DEPARTMENT OF DEFENSE REPORT
State of Competition within the Defense
Industrial Base
Office of the Under Secretary of Defense for
Acquisition and Sustainment
February 2022
ii
Contents
Reporting Requirement ....................................................................................................................1
Executive Summary .........................................................................................................................1
Section 1: Overview of Competition and Cross-Cutting Challenges ..............................................2
Overview of the State of Competition in the Defense Industrial Base ......................................................... 3
Factors Impacting Competition ..................................................................................................................... 4
Consolidation in the Defense Industry ................................................................................................................... 4
Data Rights and Intellectual Property ..................................................................................................................... 7
Federal-Wide Push to Use Commercial Items ..................................................................................................... 12
Section 2: Growing the Small Business Vendor Base ...................................................................13
Small Business Outreach to Expand the Vendor Base and Ability to Compete ......................................... 14
Leveraging Small Business Programs to Grow the Industrial Base............................................................ 15
Reducing Barriers to Entry to Support Competition ................................................................................... 16
Section 3: Defense Industry Outlook—Sectors Where Insufficient Capacity and Competition is a
Concern ..........................................................................................................................................17
Workforce Constraints and Shortfalls ......................................................................................................... 17
Priority Industrial Base Sectors................................................................................................................... 18
Castings and Forgings ............................................................................................................................................ 18
Missiles and Munitions .......................................................................................................................................... 19
Energy Storage and Batteries ................................................................................................................................ 20
Strategic and Critical Materials ............................................................................................................................. 22
Microelectronics ..................................................................................................................................................... 22
Conclusion .....................................................................................................................................23
Department Actions to Achieve the Goals of the Executive Order ............................................................ 27
1
Reporting Requirement
On July 9, 2021, President Biden signed Executive Order 14036, Promoting Competition in the
American Economy. The Executive Order established the White House Competition Council to
coordinate and promote Federal Government efforts to advance competition. Under Section 5 of
the Order, the Department of Defense (DoD) was directed to submit a report to the Chair of the
White House Competition Council reviewing the state of competition within the defense
industrial base (DIB), including areas where a lack of competition may be of concern and any
recommendations for improving the solicitation process.
Executive Summary
Competition within the DIB is vital to the Department for several reasons. When markets are
competitive, the Department reaps the benefits through improved cost, schedule, and
performance for the products and services needed to support national defense. During initial
procurement, incentivizing innovation through competition drives industry to offer its best
technical solutions at a best-value cost and price. During contract performance, the expectation
that contractors will have to compete against other firms in the future encourages them to
perform effectively and efficiently.
Competition is also an indicator of the necessary industrial capability and capacity to deliver the
systems, key technologies, materials, services, and products the Department requires to support
its mission. Insufficient competition may leave gaps in filling these 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. Moreover, having only a
single source or a small number of sources for a defense need can pose mission risk and,
particularly in cases where the existing dominant supplier or suppliers are influenced by an
adversary nation, pose significant national security risks. For all these reasons, promoting
competition to the maximum extent possible is a top priority for the Department.
Since the 1990s, the defense sector has consolidated substantially, transitioning from 51 to 5
aerospace and defense prime contractors.
1
As a result, DoD is increasingly reliant on a small
number of contractors for critical defense capabilities. Consolidations that reduce required
capability and capacity and the depth of competition would have serious consequences for
national security. Over approximately the last three decades, the number of suppliers in major
weapons system categories has declined substantially: tactical missile suppliers have declined
from 13 to 3, fixed-wing aircraft suppliers declined from 8 to 3, and satellite suppliers have
halved from 8 to 4. Today, 90% of missiles come from 3 sources.
2
As a result, promoting
competition and ensuring it is fair and open for future programs is a critical Department priority.
This report lays out five broad recommendations to spur increased competition in the DIB:
Strengthening Merger Oversight. DoD faces a historically consolidated DIB, making
heightened review of any further mergers and acquisitions (M&A) necessary. Moreover,
when a merger threatens DoD interests, DoD will support the Federal Trade Commission
1
See Final Report of the Commission on the Future of the United States Aerospace Industry, November 2002, p. 134,
https://history.nasa.gov/AeroCommissionFinalReport.pdf.
2
Source: 2020 DCMA Munitions Industry Production Analysis and July 2020 DCMA Missile Sector Economic Assessment.
2
(FTC) and Department of Justice (DOJ) in antitrust investigations and recommendations
involving the defense industrial base.
Addressing Intellectual Property Limitations. Certain practices surrounding intellectual
property (IP) and data rights have been used to limit competition in DoD purchasing and to
induce “vendor-lock” and other undesirable results. DoD will implement best practices for
identifying its long-term IP needs early in the competitive phases of acquisition programs,
ensuring IP is an evaluation factor in competitive awards and a negotiation objective in sole-
source awards, and contracting with vendors who are willing to provide the government the
IP deliverables and rights it needs. In its ongoing modernization of its approach to IP rights,
DoD should do what it can to create IP-related procedures that do not result in unnecessary
anticompetitive consequences.
• Increasing New Entrants. To counteract the trend of overall shrinking of the DIB, DoD
should endeavor to attract new entrants to the defense marketplace by reducing barriers to
entry. This will be accomplished through small business outreach, support, and use of
acquisition authorities like other transaction (OT) authority and commercial solutions
opening (CSO) that provides DoD the flexibility to adopt and incorporate commercial best
practices to reduce barriers and attract new vendors.
• Increasing Opportunities for Small Businesses. DoD should increase small business
participation in defense procurement, with an emphasis on increasing competition in
priority industrial base sectors.
Implementing Sector-specific Supply Chain Resiliency Plans: DoD should take steps to
ensure resilience in the supply chain for five priority sectors: casting and forgings, missiles
and munitions, energy storage and batteries, strategic and critical materials, and
microelectronics. Detailed recommendations are included in DoD’s report on Executive
Order 14017, America’s Supply Chains.
Section 1 of this report provides an overview of the state of competition in DIB and introduces
cross-cutting challenges and recommendations related to M&A, IP, and reliance on commercial
items. Section 2 focuses specifically on the health of the small business DIB and
recommendations to increase the small business vendor base. Section 3 provides a sectoral
assessment across five priority areas, with recommended mitigations across each of these areas.
DoD is committed to pursuing these principles throughout its procurement and sustainment
processes. These efforts to increase competition will deliver benefits for cost, schedule, quality,
performance, innovation, and industrial capacity. These efforts will also enhance its capability to
meet mission demands and national security requirements.
Section 1: Overview of Competition and Cross-Cutting Challenges
Competition within the DIB is critical to national and economic security. It spurs innovation of
transformational technologies, incentivizes contractors to offer lower prices, and yields
improvements in quality. This report reviews the current state of competition, discusses systemic
challenges to expanding competition, and describes the positive actions that DoD is taking to
broaden its competitive base. DoD’s efforts are designed to increase competition and build
domestic capacity, especially from small businesses, and to close gaps in the domestic national
security and technology industrial base.
3
Overview of the State of Competition in the Defense Industrial Base
DoD tracks competition by obligations
3
and contract actions based on data from the Federal
Procurement Data System—Next Generation (FPDS-NG). The FPDS-NG competition report
measures competition and fair opportunity at the contract and order level. The competition rate is
calculated as either the dollars obligated for competitive contracts (i.e., two or more offerors)
divided by the total dollars obligated, or the number of contract actions for competitive contracts
divided by the total number of contract actions. The competition rate varies depending upon the
mission and type of product or service being procured. Competition rates also differ greatly
depending on whether the calculation uses obligations or contract actions. The DoD competition
rate based on dollars obligated is typically in the 50-60% range; if based on the number of
contract actions, the competition rate would be consistently in the 90% range.
The competitive environment for the DIB remained relatively stable over the past several years.
Over the past ten years, DoD has seen total dollars obligated vary from a high of $420 billion in
Fiscal Year (FY) 2020 to a low of $273 billion in FY 2015. During that time, the competition
rates ranged from a high of 58.3% in FY 2014 to 50.1% in FY 2020, and projected at 52% for
FY 2021, for a ten-year average of 54.2%. Figure 1 displays the ten-year trend for competitive
and non-competitive dollars obligated, with the peak of $420B total dollars obligated in FY 2020
due to increased obligations for COVID-19 related actions.
Note: Dollars shown in billions
Figure 1: Ten-year trend for DoD competitive and non-competitive dollars
To help improve its tracking of competition within the DIB, DoD developed a Procurement
Business Intelligence Service Competition Analysis Scorecard to report competition rates at the
3
Obligations refers to the funds reserved in the accounting system upon contract award. Those dollars are obligated under the
contract for expenditure.
