Sergey Tolkachev 
Master of economics 
Assistant Professor of the 
Moscow "Stankin" State Technological University 

The active process of corporation merging that dominated in the US economy in the end of the 90's is likely to become less intensive in the new millennium. The restructuring when the largest Pentagon suppliers were absorbing competitors and acquiring additional assets came to an end. The state bodies supported the mega-merger process till 1998. The US defense industry has dramatically changed during the last decade. Now 4 largest suppliers of Pentagon include 25 companies that were independent in 1990. The Pentagon chiefs seemed to consider the reached concentration of the military production as sufficient for its optimal functioning. Further vertical and horizontal integration will weaken competition in the military industry.

Four largest companies including 2 universal concerns - Lockheed-Martin and Boeing, remain on the US armament market. Raytheon, the third prime supplier of Pentagon, has the leading positions in military electronics. The forth supplier - Northrop-Grumman is more likely to be referred to the subcontractors of the first level that supply large integrated subsystems.

Since the consolidation of the prime contractors has been suspended the assets integration into united corporate structure became vital in order to keep the competitive-able positions of the companies. The most rational approach to the internal restructuring should obviously combine the fast integration and the continued aggressive marketing policy. The companies reduce the superfluous production facilities and staff to cut down the expenses and to increase the competitive ability of their products. In order to prove their competitive ability to the Defense Ministry the companies share with it the results of such economy reached because of the production integration. The prime contractors seek to use the advantages of their different units to promote the most valuable technological and management achievements. The leaders of the defense industry pay great attention to integrate the defense and the civil technologies and production in order to reach unification and interchange-ability in the defense and the commercial products manufacturing. It favors both the increased quality and the low expenses of military systems and technologies production. Nevertheless, all three prime suppliers have some problems integrating the acquired units and working out a clear development strategy that is based on the possessed assets.

Another important part of the US defense industry restructuring is the changing relations of the prime suppliers and the leading subcontractors with the numerous lower-tier suppliers. The vertical and the horizontal integration among the largest Pentagon suppliers caused the increased competition in their relations with the subcontractors. The general quantity of the subcontractors is being dramatically reduced. Everyone of them, in its turn, should carry out more integrated functions to supply units and components. The enlargement of the leading prime contractors promotes the enlargement of their suppliers. The dominating tendency is to strengthen the cooperation and to establish more stable and reliable agent relations. The new contract paradigm prefers the small number of partners that supply integrated products with more complicated processing degree. The prime contractors look forward to charge their suppliers with integrating spare units and systems in order to cut down the expenses on purchase management. Thus, the reorganization of the low-tier suppliers industrial basis promotes their universalizing activity. Some subcontractor seek to take a vacant role of the "total supplier".

Because of the fact that more than 50% of the final product cost is the sub-supplies the surest way to increase the competitive ability of the products is to cut down the expenses related to purchases from the subcontractors. But the largest change in the relations between the prime suppliers and the subcontractors is the introduction of the Lean manufacturing methods. It means such technology of raw materials and components processing that creates additional value for the consumer at the next technological stage. Since the large-scale mergers have been finished in these branches the economical technologies became vital to cut down the expenses and to increase the price competitive ability.

Despite the reduced number of the contractors on every technological level of the military products market the competitive regime is hardly to be undermined because at least two competitors remain on every level. Besides the state bodies still protect the competitive regime. The American companies are more and more affected by the international competition due to the globalization of the world economy. The growing monopolization and the reduced competitive incentives don't threat the military industry because of the increasing tendency to integrate the military and the civil production.

(part 2)