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![[hbidcpodcast podcastid='5167995']
U.S. military requirements keep expanding, but the <a href="https://news.bloomberglaw.com/federal-contracting/bgov-onpoint-defense-supplier-base-shrinks-as-challenges-mount">defense industrial base keeps declining</a>. In the words of Bloomberg Government analyst Paul Murphy, it's shrinking, concentrated, and less diverse than ever. Murphy joined <b data-stringify-type="bold"><i data-stringify-type="italic"><a class="c-link" href="https://federalnewsnetwork.com/category/temin/tom-temin-federal-drive/" target="_blank" rel="noopener noreferrer" data-stringify-link="https://federalnewsnetwork.com/category/temin/tom-temin-federal-drive/" data-sk="tooltip_parent">the Federal Drive with Tom Temin</a></i></b> with more.
<em>Interview transcript: </em>
<p style="padding-left: 40px;"><strong>Tom Temin </strong>Paul, good to have you back.</p>
<p style="padding-left: 40px;"><strong>Paul Murphy </strong>Good to be with you, Tom.</p>
<p style="padding-left: 40px;"><strong>Tom Temin </strong>And you have written an essay stating that the, as I said, the shrinking, concentrated, less diverse supplier base, DIB, defense industrial base. Put some numbers on it. What led you to this conclusion? People have been talking about it, but you have some numbers.</p>
<p style="padding-left: 40px;"><strong>Paul Murphy </strong>Well, yeah. As you know, we track the government contracts data pretty closely. We have a process where we ingest all the contracts data. And so that's often where I begin my analysis. But we've been watching, you know, the shifting defense strategy over the last several years, particularly with the release of the 2022 National Defense Strategy, you know, with the posture of the United States has shifted dramatically to a focus on China and Russia and near-peer deterrence, which kind of naturally draws our our focus and our resources overseas to distant parts of the globe. And working with, you know, partners, you know, that we haven't had such a close relationship with for many years. And we're building up relationships with companies, with countries like Australia and longtime allies Japan, South Korea, but also the Philippines, the Marianas Islands, places where we sense these threats are emerging. So what we've been able to do is, is try and marry the spending data with this change, this shift in posture. And what we're seeing is, you know, the defense acquisition system faces a lot of challenges, fulfilling its strategic goals and is larger and fewer contracts are going to larger and fewer companies. And there's just a variety of interrelated factors that are leading to this trend.</p>
<p style="padding-left: 40px;"><strong>Tom Temin </strong>Well, is the defense industrial base shrinking because the contract recipients are fewer? Or are the companies really leaving the defense market and disappearing and therefore forcing DOD into smaller numbers with more and bigger contracts?</p>
<p style="padding-left: 40px;"><strong>Paul Murphy </strong>Well, based on our unclassified prime contracts, data absolutely is shrinking. DOD vendors are down 27.6% over the last decade or so from over 56,000 to about 41,000. It's not entirely clear whether they are doing this because they're just as interested in the defense industrial base. But we think there is some of that going on. But we also think there's a lot of other factors market dynamics, agency trends, overall budget trends, logjams over that are contributing to this. And it's not just a disinterest in the defense industrial base, but I think it's kind of the market dynamics playing out in response to these these other factors.</p>
<p style="padding-left: 40px;"><strong>Tom Temin </strong>Write off budgets are flat, say, in a given program area or they're not rising very much. And companies may be a niche company that was seeking growth, can't find it, then they might acquire another supplier and combine or they might be acquired what they call, you know, inorganic growth. But either way, there's one less company than it was before.</p>
<p style="padding-left: 40px;"><strong>Paul Murphy </strong>Absolutely. I mean, that's certainly one factor. The budget's maybe flat in real terms. My numbers look more at the contracts. And what we do see is that the contract spending is up tremendously. It's up over the last decade from just under 300 billion to nearly $500 billion. So contract spending is going up. And but at the same time, the number of vendors is shrinking, the market is concentrating and it's becoming more stratified that the top. What's got a number here for you? The top 20 largest vendors average 50% of DOD spending and the dollars they receive are up 74% in the last decade. So some vendors are certainly doing very well. And I don't want to begrudge success. On the other hand, it raises questions about, you know, how DOD can successfully fulfill its commitment to its own defense strategy.</p>
<p style="padding-left: 40px;"><strong>Tom Temin </strong>Sure. We're speaking with Paul Murphy. He's senior data analyst at Bloomberg Government. And this area of emerging technologies and there are so many structures and mechanisms in DOD for trying to identify them, give them other transaction authority contracts and so forth. But it doesn't seem to have exactly caught fire in the sense of what you're seeing of the number of contractors regularly doing business in the DIB.</p>
<p style="padding-left: 40px;"><strong>Paul Murphy </strong>Yeah, some of these innovative programs are still a relatively small share of of contract spending. But even in their own niche, they are stratified. For instance, if you looked at, you know, programs that are targeting these quote unquote, nontraditional vendors like the Small Business Innovative research Program, SBIR, the spending is up four times, but the top ten vendors got half of the SBIR dollars in fiscal 2023. OTA Spend, a very highly touted program which has a big nontraditional contract contractor focused vendor focus. Top 20 vendors average 80% of dollars in the last decade. And even programs, you know, traditional but have been around for ages, like the simplified acquisition program. They're dominated by well dominated. A third of the dollars are devoted to to large business in this program that targets small, small vendors.</p>