57.1%
56.7%
58.3%
55.4%
52.8%
52.0%
53.9%
53.9%
50.1%
52.0%
40%
45%
50%
55%
60%
65%
70%
$-
$50
$100
$150
$200
$250
$300
$350
$400
$450
2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
Billions
Total Competed ($B) Total Not Competed ($B) Competition Rate (%)
Fiscal Year
4
product service code and broader portfolio group levels.
4
The competition scorecard provides
dashboard-like presentations to help components track and analyze competition trends in
portfolio groups for major weapon system platforms (e.g., aircraft, ships, and land vehicles),
electronic and communications equipment, and their associated sustainment phases. Historically,
these portfolio groups report competition rates in the 15–40% range for dollars obligated, which
has a significant impact on DoD’s overall competition rate since these weapon systems and
major equipment account for a sizeable portion of the total dollars obligated. The competition
scorecards provide management-level reports and tools to enable informed business decisions
that support procurement policies with the goal of improving competition in the DoD supply
chain and industrial base.
Similarly, securing competition varies widely based upon the mission and type of product or
service being procured. Generally, those contracting organizations supporting installation-level
mission support and logistical requirements (e.g., food service, facility maintenance, grounds
maintenance, transportation services) and/or depot-level maintenance services requirements (e.g.,
contractor logistics support for spare parts) have multiple potential suppliers resulting in very
high competition rates. This is also true for contracting organizations heavily involved in
services, commercial products, and construction.
The competitive percentages are lower in organizations that procure major systems (e.g.,
weapons, automated information systems), specialized equipment, spares (especially on aging
weapon systems), and upgrades that may need to be purchased from the original equipment
manufacturer (OEM) or supplier. These programs can require sole-source extensions of contracts
that were originally competed because the programs have moved past the stage in their lifecycle
where competition is economically viable. These sole-source transactions are made in
accordance with statutory requirements that authorize dealing with only one source.
Factors Impacting Competition
Consolidation in the Defense Industry
During the 1990s, the U.S. defense industry underwent drastic consolidation. As an example, the
number of aerospace and defense prime contractors shrank from 51 to 5: Lockheed Martin (LM),
Raytheon, General Dynamics (GD), Northrop Grumman (NG), and Boeing.
5
The trend toward
consolidation has continued in the last five years, due to vertical and horizontal integrations and
the entry of private equity firms performing roll ups.
A few key factors help explain consolidation trends in the defense industry.
Consolidation in the U.S. defense industry historically increases under budget reduction
pressures and slows during periods of growth. A 2018 study showed that M&A
transaction volumes averaged $10–$11 billion annually during U.S. defense spending
4
Product service codes describe the types of goods or services that a contract predominantly contains. Portfolio groups were
established under DoD's Better Buying Power initiative to group together similar product service codes into categories to allow for
more streamlined procurements, similar to the government-wide category management spend categories.
5
See Final Report of the Commission on the Future of the United States Aerospace Industry, November 2002, p. 134,
https://history.nasa.gov/AeroCommissionFinalReport.pdf.
5
downturn periods, compared with $4.5 billion annually during the 9-year growth cycle
following 9/11.
6
Low interest rates make capital cheaper and more accessible for acquiring firms, facilitating
greater M&A activity.
DoD major systems development programs take years to progress from initial
requirement through design, prototyping, initial production, testing, full production,
operational fielding, and sustainment. Opportunities for new programs can be limited,
driving unsuccessful bidders to exit the market when it is unsustainable to maintain
design and manufacturing skills until the next requirement presents itself.
Consolidation and market concentration generally lead to reduced competition and creates
sourcing risk. Table 1 captures examples of the reduction of suppliers over the past twenty years
for major weapons categories, such as tactical missiles declining from 13 suppliers to 3 suppliers,
fixed-wing aircraft declining from 8 suppliers to 3, and satellites declining from 8 suppliers to 4.
Weapons category
Total U.S. contractors
1990 1998 2020
Current U.S.-based prime contractors
Tactical missiles 13 3 3
Boeing
Lockheed Martin
Raytheon Technologies
Fixed-wing aircraft 8 3 3
Boeing
Lockheed Martin
Northrup Grumman
Expendable launch
vehicles
6 2 2
Boeing
Lockheed Martin
Satellites 8 5 4
Boeing
Hughes
Lockheed Martin
Northrup Grumman
Surface ships 8 5 2
General Dynamics
Huntington Ingalls
Tactical wheeled vehicles 6 4 3
AM General
General Motors
Oshkosh
Tracked combat vehicles 3 2 1 General Dynamics
Strategic missiles 3 2 2
Boeing
Lockheed Martin
Torpedoes 3 2 2
Lockheed Martin
Raytheon Technologies
Rotary wing aircraft 4 3 3
Bell Textron
Boeing
Lockheed Martin
(Sikorsky)
Table 1. Fewer contractors exist for major weapons categories
7
Although studies of this trend have not found a strong correlation between consolidation and
increased program pricing, additional risks beyond pricing come with consolidation. Growing
6
FY17 National Defense Authorization Act Study: Preserving Competition in the Defense Industry, Boston Consulting Group, 2018,
p. 4.
7
Office of Commercial and Economic Analysis (OCEA) U.S. Aerospace & Defense Industry Consolidation Assessment, November
2021. Sources and information included CSIS, Bloomberg, Defense News, National Defense, Center for Defense, GAO, POGO.
6
concentration can reduce the availability of key supplies and equipment, diminish vendors’
incentives for innovation and performance in government contracts, and lead to supply chain
vulnerabilities.
DoD Action: Mitigating the Effects of Mergers and Acquisitions and Consolidation on
Competition
Per DoD Directive 5000.62, DoD continues to assess, on its merits, each M&A transaction that
could impact the DIB, analyzing the effect on “national security, the industrial and technological
base, innovation, or any other potential issue including those relating to the public’s interest.”
8
The Department independently assesses proposed mergers and makes a recommendation to the
lead antitrust agency for that transaction. If the transaction would result in anticompetitive
impacts, the antitrust agencies can implement behavioral or structural remedies. DoD, however,
may have concerns that go beyond those specified in the antitrust analysis, such as concerns
related to mission risk or national security risk.
When evaluating a merger, DoD assesses whether adverse competitive effects have occurred or
are likely to arise in the future. M&A is broken down into two types: horizontal mergers in
which firms acquire businesses that overlap with products or services and vertical mergers in
which firms purchase companies in their supply chain. Both types of mergers may present
competition concerns, although the defense industry has seen an increase in vertical mergers in
recent years.
9
Horizontal mergers raise concerns when the acquirer is able to raise prices, reduce
output, diminish innovation, or otherwise harm customers as a result of diminished competitive
constraints or incentives.
10
Vertical mergers can raise concerns when the vertically integrated
firm has the ability and incentive to take anticompetitive actions that provide it an advantage
over competitors. The primary theories of anticompetitive behavior in vertical mergers are a)
foreclosure (i.e., closing off a key input to competitors required for a system or product), b)
raising rivals’ costs, and c) access to competitively sensitive information. The defense industry
can be more vulnerable to foreclosure compared to other industries given DoD’s unique
requirements and frequent position as the only customer for a particular product or service.
The Department works closely with the antitrust agencies who have the authority to ensure the
appropriate remedy is implemented to address potential impacts caused by anticompetitive risks
that could result from a proposed transaction. When a merger is likely to negatively affect the
Department, the antitrust agencies will typically recommend structural remedies (such as
divestitures, or blocking the merger) or, in limited cases, behavioral remedies (such as a consent
order) if they believe the risk can be mitigated.
In addition to aiding the antitrust agencies, the Department’s assessments provide a fact-based
analysis of the risks, issues, and opportunities that help establish strategies and consider
investments in specific areas necessary to protect and promote the U.S. technology and
innovation base. In 2020, the Office of the Under Secretary of Defense for Research and
8
DoD Directive 5000.62 “Review of Mergers, Acquisitions, Joint Ventures, Investments, and Strategic Alliances of Major Defense
Suppliers on National Security and Public Interest”, effective February 27, 2017,
https://www.esd.whs.mil/Portals/54/Documents/DD/issuances/dodd/500062p.pdf.
9
See for example, Rodrigo Carril & Mark Duggan, 2020. "The impact of industry consolidation on government procurement:
Evidence from Department of Defense contracting," Journal of Public Economics, vol 184.
10
See DOJ and FTC Horizontal Merger Guidelines, Aug. 19, 2010.
7
Engineering (OUSD[R&E]) executed assessments that informed strategies and investment
decisions in areas like hypersonics, directed energy, and biotechnology.
