To keep up with rivals, DoD nominee will weigh consolidation vs. innovation

By: Joe Gould

WASHINGTON ― President Joe Biden's nominee for deputy defense secretary, Kathleen Hicks, said she is “concerned” about consolidation in the defense industrial base, and that competition is needed to maintain an edge over China and Russia.

Hicks, whose office would review deals that involve national security issues if she is confirmed by the Senate, told lawmakers Tuesday that she would work with them to ensure a healthy defense industrial base. The comments came amid market expectations that defense deal-making could take off in 2021.

“Extreme consolidation does create challenges for innovation,” Hicks told the Senate Armed Services Committee. “We need to have a lot of different good ideas out there. That's our competitive advantage over authoritarian states like China, and Russia. And so if we move all competition out, obviously, that's a challenge for the taxpayer. But it's also a challenge in terms of the innovation piece.”

As the space sector and technological developments drive growth in the aerospace and defense sector and the pandemic weakens commercial aviation firms, companies are “likely to pursue opportunities for consolidation,” the consulting firm Deloitte said in a recent report.

Firms could seek new merger and acquisition opportunities, the report said, to “capture more value, drive cost-competitiveness, or acquire targeted niche capabilities and emerging technologies” such as “advanced air mobility, hypersonics, electric propulsion, and hydrogen-powered aircraft.”

Recent years have seen a number of major deals, including the combination of Harris and L3 Technologies, United Technologies Corp. and Raytheon; BAE Systems and Collins Aerospace, and General Dynamics and CSRA. Lockheed Martin's $4.4 billion acquisition of Aerojet Rocketdyne, announced in December, has yet to clear regulators.

The Federal Trade Commission and the Justice Department also review mergers and acquisition activity in the defense sector.

At Tuesday's hearing, Connecticut Democratic Sen. Richard Blumenthal, whose state hosts General Dynamics Electric Boat, told Hicks a drop in the number of submarine suppliers from 17,000 to 5,000 over recent decades suggested broader problems for the defense industrial base, problems that he said were, “extremely alarming to me.”

Blumenthal indicated Hicks had committed prior to the hearing to aid small suppliers struggling with the pandemic's economic fallout and to develop new small and medium suppliers. (This was one focus of DoD's acquisition and sustainment office under the previous administration.)

“I'm hoping you will focus on the supply chain that is vitally important to suppliers like Electric Boat or Raytheon or any of our major sources of supply,” said Blumenthal, who has served as the top Democrat on SASC's Seapower Subcommittee.

A broader theme for the hearing was how Hicks, whose job involves supervising the defense budget, would invest in forward-leaning technologies under a flat budget and divest from existing weapons platforms. Meanwhile, lawmakers grilled Hicks about whether she supported spending on nuclear modernization, shipbuilding and other programs with connections to lawmakers' home states.

Acknowledging the political and budget tensions, Hicks said she wants to link future budgetary decisions with concepts for operations, to buy “capabilities that actually line up to theories of victory for how we are trying to pace challenges from China and Russia.”

Other lawmakers told Hicks they wanted an easier paths for smaller, cutting edge firms from outside the Beltway to do business with the Pentagon and for them to scale production of their products, beyond the experimentation phase.

“We've had testimony before this committee that many smaller companies, particularly in Silicon Valley, and in the technology field generally have given up on the Pentagon, it's too complicated is too lengthy is too expensive, even to fill out the forms,” said Sen. Angus King, I-Maine.

For her part, Hicks said Tuesday she would “increase the speed and scale of innovation in our force,” and she would work to understand how alternative acquisitions methods are servings smaller non-traditional suppliers. She affirmed that those firms cannot survive on research and development funding alone.

“I do think a sustain level of [research and development] investment is vital, but we actually have to field capabilities, and that's a place where DoD has really struggled,” she said, adding that exercises and experiments help demonstrate the value of new technologies.

“When we can demonstrate value, then we're in a much better position to have a dialogue with Congress and with industry about where that where those capabilities can take us.”

https://www.defensenews.com/congress/2021/02/02/to-keep-up-with-rivals-dod-nominee-will-weigh-consolidation-vs-innovation/