<p style="padding-left: 40px;"><strong>Tom Temin </strong>Could it be that the American economy has all of the innovation and the capacity, even that the Defense Department needs, but Defense Department program people and contract people are just terrible at market research and they can't find them anymore?</p>
<p style="padding-left: 40px;"><strong>Paul Murphy </strong>Well, there's a big problem with data transparency. And there's there's even a proposal to track small business spending under the okay program in the NDAA bill that's pending in Congress. I think they recognize a lot of the problems, but they're having trouble addressing them. And there are a number of possible solutions presented in this new defense industrial base strategy and in numerous NDAA provisions in the the bills, the authorization bills in Congress. But they take a long time. There's a lot of contention and it's incremental progress at best in the last several years. In the meantime, the programs that are in place or procedures that are in place to try and resolve some of these these issues are just going unimplemented. You know, for instance, you know, there's 400 defense industry mergers and acquisitions a year. And duty is supposed to review any that have potential for presenting threats or problems to the defense industrial base or national security. And according to Gallup, you know, they get around to studying about 40 of these mergers per year. And so they're they're proceeding apace. The industry is considering continuing to consolidate and combine these market dynamics, you know, with, you know, the logjams that are, you know, creating financial risk for companies and causing companies to become, you know, risk averse and become, as you point out earlier, analysts interested in the defense industry. And it all kind of feeds on itself and creates a bundle of problems that are kind of hard to unravel. Yeah.</p>
<p style="padding-left: 40px;"><strong>Tom Temin </strong>Well, I mean, they spend the money and they get the goods. Do you think that somehow, I mean, what's missing then? Flexibility or anything?</p>
<p style="padding-left: 40px;"><strong>Paul Murphy </strong>Prices about whether they even get the goods. I mean, the look at that PPBE system, the planning, programing, budgeting and execution. So it's been around, you know, since McNamara and the Cold War in the 1960s. And it can take two to four years for a program to be conceived and budgeted and executed. And that's before you get into, you know, the actual procurement, the procurement, the administrative, you know, lead time and and in the problems of source selection and evaluating proposals and dealing with protests and all these things that can feed into, you know, delay upon delay which tends to work to the benefit of companies that have deep pockets and are able to withstand the the the headwinds of, you know, the financial uncertainty.</p>
<p style="padding-left: 40px;"><strong>Tom Temin </strong>Right. And also it means programs get stretched out, new platforms take seemingly forever to get perfected and into production. And sometimes, you know, I'm thinking of a certain ship from a few years ago. The whole program is stillborn after a decade and billions.</p>
<p style="padding-left: 40px;"><strong>Paul Murphy </strong>Right. I mean, look how frequently, you know, the tech companies. Look how frequently your Apple Watch comes out with a new version or your Samsung phone comes out with a new version. I mean, this is the pace of of commercial technological change. And, you know, if an acquisition expand that extrapolate on that you know if if an acquisition program is taking two to four years to to come to fruition, I mean, you're looking at, you know, delivering a product that is generations out of date by the time it's in the hands of the soldiers.</p>
<p style="padding-left: 40px;"><strong>Tom Temin </strong>I guess what the nation needs is a good billion dollar carrier.</p>
<p style="padding-left: 40px;"><strong>Paul Murphy </strong>Well, you know, the technology is really changing. I mean, and there's questions about whether, you know, these traditional technologies that help the U.S. and the allies win World War Two are even appropriate. Now. They're building families of weapons, not just fighter jets, but fighter jets with uncrewed vehicles accompanying them to sense the threats over the horizon before, you know, the jets are come close to their targets or they're building families of of of undersea uncrewed vehicles to accompany ships as they patrol, you know, the South China Sea. And so it's I think there's a question about whether they're not just timing the the acquisition of these systems, but whether they're they're making appropriate decisions to, you know, keep pace with, you know, the rapidly changing technology. I mean, the Russians have figured out how to destroy tanks. Among tanks and in the front in Ukraine. They're there figuring out, you know, if we introduce new drones or the Ukraine, Ukrainians introduce new drones into the battlefield, you know, they're figuring out how to counter the the chief advisor systems and and shoot down, you know, high percentages of drones. And so there's kind of a a very rapid need for technological change. And this has to be built into the system if it's going to, you know, as I say, meet the needs of the national defense strategy.</p>
<p style="padding-left: 40px;"><strong>Tom Temin </strong>All right. Lots to think about. Paul Murphy is senior data analyst at Bloomberg Government. Always good talking with you.</p>
<p style="padding-left: 40px;"><strong>Paul Murphy </strong>Great to talk to you, Tom.</p>
<p style="padding-left: 40px;"><strong>Tom Temin </strong>And we'll post this interview with federalnewsnetwork.com/federaldrive. Subscribe to the Federal Drive wherever you get your podcasts.</p>]()
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