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p The manufacture of sophisticated modern military equipment some types of which incorporate scores of thousands of parts demands wide specialisation of and cooperation in production. Numerous enterprises of various industries often share in handling a military contract. Every year, the Defence Department concludes about 15 million deals in 850 specialised fields of supply. It has among its suppliers about 20,000 prime contractors and 100,000 subcontractors.

A small number of large industrial companies and a host of small military suppliers are involved in military production in the USA. Large monopolies, however, seize the lion’s share of government contracts. Their share was particularly great in the late fifties and early sixties (see Table 35). The reason was that in that period the proportion of missiles, aircraft, radioelectronic equipment and other military goods manufactured, as a rule, by few highly specialised industrial 202 companies substantially grew in the total number of military contracts. The escalation of the Vietnam war demanded a sharp increase in the absolute and relative scale of production of conventional armaments, apparel, food and kindred products, which led to an increase in the share of companies of corresponding industries, medium-sized and small firms in the total military contracts, and to a decline in the share of large companies manufacturing the most sophisticated types of modern equipment. In the past few years, however, the share of large firms in the total of military contracts has been growing again.

Table 35 Distribution of DOD Prime Contract Awards (percentages to total) Including * Years 100 biggest prime contractors SO leading contractors 51-100 other big contractors Small business concerns June 1940-September 1944 67.2 57.6 9.6 22 July 1950-June 1953 64.0 56.3 7.7 January 1955-June 1957 67.4 59.5 7.9 1957/58 74.2 66.9 7.3 17.1 1959/60 73.4 64.8 8.6 16.1 1962/63 73.9 65.6 8.3 15.8 1964/65 68.9 61.2 7.7 19.6 1965/66 64.0 55.1 8.9 21.4 1966/67 65.5 56.1 9.4 1967/68 67.4 57.1 10.3 18.8 1968/69 68.2 56.9 11.3 17.8 1969/70 69.7 59.3 10.4 1970/71 72.1 63.1 9.0 17.0 1971/72 72.1 62.7 9.4 18.0

p Sources: W. L. Baldwin, The Structure of the Defense Market, 1955-1964, p. 9; M. J. Peck, F. M. Scherer, The Weapons Acquisition Process. An Economic Analysis, p. 118; Interavla Air Letter, December 22, 1966, p. 3; Missile Ordnance Letter No. 380, November 15, 1970, p. 1.

p The above data somewhat overstate the actual level of concentration of military production within large monopolies, since about one-half of the military work of the large 203 concerns is subcontracted, with approximately 40 per cent of the amount subcontracted going to small business concerns.  [203•1 

p The specific nature of military production, its dispersion between industries and the immense range of military goods forbid assessment of the concentration of military production as a whole according to those conventional criteria (relative volume of output, number of employees, size of assets, and productive capacities) that are used for this purpose in the civilian branches of the economy. Hence the impossibility to correlate the level of production concentration in the military branches of industry with that in the civilian branches or in industry as a whole. Some American economists maintain that the level of concentration in the arms industry is lower than, for example, in the automotive or the aluminum industry in which concentration is strikingly high.  [203•2 

p The leading arms monopolies are the biggest business concerns not only in terms of military production but also by the general standards of the US economy. This is evidenced by the fact that many of the 100 biggest military corporations belong among the 100 biggest industrial monopolies of the USA.

p The number of firms belonging to both groups of large firms greatly increased during the Second World War, mostly among the aircraft companies. In that period, of the 24 military suppliers among the 100 huge industrial firms 15 were aircraft companies, which was the result of the rapid development of the industry. When estimating the number of firms which belong simultaneously to both groups of large monopolies, military building contractors and " nonprofit corporations" are excluded because they cannot be listed among industrial companies.

p The composition of the 100 leading military suppliers is unstable. At present, for example, they include many companies which were not on the list in the Second World War and even in the period of the US aggression in Korea, and, conversely, many large military monopolies of the above periods are not among them today.