OUSD(R&E) subject matter experts regularly participate in assessments to determine the effect
of foreign transactions, export controls, M&A, and market distribution on national security
across R&E modernization priorities as well as technology-related events in general. Results of
these assessments are used to create a balance between promoting and protecting the technology
and innovation base with the goal of sustaining competition without impacting national security.
In doing so, addressing IP rights and the impact on competitive business models is one of the
critical elements that must be proactively addressed in developing, producing, supporting, and
modernizing cutting-edge technology-based capabilities. On the one hand, IP rights encourage
technology innovations that are critical to DoD’s capabilities and mission by enhancing the
return on investment for those entities that invest in creating such technology. However,
exclusive IP rights also have the potential to restrict open competition for the new technologies,
once created.
Data Rights and Intellectual Property
IP, as a return-on-investment model, both encourages and restricts competition. From a
technology standpoint, the IP statuatory and regulatory framework drives competition to create
innovative technology as a prerequisite to qualify for IP protection. From a business standpoint,
the resulting IP protection itself establishes a form of limited monopoly to commercialize that
new technology, creating tension with competition. IP, as a form of legal protection, grants
exclusive or limiting rights to individuals (e.g., inventors or authors) for their intellectual
creations, such as inventions, works of art or music, or technical know-how. The exclusive rights
and legal remedies granted to IP owners are not undesirable or problematic merely because they
may restrict full and open competition for technologies protected by those exclusive IP rights. In
fact, IP rights can serve as an incentive to greater innovation. The government must recognize
and plan for the impact of such rights, and use competitive pressure, its market power, and all the
other tools available to mitigate against undesirable restrictions on competition when utilizing
cutting-edge technology protected by IP rights.
In the defense sector, procurements operate under a unique system for allocating rights for use of
technical data and computer software based on a combined licensing of the underlying
copyrights and trade secret protection—collectively referred to as “data rights.” This data rights
regime generally allocates greater rights to the entity (government or contractor) that funded the
development of the underlying technology (hardware or software). However, under various
statutes, regulations, and case law, some forms of government investment are categorized as
contractor funding. For example, government development funding paid via independent
research and development (R&D) reimbursement are later treated as contractor funding in any
follow-on procurement contract. DoD can also contractually require unlimited rights for certain
technical data regardless of who funded development (e.g., data necessary for operation,
maintenance, installation, or training (OMIT) activities, or form, fit, and function data to enable
interchangeability of functionally equivalent components).
This funding-based approach to allocating IP rights is based on a statutory foundation that has
existed since the mid-1980s. These rules, requested and long supported by industry, are enabled
by taking advantage of the existing features of the data rights rules and the economics of the
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defense marketplace. This poses challenges in the later stages of the acquisition program
lifecycle, after the government has selected the sources of its products and is seeking to foster
competition for product support and upgrade of the selected vendors’ products, which typically
are protected by IP restrictions. To address these long-term restrictions on competitive sourcing,
the government must take action earlier in the program lifecycle, leveraging competitive source
selection to work with vendors to establish long-term business models that allow for increased
competition while respecting the vendors’ privately developed IP rights.
To do so, DoD should anticipate, plan for, and counter the following considerations and practices
that can be used to limit competition:
No compulsory licensing beyond the regulatory standard rights, regardless of what is actually
needed. Statutory and regulatory restrictions prohibit requiring greater than the regulatory-
standard data rights licenses as a condition of awarding a contract, and discourage the offer of
proprietary technology with data rights restrictions.
11
DoD personnel and defense contractors
often misunderstand or misconstrue rules that carve out detailed manufacturing and process data
(DMPD) from DoD’s ability to require unlimited rights in data for OMIT activities.
One way to address these challenges is to ensure that the program’s long-term IP requirements
are integrated appropriately into source selection evaluation factors, to ensure the government is
planning for the IP-based risks to its long-term program competition goals, and to incentivize
contractors to furnish the necessary data deliverables and license rights to promote later
competition. Addressing IP challenges at this stage can be especially effective because multiple
contractors are competing for the first contract and have a greater competitive incentive to
provide the technical data rights as a means of securing the contract. In other words, DoD should
be seeking to deal at the outset with contractors who provide the rights needed by the
government.
Tying or bundling—and its relation to modularity and Modular Open Systems Approaches.
Defense contractors frequently leverage a feature in the data rights scheme related to allocating
license rights based on source development funding. This feature has been known historically
and formally as the doctrine of segregability, and more recently and informally as the doctrine of
modularity, or modular licensing. This concept allocates license rights based on the source of
funding for the development of the technology with the assessment of the funding source at the
“lowest practicable segregable level” of the system architecture. In practice, this may result in
discrete subsystems or components of a larger system being categorized as developed
exclusively at private expense and therefore subject to the most significant license restrictions
(e.g., limited rights in technical data, or restricted rights in noncommercial computer software).
Since these license rights generally do not allow release of the data or software for competition,
this practice can supply the government with gaps in data rights in a system or subsystem—
sometimes referred to as “Swiss cheese” data rights.
This terminology refers to the scenario in which a system or subsystem that was developed
mostly or significantly at government expense (resulting in licensing allowing use and release for
competition) may also have discrete subsystems or components that were privately developed
11
See 10 U.S.C. § 2320(a)(2)(H), which is implemented at DFARS 227.7103-1(c) and (d) for noncommercial tech data, and
extended by policy to noncommercial computer software at DFARS 227.7103-1(c) and (d). In addition, similar long-standing policies
and practices for commercial technologies are implemented at DFARS 227.7102-1 for commercial tech data, and DFARS 227.7202-
1 and -3 for commercial computer software.
9
(and subject to licensing prohibiting such competitive use or release). In such a case, DoD would
be unable to release the complete, detailed data package and data rights covering the entire
system for a competitive product support effort, due to the restrictions on those portions of the
data covering the proprietary components. If that proprietary data were excluded from the data
package, the remaining data may be released for competition, but the data package would be
incomplete (i.e., it is said to have “holes” in it or Swiss cheese data rights), rendering overall use
for competition impracticable. This circumstance limits competition on much larger systems
funded substantially by the government.
To proactively mitigate against such IP-based restrictions on competition, DoD can utilize a
variety of techniques and countermeasures, such as using a modular open systems approach
(MOSA) to manage the proprietary components as “black boxes,” negotiating specialized license
agreements, or a combination of the two. MOSA combines system engineering open architecture
techniques with open licensing and related legal and business considerations to isolate
proprietary technology and prevent overleveraging of limited private investments from
undermining return on government investment. MOSA enables the government to limit the
impact of restrictions on privately developed components by treating those components at
technology as proprietary “black boxes” that are described with releasable “form, fit, or
function” data
12
and well-defined and described interfaces to the remainder of the system
components. This allows other vendors to identify suitable alternatives for the proprietary black
boxes, or, if necessary to contract with the OEM for support for those black boxes, limit such
sole-source efforts to the black box itself.
Alternatively, or in conjunction with MOSA, the government can mitigate the IP restrictions on
proprietary components by negotiating specialized license agreements that better balance the
government’s and vendors’ interests than the Defense Federal Acquisition Regulation
Supplement (DFARS) standard license rights, or the vendor’s customary commercial license.
The DFARS allows and encourages the parties to negotiate specialized license agreements for all
data rights scenarios, including technical data and computer software for commercial and
noncommercial products, for developmental and nondevelopmental technologies, or any
combination of such characteristics. In all cases, the negotiation of any specialized license must
occur through voluntary, mutual agreement of the parties. Accordingly, the government has a
compelling interest in entering into such negotiations in a competitive environment to the
maximum extent possible, to leverage its market power and incentivize the vendors to enter into
agreements that encourage the competitor to develop business models and provide corresponding
offers that better balance both parties’ interests in ensuring return on their technology
investments, while promoting and enhancing DoD options for increased competition throughout
the lifecycle of the program.
To effectively implement these mitigations and countermeasures to IP-based restrictions on
competition, DoD should do so early in the program lifecycle—to leverage competitive pressures
and government market power to the maximum extent practicable. This requires the government
to develop IP strategies at program inception, and to ensure that those strategies plan for the
12
The DFARS framework provides DoD with the ability to require unlimited in rights in form, fit, or function data, which is defined as
“technical data that describes the required overall physical, functional, and performance characteristics (along with the qualification
requirements, if applicable) of an item, component, or process to the extent necessary to permit identification of physically and
functionally interchangeable items”. See DFARS 252.227-7013 paragraphs (a)(11) and (b)(1)(iv).
