The Clinton Team Seems To Agree The Raytheon Merger Is Anti-Competitive; Now, What Will It Do About That Danger?
(Washington, D.C.): The Departments of
Justice and Defense appear to be nearing
the end of their extended reviews of the
anti-trust and other implications of the
Texas Instruments (TI) part of proposed
mergers between Raytheon, TI and Hughes
Electronics. The Center for Security
Policy — which called last February for
a careful examination of the impact this
merger would have on the Nation’s defense
industrial base and the public’s interest
in competition among Pentagon suppliers
— is gratified by the high-level
attention that has evidently been given
to these questions.
The Nature of the Problem
It appears that the result of the
Clinton Administration’s review of the
Raytheon-TI-Hughes deal is headed toward
confirming some — if not all — of the
Center’s expressed concerns:
- The Raytheon merger would
give rise to what has been called
“a virtual stranglehold on
spy satellite sensors and
militarily critical radar
components.”
Particularly worrisome is the
concentration of the ability to
manufacture the key ingredients
in the most advanced
state-of-the-art avionics (e.g.,
actively scanned array
fire-control radars) —
Monolithic Microwave Integrated
Circuits (MMICs) and
Transmit/Receive (TR) Modules —
in the hands of a single company. - Over the past decade, the
government has spent some $280
million to ensure that the
companies in the planned
triple-merger remained separate
and competing suppliers of these
advanced MMICs and T/R Modules.
The rationale: to spur both
cost-effectiveness and innovation
in this area. Allowing these two
suppliers to join forces, with
the effect of driving competition
out of both the production of
these components and the
production of a critical end-item
like fire control radars, would
squander the positive results of
that enormous investment. - Hughes, Raytheon and Texas
Instruments now control — and
compete against each other in —
the manufacture of virtually all
air-to-air missiles used by the
U.S. military. Were the
merger to be approved, it would
be nearly impossible for another
company to enter this arena and
compete realistically with the
new giant. - Here, too, the Pentagon has
sought to ensure the availability
of a second source for its
current primary air-to-air
missile, the Advanced
Medium-Range Air-to-Air Missile
(AMRAAM). According to the Washington
Post, the Defense Department
spent “tens of millions of
dollars” after it awarded
the production contract for the
AMRAAM to Hughes in order to
ensure that Raytheon would also
be able to produce this missile.
Under Secretary of Defense for
Acquisition Paul Kaminski has
said the competition that has
existed between Hughes and
Raytheon on this project has
saved taxpayers hundreds of
millions of dollars and has
reduced the price of the AMRAAM
by 70 percent. It stands to
reason that the absence of such
competition would foreclose the
possibility of these sorts of
savings in the future.
What is To Be Done?
There appear to be basically two
approaches to address the prospective
anti-competitive implications of the
Raytheon-Texas Instruments-Hughes merger:
1) The free market approach:
This approach would require, as a
condition of government approval of the
proposed merger, that certain elements of
the companies be divested. (For example,
the production capacity of Texas
Instruments’ MMICs and Modules foundry
could be kept out of the merger. Such a
company would almost certainly be
acquired by another firm and provide
continued competition with the similar
capability that now exists within
Raytheon.)
Under the free market approach, the
fundamental principles of market
capitalism would be relied upon to ensure
both competition and the best value for
the defense dollar expended.
2) The industrial policy
approach: The alternative would
appear to be to approve the elimination
of one of two independent competing
suppliers, then to try to make the
post-merger Raytheon behave as though it
did not enjoy a monopoly — not only at
the level of components, but also as the
maker of full-up weapon systems.
Such an approach would obviously
entail a considerable amount of
government intervention, regulation and
micro-management. It is far from clear,
however, that industrial policy can be
relied upon in a circumstance such as
military electronics, where firms must
share detailed information about the
design of their systems with their
suppliers in order to obtain
correctly-configured components.
To be sure, “Chinese walls”
or “firewalls” can secure
information that must be
compartmentalized under certain
circumstances — notably, for short
periods of time and for a finite purpose.
Even with considerable government
oversight and interference, though, it
would clearly be problematic to rely on
such “firewalls” to safeguard
information that must be shared over
decades with engineers working for a
single company.
Adoption of the latter approach could
leave the government in the worst of all
possible worlds down the road: Having to
pay still more millions of
dollars to create a new competitor to the
entity it allowed to be created out of
two companies it had previously paid
dearly to have compete with one another!
The Bottom Line
The choice now before the Justice
Department and the Pentagon would seem to
be an obvious one: Use a
self-policing, “small
government” means of ensuring
competition vital to an efficient and
cost-effective defense industrial base
rather than an unwieldy, intrusive and
ultimately unreliable mechanism of
competition-via-federal-fiat.
While the close attention evidently
being afforded this issue by the Clinton
Administration is commendable, it
behooves Congress to play its part in
evaluating the issues at stake in the
latest proposed defense consolidation.
The Senate will presumably have a natural
opportunity to do so in the course of
upcoming confirmation hearings for
Jacques Gansler, the controversial
nominee to replace Dr. Kaminski as Under
Secretary of Defense for Acquisition.
The larger question with which both
the legislative and executive branches
must wrestle, however, is whether
the defense consolidation process has
reached a point of diminishing returns
for the national security and the
taxpayer — if not for Wall
Street and the industry executives who
are obliged to focus on their corporate
bottom-lines. A national debate
is overdue about whether the public’s
interest in cost-containing competition
is compatible with a dramatically
contracted industrial base that may
otherwise seem justified, if not
unavoidable, given present (and
projected) defense procurement plans.
– 30 –
1. See the
Center’s Decision Brief
entitled ‘A Bridge Too Far’?
Pending Defense Industry Merger Raises
Serious National Security,
Competitiveness Concerns (
February 1997).
2. See “Should
Raytheon Rule Air-To-Air” which
appeared in Missiles and Munitions
Inaugural Issue/Summer 1997.
3. See
“Raytheon Deals Raise Anti-Trust
Concerns: U.S. Could Block or Alter Some
Merger Terms” which appeared in the Post‘s
29 January 1997 edition.
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