p Of considerable interest is analysis of the distribution of 204 large military monopolies between industries. In this respect, the most striking fact is that among the leading military suppliers the proportion of motor and shipbuilding companies and companies of other industries has sharply diminished and, conversely, that of aircraft and electronics companies has significantly increased. These changes are associated with alterations in the structure of military contracts which, in turn, are due to the rapid development of weaponry, as well as to changes in military strategy.

p Of the 100 leading arms manufacturers, 57 are directly involved in aircraft and missile construction or the production of electronic instruments for these industries and related research; 12 are suppliers of missile fuel, aircraft petrol and other oil products; 7 build military bases in US territory or overseas; 4 are shipbuilding firms; 6 manufacture combat vehicles, and the other 14 supply ordnance, small arms, ammunition or render various services to the armed forces, 5 of the latter firms being "non-profit corporations".  [204•1 

p The distribution of companies between individual industries is based on their basic specialisation, although individual companies manufacture products uncharacteristic of their industries. For example, General Dynamics is listed in the aircraft industry, but it also builds submarines and has electronics and nuclear divisions manufacturing corresponding military goods.

p The great changes in the structure of military production entail variations in the composition of leading arms- manufacturing companies and in their relative importance in military supplies. For example, the biggest automotive company General Motors ranked first for the total value of military contracts it won during the Second World War and the US war in Korea, whereas by 1958-60, it had slid to 21st place and in 1969-70 placed seventeenth. In the past few years, Lockheed Aircraft has been in the lead for the total value of military contracts although in the Second World War it was tenth and during the Korean war, seventh.

Individual major military suppliers exhibit great discrepancy between their positions among the 100 leading 205 military and among the 100 leading industrial monopolies. For example, in 1970, Lockheed Aircraft ranked first for the value of military contracts among the 100 leading military monopolies and 33rd among the 100 leading industrial corporations. At the same time, General Motors, which was in 17th place for the value of military contracts, ranked first in total output. This discrepancy is due to the difference between the shares of military goods in the total output of individual leading military suppliers.

Table 36 Distribution of Firms by
Percentage of Total Sales
Made to the Department
of Defence or Government
in Calendar Years 1957
and 1962 for 57 Reporting
Finns Share of war Number of supplies in total companies company sales. per cent 1957 1962 90-100 13 10 80-89 5 6 70-79 5 10 60-69 5 3 50-59 1 2 40-49 3 2 30-39 2 6 20-29 5 5 10-19 4 3 0-9 14 10 57 57

p Source: W. L. Baldwin, The Structure of the Defense Market, 1955-1964, p. 75.

p Leading military suppliers widely differ from one another for the level of specialisation of firms manufacturing military goods. The relationship of military output to the total output of a company may be a criterion for assessing this specialisation.

p In 1962, 29 companies had a 60 to 100 per cent share of military goods in the total value of their marketed products. Among such firms are Lockheed Aircraft, Martin Marietta, and others. There are a few companies whose military production is great in absolute figures but forms a small share in relation to total output. General Motors is an example in point.

p We discussed above the role of a relatively small number of leading military contractors who hold a dominating position in military production. Let us also examine the role of the multitude of small companies in the production of military goods.

p In the terminology of US Defence Department procurement agencies small business concerns are firms with less 206 than 500 employees.  [206•1  To assess the importance of these firms in military production it is necessary to ascertain their role as prime contractors and as subcontractors of large corporations. During the Second World War, small business concerns won 22 per cent of all prime military contracts. Their share decreased in the fifties and early sixties, as is illustrated by Table 35. Small firms play a relatively big role in procurements by the Army and a smaller role in procurements by the Air Force.

p Small business concerns have different roles to play in supplies of various kinds of military goods. These firms account for an insignificant share of arms contracts, particularly for missile systems and aircraft equipment, while their share in the total contracts for military construction, food, textiles and clothing supplies amounts to over 50 per cent.  [206•2  It is characteristic that firms having under 500 employees produce the bulk of the above-listed goods.

p Small corporations win on the whole a much smaller share of military contracts in contrast to their place in the national economy. This question has been repeatedly discussed in Congress, and even legislation was adopted to give small firms priority in military contracts awards. For example, the Armed Services Procurement Act of 1947 states that "a fair proportion of the total purchases and contracts ... shall be placed with small business concerns”. Similar provisions are contained in the Defense Production Act of 1950. In view of the above congressional legislation, the Defence Department took some steps to increase the share of small firms in military contracts. However, this measure failed to yield practical results. The 1958 report of the House Committee on Small Business states: "Unless there is a change in both the attitude and approach by the Government procurement agencies in dealing with small business it will not receive a fair share of Government contracts.”  [206•3  It was only the war in Vietnam, as noted above, that led to a certain increase in the share of small firms in the total military supplies.

