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TheStreet Open House

F-22 Demise Highlights Plight of Small Firms

Stocks in this article: NOC BA LMT

WASHINGTON ( TheStreet) -- When the Senate voted to nix the F-22 fighter plane in July, its builders Lockheed Martin (LMT - Get Report) and Boeing (BA - Get Report) weren't the only companies hit. More than 1,000 parts suppliers in more than 44 states were part of the collateral damage.

"Some of these suppliers could be little mom-and-pop shops that make one particular part that the plane needs," says Brian McDermott, vice president of supplier management for the Aerospace Industries Association in Arlington, Va. "For smaller companies that can't diversify, when those programs get cut, they may have to close their doors."

President Barack Obama is betting on small businesses to create jobs, but problems at large companies have brought some of these firms close to ruin. In the age of market consolidation, the ties between big manufacturers and small suppliers have become tighter than ever before. Big business decisions that used to affect employees and investors are now reaching even the smallest companies in every struggling industry, from carmakers to banks.

For the defense industry, that consolidation followed a 1993 dinner nicknamed "the last supper," at which Pentagon officials told aerospace executives they'd have to consolidate if they wanted to survive. In the successive years, Northrop and Grumman merged to form Northrop Grumman (NOC - Get Report), and Lockheed and Martin Marietta became Lockheed Martin.

"They realized they couldn't do everything themselves," McDermott says. "When you look at any current or future airplane or weapons system that's being produced, most of the larger contractors are not original equipment manufacturers in the strict sense of the word - they're equipment integrators. And you have all these companies that are vying for each of these contracts."

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