Defense acquisition chief foresees more industry mergers

Pentagon will rely mostly on market forces in deciding to allow consolidation of smaller military contractors, Ashton Carter says.

As a decade-long defense spending spree comes to an end, senior Pentagon officials foresee a new round of defense company mergers and acquisitions, the military's chief weapons buyer said Wednesday.

But the Pentagon probably won't permit mergers between major weapons makers, Ashton B. Carter, undersecretary of defense for acquisition, technology and logistics told a defense contractors conference.

The Defense Department still believes competition remains "the key driver of productivity and value," Carter said, so it unlikely to approve mergers, for example, between the few remaining giants that build aircraft or ships.

But mergers or acquisitions among smaller companies seem inevitable in the current budget climate, he said.

The military requested a $553 billion base budget for 2012 that is $13 billion less than earlier planned, but still $5 billion more than the amount requested for 2011 and $27 billion more than the amount the military is budgeted in the continuing resolution that is funding it since Congress failed to pass the 2011 budget.

In addition to the base budget, the Pentagon is asking for $118 billion to continue operations in Afghanistan and Iraq.

After 2012, the rate of increase in defense spending is expected to slow so that it barely keeps pace with inflation during the next five years. That's after a decade in which defense spending essentially has doubled.

The effects of slow or no growth "will doubtlessly lead to more mergers and acquisitions," Carter said. "In the main, we will rely on normal market forces" when deciding whether to approve consolidation among smaller defense firms, he said.

But maintaining a healthy defense industry over the long term will trump short-term company gains, Carter said.

"We do not want to see the defense industrial base experience what has happened in other sectors of economy -- poor risk management and excessively short-term behavior at the expense of long-term" viability, he said.

"We will promote policies that provide for long-term innovation, efficiency, profitability and productivity growth for the defense industry," said Carter, who spoke at a defense requirements conference sponsored by Aviation Week.

As other senior defense officials have in recent weeks, Carter warned the lack of increased spending under the continuing resolution poses a crisis for the Pentagon. Spending is stuck at the 2010 level -- $526 billion for the base budget -- at least until March 4, when the current continuing resolution expires.

New programs cannot be started and some existing programs must be stopped for lack of expected funding, he said. "The result is not only delay, but its inefficient and uneconomical to proceed in this herky-jerky fashion. It adds cost overhead to everything we do."

Carter said the military needs a base budget of at least $540 billion for 2011. Congress is expected to vote on a new continuing resolution in early March.

He urged lawmakers not to include money for an alternate engine for the Joint Strike Fighter. Presidents Barack Obama and George W. Bush before him sought to cancel the multibillion-dollar engine development program, but Congress has repeatedly kept it alive. Later Wednesday, House lawmakers voted 233-198 to ax the controversial second engine for the program.

Carter said that after studying the engine, he has concluded, "you can't analytically justify" the money being spent on it. The engine has "large, known, upfront costs" that "will not be paid back over the long run. Therefore, it's not a good investment," he said.

The airplane that the alternative engine would power is also too costly, he said. In an effort to control costs, the Defense Department proposes to buy 32 Joint Strike Fighters in 2012 rather than 43, and put the troubled vertical landing variant of the plane on probation for two years.

Carter said he plans to get JSF costs down.

The Defense Department should have "the same experience you have when you go to the computer store each year and buy a better computer for cheaper," he said. Instead, Carter said he goes before Congress each year and must explain why certain weapons aren't getting better, but will cost more.