Defense Contractor Shkrelis The US Government By Jacking Up Prices On Sole-Source Components
Monopolies are everywhere, even in the Defending America™ business. Huffington Post's Zach Carter writes about a defense company that's being termed the "Martin Shkreli" of government contracting. In case you need reminding, Martin Shkreli is the hedge fund bro turned pharma kingpin who purchased a drug used by cancer and AIDS patients and raised its price from $14/pill to $750/pill. After an immense amount of backlash, Shkreli promised to lower the price, reneged on that promise, acquired the Wu Tang Clan's one-copy-only $1 million album, and otherwise engaged in personal and professional roguery, including smirking his way through a Congressional hearing on drug prices.
The Shkreli process is being used by a defense contractor to inflate prices on what appear to be common manufacturing components, but ones with very few suppliers. When this company steps in, the number of suppliers decreases to one and the component prices skyrocket. This company was spotted by a member of Congress, who made it public with a letter to his colleagues.
On Tuesday, Rep. Ro Khanna (D-Calif.) sent a letter to Secretary of Defense James Mattis and the Pentagon’s acting inspector general accusing defense contractor TransDigm Group of illegally overcharging the Department of Defense by acting as a “hidden monopolist.”
[...]
Khanna’s letter cited five specific aerospace parts the company had jacked the price on, including a “cable assembly” that went from $1,737.03 to $7,863.00 after being acquired by TransDigm. The price of a TransDigm “motor rotor” soared from $654.46 to $5,474.00.
According to the company's SEC filings, it's particularly good at monopolizing component parts. It estimates 80% of its sales come from parts where it's the sole supplier. But raising prices may be one of the only things it's good at. Carter's story quotes from a Washington Post story where TransDigm parts were the cause of a "record number" of Air Force drone crashes. Not only did taxpayers overpay for the components, but they're on the hook for the resulting damage.
Ten Reapers were badly damaged or destroyed in 2015, at least twice as many as in any previous year, according to Air Force safety data.
The Reaper’s mishap rate — the number of major crashes per 100,000 hours flown — more than doubled compared with 2014. The aircraft, when fully equipped, cost about $14 million each to replace.
The Air Force’s other primary drone model, the Predator, also suffered heavy casualties.
An older and less capable version of the Reaper, the Predator was involved in 10 major accidents last year. That’s the most since 2011, when the U.S. military was simultaneously surging troops into Afghanistan and withdrawing ground forces from Iraq.
Behind the expensive crashes is a TransDigm part: a starter-generator that's failing with alarming frequency. Once that dies, the battery goes with it, causing the drone to "go stupid," according to the head of Air Force's drone operations. However, the Air Force seems less than concerned about the problematic part and the ensuing expensive crashes. Loooooooots of military funding makes this a non-issue, apparently. After all, we (the taxpayers) can always buy more drones!
Although the drone pilot shortage has compelled the Air Force to reduce the number of combat missions, Otto said the aircraft mishaps have not forced additional cuts. The Air Force has enough replacement drones on hand, he said, and already had orders in place to buy dozens more Reapers over the next few years.
“Any impact to operations has been negligible to barely noticeable,” he said.
We're supposed to be insulated from this sort of pricing by Pentagon rules and policies. Sole suppliers are supposed to disclose costs to the government in order to prevent excessive markups. TransDigm's not interested in playing by these rules. Matthew Stoller of the New America Foundation calls its evasive maneuvers and exploitative pricing "monopoly power performance art." TransDigm has apparently built a network of shell corporations to hide the components' origination, allowing it to bypass the Pentagon's form of consumer protection.
Khanna’s letter argued that TransDigm evaded these rules by setting up “a network of captive distributors” ― middlemen who sold to the government, creating the illusion of an actual competitive market. [...] No less than 12 TransDigm subsidiaries failed to disclose to the Defense Department in their procurement filings that they were owned by TransDigm, according to Khanna.
This is nothing new to companies who feel held back by government regulation. As we've seen before, sellers of weaponized code (malware, spyware, exploits) have routed around sales bans by using middlemen and shell corps to put their tools in the hands of governments with long histories of human rights abuses. In this case, it's the good ol' US of A doing the purchasing, but paying far more than it should, and being unable to do much about it, thanks to the obscuring of part sources.
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