The Atlantic - December 14, 2011, By August Cole
The 1990s might not have been a decade of peace, but they were for big, U.S. defense firms. After decades of working for a Defense Department oriented toward the defeat of the Soviet Union, they struggled to adjust. During the 1980s the Pentagon had spent billions of dollars on developing and improving expensive hardware -- tanks, submarines, fighter jets -- but, in the post-Soviet '90s, their appetite shrank.
President George W. Bush speaks to employees of United Defense Industries in California in May 2003. In the
background is a Bradley fighting vehicle, made by the company and widely deployed during the initial U.S.-led
invasion of Iraq two months earlier / Reuters
In 1995, U.S. Defense Department procurement spending dropped below $50 billion for the first time since 1982.
This changed with the attacks of September 11, 2001, which began an historic period of prosperity for the U.S. defense industry. Now, much like the period that followed the collapse of the Soviet Union, the industry faces a decade, or more, of adversity and softening political support for weapons spending. The defense industry is back at another crossroads, and the stakes for them are just as high.
Defense cuts during the early 1990s had a profound impact on not just the defense industry, but on America itself. Tens of thousands of well-paying jobs were lost when defense firms shut down entire lines of business. The spiritual home of the American aerospace industry, southern California, faced a debilitating economic downturn, crashing real estate prices and scattering aerospace workers throughout the country. More than 100,000 jobs were lost in the Los Angeles area between 1988 and 1994, according to one estimate.
Some companies decided they didn't need the defense business anymore and simply got out of the market, selling off their defense divisions. Texas Instruments sold its defense business to Raytheon in 1997 for $2.95 billion. At the time, Raytheon executives said the Texas Instruments deal would bring their annual sales up to $15 billion. By, 2010, Raytheon reported annual revenue of more than $25 billion.
The largest contractors today eclipse Raytheon. These so-called "super primes", Lockheed Martin, Northrop Grumman, and Boeing, dominate the global defense market. Their size is a direct result of the corporate consolidation of the 1990s. Martin Marietta Chief Executive Norman Augustine once remarked that the Pentagon held a "last supper" in 1993, when it gathered more than a dozen of the industry's top executives to inform them that the defense landscape was changing in ways nobody would have expected a few years earlier. Augustine later oversaw a merger between Martin Marietta and Lockheed Corp.
Lockheed Martin, currently the Defense Department's biggest contractor by sales, grew its revenue from $23 billion in 1995 to $46 billion in 2010. Lockheed Martin even tried to buy Northrop Grumman, but regulators threw up so many roadblocks that Lockheed Martin dropped the bid in 1998, proving there were limits to how big and powerful defense companies could become. Even so, a look at the sprawling Fort Worth, Texas facilities where Lockheed builds the Joint Strike Fighter is a testament to how enormous the firms have become. Lockheed bought the campus from General Dynamics in 1993, two years before Lockheed merged with Martin Marietta. The Joint Strike Fighter, the most lucrative Pentagon contract in history, gives Lockheed Martin a practical monopoly on the U.S. fighter market for the foreseeable future.
There were other changes in the 1990s that affected defense companies. Firms working on exotic nuclear weapons programs or secret satellite communications systems no longer attracted the country's most talented engineers. Technology and Internet companies did. Stock options and paradigm shifts in corporate and personal technologies, not the challenge of outdoing a now defunct adversary, drove innovation. California-based investors and bearded guys tinkering in their garages -- not the defense industry -- became the source of the country's cutting edge technologies.
In the decade following September 2001, military spending soared and so did the fortunes of defense firms, which booked record profits, revenues, and stock prices. Procurement spending rose to more than $147 billion in 2010, nearly three times the amount for 1995.
Now, the cycle is shifting again. With the U.S. winding-down in Iraq and Afghanistan, and its domestic politics increasingly concerned with the country's debt, severe declines may be ahead for military budgets.
It's not yet clear how far defense spending will fall. The uncertainty alone is already putting enormous pressure on U.S. defense companies. The biggest are simply too large to try to merge with their peers, as they did during the 1990s, without falling afoul of regulators or investors.
The defense industry is once again at a crossroads, and the stakes are the highest they've been. Large defense contractors are interwoven into not just every layer of the national security apparatus, but also of civilian government. They are involved in everything from smart bombs to military interrogations to the most recent U.S. census. Tens of thousands of jobs are again on the line during a time of economic trouble. Whatever the level of military spending falls to, the defense industry's economic, strategic, and political actions well into the 21st century will continue to be heavily influenced by its period of decline following the fall of the Soviet Union.
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