Defense Contractor Shkrelis The US Government By Jacking Up Prices On Sole-Source Components

from the forget-the-$400-hammers dept

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.

Filed Under: defense contracting, monopolies, ro khanna
Companies: transdigm group


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  • identicon
    Anonymous Coward, 29 Mar 2017 @ 9:43am

    We need to create some capital offenses for corporations. They're people now, that's reasonable.

    reply to this | link to this | view in chronology ]

    • identicon
      Anonymous Coward, 29 Mar 2017 @ 9:51am

      Re:

      They already exist...

      The trick is to get them to prosecute, their jobs and lives are on the line if they misstep, you would likely be just as afraid as they are. Citizens do not get politicians elected, corporations with deep pockets for funding them do!

      reply to this | link to this | view in chronology ]

    • icon
      Bergman (profile), 29 Mar 2017 @ 7:00pm

      Re:

      One of the reasons corporate CEOs are paid so much is that they are the personhood of the corporation incarnate. If the corporation commits a crime that carries a prison sentence, it is the CEO who stands trial for it and goes to prison for it if convicted.

      The problem is that the US government is REALLY reluctant to actually apply that to people.

      reply to this | link to this | view in chronology ]

      • identicon
        Anonymous Coward, 30 Mar 2017 @ 11:35am

        Re: Re:

        If the corporation commits a crime that carries a prison sentence, it is the CEO who stands trial for it and goes to prison for it if convicted.

        Nah, shit flows downhill. Someone under him/her will take the fall. The main job of the CEO is to suck-up to the board. How much he/she is paid depends on how how well they do that.

        reply to this | link to this | view in chronology ]

  • identicon
    Anonymous Coward, 29 Mar 2017 @ 9:49am

    ---Monopolies are everywhere,---

    ---overcharging the Department of Defense by acting as a “hidden monopolist.”---

    Looks like they were hiding in plain sight to me. The openness of the corruption in the American government is effortless to see for those willing to look. The old game of "The Emperors New Clothes" is alive and well. Move along citizen, nothing to see here, go over there instead and check out those guys on the "other side" are trying to do something wrong. You should protest that, you can't let them get away with that!

    I see it clearly, the question is "why do most of you not see it?"

    reply to this | link to this | view in chronology ]

    • identicon
      Anonymous Coward, 29 Mar 2017 @ 11:50am

      Re: hiding in plain sight

      Yeah, what exactly is TransDigm so horribly guilty of (??) --- gaming the corrupt and out of control DoD procurement system? There seems nothing illegal going on.

      The root problem is caused by stupidity and mismanagement at the Pentagon, that has been standard practice for 75 years.

      Anyone thinking this TransDigm item is a big deal or even newsworthy-- has no clue how Pentagon contracting, budgeting and accounting actually work.


      Each year Congress requires DoD to pass a full financial audit -- DoD has never passed one yet -- never even come close to passing a fair audit of its books. Every year, the Defense Inspector General dispatched dozens of auditors to the military's financial and accounting centers. Every year, they report back that the job couldn't be done. Defense Department records were in such disarray and were so lacking in documentation that any attempt would be futile. In one yearly inspection, the Inspector General told Congress that his auditors stopped counting after finding $2.3 Trillion in unsupported entries (phony pencil-whipped accounting records) made to dishonestly force financial data to agree on paper.

      Pentagon contracting has always been a mess -- plenty of opportunity for savvy businessmen to legally make big profits.

      reply to this | link to this | view in chronology ]

      • identicon
        Anonymous Coward, 29 Mar 2017 @ 1:54pm

        Re: Re: hiding in plain sight

        You seem to fail to understand what corruption is.

        You like so many other willful idiots seem to think that incompetence is the name of the game. It is not, they are very competent at what they do, they are just experts and suckering you into thinking that this is incompetence.

        It is straight up corruption, they know it and swim around in it like they are at a pool party.

        reply to this | link to this | view in chronology ]

        • icon
          orbitalinsertion (profile), 29 Mar 2017 @ 3:40pm

          Re: Re: Re: hiding in plain sight

          I didn't see incompetence implied at all.

          What is worthy of notice? The simple fact that there is another open bit of data you can use when arguing against corrupt government and corporate behaviors.