10
program’s long-term needs to preserve and enable competition throughout the lifecycle. To do
so, these IP strategies must be integrated with other program analyses and strategies, such as the
product support analysis and lifecycle support plan, and the program’s acquisition strategy. The
effective integration of these strategies requires a cross-functional team effort, including subject
matter experts from program management, engineering, contracting, law, sustainment, logistics,
cost and pricing, and financial analysis. Accordingly, DoD is dedicating significant effort to
training and educating its acquisition workforce, including modernizing its IP policies,
regulations, and training resources.
DoD Action: Modernizing Intellectual Property Policy, Regulations, Guidance, and Training
In October 2019, DoD published DoD Instruction (DoDI) 5010.44, Intellectual Property (IP)
Acquisition and Licensing. This DoDI created a DoD-wide policy to govern and unify the
acquisition, licensing, and management of IP, implementing the statutory requirements of 10
U.S.C. § 2322(a). A critical element for supporting consistent implementation of these policies
and best practices, this DoDI established the DoD IP Cadre, a DoD-wide, cross-functional team
of IP experts. The DoD IP Cadre is organized using a federated structure, with a new office
established in the Office of the Secretary of Defense (OSD) to coordinate with other offices and
functional experts throughout OSD, the military departments, and other DoD components to
advise and support DoD programs and the acquisition workforce.
The new IP policy cites six core principles for guiding the DoD IP Cadre’s program support and
workforce training activities:
1. Integrate IP planning fully into acquisition strategies and product support strategies to
protect core DoD interests over the entire lifecycle. Seek to acquire only those IP
deliverables and license rights necessary to accomplish these strategies, bearing in
mind the long-term effect on cost, competition, and affordability.
2. Ensure acquisition professionals have relevant knowledge of how IP matters relate to
their official duties. Cross-functional input and coordination is critical to planning and
lifecycle objectives.
3. Negotiate specialized provisions for IP deliverables and associated license rights
whenever doing so will balance DoD and industry interests more effectively than the
standard or customary license rights. This is most effective early in the lifecycle,
when competition is more likely.
4. Communicate clearly and effectively with industry regarding planning, expectations,
and objectives for system upgrade and sustainment. Avoid requirements and
strategies that limit DoD’s options in accessing vital technology and commercial
solutions available from industry.
5. Respect and protect IP resulting from technology development investments by the
private sector and the government.
6. Clearly define and match data deliverables with the license rights in those
deliverables. Data or software deliverables are of no value unless and until the license
rights to use it are attached and the government obtains and accepts those
deliverables.
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DoD is implementing these core IP principles through a variety of mechanisms, including
conducting rulemaking in multiple pending cases to revise the IP coverage in the DFARS. Most
of the cases relate to data rights statutory and government-wide policy changes, addressing issues
such as IP pricing and valuation, establishing a preference to utilize specially negotiated licenses,
additional planning requirements and license rights to better enable MOSA, and improvements to
the data rights licensing and procedures in the Small Business Innovative Research (SBIR) and
Small Business Technology Transfer (STTR) programs. This rulemaking will take years due to
its extensive scope and “enhanced engagement”
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approach to gather industry inputs early in the
drafting of these regulatory changes to modernize many aspects of DoD acquisition of IP rights.
In addition, the forthcoming Intellectual Property: A Strategic and Tactical Guidebook
(IP Guide) will support acquisition business process revision as part of Adaptive Acquisition
Framework implementation.
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The IP Guide, combined with supporting training and integration
of its use within DoD’s business processes, will help DoD secure the necessary technical data
and associated rights to enable greater competition through the sustainment of the major system.
Specifically, the IP Guide will:
Describe legal and practical challenges to acquiring the data and associated rights to
support the DoD mission, especially for developing, fielding, and sustaining weapon
systems (including maintenance and repair);
Explain needs-determinations for data and associated rights and how various policies in
statute and regulation designed to balance the interests of government and industry create
these challenges to meeting DoD IP needs;
Offer pointers and practices for better negotiating these challenges tactically and explain
how to create government strategies to address industry approaches that limit competition
based on IP restrictions;
Provide guidance on IP valuation and evaluation considering DoD technology needs,
return on investment for government and industry, and the strength and breadth of the
DIB, including small businesses and non-traditional defense contractors;
Address technical enablers, such as MOSA, and special technical needs, such as technical
data or software for cybersecurity and supply chain risk management;
13
DoD agreed to implement an “enhanced engagement” approach to DFARS IP revisions as part of its assessment and
implementation of issues and recommendation of the Government-Industry Advisory Panel established pursuant to Section 813 of
the National Defense Authorization Act for FY 2016. This approach functions as an exception to the normal rulemaking process,
including inviting industry to participate in public meetings earlier in the drafting stages of the rule.
14
The Adaptive Acquisition Framework enables Program Managers to choose the right pathway to deliver their capability to the
warfighter as quickly as possible. It empowers innovation and common-sense decision-making throughout the process while
maintaining discipline in practices and procedures. The six pathways are urgent capability acquisition—to field capabilities to fulfill
urgent existing or emerging operational needs or quick reactions in less than 2 years; middle tier of acquisition—to rapidly develop
fieldable prototypes in an acquisition program to demonstrate new capabilities or rapidly field production quantities of systems with
proven technologies requiring minimal development; major capability acquisition—to acquire and modernize military unique
programs for enduring capability; software acquisition—to facilitate rapid and iterative delivery of software capability (e.g., software-
intensive systems or software-intensive components or subsystems) to the user; defense business systems—to acquire information
systems supporting DoD business operations; and acquisition of services—to acquire services from the private sector, including
knowledge-based, construction, electronics and communications, equipment maintenance, facilities, product support, logistics,
medical, research and development, and transportation services.
12
Explain the extensive and intricate regulations on data and patent rights and the
procedures for ordering data properly; and
Evolve as a living document, with frequent updates due to the pending DFARS IP-related
public rulemaking activities, and as lessons are learned from the 2020 National Defense
Authorization Act Section 801 pilot program considering the best practices and
techniques for valuing and evaluating IP.
Federal-Wide Push to Use Commercial Items
In the 1990s, the federal government streamlined acquisitions by highlighting the importance of
commercial items. In the Federal Acquisition Streamlining Act (FASA), the government set out
a broad definition of commercial items to speed procurement time and manage tax dollars via a
competitive marketplace. FASA included a preference for Commercial off the Shelf (COTS)
items instead of the time-consuming and expensive process of creating government-unique
items. The Federal Acquisition Reform Act extended the theme through the following changes to
procurements of commercial items: exempting such contracts from the requirements to submit
certified cost and pricing data, allowing simplified procedure use up to $5 million, removing
certain contracting provisions for COTS items, and eliminating the requirement for cost
accounting standards.
Since then, DoD has dramatically increased the use of commercial item procurements.
According to DoD contract award data from the Federal Procurement Data System, the early
2000s saw commercial items make up 30−50% of all procurements. Since 2011, commercial
items have consistently accounted for over 88% of new awards (and as high as 98% of new
awards) across DoD. The early efforts to push the Department toward procuring commercial
items has clearly resulted in increased commercial item procurements, which has brought with it
benefits to competition as the vast majority of commercial items and services are acquired on a
competitive basis, and cost and schedule efficiencies by leveraging existing commercial
solutions.
However, the government’s increasing reliance on commercial or commercial-derivative
technologies, even as components within defense-unique systems, erodes its ability to secure the
detailed, proprietary IP needed for organic or competitive support to that defense system
throughout its lifecycle. Defense systems are often complex systems of systems, with each
system further decomposed into subsystems, subsystems decomposed to components, and so on.
The supporting IP model for commercial or non-developmental (i.e., that the customer will not
receive detailed IP deliverables or the license rights to use or release that commercial IP for
competition with the IP owner) puts the government at greater risk of becoming vendor-locked
for critical sub-elements of these complex systems. If a component or subsystem becomes
vendor-locked, the process for acquiring, supporting, and upgrading the overarching system or
subsystem can be subject to the pressure of that vendor lock, because the overall support for that
system depends on the exclusive IP rights governing a critical subsystem or component.
The preceding discussion outlines the challenges in securing the IP and data rights and some of
the systemic challenges to expanding competition within the DIB. However, there are also many
opportunities and efforts ongoing to expand the industrial base and address these challenges to
expand competition.
13
DoD Action: Attracting Non-Traditional Vendors—Other Transactions and Commercial Solution
Openings
The OT and CSO authorities give DoD the flexibility to adopt and incorporate business practices
that reflect commercial industry standards and best practices. The underlying concept of OTs has
existed for more than 60 years and has been available to DoD for research OTs since 1989 and
for prototype OTs since 1994. In 2016, the prototype authority was expanded to include follow-
on production. Previously, OTs only covered R&D and, once a capability developed enough to
warrant production, a traditional FAR-based contract followed. This transition presented a
significant disincentive to non-traditional defense contractor (NDC) engagement. The production
authority incentivizes participation from more NDCs to enable the transition from prototype to
production with the goal of becoming part of the government’s solutions ecosystem.
