Competition rates for Defense Department contract dollars have dipped a bit the past decade, the DoD says in a new report, which outlines five lines of effort aimed at dealing with challenges posed by industry consolidation and ways to boost competition and strengthen the supply chain.

Between 2012 and 2021, competition rates peaked at 58.3 percent in fiscal year 2014 and bottomed out at 50.1 percent in FY ’20 before climbing back to 52 percent in FY ’21, says the 30-page report, State of Competition within the Defense Industrial Base. The 10-year average was 54.2 percent, it says.

Aerial of the Pentagon, the Department of Defense headquarters in Arlington, Virginia, near Washington DC, with I-395 freeway on the left, and the Air Force Memorial up middle.

Based on contract actions, the report says competition rates are in the 90 percent range.

The report was directed by President Biden’s July 2021 Executive Order 14036 on spurring U.S. economic competition.

The report outlines the already well-known consolidation within the defense industry over the past 30 years, such as going from 51 prime contractors to five currently, 13 down to 3 suppliers of tactical missiles, eight to three fixed-wing aircraft suppliers, eight suppliers of surface ships down to two, a single supplier of tracked combat vehicles versus three, and four satellite providers from eight.

“As a result, DoD is increasingly reliant on a small number of contractors for critical defense capabilities,” the report says. “Consolidations that reduce required capability and capacity and the depth of competition would have serious consequences for national security.”

The five recommendations in the report include strengthening oversight of proposed mergers and acquisitions. A good example of this was the Federal Trade Commission in January voting to sue to block Lockheed Martin’s [LMT] proposed acquisition of Aerojet Rocketdyne [AJRD] due to anti-competitive concerns, a move that led Lockheed Martin to terminate the merger agreement on Sunday.

“Simply put, the deal would have resulted in higher prices and diminished quality and innovation for programs that are critical to national security,” Holly Vedova, director of the FTC’s Competition Bureau, said in a statement on Tuesday. “The FTC’s enforcement action in this matter dovetails with the DoD report released this week recommending stronger merger oversight of the highly concentrated defense industrial base.”

The report also lists five priority industrial base sectors, which are castings and forgings, missiles and munitions, energy storage and batteries, strategic and critical materials, and microelectronics. It suggests ways to improve the resilience of the supply chain in these areas.

For missiles and munitions, the report highlights the need to focus on companies and technologies for hypersonic missiles, particularly when it comes to industry consolidation.

“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,” says the report, which was prepared by the Office of the Under Secretary for Acquisition and Sustainment. “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.”

The report also recommends ways to overcome challenges posed by intellectual property limitations, including adopting open architectures and specialized licensing agreements.

Other recommendations include reducing barriers to entry to get new vendors in the defense sector and to increase opportunities for small businesses. The report notes that DoD continues to score well on awarding contracts to small businesses but that the number of small companies in the defense industrial base has declined by 40 percent in the past decade.