          In some particular communities, like here at TD, most everyone "sees it". Huge swaths of the populace assume it regardless. We aren't that stupid and you have no special insight. You seem to think this is a sudden surprise to everyone but yourself. Lol. And of course, if this particular bit of news was never posted or discussed, we'd all be equally ignorant for that too.

          Maybe you should spread your enlightenment in places where people deny this shit happens. Your argumentative position would be appropriate then.

          reply to this | link to this | view in chronology ]

  • icon
    Roger Strong (profile), 29 Mar 2017 @ 9:49am

    You haven’t really made it until people start using your name as a verb.

    reply to this | link to this | view in chronology ]

  • identicon
    Anonymous Coward, 29 Mar 2017 @ 10:06am

    Read the EULA!

    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.

    I guess, like too many of us, they didn't read the contract before clicking "Buy now"... "PROVIDED “AS IS” WITHOUT WARRANTY OF ANY KIND, EITHER EXPRESSED OR IMPLIED, INCLUDING, BUT NOT LIMITED TO, THE IMPLIED WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE. THE ENTIRE RISK AS TO THE QUALITY AND PERFORMANCE IS WITH YOU. SHOULD THE PRODUCT PROVE DEFECTIVE, YOU ASSUME THE COST OF ALL NECESSARY SERVICING, REPAIR OR CORRECTION."

    reply to this | link to this | view in chronology ]

    • identicon
      Anonymous Coward, 29 Mar 2017 @ 10:11am

      Re: Read the EULA!

      That doesn't work with a government contract.

      reply to this | link to this | view in chronology ]

      • icon
        That One Guy (profile), 29 Mar 2017 @ 10:22am

        Re: Re: Read the EULA!

        Certainly shouldn't anyway.

        "Says here that if something breaks due to poor quality and/or manufacturing it's entirely on us, and you won't be responsible."

        "Standard contract terms."

        "Hmm... no. How about, if something breaks it is your fault, or we find someone else to hand this multi-million dollar contract to?"

        reply to this | link to this | view in chronology ]

      • identicon
        Anonymous Coward, 29 Mar 2017 @ 11:21am

        Re: Re: Read the EULA!

        If that didn't work, how did the taxpayers end up "on the hook for the resulting damage"?

        reply to this | link to this | view in chronology ]

  • icon
    Berenerd (profile), 29 Mar 2017 @ 10:21am

    I got this...

    Disclosure of costs:

    Materials to make the part: $1.75
    Invoicing and crafting costs: $5.38
    For everything else: Priceless rounded down to $5736.43

    reply to this | link to this | view in chronology ]

    • icon
      Roger Strong (profile), 29 Mar 2017 @ 11:12am

      Re:

      Even when the contractor is honest....

      - Paying the specialists who can navigate the government tendering system and produce a proper bid for this one tender alone: $20,000

      - Paying an engineer to certify that our part will meet the G-load, temperature and vibration requirements specified in the contract: $20,000.

      - But since we only win the contract one in three times, multiply the above figures by 3x.

      - And since production run start-up costs are normally amortized over hundreds of thousands of an item produced, but you're only ordering *25*, we'll bill the production run start-up costs up front: $20,000.

      - Plus the usual amount to pay the regular staff, the cleaners, the rent on the office, the phone bills...

      reply to this | link to this | view in chronology ]

  • icon
    Ryunosuke (profile), 29 Mar 2017 @ 10:42am

    This is precisely why I hate "we need to spend more or less on the military". It's not about how much money you throw at a problem, because that in itself, can be the problem.

    I prefer "We need to spend wisely" or "Spend efficiently". At what point would it be cheaper to buy parts from Mexico, or make them in house?

    reply to this | link to this | view in chronology ]

  • identicon
    Anonymous Coward, 29 Mar 2017 @ 10:54am

    Shkreli's good work

    I think Shkreli's abuse of his monopoly position was a good thing overall, and would have been better if he had been even more of a jerk about it. People tend to ignore the problems with that type of captive market. By abusing his position, and in the process seriously hurting a demographic group that can readily garner public sympathy, he brought some much needed attention to the problem. Sadly, that attention did not rise to the level required to reform the relevant laws to make it illegal for someone to do that again.

    reply to this | link to this | view in chronology ]

  • icon
    Roger Strong (profile), 29 Mar 2017 @ 11:30am

    T-Shirt Suggestion

    If you're going to Shkreli me, Lewinski me first.

    reply to this | link to this | view in chronology ]

  • identicon
    AllIsLostAbandonAllHopeOr, 29 Mar 2017 @ 11:42am

    From Tractors to Defense to Pharma to...

