"We have believed that absence of platform replacement in defense spending can go on for only so long, and that the future is not an endless series of electronics upgrades to 1970s- and 1980s-vintage aircraft, naval vessels and armored vehicles," Byron Callan, analyst at Merrill Lynch, New York, wrote in a June 2 note to his clients.
http://www.defensenews.com/story.php?F=990702&C=thisweek Posted 07/25/05 14:24 Print-friendly version BALANCING ACT Firms Tap Into Security To Maximize Profits By GOPAL RATNAM It is emblematic of the times that one of the newest and fastest-growing entrants to this year�s Defense News Top 100 is Armor Holdings, a body- and vehicle-armor maker in Jacksonville, Fla. The company went from $91 million in defense sales in 2003 to $605 million in 2004 � a more than five-fold increase � and from no ranking in the Top 100 list to No. 68 this year based on 2004 defense sales, propelled by a prodigious demand for armor from the U.S. Army and Marine Corps. With nearly 140,000 U.S. troops in Iraq facing deadly roadside bombs, the lack of adequate armor for some troops became the subject of congressional inquiry and outrage in 2004, pushing the Pentagon to spend more on such protection. Whether the United States should better prepare for, and consequently spend more on, thwarting insurgencies, terrorist threats, and chemical, biological and nuclear attacks under the assumption that it�s already well prepared to defeat conventional foes is the key debate in Washington. The outcome will determine how the Pentagon decides to spend its vast war chest in the years to come and shape the global defense industry. Against such a backdrop, most major defense companies in the Top 100 have been spreading their risk and gaining expertise under a broader rubric of security rather than the narrow one of defense. Robert Stevens, chief executive of Lockheed Martin, which again this year is No. 1 on the Top 100 list, said his company is more than a defense contractor. Lockheed is a �global security-minded company,� Stevens said in a recent interview. The �work we do internationally attempts to equip coalitions who are intended to move and act together.� Alhough many associate Lockheed with planes and rockets, which constitute half the company�s sales, �about half our sales and more than half our earnings before interest and taxes come from information technology [IT] and systems that are hard to put on a stick,� he said. �We�d like to continue that expansion and [are] growing our IT systems and services.� High-Tech vs. Boots on the Ground The failure to provide adequate armor for American troops and what is seen by many as the Pentagon�s poor planning for the insurgency that engulfed many parts of Iraq following the overthrow of Saddam Hussein are central themes of the Quadrennial Defense Review, a congressionally mandated review of the U.S. military�s capabilities that is currently under way. Some fear this review could unravel the Pentagon�s transformation plan, an effort to induct high-tech weapons and digital networks into the U.S. military that calls for spending billions of dollars. Ronald Sugar, chief executive of Northrop Grumman, No. 3 on this year�s Top 100 list, captured the sentiment in a speech in Washington. The insurgency and daily death toll in Iraq have led skeptics to question the Pentagon�s goal to transform the U.S. military into an electronically wired, nimble force, Sugar said in a Feb. 15 speech at the National Press Club, Washington. �What good is all this high technology, some have asked � if it all comes down in the end to a simple, dirty street fight? What we need instead, the skeptics say, is more boots on the ground.� Sugar argued that simply adding more troops is not the answer. Instead, �we must provide the same asymmetric advantage we now have on the broader battlefield to our troops in the streets and alleyways of Baghdad, Fallujah or wherever they may be.� He advocated high-tech solutions, such as the use of laser weapons, to shoot down enemy rockets and mortar shells that pound the Green Zone in Baghdad. On the other end of the spectrum of potential threats is defense against a traditional nation-state. The question U.S. lawmakers and many in the Pentagon are asking is whether China will be a friend or a foe. The Pentagon�s annual assessment of China�s military capabilities, while cataloguing Beijing�s military modernization plans, expressed uncertainty about which path China might take. �China is developing on the world stage as a regional power, but its emergence also has global implications,� said the report, sent to Congress on July 19. �China faces a strategic crossroads. It can choose a pathway of peaceful integration and benign competition. China can also choose, or find itself upon, a pathway along which China would emerge to exert dominant influence in an expanding sphere.� Those who believe China�s rise may not be peaceful argue that Washington must thwart Beijing�s attempt to exert global influence, and advocate a U.S. arms buildup aimed at China. Jim Woolsey, former CIA chief and currently a partner at Booz Allen Hamilton (No. 28), said the United States and China already may be on a collision course. �China is investing in high-tech sensors and weapons [intended] to target U.S. aircraft carriers with an intent to dominate the Western Pacific,� Woolsey told the House Armed Services committee July 13. While the Pentagon debates how and where to spend its money in the next few years � on new threats like terrorism and insurgency or to counter potential threats like China � some analysts warn that not spending enough on new weapon platforms could hurt growth at the four major U.S. defense companies. �We have believed that absence of platform replacement in defense spending can go on for only so long, and that the future is not an endless series of electronics upgrades to 1970s- and 1980s-vintage aircraft, naval vessels and armored vehicles,� Byron Callan, analyst at Merrill Lynch, New York, wrote in a June 2 note to his clients. Callan said the United States continues to spend vast amounts of money on developing new weapons but is not buying enough of this new equipment. According to Merrill Lynch analysis, the ratio of procurement to research and development has been steadily falling since the early 1990s, when it stood at about 2.5, to a little over 1 today � suggesting that not all the new equipment being developed is being purchased. Money available to buy such new systems may be further squeezed when the emergency wartime supplements for Iraq and Afghanistan come to an end. One former senior defense official expects emergency funds for Afghanistan and Iraq to end by 2006 and 2008 respectively, going by the example of U.S. operations in Bosnia, when supplements ended five years after the start of operations. If the supplements end and the cost of operations are folded into the regular budget, it could further erode money left for major weapons, the former official said. Callan also fears that beyond 2006-07, �operating costs of military operations could impinge on modernization spending.