Beneficiaries of the Military Buildup Await Their Orders
A Call to Arms Awakens Defense (Business Week, October 1, 2001)
Democrats in Senate Budge on Missile Defense Money (New York Times, September 19, 2001)
Boeing sinks as defense stocks surge (CBS.MarketWatch.com, September 17, 2001)
House Approves $343 Billion Defense Bill (Associated Press, September 25, 2001)
WSHINGTON, Sept. 21 - Early last week, Frank C. Lanza, the chief executive of L-3 Communications, an aerospace and communications company in New York, received a not-too-surprising telephone call from military officials.
"They asked us, `Can you do the following things, and how long will it take you to do it,' " Mr. Lanza said. "They are in the planning process. And they need to know about our ability to deliver certain products."
That planning process is about war: the Pentagon is preparing a shopping list for the global struggle against terrorism promised by President Bush. As a result, scores of military contractors, from giants like Lockheed Martin to smaller companies like L-3, could be among the corporate beneficiaries of the devastating attacks of Sept. 11. Even as those assaults have sent the stock market plummeting and caused havoc for much of American business, prospects for the military-industrial complex are looking stronger than they have in years.
Overnight, political opposition in Congress to huge increases in Pentagon spending has vanished, along with concerns about dipping into surplus Social Security funds. Consequently, what had seemed to the industry like a disappointingly small military budget just two weeks ago is now climbing toward unanticipated heights, providing a lift for military contractors and a quick Keynesian stimulus for the economy.
Beyond the buildup for war, winners and losers in the race for Pentagon money will also be determined by the outcome of Secretary of Defense Donald H. Rumsfeld's efforts to transform the military. His goals have included improving intelligence, expanding long-strike capabilities and making the forces lighter, faster and more high-tech. But the process has faced stiff resistance from some commanders and lawmakers who fear Mr. Rumsfeld wants to starve programs for modernizing conventional ships, planes and howitzers to nurture untried products, like space planes or remotely piloted submarines.
"The services are going to want to try to use some money to address their modernization needs," said Jacques S. Gansler, an under secretary of defense in the Clinton administration who now teaches public policy at the University of Maryland. "And that's where you get a conundrum over whether to buy a new tank, or equipment you'd like to have for 21st-century warfare against terrorists. You'll have a battle between those two options."
The budget numbers tell the story. Three days after the attack, Congress overwhelmingly approved $40 billion in emergency funds, with $10 billion to $15 billion for the armed services. In the next few weeks, Congress is also expected to approve, with little dissent, a $33 billion increase in the Pentagon budget, raising it to $329 billion for the fiscal year beginning Oct. 1.
And before final votes on the 2002 spending plan are even cast, the Pentagon is expected to ask for an additional $15 billion to $25 billion. There is bipartisan support for that, too.
"Capitol Hill is prepared to do whatever the Pentagon wants," said Gordon Adams, a budget official in the Clinton administration who is now director of security policy studies at the Elliot School of International Security Studies at George Washington University.
Much of the initial wave of money will go toward rebuilding the smoldering hole left in the Pentagon by the hijacked airliner, paying for heightened security at military installations worldwide and preparing for retaliatory strikes. That will mean buying new bullets, cruise missiles, boots, reconnaissance equipment and spare parts.
But many analysts and military officials say they expect there to be a significant amount of money left over after those basic needs are met. The service chiefs and senior lawmakers will probably want to spend those funds on favored weapons programs, like Boeing (news/quote)'s F-18 E and F fighters, United Defense's Crusader artillery system, and Northrop Grumman and General Dynamic's DD-21 stealth destroyer. It will not matter if those systems are not clearly useful in the war on terrorism, the analysts say.
"There is a heightened sense of danger out there," said Loren Thompson, chief operating officer with the Lexington Institute, a military policy organization based in Arlington, Va.
"There are increased resources," he added. "There is muted partisanship. And those three factors combine to improve the prospects of many defense programs, even those that don't appear immediately relevant to the current operations."
Whether that buying spree lasts will depend on the nature and duration of the military operation Mr. Bush orders. A ground war could help builders of armored equipment, like General Dynamics. A war fought mainly from the air could benefit Lockheed or Boeing. And a totally different kind of battle, where rooting out an elusive enemy will require intelligence and surveillance skills more than sheer firepower, could help companies like Northrop, maker of the Global Hawk, an unmanned reconnaissance aircraft.
Yet the influx of money soon to flow from Capitol Hill seems certain to trickle down to a wide array of military contractors, big and small.
"A rising tide does lift all boats," said John Williams, a spokesman for the National Defense Industrial Association, a trade group representing 900 military contractors.
There will be new purchases of explosion-proof windows and doors for the Pentagon and other military buildings. Spare parts and maintenance contracts will grow as more ships, planes and helicopters undergo the relentless wear-and-tear of overseas deployment.
