Hard Times For Western Defense Companies

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Western Defense Companies Face Grim Future -- Zachary Keck, The Diplomat

Global defense spending shrank last year for the first time since 1998, according to a new report by the UK-based advisory firm, AlixPartners. This is consistent with other recent reports by organizations like Stockholm International Peace Research Institute’s (SIPRI).

In its 2013 Aerospace & Defense Industry Outlook, AlixPartners estimates that the aerospace and defense (A&D) industry as a whole grew by 6.8 percent in 2012, a sizeable increase from the 5.5 percent growth rate the industry experienced in 2011.

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My Comment: Tough times now .... maybe. But if there is one thing that I have learned about covering conflicts and defense spending over the years it is the following .... quiet times are always followed by a major war somewhere.

The U.S. Defense Industry Has Few Friends In Congress

Defense Industry Finds Few Old Friends On Hill -- Politico

The defense industry is in the fight of its life, but many of its longtime champions on Capitol Hill are retired, dead or in jail.

Of the 30 largest House recipients of defense industry campaign donations since the 1990 election cycle, only 11 are still serving in Congress, according to a POLITICO analysis of federal data compiled by the Center for Responsive Politics. It’s the same story in the Senate, where 14 of the top 30 recipients over the same time period still serve.

And many observers admit that the remaining industry defenders aren’t the defense giants who once walked the halls of Congress.

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My Comment: Because they do not have the seniority, new House members who are sympathetic to the defense industry will not have the chairmanships (and the power) that goes with it. Hmmmm .... my advice to the defense industry .... now is the time to find new friends.

Is The Defense Industry Ignoring The Looming Defense Budget Cuts?

Defense Biz Ignores Pending Cuts—A Case Of Denial? -- David Francis, The Fiscal Times

Wall Street and the rest of the country woke up yesterday to the surprising news that the U.S. Gross Domestic Product had contracted in the fourth quarter of 2012, falling by 0.1 percent. The news was especially disappointing in light of analysts’ expectations of 1.1 percent growth. It was also the first time GDP growth was negative since 2009.

The drop was attributed to a 22 percent drop in defense spending in the fourth quarter, shaving 1.28 percentage points from GDP. What’s alarming about this decrease is that it happened before the more than $50 billion in sequestration cuts, set to take effect in March.

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My Comment: They and everyone else are in denial on what will be the inevitable impact of high deficits and unsustainable debt on their businesses and personal lives.

How The World's Biggest Defense Merger Was Quashed By Angela Merkel

How Angela Merkel Quashed A Mega-Merger -- Aviation Week

On a sunny weekend in the south of Germany last August, the new chief of EADS, Tom Enders, had a rare opportunity to relax and take some time for his hobbies, such as paragliding. And although many consider it a dangerous pastime, Enders had never been seriously injured. So why should this time be different?

As it turned out, Enders should not have jumped that day. The CEO hurt himself seriously enough during a landing that he had to cancel what might have been the most important business trip of his career and an historic meeting for the giant aerospace company he leads.

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My Comment: If intriguing business stories are your thing .... this is a fascinating read.

To Survive U.S. Defense Companies Are Diversifying And Finding New Markets

Defense Firms Seek Alternatives as U.S. Cuts Military Spending -- Wall Street Journal

Dawne Hickton has seen the future—and it is old people.

After building a business largely on selling titanium to the U.S. defense industry, Ms. Hickton is turning her sights to health care.

RTI International Metals Inc., RTI +0.07% of which Ms. Hickton is chief executive, last year paid $182 million to buy a medical-device business, gaining access to the market for spinal implants and other products for the nation's growing numbers of senior citizens. "That's a future for us—the elderly population," Ms. Hickton says. "That's a growing market. We don't know what the defense market is going to do."

Over the past three years, she says, Pittsburgh-based RTI's defense work has been cut in half, falling to 20% of the company's revenue from 40%.

Faced with more defense cuts on the horizon, RTI is part of a broader shift by defense companies, large and small, looking for ways to contend with lost business. Some of them are diversifying. Others are shedding unprofitable segments, closing plants or laying off workers. Many are looking to increase sales on the international market.

