on federal antitrust agencies to do so. Recent history suggests that much more needs to be done to ensure we maintain a robust, competitive defense base. Without more transparency, however, Congress cannot assess whether DoD’s current authorities and access are sufficient to protect our national security.

Conclusion and Questions
Major conflicts around the globe have made clear that the defense industrial base must
remain strong and resilient to be able to support our national defense. In this effort, DoD
spent over a $130 billion on weapons and systems in 2022, raising the importance of the
U.S. government to ensure taxpayer dollars are spent on fairly priced equipment and not
contributing to price gouging. With rampant consolidation that affects supply chains,
prices, and security, DoD must conduct more thorough and transparent assessments of M&A
in the defense space.
To better understand DoD’s process and DoD’s view on the status of the defense industrial
base, we request answers to the following questions by March 11, 2024:
1. What is DoD’s current assessment of the health of the defense industrial base?
2. In response to GAO’s report, has DoD committed to tracking or conducting any
long-term reviews of defense mergers?
3. What were the assurances DoD received from L3Harris regarding the L3HarrisAerojet merger? If DoD received no assurances, why did it not choose to seek them?
4. What are the benefits DoD expects the defense industrial base will gain from the
L3Harris-Aerojet merger?
5. How does DoD plan to ensure those benefits materialize and hold the company to its
“assurances”?
6. What does DoD release to the public regarding its assessments and recommendations
on defense M&A?
a. Is DoD in the process of changing its disclosure procedures regarding its
assessments and recommendations on defense M&A?
7. How will DoD ensure that it receives the disclosures required under section 857 of
the FY24 NDAA?
a. What actions will DoD take to assess the impacts of mergers when it receives
these disclosures?

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