In 2017, Congress granted DoD the authority to implement a pilot program to acquire innovative
commercial items, technologies, and services, commonly known as CSO authority, under a FAR-
based construct. This authority, now permanent, spurs innovation among traditional defense
contractors, attracts companies with leading-edge technologies, and adapts business practices to
explore innovative technology more rapidly.
OT use has grown significantly over the past few years, more than doubling from FY 2019 to FY
2020. The R&D sector has seen an increase in vendors of about 9% over the past ten years, while
most sectors have seen a decline in the number of vendors despite increased dollars spent. Some
of this can be attributed to leveraging these new authorities. Most of the growth in FY 2020 was
for R&D on COVID-19 vaccines and therapeutics, demonstrating the ability of OTs and CSOs to
access innovative, non-traditional firms with technical solutions to support the DoD mission.
Consistent with the intent of the authority, most obligations were competitively awarded to
NDCs. OTs, when leveraged appropriately, supply DoD with access to state-of-the-art
technology solutions from traditional contractors and NDCs through a multitude of teaming
arrangements tailored to the project and the needs of the participants. OTs and CSOs foster new
relationships and practices involving traditional and NDCs, especially those not interested in
FAR-based contracts to support dual-use projects; encourage flexible, quicker, and cheaper
project design and execution; and leverage commercial industry investment in technology
development. The increased flexibility broadens the industrial base by leveraging commercial
industry investment in technology development to incorporate DoD requirements into future
technologies and products.
Section 2: Growing the Small Business Vendor Base
Small business participation in defense procurements as prime and subcontractors is vital to the
defense mission, competition, and the health of the DIB. Small businesses spur innovation,
represent the majority of new entrants into the DIB, and, through their growth, create a pipeline
of the next generation of suppliers with diverse capabilities to support the DoD mission. They are
also essential to the nation’s economic prosperity. Small companies hire 43% of all high tech
jobs in the country, produce 16.5 times more patents than large firms, and generate 44% of the
nation’s economic activity. The ingenuity, agility, and capabilities of these firms are inextricably
tied to the nation’s national and economic security.
In 2021, DoD’s efforts to increase small business participation in the defense ecosystem reached
several key milestones. The Department received an "A" from the Small Business
14
Administration for meeting its contracting goals for 7 straight years. Reaching an all-time high,
DoD spent $80.3 billion with small businesses, with 45% of those awards going to disadvantaged
or woman-owned businesses; and in the past 10 years, DoD dramatically increased small
business spending in R&D by 83%. In that same time, DoD expanded spending in small business
manufacturing by 28%. Yet, over the past decade, small businesses in the DIB shrunk by over
40%. According to Deputy Secretary of Defense Kathleen Hicks, the data shows that if the DIB
continues along the same trend, DoD could lose an additional 15,000 suppliers over the next 10
years. This downward trend is a national security and economic risk to the nation that could lead
to a decline in key domestic capabilities and requires swift action to reverse.
Small Business Outreach to Expand the Vendor Base and Ability to
Compete
To support expanding the vendor base, DoD is increasing outreach and engagement with
industry, simplifying information on opportunities to do business with the Department, and
providing support to small businesses that seek to enter the defense marketplace. DoD conducts
monthly calls with industry associations that have significant small business membership, hosts
quarterly meetings with industry associations representing minority and women-owned small
businesses, and leverages the Procurement Technical Assistance Program (PTAP) and small
business professionals in the military services and defense agencies to organize outreach events,
industry days, and matchmaking events. DoD is also streamlining dissemination of information
and opportunities to small businesses by turning its small business website,
business.defense.gov, into a single point of entry for small businesses. On this website,
companies can find toolkits on how to do business with DoD and information on programs and
offices that work with small businesses across DoD.
As a part of DoD’s overall small business strategy, the Department will create a unified
governance structure of small business programs and activities that will create more synergies
and transition pathways between these programs. Additionally, DoD is developing market
intelligence tools that will help the acquisition workforce identify capable suppliers in the federal
and commercial marketplace that could perform on defense requirements. This, in turn, will
increase the number of contracts set aside for small business competition.
DoD is also helping small businesses to become “DIB ready” so they are prepared to do business
with DoD and other federal agencies. DoD’s PTAP program supports 96 Procurement Technical
Assistance Centers (PTACs) across the country that provide counseling services and training to
small businesses while also helping them identify potential contract opportunities with DoD.
PTACs provide assistance to over 50,000 small businesses each year, including new entrants.
They help small businesses identify opportunities to do business with DoD and perform on
contracts as prime and subcontractors. DoD is increasing the connectivity and collaboration of
these PTACs with DoD’s contracting workforce, small business professionals, and small
business programs to make it easier for small businesses to find opportunities in the defense
marketplace. In addition to this, DoD provides cybersecurity resources to small businesses
through Project Spectrum regarding DoD’s cybersecurity requirements, including self-
assessments of readiness to do business with DoD.
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Leveraging Small Business Programs to Grow the Industrial Base
DoD’s small business programs play an instrumental role in diversifying the defense supply
chain and bringing new entrants, specifically from underserved socio-economic groups, into the
defense marketplace. In FY 2021, the President’s budget restored funding for the Mentor Protégé
Program (MPP), tying it to Build Back Better and leveraging the program to bring small
businesses from underserved communities and new entrants into the defense supply chain
through agreements through which mentor firms provide business development assistance to
small business protégé firms. Despite bipartisan congressional support for the program, the
funding for this program was eliminated as a part of the defense-wide review in 2020, which led
to a decrease in socio-economic firms participating in MPP and in defense procurements. MPP is
the only funded business development assistance program in the federal government and each
year, small businesses that participated in this program as protégés contribute between $3−$4
billion in work to support the defense mission. DoD is expanding MPP into more defense
agencies and taking steps to decrease the timeline to secure an MPP agreement.
DoD program managers have the autonomy to deploy acquisition strategies to stimulate
competition. Programs like the SBIR and STTR attract small businesses to develop new or
improved technologies. Such programs stimulate technological innovation in the DIB and
encourage new entrants and disruptors to enter markets. A priority for DoD is working to
strengthen its partnerships with small businesses and make it easier for them to access the
SBIR/STTR programs, which receive nearly $2 billion annually in DoD investment.
The benefits of this investment, for DoD and for small businesses, are clear. A recent study of
the SBIR/STTR programs found that DoD achieved a 22-to-1 return on investment in small
business R&D over the last 23 years and generated $347 billion in total economic output
nationwide.
A top priority for DoD is improving award timelines for the Phase I SBIR and STTR Programs.
By making faster SBIR/STTR awards to small businesses both for initial awards and for
subsequent Phase II and Phase III commercialization awards, DoD can bring new entrants into
the national security and technology industrial base and enable current SBIR/STTR awardees to
more rapidly mature technologies to support mission requirements. DoD significantly improved
on meeting the required 90-day notification to small businesses of decision to award as well as
the Small Business Administration’s recommended contract award times of 180 days from the
close of the initial SBIR/STTR solicitation. According to the results from recent reports from the
Government Accountability Office (GAO), DoD observed a 16% and 30% improvement in
selection notification and award timeliness, respectively. This improvement provides more
predictable and rapid timelines to get awards on contract to support small business growth and
foreseeable cash flow. In addition, the military services have established their own pilot
programs to address timeliness in innovative ways to achieve the same improvements. DoD is
also increasing usage of out-of-cycle topics, which are SBIR solicitations issued outside of the
regular three SBIR solicitations per year. This creates more opportunities year-round for small
businesses to participate in SBIR competitions.
To make the positive changes systemic across the Department, DoD also reestablished the DoD
SBIR/STTR Contracting Officers Working Group in 2020 and hosts monthly DoD SBIR/STTR
Program Managers Meetings to share best practices to foster improvements in the quality and
16
timeliness of awards. DoD is also enhancing training for personnel in the acquisition workforce
to increase understanding of SBIR/STTR programs and the challenges faced by SBIR/STTR
awardees. All these program management and training initiatives enable stakeholders who are
key to the SBIR/STTR acquisition process to improve processes and assist industry partners to
successfully compete and win requirements in support of the DoD mission, while growing their
capacity and capability.
To grow and support the network of science and technologies in support of the DoD mission,
DoD implemented the OUSD Transitions SBIR Technologies (OTST) program in June 2020.