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p The insignificant share of small firms in many military contracts is due in the main to their inability to compete against large specialised military monopolies which have important strings in the Pentagon and, what is decisive, their factories in respect of technological facilities, composition and qualifications of manpower are more suited to manufacturing modern sophisticated weaponry than those of small companies.

p In addition to large and small companies, prime military contracts are also placed with medium-sized companies not listed among the 100 leading military suppliers or among small firms. There is scant information on the role of medium-sized firms in military production. If the share of large and small firms is excluded from the total military contracts, it may be presumed that the share of mediumsized companies in the total military supplies will amount roughly to 9-10 per cent.

p This distribution of prime military contracts among prime contractors does not correspond to the true role the abovementioned groups of firms play in handling military contracts. Prime contractors subcontract part of their work, while often acting as subcontractors themselves.

p Prime military contractors, just as all other commodity producers, acquire from other companies raw materials and stores necessary for military production. With the use of increasingly complex and special materials and manufactured units and parts in military production, the relations between prime contractors and supplier companies assume the character of continuous production co-operation on the basis of subcontracts, whereby the prime contractor offers a fixed fee stipulating definite terms and requirements concerning the type of products, their quantity, quality and delivery terms.

p The system of subcontracts has become widespread in the US arms industries. Unfortunately, full information on subcontracts is unavailable. Using data from the reports of large Defence Department contractors, Peck and Scherer give the following information on this question. From 1956 to 1959, 61 big military contractors paid other companies 50 per cent of their total income from prime military contracts and subcontracts. This value includes both payments for
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208 Table 37 Military Contract Receipts and Intel-business Payments on Military Projects, 61 Companies: Fiscal Year 1959* Category Military contract receipts Number of com panies Total, mil. dollars From prime contracts From subcontracts and purchases mil. dollars per cent of total mil. dollars per cent of total Large airframe and missile ...... 5 6 5 5 7 8 5 8 5 7 5,092.1 1,884.8 295.8 413.8 3,553.8 542.9 1,286.6 508.2 1,509.0 1,217.8 4,333.0 1,835.0 210.2 257.9 2,785.9 378.5 1,084.1 234.5 1,353.8 1,019.4 94.9 97.4 71.1 62.3 78.4 69.6 84.3 46.1 89.7 83.7 259.2 49.6 85.6 156.1 767.8 165.2 202.1 273.5 155.1 ^198.2 5.1 2.6 28.9 37.7 21.6 30.4 15.7 53.8 10.3 16.3 Medium airframe and missile ...... Small airframe and missile ..... Aircraft and missile assembly and components ...... Broad electronics— Laree ..... Broad electronics— Military electronics— Larfire ...... Military electronics— Medium ..... Aircraft and rocket engines ..... Automative and heavy machinery .... Total ........ 61 16,304.8 13,492.3 85.8 2,312.4 14.2 209 Intel-business payments on military projects Total Small business Large business mil. dollars percentage of total military contract receipts mil. dollars percentage of interbusiness transactions mil. dollars percentage of interbusiness transactions 2,757.7 54.1 762.5 27.7 1,994.8 72.3 917.5 48.7 283.6 30.9 633.8 69.1 124.3 42.0 68.2 54.9 56.1 45.1 187.2 45.2 106.5 56.9 80.9 43.2 1,767.7 49.7 622.2 35.2 1,145.5 64.8 202.7 37.3 108.2 53.4 94.3 46.5 615.1 47.8 288.6 46.9 326.0 53.0 288.5 45.0 106.6 46.7 121.8 53.3 753.2 49.9 302.4 40.2 451.0 59.9 596.3 49.0 201.9 33.9 303.8 66.0 8,150.2 50.0 2,850.7 35.0 5,298.0 65.0

* Due to rounding, percentage totals may be off slightly. Source: M. J. Peck, F. M, Scherer, The Weapons Acquisition Process. An Economic Analysis, pp. 154-55.