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My Comment: Bottom line .... to survive and grow America's defense companies must find markets overseas and diversify .... if not .... expect to become a smaller company (and that is if you survive).

U.S. Defense Budget Cuts Will Hammer Industry

2013 Outlook: Budget Cuts Will Hammer Industry -- Natinoal Defense

The Defense Department and its contractors are still hopeful for an 11th hour deal that will shield the Pentagon from a 10 percent budget cut in 2013. But even if Defense is spared from the sequester, the business climate for Pentagon contractors will be bleaker in 2013, analysts predict.

Whereas the defense budget top line peaked in 2010 and has only dipped slightly, projected spending on new equipment already has declined by one-third since 2008 and is on a path to go down another 10 to 15 percent, says Erich Fischer, a partner at the consulting firm Booz & Company.

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My Comment: The good old days of increasing defense budgets are coming to an end.

A Sign Of Things To Come

Boeing Announces Big Layoffs in Defense Division -- CNBC

Boeing announced a major restructuring of its defense division on Wednesday that will cut 30 percent of management jobs from 2010 levels, close facilities in California and consolidate several business units to cut costs.

The company told employees about the changes on Wednesday, in a memo obtained by Reuters and confirmed by Boeing.

Boeing, the Pentagon's second-largest supplier, said the changes were the latest step in an affordability drive that has already reduced the company's costs by $2.2 billion since 2010, according to the memo.

The measures come as U.S. weapons makers are under pressure to cut costs and preserve profit margins amid dwindling defense spending in the U.S.

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Update: Boeing To Trim Executive Ranks, Shuffle Defense Unit -- Defense News

My Comment: I suspect that this is just the tip of the iceberg.

Bleak Times Predicted For The US Defense Industry

US Defense Biz Outlook Grim, Foreign Sales Won't Save It: Deloitte -- Aol Defense

Even if Congress somehow averts sequestration, the defense industry is headed for layoffs and, at best, anemic growth, and the much-vaunted surge in foreign military sales won't turn that around.

If the automatic cuts known as sequestration do take effect as currently scheduled in January, the impact would be "a devastating blow."

That's the bleak verdict from Tom Captain, head of the aerospace and defense practice at Deloitte LLP, who previewed the consulting firm's mid-year overview of the industry in a conversation this morning with AOL Defense. (We'll update this story with a link to the report when it's released tomorrow).

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My Comment: Their biggest customer .... the U.S. Defense Department .... is cutting back, and cutting deep. The money is no longer there, and with trillion dollar deficits that need to be brought down .... new weapon systems and maintaining present ones are becoming less important to the U.S. public as the debt crisis grows and social cutbacks increase.

Europe's Mega Defense Merger Is Putting Pressure On The German Government

Graphic: World's largest defense companies

Mega Defense Merger: EADS-BAE Plans Put Merkel Under Pressure -- Spiegel Online

The planned merger of British defense contractor BAE Systems with aircraft maker EADS is putting Germany's chancellor under pressure. If Merkel consents to the deal, she will jeopardize jobs in the high-tech industry. But if she refuses, she will endanger the future of the aerospace giant.

It was a beautiful August day when Tom Enders, a former paratrooper and avid amateur pilot, decided to go for a spin with his hang-glider. But the short flight ended painfully for Enders when he crash-landed the glider, injuring tendons in both arms. With his arm in a sling and a plastic cast, the powerful CEO of the European Aeronautic Defence and Space Company (EADS), the parent company of aircraft maker Airbus, looked like he was wearing part of a suit of armor. It wasn't exactly an encouraging look for someone who is in the process of forging the world's largest defense group.

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My Comment: This merger would not only create the world's largest defense group .... with annual sales of about $45 billion (€34 billion) .... but this new company would now be capable of providing the entire arsenal of modern warfare, including aircraft carriers, fighter jets, nuclear submarines, satellites and drones. More to the point .... through this merger the Europeans will then be positioned to compete against the giant U.S. defense companies for global markets. It is because of this need to position themselves on the global scene that (I believe) this merger will go through .... even with the prospect of job losses in cetain departments.

Is America's Tank Builder About To Shut Down?

