The prospect of $600 billion in automatic defense cuts could drive an increasing number of smaller defense firms out of the industry — or out of business altogether. A rise in defense firms merging, moving into commercial industries and going out of business are all likely scenarios, industry groups and budget analysts say.
“It’s a cumulative thing,” said Todd Harrison, a senior fellow at the Center for Strategic and Budgetary Assessments. “The reduction in war funding is coming on top of reductions on the base defense budget.”
Sequestration would have an impact on the major companies as well, and belt-tightening among big contractors would trickle down to hit the small subcontractors. That’s because the major players would look to perform many of the tasks currently subcontracted to other firms in-house as a way to save costs.
“Right now they contract out a fair amount of what they do to smaller, second-tier or third-tier companies,” Harrison said. “If you start cutting back significantly on their business, they’re going to try to insource more of that work rather than outsource it. So the cuts could be magnified on the second- and third-tier contractors for that reason.”