National Defense Magazine - June 19, 2012, By Sandra Erwin
The federal budget stalemate that began nine months ago and might not be resolved until after the November election is likely to cause lasting damage to the defense industry, said Robert J. Stevens, chairman and CEO of Lockheed Martin Corp.
Unless Congress hammers out a deal to reduce the federal deficit before year’s end, the government must cut spending by $1.2 trillion over 10 years, beginning Jan. 2. Half of the reductions would come from the defense budget.
Under this “sequestration” scenario, military spending would drop by 10 percent, a reduction that might seem moderate by historical standards of post-war military build-downs. But because the Pentagon is not planning for these automatic across-the-board cuts, nobody knows what accounts or programs will be affected. The cloud of uncertainty already has wreaked havoc on defense contractors’ bottom lines, and continues to fuel fears that the industry is in financial freefall, Stevens said June 19 at a news conference in Arlington, Va.
Stevens is scheduled to retire Dec. 31 and hand over the reins of the nation’s largest defense contractor to current Chief Operating Officer Christopher E. Kubasik. Over the past several months, Stevens has spoken repeatedly about the impact of sequestration on industry employment and profits. His comments at this press conference, however, offered the starkest predictions yet.
Lockheed Martin, like other companies in the defense sector, has anticipated reduced military spending. It has shut down excess facilities, downsized its workforce by 18 percent over the past three years and its hiring has slowed down considerably, said Stevens.
Although he recognized that it is fair that defense industry do its part in reducing spending, Stevens said the uncertainty of sequestration is much worse than simple belt tightening, and more the equivalent of “blunt force trauma” for industry. A large prime contractor such as Lockheed, with 9,000 defense programs in its portfolio, has thousands of subcontractors with which it might have to sever relationships if Pentagon programs remain in limbo.
Stevens warned of “erosion in the quality” of the Defense Department’s supply chain, in addition to talent drain and disruption of military programs from which it could take years to recover.
He also had harsh words for U.S. policy makers who trumpet initiatives to boost U.S. manufacturing and high-tech jobs but make no acknowledgement of the role of aerospace and defense industry in those efforts. “Why isn’t the defense sector viewed as this incredible nucleus of high-technology manufacturing in America?” Stevens asked. “You hear so much discussion about restoring the manufacturing base in America, lifting the industry,” he said. Aerospace and defense exports are one of the few sectors where the United States has a positive trade balance, said Stevens. That also will be at risk because of sequestration. “Disruption in high-tech manufacturing in this area seems to us to be curiously disconnected from the discussion” of how to boost U.S. industrial competitiveness, he added.
The military’s long-term modernization plans also will be affected, he said. “When there is increasing uncertainty in the long-term horizon, it constrains the application of research-and-development dollars.”
Asked whether he expects the defense sector to shrink, Stevens said industry consolidation ought to be driven by demand. Even if sequestration is averted in an eleventh-hour deal, defense spending will continue to be under scrutiny, he said. Whatever funding is allocated to defense ought to be aligned with a national security strategy and defense needs, he said. Pressure to reduce the nation’s $16 trillion debt might require more defense cuts, he noted. He also cautioned that efforts to protect military spending should not come at the expense of other national priorities such as education. The defense industry needs skilled workers, particularly engineers, scientists and other specialized technologists in order to remain competitive, he said. “We need more education.”
One of the budget deal scenarios that lawmakers are contemplating might involve a mix of spending cuts and higher taxes. Stevens suggested that any additional taxes on defense companies also would be bad news for the industry’s ability to compete globally. “Taxation drives our ability to compete on a global stage.”
Until the current gridlock in Washington is settled, industry would like to see a more active dialogue with Defense Department leaders about what might happen next, Stevens said. “We need to be talking more about how this future is likely to look.
A group of industry associations already has requested a meeting with Defense Secretary Leon E. Panetta to discuss possible budget scenarios that might unfold between now and January. Executives contend that waiting for Congress to act during the lame duck session after the November election is not acceptable, as the private sector has to begin taking actions over the summer to prepare for possible program cancellations or delays.
Analysts predict that is a strong chance that Congress will defer or repeal sequestration. Regardless, revenues across the industry have declined more as a result of the uncertain spending forecast than because of actual cuts, as Pentagon program managers are delaying contract awards.
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