M1 Abrams tanks sit on the assembly line at a plant in Lima, Ohio, the only place where the tanks are manufactured. Plant and local officials fear the plant won't survive if the military temporarily halts new tank orders. General Dynamics Land Systems

M1 Abrams Tank Builder Pushes Congress To Keep Contract Going -- McClatchy News

WASHINGTON — The M1Abrams tank has survived the Cold War, two conflicts in Iraq and a decade of war in Afghanistan. No wonder: It weighs as much as nine elephants and it’s fitted with a cannon that’s capable of turning a building to rubble from two and a half miles away. But now the machine is a target in an unusual battle between the Defense Department and lawmakers who are the beneficiaries of large campaign donations by its manufacturer.

The Pentagon, facing smaller budgets and looking toward a new global strategy, wants to save as much as $3 billion by freezing refurbishing work on the M1 from 2014 to 2017, so it can redesign the vehicle from top to bottom. Its proposal would idle a large factory in Lima, Ohio, as well as halt work at dozens of subcontractors in Pennsylvania, Michigan and other states.

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My Comment: Shutting down parts of America's defense-industrial complex with the promise of opening it up in the future with a 'new program' is raising concerns .... and with just cause. I heard the same thing when I was living in Russia and the Russian government made the decision after the collapse of the Soviet Union to mothball key parts of their military industrial complex for a few years .... they even retired my uncle who was a director in their military-satellite communications division. Guess what .... those plants were never opened again .... and in today's world the present Russian government is now faced with huge costs in starting this up all over again.

America's Defense Industry Has A "Surge" Weakness

Photo: F-22 Raptor Final Assembly Line (Lockheed Martin)

America’s Hidden Industrial ‘Surge’ Weakness -- DoD Buzz

Wednesday’s brief by two of DC’s top defense analysts included another interesting element besides their endorsement of an “industrial strategy” to protect the defense sector: If the U.S. got into a desperate national pinch and needed to “surge” its stocks of weapons or equipment, it probably could not do it, they said.

Barry Watts and Todd Harrison, of the Center for Strategic and Budgetary Assessments, explained that there are many reasons why the U.S. could not switch on a major industrial effort like the one that built the “arsenal of democracy” in World War II:

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My Comment: I am sure that America's industrial base will be able to gear up and commit to a massive "surge" in stocks of weapons and equipment if the need should arise .... the problem is that it will take time, and in today's wars .... time may be a luxury that we do not have.

On a side note, as bad as the situation may be for America's industrial base dedicated to defense procurement, we are still better off than anyone else .... for now.

Push-Back From The US Defense industry On Further Defense Budget Cutbacks

Defense Contractors Launch Campaign To End Military Spending Cuts -- L.A. Times

Seeking to whip up public support for what’s expected to be a hard-fought budget battle in Congress, a group of defense contractors launched a lobbying campaign urging an end to cuts in military spending.

The campaign, named Second to None, was introduced by the Aerospace Industries Assn. trade group Wednesday at the National Press Club in Washington. The group, which represents manufacturers and suppliers of aircraft, space systems and engines, warned of potential job losses and national security risks.

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More News On The U.S. Defense Industry Pushing Back On Defense Cuts

Contractors battle against further US military cuts -- Reuters
US defence sector attacks further cuts -- Financial Times
Manufacturers lobby against deeper defense cuts -- Forbes/AP
Aerospace Association Chief Says Defense Industry Is Fragile -- Bloomberg
Coalition of manufacturers lobbies ‘supercommittee’ to spare military spending -- Washington Post
Aerospace industry campaigns against further defense cuts -- The Hill
Republicans seek a ceiling on defense cuts -- Washington Times
AIA Launches Second to None Campaign -- PRNewswire
Defense Industry Comes Out Swinging: Don't Cut Us! -- Aol Defense
Make-Believe Defense Cuts -- Benjamin H. Friedman, Cato @ Liberty

The Defense Industry's Golden Decade Is Coming To An End

Lockheed Martin debuted the F-35 fighter in 2006. Spending on the jet is in danger of being cut back. USAF/Reuters file

For Defense Industry, A Golden Decade Comes To An End -- MSNBC/AP

Sept. 11 attacks led to a spending spree, but now the US must cut back.