Munitions makers can also count on new orders for items like cruise missiles and other kinds of precision- guided weapons.
Companies like Alliant Techsystems (news/quote), a munitions maker in Minneapolis, and Boeing, which makes highly accurate gravity bombs and cruise missiles, would be candidates for new orders. And there has been talk among military planners of speeding up a Raytheon (news/quote) contract to refurbish older Tomahawk missiles with Global Positioning Systems for greater accuracy.
That $414 million program to upgrade 644 missiles was started
as an emergency contract after the Air Force ran short of Tomahawks during
the bombardment of Yugoslavia in 1998 - an embarrassment the Pentagon wants
to avoid repeating.
"The prospects for smart weapons really look favorable," said William J. Frost, vice president for administration for the EDO Corporation, a New York-based company that makes targeting, radar jamming and sonar equipment.
But some Pentagon planners are talking about speeding up production
of much bigger items as well, should the struggle be as protracted as Mr.
Bush has predicted.
For instance, Mr. Rumsfeld has urged the services to increase
the number of reconnaissance planes available for hunting down Osama Bin Laden's
One option would be to accelerate an existing Boeing program
for equipping six C-9's with sophisticated surveillance equipment. Boeing
has delivered the first four planes at an average cost of $54 million each.
Now, the Navy has asked the company if it could expand production. Deena Weiss,
a Boeing spokeswoman, said that would not be a problem.
Some analysts and Navy officials also say that a prolonged battle
overseas could require buying more carrier-based aircraft. Boeing is scheduled
to deliver 39 of the F-18 E and F fighters in 2002.
"As ever, carriers are useful for a full spectrum of conflict,"
said Richard Aboulafia, an aerospace analyst with the Teal Group in Fairfax,
The Pentagon is also planning to seek money to speed up a program,
led by General Dynamics, to replace the 24 nuclear-tipped missiles on aging
Trident submarines with 154 Tomahawk cruise missiles.
If Mr. Rumsfeld has his way in transforming the military, the
biggest winners will be companies that build intelligence-gathering equipment,
wireless communications systems, precision-guided weapons and missile-defense
"At least on the face of it, you would think that the people who are strongly focused on surveillance and precision weapons would do relatively better," said Wolfgang Demisch, managing director with Dresdner Kleinwort Wasserstein Securities.
Indeed, he added, "you could be looking at a significant
reduction in available funds for ordinary military affairs and purchases."
L-3, created out of a division of Loral after that company was
purchased by Lockheed Martin, is cited by some analysts as the kind of high-
technology company that stands to gain from Mr. Rumsfeld's new vision. It
produces equipment that provides security for wireless communications and
components for aircraft and airport security systems. The company also makes
products that help intelligence officers scan, filter and analyze huge quantities
of voice and electronic data.
Mr. Lanza said he was convinced that the impending mobilization, combined with Mr. Rumsfeld's plans, would hasten a realignment of Pentagon budget priorities away from cold war weapons toward the new technology his company produces.
"Sept. 11 is going to change the landscape for this industry,"
National missile defense is another high priority of the Bush
administration that seems to have gained political momentum from the terrorist
attack, analysts say.
"There is a clear linkage between terrorism and missile
defense," said David E. Baker, a retired Air Force general who is now
managing director for the Schwab Washington Research Group. "If these
terrorists could get a hold of a missile and put some bad stuff into that
nose cone and launch it on Manhattan, they would."
Before Sept. 11, Democrats on Capitol Hill were hoping to trim
back President Bush's $8.3 billion first- year missile shield program and
place tight restrictions on testing and development. But that opposition has
softened, with many Democrats saying they have lost the stomach for a partisan
fight - even as they privately argue that a missile shield could not have
prevented the attacks.
Contractors on the program include TRW, which builds satellites;
Raytheon, which builds "antimissile kill" vehicles; Lockheed, which
makes missiles and communications equipment; and Boeing, which in addition
to building booster rockets is the lead contractor on the program.
Indeed, for Boeing, military business in general has been a
silver lining in an otherwise bleak fall.
Last week, the company's stock price fell sharply in tandem
with the airline industry's, and it announced plans for as many as 30,000
layoffs. But its military business, which accounts for about a quarter of
its revenue, remains healthy.
"Boeing has taken a thrashing," Mr. Baker said. "But
their military sector is pounding away like a Ferrari on all cylinders."
Many military contractors have been hesitant to talk publicly about their improved economic prospects. "This is such a gruesome way to make money," a lobbyist said.
But some companies have been openly lobbying for new business.
Indeed, several executives have called the Pentagon directly in the last week
to say they were prepared to ramp up production. One was Continental Electronics,
a communication equipment company with annual revenue of $26 million.
"We believe that our radio transmitters would be desperately needed in places like Pakistan," said John Uvodich, the company's president. "We are just trying to let people in Washington know that we are here to assist."