� The U.S. Army expects such wartime supplements to pay for its modernization, including Future Combat Systems and modular brigades, and will face a sticker shock if the supplements end. But for companies that specialize in wartime services, IT and repair, these are boom times. Halliburton (No. 10), Titan (No. 25), Engineered Support Systems (No. 57) and CACI (No. 64) enjoyed tremendous growth in 2004. Halliburton subsidiary KBR received large contracts to provide battlefield services to U.S. troops in Iraq and Afghanistan; Titan is the largest provider of translators to the U.S. military; Engineered Support Systems is one of the major firms specializing in repairs of equipment; and CACI provides IT systems and consultancy to the Pentagon and U.S. intelligence agencies. European Growth In Europe, as in the United States, the fast-growing firms tended to be midsized providers of subsystems or repair services, like the United Kingdom�s Cobham (No. 49) and Meggitt (No. 87), while London-based BAE SYSTEMS (No. 4) registered an 18 percent top-line growth in defense revenues. French defense giant Thales saw a modest growth in 2004 defense sales of 4.6 percent compared with 2003 and slipped in its Top 100 rank from No. 7 to No. 9. Although many European firms look to the U.S. defense market both for sales and technology, fears in the United States over technology leaks and a desire to protect American manufacturers continues to frustrate European company executives. �My observation, after spending a year in this industry, is that the U.S. and the U.K. defense partnership has yet to produce a coherent response to the phenomenon of globalization,� said Dick Olver, chairman of BAE SYSTEMS, in a July 12 speech in Washington. �There is no consensus on this, and the debate needs to take place.� Olver, formerly the deputy chief executive of the oil and energy giant BP., said that export control issues raised by U.S. officials have plagued cooperation between the United States and its partners on the Joint Strike Fighter program. But unlike the danger of sensitive technology falling into wrong hands remains, a line needs to be drawn between information that needs to be protected and those that can be freely traded, he said. Olver called the U.S. Congress� attempts to legislate protection through Buy America measures �misguided,� and instead called for lifting all barriers on sharing of unclassified technology between allies and in classified areas to create a pool of licensed experts on both sides who would be allowed to exchange such information. Lockheed�s Stevens also called for a U.S. debate and enumeration of what technologies need protection and those that can be shared without limitations. Technology-Transfer Woes Technology sharing is likely to become an even more contentious issue as the Bush administration plans to allow transfer of civilian nuclear technology to India � an idea that many in Congress, and even some within the administration, find troublesome because they see New Delhi as having flouted international norms in developing nuclear weapons. Though India has disavowed further nuclear tests and has passed strict export control laws to please Washington, translating the Bush administration�s intent into reality is expected to be a hard slog. India�s state-owned Hindustan Aeronautics (No. 51) also expects to receive military technology to co-produce American F-16s or F/A-18s, if New Delhi decides to buy these fighter jets to replace its aging Russian fighters. Private sector Indian companies also hope to benefit from the potential technology flow. A large delegation of Indian entrepreneurs accompanied India�s Defense Minister Pranab Mukherjee on his recent visit to Washington, when he signed a new 10-year framework agreement on defense cooperation with U.S. Defense Secretary Donald Rumsfeld. These company executives and industry association leaders met their U.S. counterparts to discuss ways to enhance cooperation between the two. Among newly emerging defense industries in the world, Russia�s plans to combine all its aircraft manufacturing facilities � the state-controlled Aviation Holding Company Sukhoi (No. 34), RSK MiG (No. 88), Tupolev, Ilyushin and the privately owned Irkut (No. 66) � under Unified Aircraft Corporation, or OAK, the Russian initials for the company, is facing delays. A decision on the combined company�s structure has been delayed since January and is now expected in August, if at all. The defense businesses of Japan�s conglomerates, including Mitsubishi Heavy Industries (No. 20), Kawasaki Heavy Industries (No. 40), Mitsubisihi Electric (No. 48) and NEC (No. 56), could undergo changes if and when the ongoing debate in Tokyo about constitutional reforms allows Japan�s Self-Defense Force to take on a more active posture. Vivek Raghuvanshi in New Delhi and Lyubov Pronina in Moscow contributed to this report. View the 2005 Defense News Top 100 chart http://www.defensenews.com/content/resources/dn_top100_2005.pdf ------------------------ Yahoo! Groups Sponsor --------------------~--> <font face=arial size=-1><a href="http://us.ard.yahoo.com/SIG=12hv1gac3/M=362329.6886306.7839369.3040540/D=groups/S=1705323667:TM/Y=YAHOO/EXP=1122780291/A=2894321/R=0/SIG=11dvsfulr/*http://youthnoise.com/page.php?page_id=1992 ">Fair play? Video games influencing politics. 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