The ups and downs of the stock market notwithstanding,
there are many reasons for the dot-com firms to be optimistic about the future.
Unfortunately, that is not the case for the defense industry.
Recently, I heard someone compare the dot-coms to defense companies. Specifically,
he compared the combined market capitalization of the five top companies in
defense industry to the five biggest dot-coms. That comparison showed that the
dot-coms had a market capitalization almost five times greater than the defense
industry. Interestingly, the combined earnings of the same dot-coms was a net
loss, while the combined earnings of the five top defense producers was more
than $4 billion.
We could view this as an interesting bit of trivia, but it clearly is more
than that. The financial markets are making a statement about the dot-coms.
And they also are sending clear signals about their perception of the defense
In recent months, Wall Street has sent defense stocks plunging to a 12-month
low. What the markets are saying, therefore, is that, regardless of this year's
increase in defense procurement budgets, the future is not bright for defense,
even if many companies' balance sheets are showing profits.
Perhaps it would be of interest to look at the defense industry with the eyes
of an investor. For instance, would a prudent investor be interested in putting
money into a sector that has been shrinking in size for the last 10 years? Would
that investor be interested in a sector that has, essentially, only one customer-and
that customer has been known to act indecisively, to change its mind frequently,
to take too long to pay its bills, and to periodically resort to law suits where
criminal-like penalties result from only civil-level evidence (under the False
Further, markets and investors don't like uncertainty. Unfortunately, the defense
sector has plenty of that.
Next year's Quadrennial Defense Review (QDR) could change spending priorities;
a national panel is about to render yet another report on ways to keep defense
industry healthy; the Army is attempting to transform itself into a more mobile
force; and changes seem imminent to the Joint Strike Fighter acquisition strategy.
This set of possibilities is yet another reason for the markets to shy away
Short-term market vagaries aside, there are other significant reasons why investors
will be inclined to shun defense stocks. These reasons have to do with the makeup
of the workforce. The dot-coms continue to attract the best and the brightest.
Defense organizations, unfortunately, continue to "gray," while downsizing
and layoffs discourage fresh college graduates. As was reported last month by
Defense News, the percentage of Defense Department employees over the age of
50 has increased from 22 percent in 1989 to 34 percent in 1999.
More than one-third of defense industry workers already are more than 50 years
old. Our own association membership's median age, revealed a recent survey,
has climbed to 57.
Some suggest that we should federalize the defense industry, since no significant
increases in defense budgets are on the horizon. However, this idea flies in
the face of the move to privatize government operations and we would look hypocritical
to the Europeans, as we often criticize them for their government-subsidized
defense industry. But more importantly, how would we retain our needed technological
edge with a government-owned defense industry?
This debate needs to be raised to the highest levels of government and industry.
It is a debate that belongs on Capitol Hill, at the Pentagon, and in the corporate
In the short-term, however, the reality is that only the Congress can provide
the healthy procurement budgets that could begin to turn the markets around.
Despite this year's increase to the procurement accounts, defense spending still
amounts to only 3 percent of the gross domestic product, versus 6 percent less
than two decades ago. As noted by defense analyst Loren Thomson recently, procurement
is the main source of industry profits, and the $60 billion the Administration
is requesting for fiscal 2001 is a third less than the Congressional Budget
Office says is needed to sustain the Pentagon's weapon requirements outlined
in the 1997 QDR.
But what really damages industry credibility with investors, noted Thomson,
is the "capricious, unpredictable way in which the government shifts procurement
dollars around from year to year, undercutting business plans and earnings projections
... Policymakers don't understand the damage such turbulence causes."
This is an important subject that should matter to the nation, because we are
talking about the viability of an entire industry that sustains our military
forces. And we not only have a shrinking industry, but we also have an aging
industry. Neither development is good for our national security.