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purchased materials and manufactured parts and components and payments under subcontracts.  [210•1 

p The extent of subcontracting varies with individual categories of prime contractors (see Table 37). Large and medium-sized companies manufacturing aircraft frames and missiles are in the lead both for the relative rate of income from prime military contracts and for the amount of subcontracted business going to other firms. Companies manufacturing electronic equipment depend more on income from subcontracts and have the smallest share of their work subcontracted to other firms.

p Table 37 also shows that 65 per cent of the subcontracts of the above-said large military contractors are placed with large companies and only 35 per cent with small firms. Hence the conclusion that the system of subcontracts somewhat reduces the share of large companies and correspondingly increases the proportion of small firms in the total output of military goods. For example, in 1957 prime contractors paid a total of 3,562 million dollars to small firms under subcontracts. If this sum is added to that of prime military contracts placed with small firms in the same year (3,783 million dollars) the total value of their military contracts will amount to 7,345 million dollars, while their share in the total value of military contracts will grow from 20 to 30 per cent. For all that, however, the share of small firms in military contracts remains much smaller than that they have in the country’s total industrial output. For example, small firms (under 500 employees) in 1958 employed 57.1 per cent of the labour force of the manufacturing industries,  [210•2  which is by far larger than their share in the total military contracts.

p During the two world wars, and, to a lesser extent, in the period of the Korean war, the bulk of orders filled under subcontracts were for goods which could be manufactured by the prime contractors’ own factories. The system of subcontracts was employed for mass production of military goods through co-operation with other business concerns. For example, during the Second World War, about 30-40 211 per cent of aircraft frames (in terms of value) were manufactured by subcontractors from other industries. In the past few years the above-said type of subcontracts has been increasingly replaced by subcontracts for the development and manufacture of such assemblies and components whose production cannot be efficiently organised at factories of prime contractors; therefore, they are manufactured at specialised factories under a subcontract. The manufacture of modern types of sophisticated military equipment objectively demands detailed specialisation and broad co- operation in military production, which has led to a considerable spread of the subcontract system.

p Detailed specialisation and wide co-operation may be considered an achievement in the organisation of military production in the USA. The Pentagon’s prime contractors are doing business on a wide scale with specialised factories of various industries which supply them with large components, assemblies, units, parts, raw materials, stores and other goods required for the manufacture of military endproducts. This co-operation is effected in the form of multistage subcontracts, market purchases and otherwise.

p The level of co-operation in military production is exemplified by the manufacture of the C-141 Air Force transport plane. The 1,000 million dollars’ order for these planes was placed with Lockheed Aircraft in 1961. A total of over 6,000 firms located in 50 states of the USA and in Canada shared in building C-141 transports. Lockheed Aircraft itself handled 38 per cent of the total value of manufacturing work, while 62 per cent was performed under subcontracts. A total of 1,200 industrial firms were direct subcontractors of Lockheed Aircraft.  [211•1  In their turn, its subcontractors distributed smaller subcontracts which sometimes became three- and even four-stepped.

The specialisation of many factories in military production leads to their being wholly dependent on the volume and structure of government military contracts. An increase in military contracts boosts production at these factories, and conversely, a reduction results in a slump. To lessen somewhat the dependence of arms-manufacturing 212 firms on the availability of government military contracts, work to diversify the arms industry has been under way recently, i.e., the range of products manufactured by firms is being widened by starting production of civilian goods. However, considerable obstacles stand in the way of this work due to the high-degree specialisation of the production facilities of arms-manufacturing firms and the resulting low efficiency of their use for manufacturing civilian goods, these firms lacking adequate experience in the production of goods for the free market, etc. Therefore, attempts by individual highly specialised arms-manufacturing companies to diversify and convert their production to other goods often proved futile.