The Pentagon Spent Decades Consolidating the Defense Industry. It’s Now Time To Pivot.

With the Cold War effectively over, then-Secretary of Defense Les Aspin led an effort to deliberately encourage industry consolidation. The message was clear: defense budgets were now declining, and there would not be enough demand to sustain 51 prime contractors competing for major programs.  

Over the rest of the decade, thousands of suppliers left the market, mergers reshaped the industry and by the early 2000s, the United States was left with five dominant prime contractors. It was a system optimized for cost efficiency and lower procurement volumes.  

However, 30 years later, the current geopolitical landscape has created an entirely different set of demands. The industrial base the Pentagon designed for the post-Cold War era is a model that is no longer optimal. Rebuilding competition in the defense industry has become a national imperative in light of today’s threat environment.

Modern Demands Require a Modern Industrial Base

Global conflicts like the ones in Ukraine and Iran show the need for industry to rapidly scale and sustain production capacity. Even for the most advanced militaries, modern warfare can rapidly deplete critical resources, most notably dispensable munitions.

When too much production depends on too few companies, it creates supply chain bottlenecks and cybersecurity vulnerabilities, which are the kind of weaknesses that nation-state competitors exploit.

With only five primes controlling most major platforms, the market structure has evolved into one characterized by monopolies or duopolies in critical segments. For example, 90% of U.S. missile production comes from only three companies. Expanding the number of primary defense contractors will strengthen military capabilities and resilience with speed and agility. 

Today, innovation largely flows from subcontractors instead of the primes themselves. Rebuilding competition requires intentional action from the Pentagon to reshape procurement and regulators to encourage competition. The stakes are too high for the supply chain to have a single point of failure. 

A New Financial Model

 The Pentagon is working to reform the legacy procurement practices that have led us to where we are today.  

 Building a new artillery plant or semiconductor facility requires substantial financial resources. Companies can be reluctant to invest in these projects if Pentagon orders fluctuate year to year. The Pentagon and Congress both play a role in reshaping procurement and stabilizing future demand.

Continuing to fund programs like the Defense Production Act (DPA) Title III program, which provides loans, loan guarantees and direct investments to expand production of critical defense inputs, is a great place to start. This program also funds digital manufacturing, allowing suppliers to easily scale with Department of War (DOW) data systems and making it easier for smaller and mid-tier manufacturers to compete.

Long-term commitments and government investments allow companies to justify capital investments, expand their workforce and outsource to new suppliers.

In 2019, the merger of L3 Technologies and Harris to form L3Harris created what many describe as a sixth prime. This merger combined two mid-tier firms to create a scaled competitor. Introducing more competition across segments such as intelligence, surveillance, and reconnaissance, communications and missiles, it also demonstrated that scale and competition aren’t mutually exclusive.

This year, the Department of War and L3Harris negotiated a novel partnership. Under the agreement, L3Harris will spin off and IPO its missiles business, with the DOW serving as an anchor investor through a $1 billion convertible preferred equity investment. The proceeds would fund a significant capacity expansion: more than 70 new buildings across Alabama, Arkansas and Virginia, equipped with state-of-the-art digital manufacturing tools and production lines.

This structure blends market discipline with national security priorities. Rather than relying solely on cost-plus contracts or episodic supplemental appropriations, it taps public capital markets to fund capacity expansion. The DOW’s role as anchor investor reduces financing risk, signals long-term demand credibility and aligns incentives around execution and performance.

As the five primes review their portfolios, they may conclude that certain business units would create more value as independent companies. Divestitures and initial public offerings could result in five or more additional scaled, focused defense companies. Combined with an existing Tier 2 defense company or an emerging firm in “Defense Tech” and a revitalized mid-tier, the U.S. could move from five or six dominant primes to a dozen or more significant public (or privately held) competitors.

Regulation Drives Competition

Antitrust authorities like the Department of Justice and the Federal Trade Commission must also be involved. It’s up to these authorities to support an industry structure that is both competitive and resilient.

For years, the Pentagon aggressively pushed the defense industry toward consolidation, forcing many small- and mid-sized companies to reevaluate their strategies. According to the 2025 NDIA Vital Signs Report, the number of small businesses participating in the defense industrial base has fallen by more than 40% over the last decade.

While foreign adversaries have recognized the importance of manufacturing scale, the United States continues to follow a path that made sense 30 years ago. For the United States to maintain military dominance in the 21st century, it must recognize that military advantage depends on industrial strength and endurance.  

Decades ago, Secretary Aspin successfully influenced industry to reshape and meet the defense needs at the time. Today, Secretary Pete Hegseth is guiding the industry to course-correct and meet the needs of the warfighter, now. The result should produce a defense industrial base that is broader, stronger, more agile and resilient. With these changes, the industry will be more directly accountable to the heroes who defend our nation every day.