The OTST program assists in accelerating the transition of SBIR- and STTR-funded
technologies into defense programs. It focuses on systems developed, acquired, and maintained
for the warfighter and to bridge the time gap between R&D awards and contracting delays that
lead to companies falling into the valley of death
15
between an award, such as SBIR, and
transition into a program. To date, 46 SBIR/STTR Phase II projects have been approved for
additional funding and $62.2 million been awarded to small business.
Additionally, to attract new entrants into the defense marketplace, leverage commercial
technology, and utilize innovations from the nation’s entrepreneurs, it is vital for DoD to use
new methods to engage and do business with commercial companies. To that end, DoD’s
National Security Innovation Network hosts hackathons, pitch events, and prize challenges that
link academia, entrepreneurs, and inventors to DoD mission requirements. This national network
of innovators is an important place to get engaged in the defense marketplace for new entrants.
Additionally, DoD’s Defense Innovation Unit also leverages OT authorities to contract rapidly
with commercial companies to prototype commercial or dual-use technologies for defense
requirements. These efforts all leverage existing programs within DoD to increase competition
within the DIB.
Reducing Barriers to Entry to Support Competition
Small businesses also face significant barriers to entry in doing business with DoD. To this end,
DoD issued a notice in the Federal Register soliciting feedback from industry on barriers to entry
to inform the development of DoD’s Small Business Strategy and is working to ensure that
regulation and policy do not unduly burden small businesses. As a part of this process, DoD
supported an interagency effort with the White House, the Office of Management and Budget
(OMB) and the Small Business Administration to implement meaningful reforms to category
management that will increase the ability of certified small businesses, such as Small
Disadvantaged Businesses, Women-Owned Small Businesses, Service-Disabled Veteran-Owned
Small Businesses, to compete for federal government contracts and for federal agencies to
receive Tier II Category Management credit towards OMB-established Category Management
goals. This interagency effort will also create more opportunities annually for small businesses to
onboard onto contract vehicles and compete for contract awards. Additionally, DoD is working
within the interagency to develop a definition of new entrants, to allow it to benchmark against
and track the inclusion of new entrants in the federal marketplace. DoD will also continue to
implement management practices that are focused on raising the visibility of small business
15
The valley of death is a term frequently used among venture capitalists to describe the period in the life of a startup between when
it begins operations and when it begins to generate revenue. During this period, the company uses up initial equity and must begin
to generate enough revenue to become self-sustainable.
17
capabilities across DoD and holding Senior Executives accountable for small business objectives
in their annual performance planning. These efforts are aimed at reversing the decline in the
small business supplier base and increasing competition, specifically through small business set-
asides.
Section 3: Defense Industry Outlook—Sectors Where Insufficient
Capacity and Competition is a Concern
To effectively and efficiently utilize resources, DoD examined the state of competition in five
critical focus areas: castings and forgings, missiles and munitions, energy storage and batteries,
strategic and critical materials, and microelectronics. DoD further identified the health of the
small business DIB (discussed in the previous section) and workforce (discussed below) as
critical strategic enablers across all prioritized sectors, along with cyber posture, interoperability,
and manufacturing.
Recommendations addressing vulnerabilities in these sectors and enablers are further detailed in
the Department’s report on Executive Order 14017, America’s Supply Chains.
Workforce Constraints and Shortfalls
In each of the below sectors, workforce constraints and shortfalls are an area of concern. In fact,
the growing shortfall of middle- and highly-skilled workers is a global manufacturing concern.
16
In addition to the overall shortage of workers, business consolidation and reduced competition in
defense manufacturing frustrates DoD’s ability to compete in the labor market, both for broadly
needed manufacturing skills and for workers with critical defense specialty skills. Fluctuations in
defense contracts increase the risk that individual companies will lose production work and be
unable to retain their workers on defense production lines. Once these highly skilled workers
move out of defense supply chains, “they are difficult to recruit back and more expensive to
retrain.”
17
The defense manufacturing sector comprises primarily small and medium
manufacturers (SMMs), so any constriction of this sector affects these businesses the most. As a
result, SMMs die off as their capabilities and workforces cannot compete successfully for new
work.
To improve and maintain competitive advantage as defense needs and technologies change,
manufacturers must retain workers with defense-specific skills, upskill their workforces when
needed, and access the skilled workers to modernize their production capabilities. Today, DoD
and other stakeholders are working to reconnect the workforce development (training and
education) ecosystem, which includes students, to defense industry needs. These efforts include
helping to recruit and connect students and adult learners to defense manufacturing employment
opportunities and incentives to develop the skill sets essential to defense supply chains. These
efforts will improve defense manufacturers’ access to skilled workers and their ability to respond
to emerging defense business opportunities.
16
Korn-Ferry, “Future of Work: The Global Talent Crunch, April 26, 2020.
17
Eaglen, Mackenzie and Sayers, Eric, “Maintaining the Superiority of America’s Defense Industrial Base,” The Heritage
Foundation, May 22, 2009.
18
Priority Industrial Base Sectors
18
Castings and Forgings
Cast and forged products are critical to defense and are used in almost all platforms, most
subcomponents, and machine tools and other production equipment. Leading sector companies
take advantage of China’s low labor costs and lax environmental regulations to compete on
price. Like many other manufacturing sectors, this area has been subject to industrial espionage
and state-backed adversarial capital pressures. DoD casting and forging business can often be
unattractive to firms and investment capital providers because DoD often orders in small
quantities but frequently has highly specialized requirements that most commercial firms cannot
afford to equip themselves to fulfill.
In the domestic market, these factors have combined to impede innovative product and process
development for defense, including the incorporation of new manufacturing technologies. They
have also produced loss of technical expertise in the U.S. castings and forgings workforce, which
has also long lacked representative diversity.
Barriers to Competition
Low margins, low and unpredictable demand, and little incentive to add new capabilities: The
castings and forgings sector is mature, capital-intensive, and fiercely competitive on price, but
access to capital can be poor. DoD often does not order enough or with sufficient regularity to
supply a stable base for business. Margins are often too tight for firms to produce the capital
required to add new capabilities, such as working with new material and larger facilities.
Onerous business processes and regulations, paired with substandard technical data: DoD’s
requirements development, acquisition, and sustainment processes form a long, complex
lifecycle and can require provision of extensive sets of data. Businesses perceive DoD policies
on accounting requirements, cybersecurity, and other business needs as imposing uncompensated
additional costs compared to more profitable commercial procurement opportunities. Outdated
policies make many DoD programs unable to furnish the industry-standard 3D technical data
required by modern production processes. Translating from 2D paper blueprints and outdated or
error-prone files imposes unacceptable costs and risks on casting and forging suppliers.
Unique materials and high quality standards: Many DoD programs use materials or have
technical needs that require production processes, equipment, facilities, and specifications far
beyond those of more numerous commercial products. However, the DoD market for these
materials is too small to justify the cost and risk of adding capabilities or sustaining a new,
specialty firm.
Overall Impact
The impact of competition in this sector has been mixed. For DoD needs that are well-aligned
with commercial mass production (i.e., similar to commodity products), competition has spurred
some innovation and helped DoD control prices to some extent by supporting a larger supplier
18
These sectors were established as priority areas by the Department of Defense through its response to President Biden’s
Executive Order 14017 on America’s Supply Chains. For its one-year report on its implementation of that executive order, the
Department provides the national security rationale for this prioritization.
19
base. However, when DoD requirements are not so aligned or when required volumes are too
small, the pool of potential suppliers has often been far too small to support meaningful
competition. This has presented DoD with three options: live without the product(s), provide
direct support to keep relevant commercial firms in the market (via Defense Production Act Title
III investments), or develop the needed production capabilities in the organic industrial base. The
first option can result in mission failure. The other two options often produce limited capabilities
with less flexibility and higher overall costs.
Well-intended efforts to spur competition can also produce unintended effects, especially at DIB
tiers below the defense primes. Such effects reported by industry include avoidable production
delays, stifled innovation, product quality issues, and loss of beneficial long-term supplier
relationships due to supplier perceptions of a less-than-level playing field. Ultimately, some
firms simply choose to exit the defense market.
As a result, DoD is largely limited to the same OEMs supplemented and served by a constantly
shrinking set of small job shop suppliers making razor-thin margins, one contract loss away from
bankruptcy. This situation can result in loss of specialty capability, especially as older workers
with extensive tacit knowledge retire.
Missiles and Munitions
Barriers to Competition
The missiles and munitions (M&M) sector has trended toward consolidation, with 30 prime
contractors in this sector three decades ago, but only seven today. Each M&A case should be
reviewed carefully for negative effects on competition. The consolidation trend is even more
pronounced in the hypersonic weapon systems sector, which currently has only one prime
contractor.
