Three large companies and seven small companies currently manufacture a product with potential military applications. If the government regulates the industry, it will institute a single set of manufacturing specifications to which all ten companies will have to adhere. In this case, ttherefore, since none of the seven small companies can afford to convert their production lines to a new set of manufacturing specifications, only the three large companies will be able to remain in business.
None of the seven small companies currently manufactures the product to a set of specifications that would match those the government would institute if the industry were to be regulated is an assumption on which the author's argument relies.