The biggest defense contractors are losing their dominance in the research and development market, leaving room for small- and medium-sized businesses to gain a toehold in designing the Pentagon’s next generation technology.
At the same time, businesses that haven’t worked with the Pentagon in the past are reluctant to jump in because of budget concerns, according to report released Monday by the Center for Strategic and International Studies.
The study looked at unclassified research and development contracts worth more than $3,000 across the entire federal government, but the authors, Andrew Hunter and Jesse Ellman, focused on defense research and development spending over the last six years.
It found that, overall, research and development contracts at the Defense Department declined at a sharper rate than those in the rest of the federal budget. While the overall R&D budget shrunk by 28 percent between 2009 and 2015, related defense contracts decreased by 53 percent over the same time period. Most of the reduction comes in the later stages of R&D, Hunter said.
Research and development contracts among the big five defense contractors — Boeing, Lockheed Martin, Northrop Grumman, Raytheon and General Dynamics — have taken a significant hit. While these five giants won more than 60 percent of R&D contracts in 2006, that number dropped to just 33 percent in 2015.
Hunter pointed out that not only are these defense giants getting a smaller piece of the pie, the pie itself is actually smaller as tight budgets force spending on R&D to shrink.
Small and medium contractors, however, are getting a larger share of R&D contracts, and medium-sized businesses saw an increase of roughly 10 percent.
“The fact is that in a tough market, relative minnows in the R&D marketplace are holding on to their piece of the pie,” Ellman said. “Small businesses are not being shoved out of the market.”
Hunter said he expects this trend to level out, but doesn’t know if it’ll be reversed to give the big five a dominant share of the research and development market again.
Defense Secretary Ash Carter was on his way to Silicon Valley on Monday afternoon to work on building the relationship between start ups and the Pentagon. Hunter said the data in their study is good news for smaller companies who might be considering doing business with the Defense Department for the first time.
“This theory that you can’t beat the big five, that they have so much political influence that they’re just going to knock everyone else out of the way … that is essentially the opposite of what we see being the case here,” he said. “If you’re a Silicon Valley firm considering idea of breaking into defense game, the market access information would probably look pretty good.”
But the Pentagon has struggled to attract new partners. In 2008, about 1,100 companies per year who had never done business with the Defense Department before signed their first research and development contract with the Pentagon. By 2013, that number had dropped to about 400 per year and it’s remained steady at about that level ever since, Ellman said.