The growing pressure on defense budgets to reduce costs and spending has negative effects on
munitions programs—including service cuts and congressional program reductions. While the
budgets for munitions have not returned to their 2015 low, the services tend to flatten M&M
procurements or cyclically push procurements into the out year. As commodity costs grow, these
factors drive suppliers to exit the market rather than join it, such as automation solutions
companies pivoting away from lower-margin defense programs.
M&M is a market with few competitors, all of whom are large companies with established brand
identities and strong holds on cumulative experience, proprietary designs, and technology.
Competition in the sector is mainly derived from these few companies bidding on new projects.
The costs to enter the M&M market are higher than other sectors due to the nature of weapon
systems—particularly as safety requirements add additional layers to the design of equipment
and/or facilities. For example, any company storing or using energetic materials requires larger
property investments, due to quantity-distance limitations and explosion-proofing of equipment
and buildings. These additional costs, while necessary and appropriate, can heavily burden any
entrant into the market.
Overall Impact
As DoD looks to expand its missile capacity to deter adversaries, the impact of consolidation on
DoD programs will play a role. For this industrial base sector, the impacts are similar to those
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defined throughout this report: reduced competition, increased costs, and potential supply chain
risks due to capacity shortfalls. One area within the M&M (and aircraft) sector where attention
should be paid in the coming decade is hypersonic technologies. Within this sector, many
primes, first-tier subcontractors, and first-tier material suppliers are positioning themselves to
acquire lower-tiered hypersonic contractors and material suppliers.
19
This vertical integration
will likely lead to reduced competition and may eliminate it altogether. As the demand for
hypersonic weapons grows, so too will the need for specialized manufacturers and suppliers.
However, these small and nascent companies are at risk of acquisition from the major primes and
subcontractors. Acquisition of these specialized hypersonic niche contractors (especially at this
early stage of hypersonic technology and hypersonic missile development) will effectively
prevent any other company from entering the market, thereby leading to reduced or limited
competition, and capacity issues in the future. When competition is no longer a variable for a
company the only other acquisition approach may be sole-source contracting. This was most
recently demonstrated when Boeing dropped out of the Ground Based Strategic Deterrent
(GBSD) engineering and manufacturing development phase competition saying “the current
acquisition approach does not provide a level playing field for fair competition”
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, resulting in
Northrop Grumman receiving a sole-source contract.
Energy Storage and Batteries
Barriers to Competition
Adversarial efforts to capture the battery value chain have limited competition and led to
consolidation in the advanced battery sector. This consolidation has led to the loss of domestic
sources of raw materials and battery components; consequently, DoD relies on foreign-produced
batteries for many of its military capabilities. The People’s Republic of China leverages its
disregard for worker safety, environmental impact, and chemical pollution to lower its costs and
dominates the battery cell market with approximately 80% of the material sources, processing
materials essential for lithium batteries, including lithium, graphite, cobalt, and battery-grade
nickel. These sole sources and reliance on foreign-produced batteries reduce competition and
result in U.S. vulnerabilities.
The U.S. industrial base for battery component manufacturing capacity is limited and requires
major capital expenditures and time to compete. The U.S. doesn’t manufacture cathodes or
electrolyte domestically in a scale compared to demand. Large-scale commercial batteries and
specialty batteries for DoD face major challenges to build sufficient capacity. Specialty DoD-
only batteries have very low demand. Production requires specialty skill sets, reliable production
processes, capital, and a history of success to compete for DoD business. DoD systems,
developed years in advance of volume production, must have sufficient income to survive the
funding gap as well as long investment recovery periods. This has left some battery
manufacturers to bear the design and qualification costs prior to production.
In any acquisition where the requirement is clearly definable and the risk the product or service
will not meet requirements is low, cost or price may play a dominant role in the selection
process. Where DoD does not also consider supply chain risk and logistics security, a low-cost
19
LM acquired i3, https://news.lockheedmartin.com/2020-10-09-Lockheed-Martin-to-Acquire-i3-Hypersonics-Portfolio.
20
Boeing Drops Out of GBSD Competition, https://theelectricgf.com/2019/07/25/boeing-drops-out-of-gbsd-competition-to-replace-
icbms/.
21
option may add risk, especially when those low-cost options are from adversary nations.
Therefore, the lowest-cost suppliers can become the DoD supplier, even for critical weapon
systems. Additionally, a lack of competition on some materials and components at best
performance levels occurs because a company has an IP lock on its production. Without policies
that incentivize robust and high-quality supply chains, securing low-cost components will
continue to be a challenge.
The lithium-ion sector includes a high cost of capitalization for production scale to achieve
competitive economy of scale. Lithium-ion batteries can be produced by hand but this process
results in a poor quality and more expensive product. For specialty DoD-only batteries, barriers
to market entry include low demand, lack of specialty skill sets, and the need for reliable
production processes. These elements require capital and a history of success—challenging
barriers for new entrants to overcome. Other barriers include a long pay-back period on
investments, which can deter market entry even if a new entrant can capitalize the necessary
facility and production equipment. Some battery manufacturers must bear the design and
qualification costs prior to production.
Additional challenges in this sector are:
DoD’s small proportion of the customer base for energy storage limits its influence on the
market.
In the energy storage space, secure access to supply chains is needed for key capabilities
and to support distributed operations in contested environments.
Carbon/graphite is the anode structure for lithium-ion batteries. However, in terms of
market share, the U.S. has some synthetic graphite production capability and is seeking
more, but no defense battery producer uses only synthetic graphite.
China holds a significant share of the market in cobalt processing (82%) and manganese
processing (93%). Manganese and cobalt are necessary in producing lithium-ion cathode
material.
Overall Impact
The Department is often dependent on commercial battery technologies for meeting National
Defense Strategy objectives. China’s dominance in minerals, materials, and cells globally
presents supply chain risks. This trend will continue without a collective response as outlined in
the goals within the National Blueprint for Lithium Batteries (2021-2030)
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, and the
recommendations outlined in the report covering the 100-Day Reviews under Executive Order
14017.
22
The five goals within the National Blueprint for Lithium Batteries and the
recommendations outlined in the 100-Day Reviews focus on increasing investment in the
upstream mining, materials processing, and battery precursor materials production, as well as
supporting downstream cell and pack production. Both documents highlighted the need to
21
National Blueprint for Lithium Batteries, U.S. Department of Energy, June 2021, https://www.energy.gov/sites/default/files/2021-
06/FCAB National Blueprint Lithium Batteries 0621_0.pdf.
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Building Resilient Supply Chains, Revitalizing American Manufacturing, and Fostering Broad-Based Growth, 100-Day Reviews
under Executive Order 14017, June 2021, https://www.whitehouse.gov/wp-content/uploads/2021/06/100-day-supply-chain-review-
report.pdf.
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coordinate closely with industry on the development of a skilled, sufficient workforce and
maintaining technological dominance through continued R&D investment.
In line with these goals and recommendations, the Department advocates for a whole-of-
government approach to address challenges within this sector, coupled with the resources needed
to take action to reverse the erosion of domestic DIB battery capabilities and capacity.
Strategic and Critical Materials
Barriers to Competition
Competition in the critical materials sector is distorted by political intervention and unfair trade
practices in adversary nations. These factors result in significant challenges for the survival of
domestic and allied manufacturers in commercial markets, where price drives demand. Domestic
and allied manufacturers often exit the business, leaving single-source suppliers in adversary
nations producing specialty metal alloys, rare earth elements, and critical chemicals.
Further, weak environmental and labor regulations, as well as lax enforcement of risk such as
forced labor, provide unfair cost advantages to companies operating in adversary nations. Such
activities artificially decrease the fair market price for strategic and critical materials and
undermine the competitiveness of U.S. and allied producers.
Critical materials manufacturing is capital- and time-intensive. Mining and processing concerns
are risk-averse while capital recovery times are long. Furthermore, pricing of mined material is
inelastic while downstream manufacturers more rapidly change suppliers and product
formulations to obtain the lowest cost source. Companies are disincentivized from spending
money on a project without surety of a profit in the long run. Changing the structure of the
supply chain for these materials is difficult without government incentives and partnerships with
the private sector.
Finally, the U.S. depends heavily on foreign sources for critical chemicals in its weapon systems.
The COVID-19 pandemic showcased the vulnerability of supply chains to interruption, whether
by force majeure or design. These critical chemicals include inorganic salts as well as
environmentally challenging materials. The U.S. market for critical chemicals focuses on
agricultural or industrial use, which have higher volumes and less stringent requirements than
materials for military applications.