NEW YORK — The wars in Iraq and Afghanistan are winding down, Osama bin Laden is dead, and the federal government is deeply in debt. This spells the end of what was a golden decade for the defense industry.



In the decade since the Sept. 11 attacks, the annual defense budget has more than doubled to $700 billion and annual defense industry profits have nearly quadrupled, approaching $25 billion last year.



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My Comment: Yup ... the golden decade for the defense industry is now rapidly becoming the depressed decade .... or worse.

America's Warplane Industry In Decline

F-22 Raptors flying near a U.S. air base in Arizona. United States Air Force, via Bloomberg News

Boom Times In Warplane Industry Fade Into History -- New York Times

At the height of the Cold War, the Paris and Farnborough Air Shows could usually be relied on to produce new military products every year. It was a boom period for prime contractors in the field and for their legions of suppliers and parts manufacturers. A number of programs started in that period, like the Lockheed Martin F-22 Raptor, the EADS Typhoon Eurofighter, Dassault’s Rafale and the Saab Gripen, continue to come off the assembly line.

But their days are numbered (F-22 production is due to end within a year or two) and successors are scarcely to be seen outside of China and Russia.

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My Comment: What does not help the situation is when you have marketing people who are not interested in promoting your product, and when you have the cream of your Air Force fleet grounded.

The Defense Industry And How It Influences Washington

The Influence Of The Defense Industry -- DoD Buzz

The Sunlight Foundation put up a fascinating blog post this week matching DoD’s top 10 contractors with the amounts they spent on campaign contributions and lobbying between 2009 and 2010. No surprise, the Pentagon’s top firm is Lockheed Martin, but the company that spent the most on lobbying was Boeing, with almost $35 million, followed by Northrop Grumman, with almost $31 million. (And Lockheed was no slouch: It spent almost $26 million, according to Sunlight’s data.)

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My Comment: Unions, financial and defense industries, foreign governments, special interest groups, etc. .... another example on why Washington is often perceived as being sold and bought by special interests.

Why No Enthusiastic Advocacy For The British Defense Industry?

A pair of Tornados prepare to take off from RAF Lossiemouth Photo: Reuters

Who Will Defend The Defence Industry? -- Con Coughlin, The Telegraph

Ministers should be banging the drum about British skills and planning for the future , says Con Coughlin.

The Government’s enthusiastic advocacy of a no-fly zone for Libya has provided a graphic illustration of its willingness, when necessary, to exercise military muscle. Within hours of the UN Security Council approving a resolution that authorised military action, British planes, submarines and frigates were in the thick of it, attacking Colonel Gaddafi’s tanks and anti-aircraft defences.

Indeed, the performance of RAF Tornados and Typhoons has been critical in turning the tide against the Libyan regime’s forces. Thanks to the crews’ skill in using their Storm Shadow and Brimstone missiles in precision attacks, the rebels have been able to battle for control of the port of Sirte, the Gaddafi clan’s stronghold.

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My Comment: The British mindset is .... what can I say .... British .... and extolling the virtues of the defense industry is not in their character. But on the flip side .... extolling the virtues of the British soldier is something that they have no trouble in doing.

Analysts Are Forecasting A Period Of Prolonged Pain ForThe Defense Industry

From DoD Buzz:

Uber-connected defense analyst Loren Thompson gave his outlook for the defense industry to a group of Raytheon executives the other day and after reading the text of his remarks I imagine some of those execs are considering a career change. The short version: Thompson says defense spending will drop significantly under Obama, weapons programs will be cut first and the industry faces a prolonged period of depressed demand similar to that of the 1990s - as in the “procurement holiday” 1990s.

Thompson is a very smart guy and knows the defense industry and Pentagon procurement backwards and forwards. It’s worth reading his remarks in full as he provides some good historical context for where things currently stand as far as defense spending, industry and the American economy. Thompson reminded the assembled executives that their industry was a Cold War creation. Before around 1950, the defense industry barely existed at all. The threat of communist aggression and ICBMs put the U.S. on a permanent war footing and military spending went from one or two percent of GDP to ten percent.

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My Comment: Maybe .... maybe not. With a U.S. recession a distinct possibility for 2009, many Congressmen are going to protect Defense procurements for their districts. There may in fact be an increase when all is said and done..