Globalization Both Boon and Bane for U.S. Weapon Suppliers
In the face of a Pentagon spending downturn, every major U.S. contractor now has astrategy to grow exports. Foreign buyers have commanded the attention of U.S. firms after every military builddown. This time, however, the global market is markedly different from previous down cycles, said John J. Dowdy, senior partner at the consulting firm McKinsey & Co.
Companies should set realistic expectations, Dowdy said June 21 at a Bloomberg Government defense industry conference, in Washington, D.C.
Rising powers in the Middle East and Asia have the financial wherewithal and political ambitions that make them prime target customers for U.S. weapon manufacturers. But these buyers are becoming tougher to recruit, especially as high-tech weaponry evolves into a buyers’ market, Dowdy said. “Competitive intensity is increasing,” he added. “It’s not going to be easy.”
A grass-is-greener syndrome is afflicting the arms business, he said. U.S. suppliers are chasing international sales while their foreign competitors make plays for the U.S. market, which is still the world’s largest by far. This will create added pressure for companies, especially as the United States and most NATO countries cut military spending, Dowdy said. “We’re in for a tough period.”
American firms enjoy some considerable advantages, including the fact that U.S. weaponry remains the gold standard and many countries purchase arms from the United States as a means to forge closer ties. But countries also are becoming more demanding and sophisticated buyers, Dowdy said. They are no longer satisfied with just being able to buy a U.S. weapon system. They want access to sensitive intellectual property, they expect weapons to be manufactured locally, and also want to boost their economies by exporting arms to other countries.
Developing powers such as India can take advantage of their lower cost base and make equipment that might not be as advanced as what the Pentagon buys but would be cheaper and more marketable to Third World nations, analysts said. “India soon is going to spend more in defense than England or France,” Dowdy said. India is now the world’s largest arms importer but also has ambitions of becoming an exporter, he said.
Richard A. Genaille, deputy director of the Defense Security Cooperation Agency, struck a more optimistic note.
“Our partners are more demanding … But that’s nothing new,” he told the Bloomberg conference. “We’ve become more adept at accommodating those requirements.”
Genaille said the future is bright for U.S. suppliers, although sales are not going to remain at current levels for long.
“U.S. industry competitiveness remains high,” he said. Other countries may be able to manufacture at less cost, but they cannot compete with the United States when it comes to logistics support and training services, which the Pentagon provides when a country buys a U.S. weapon system.
The Obama administration has made no secret of its plan to more actively promote sales of U.S. weapons internationally.Exports are encouraged both as a national security tool to help build alliances and as employment generators.
President Obama in August 2009 announced the start of acomprehensive review of the U.S. export control system, whichAmerican firms contend is too cumbersome and out of touch with today’s globalized market. Industry’s most sought-after changes include the removal of dual-use technologies from the so-called “munitions list” of restricted exports. Dual-use technologies have both civilian and military applications.
Genaille said the president’s initiatives were “revolutionary.” If all the reforms currently under consideration end up being implemented, “they will make it considerable easier for our industry to do business abroad,” he said.
DSCA projects growing U.S. sales of fighter and transport aircraft, attack helicopters, and “C4ISR products,” an umbrella term for high-tech communications, surveillance, intelligence and reconnaissance, said Genaille.
DSCA has sought to simplify the paperwork associated with foreign military sales to help lower costs, he said. The agency also is inviting corporate executives for regular meetings to strategize about future business opportunities. It created a “Security Cooperation Industry Group” that meets quarterly.
Chris Raymond, vice president of business development at Boeing Defense, Space & Security, said industry in general is optimistic about foreign sales, but cautioned that it is not a panacea. The Boeing Co. has tripled international sales of military systems over the past decade, said Raymond. But he does not foresee foreign customers making up for cutbacks in Pentagon spending. The U.S. military is projected to spend at least $100 billion a year on new equipment over the coming decade.
During a private meeting of defense industry executives last month, officials said they were confident that the Obama reforms will help fuel exports. “It’s the first time any administration has taken on regulatory reforms,” one senior industry official said. High-level Pentagon officials plan to meet with corporate executives to discuss details of the ongoing reforms, which do not require changes in ITAR (International Traffic in Arms Regulations) laws, the industry official said. Many dual-use technologies that have been on the munitions list that the State Department oversees soon could be moved to the less restrictive export regime managed by the Commerce Department.
The sale of an F-15 fighter to a friendly nation, for example, could be significantly simplified, as most of the spare parts would be under Commerce.