Overall Impact
The U.S. must ensure a domestic supply of the critical materials essential to U.S. defense
programs, especially key munitions. Policy interventions should be tailored to the unique market
failures of a given strategic and critical material market, with a strong emphasis on partnerships
with the private sector and accelerating the development of diversified and reliable sources of
supply. The U.S. must consider an all-of-the-above approach, including high-risk research for
advanced production processes and equipment, facilitating business-to-business ties within the
industrial base and with U.S. allies, and, as appropriate, bespoke trade remedies.
Microelectronics
Barriers to Competition
There are a series of challenges for microelectronics (ME):
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DoD has limited market influence in the ME sector, holding approximately 1% of the
customer base. This inhibits competition, since very few ME companies are willing to
engage with low-volume customers.
The offshoring of ME manufacturing reduces domestic competition. U.S. domestic
manufacturing is expected to decline from 12 percent to 10 percent by 2030. Factors that
contribute to offshoring include exorbitant R&D costs associated with advanced
semiconductor technology and the large capital investment required to build and operate
semiconductor fabrication facilities.
Domestic semiconductor manufacturers, structured to compete in a fair market for profit,
are increasingly forced into a one-sided competition with non-market competitors. This
situation reduces profit for the domestic manufacturers, translating to less investment in
R&D. Less investment in R&D reduces innovation, impacting long-term competitiveness
and reducing employment opportunities domestically.
Governments in Asia offered tax breaks to U.S. industries to relocate as incoming
industry offered employment and technology transfer to their growing populations. The
countries offered a large, low-wage workforce, affordable land, and tax incentives to
become an economically fertile ground for the U.S. and other foreign investment.
Secure access to ME is vital to maintaining national and economic security. Many large
ME manufacturers are not willing to adopt DoD assurance and security protocols, which
reduces the number of manufacturers engaged in supplying DoD ME products.
DoD imposes unique requirements and associated low volumes, disincentivizing vendors
to engage in manufacture of DoD ME products.
China has pledged to invest over $250 billion in ME. Much of this investment is targeted
at expanding capacity to achieve semiconductor manufacturing independence, without
consideration for market conditions, such as excessive inventory resulting from excess
manufacturing capacity. This may reduce profit margins of domestic manufacturers who
compete with Chinese firms on a cost basis.
Overall Impact
Because of targeted incentives and heavy government subsidies by countries in the Pacific Rim,
primarily China, U.S. manufacturers have lost much of their capability to produce ME,
remaining active only in the design phase. As a result, DoD has found it challenging to secure
technology for state-of-the-art ME and to sustain domestic production for legacy ME critical to
U.S. military systems. Irrespective of the U.S. longstanding record of sustained innovation,
countering the efforts of adversary nations and market forces to regain the domestic capacity to
meet national demand for ME and reduce reliance on Pacific Rim will take a whole-of-
government response.
Conclusion
Maintaining a competitive DIB is vital to our national security interests. Major consolidations in
the mid-1990s significantly reduced competition for weapons programs, with the total number of
U.S.-based prime contractors declining from 51 in 1993 to 5 in 2000 [Figure 2]. The landscape
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has largely remained unchanged since then, but some moderately concentrated sectors, like
aircraft and missiles, have seen increased deal activity resulting in further risk of single/sole
sourcing for key capabilities. For example, recent consolidation in the solid rocket motors sector
has resulted in only two domestic suppliers [Figure 3]. In the last five years, smaller deals have
increased due to primes vertically consolidating the industrial base, sub-prime suppliers
acquiring horizontally, and the entry of private equity firms performing roll ups.
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Figure 2: From 1980 to 2015, the defense sector has seen significant consolidation—Illustrative
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Figure 3: From 1950 to 2020, solid rocket motor production has consolidated
In mature markets, redundancies and inefficiencies can be harbingers of value drain, and the
emergence of dominant players within an industry can have positive impacts on customers. In
particular, companies that can develop economies of scale or scope and mature learning curves
to drive greater efficiencies can deliver lower costs and better innovation for customers.
Although consolidation has, in some cases, led to improvements in corporate efficiency, product
quality, or internal costs, too much market concentration can negatively impact competition by
providing the remaining companies with greater market power to potentially foreclose on
competitors, reduce customer choices, limit innovation, and charge higher prices to DoD.
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To achieve the goal of maximizing competition, DoD competes every contract action to fulfill
Department requirements for products and services, where practicable, through continued
application of the Competition in Contracting Act. As highlighted in this report, when measured
by individual contract action, over 90% of actions are competed. DoD has sufficient statutory
and regulatory authorities to seek competition in its solicitation and contracting processes.
However, DoD’s ability to expand competition in procurements is more reliant on addressing
industry-wide challenges, such as industry consolidation and limited domestic capacity due to
commercial or economic pressures. Further, competition for sustainment contracts is hampered
by DoD’s ability to secure the necessary data rights, technical data, and computer software; the
impacts of aging weapon systems and obsolete parts; and the drive to leverage commercial items
and commercial or commercial-derivative technologies. These challenges, discovered and
documented in market research, inform the resulting system’s acquisition strategy and determine
the depth of competition achievable over the life of any major system.
Despite these sizable challenges, DoD is promoting competition by seeking new entrants,
attracting non-traditional defense contractors, and growing capacity in its existing vendor base.
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Nayantara Hensel, 2010. "Can Industry Consolidation Lead to Greater Efficiencies? Evidence from the U.S. Defense Industry,"
Business Economics, Palgrave Macmillan; National Association for Business Economics, vol. 45(3), pp. 187-203, July.
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The strategy includes careful review of potential M&A, new IP policy, IP workforce training,
use of innovative acquisition processes (e.g., OTs and CSOs), and small business outreach and
streamlining of R&D programs to support small businesses.
DoD recognizes a whole-of-government effort is needed to address the economic and
commercial market pressures that continue to drive offshoring and challenge the deliberate
efforts by adversary nations to grow and deny these technologies and materials to the U.S. and its
allies. DoD offers a series of actions to grow the domestic capacity and capability for these vital
technologies and materials, contributing to greater national and economic security. DoD’s
actions will promote greater competition while also supporting and growing a workforce that
will underpin and deliver these important technologies and materials.
Department Actions to Achieve the Goals of the Executive Order
The Department will confront the challenges posed by industry consolidation and work to ensure
sufficient domestic capacity and capability in priority industrial base sectors. These actions
include:
Given the extent of consolidation of key industries over the last decade, DoD will assess
its approach to evaluating vertical and horizontal mergers, with adequate attention to
risks to national security.
DoD will work with interagency colleagues at the Department of Justice and Federal
Trade Commission to further examine the impact of consolidation on the functioning of
the defense market.
DoD will implement the interagency recommendations outlined in Executive Order
14017, America’s Supply Chains, focused on the five priority sectors of the DIB: castings
and forgings, missiles and munitions, energy storage and batteries, strategic and critical
materials, and microelectronics. This includes developing alternatives to the use of
strategic and critical minerals to increase supply resilience for defense programs and
national security, and to reinvigorate the supply chain.
DoD will support workforce development efforts in the manufacturing and technical
trades to sustain defense specific skills needed to develop, field, and support DoD
systems and equipment.
The Department is also taking action to further competition within its contracting processes,
procedures, guidance, regulations, and the training of its workforce. The efforts are designed to
use flexible authorities to attract non-traditional contractors, new entrants, and build back the
small business vendor base. Given the importance and challenges to acquiring the IP and
associated rights to support greater competition throughout a system’s lifecycle, the Department
outlines a series of ongoing efforts to overcome those challenges. These include:
Leverage and promote appropriate use of OT authority to continue to attract non-
traditional and new entrants to the DIB. Provide revised guidance to ensure the effective,
efficient, and transparent use of these OT authorities for research, prototyping, and
production.
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Expand appropriate use of CSOs to rapidly apply leading-edge industry solutions to
operational and R&D challenges, which also attract non-traditional vendors and new
entrants to the DIB.
With an eye to avoiding anticompetitive conduct contrary to DoD’s interests, complete
the current public rulemaking activities related to data rights statutory, policy, and best-
practice changes covering issues such as IP valuation, negotiation of special licenses,
MOSA, and data rights in SBIR and STTR programs.
Complete and publish the forthcoming Intellectual Property: A Strategic and Tactical
Guidebook (IP Guide) to support and explain legal and practical challenges to acquiring
the IP and associated IP rights to support the DoD mission, especially for developing,
fielding, and sustaining weapon systems, including maintenance and repair.
Leverage the IP Guide and complete workforce credential training to address IP
challenges to secure the IP rights and technical data needed to drive increased
competition throughout the lifecycle of major systems.
Implement DoD’s forthcoming Small Business Strategy to promote a strong, dynamic,
and robust small business industrial base by reducing barriers to entry, increasing small
business set-aside competitions, and leveraging small business programs to grow the
small business industrial base.