    Time to create some actual regulations around price fixing and monopolies. Extend that legislation to the Duopolies controlling U.S. ISP's, then auto dealerships for repair costs, then medical device makers, then pharmaceuticals then... (the list is too long).

    Any rational person would see there's a problem with capitalism as enacted within the borders of the U.S..
    It's not free market (no such thing really), it's captured markets played by a few very deep pocketed industries.

    Short term gain by investors shouldn't even be on the table in a rational world when it comes to Health care and then nations security (health care should be treated as part of security, i.e. can't have enabled bodies if those bodies can't pass boot camp).

    How do we as a nation come together and purge the captured politicians that can't enact legislation or put in place regulations if they (and we) know that those deep pocketed industries will put money into opposing their elections?

    reply to this | link to this | view in chronology ]

  • icon
    ECA (profile), 29 Mar 2017 @ 12:49pm

    uMMM lets go back to the OLD DAYS

    OPEN CONTRACTS.
    NO PROTECTIONISM ON ANY GOVERNMENTAL PRODUCT/PROJECT.
    OPEN BIDDING, CONTINUOUS BIDDING for IMPROVED products..
    NO government ELECTED EMPLOYEE can be Part or parcel of a company or service to Supply the gov.
    ANY part created for a Government made product is OPEN SOURCED, INSTANTLY. and NO copyright will be Given, Used, and all previous will be REMOVED.

    And all information will be OPEN for viewing/evaluation/...

    reply to this | link to this | view in chronology ]

    • icon
      Roger Strong (profile), 29 Mar 2017 @ 1:14pm

      Re: uMMM lets go back to the OLD DAYS

      OPEN CONTRACTS... OPEN BIDDING

      This is defense we're talking about. This would make maintaining secrecy on the next generation of nukes, stealth fighters, drones and defensive structures rather difficult.

      And it doesn't get rid of corruption when there's a favored vendor. Like in the Space Shuttle Main Engine (SSME) competition. From a post many years ago on Usenet:

      "Most of the technology development on staged combustion had been done by Pratt & Whitney, but oddly, the contract for the staged-combustion SSME went to Rocketdyne instead. So the experienced people were shut out, and the guys who were actually doing the work were having to come up to speed on a technology that was new to them."

      In his book "Advanced Engine Development at Pratt & Whitney," Dick Mulready devoted a chapter to the competition to develop the space shuttle engine. By the time of selection, P&W's XLR129 had over 251 seconds of operation, versus 0.461 for Rocketdyne's engine. During a visit, Dick Bissell, a consultant for United Aircraft and formerly of the CIA and progenitor of the U-2 and Blackbird, said, "I am sorry, but you cannot win. It was already decided in advance. The only reason for the competition was to transfer your technology to them."

      reply to this | link to this | view in chronology ]

      • icon
        ECA (profile), 29 Mar 2017 @ 6:08pm

        Re: Re: uMMM lets go back to the OLD DAYS

        IT USED TO be THAT WAY..
        All airplane developers sent in Info and on what they could do, with SPECS the gov. gave them..
        ANYONE could BID the contract...and there WERE FEW OVER RUNS..

        reply to this | link to this | view in chronology ]

  • identicon
    Anonymous Coward, 29 Mar 2017 @ 1:05pm

    This is a great example of why a lot of lower level federal employees hate contractors.

    reply to this | link to this | view in chronology ]

  • identicon
    I Love Capitalism, 29 Mar 2017 @ 1:31pm

    So what's the problem?

    Sounds like good business to me!

    reply to this | link to this | view in chronology ]

  • icon
    REM(RND) (profile), 30 Mar 2017 @ 10:05am

    Apologies to Tom Wheeler. I believe we have a new bearer of the title "Dingo".

    reply to this | link to this | view in chronology ]


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