EADS North America CEO: New Plan Needed to Replace Sequestration

The House Armed Services Committee heard once again what defense industry CEOs have been saying for months: Automatic across-the-board budget cuts scheduled to take effect in January will be devastating to the defense sector and the U.S. economy.
With no congressional deal in sight to undo the automatic cuts, industry leaders are making a last-ditch bid to convince lawmakers to end the sequestration stalemate and agree on a reasonable, deliberate plan to cut spending in a less disruptive way.
The defense industry does not object to strategic spending reductions driven by fiscal needs and national security priorities, but the current scenario would result in random, indiscriminate cuts and would leave Pentagon suppliers no time to adjust business plans or resize their workforce, EADS North America CEO Sean O’Keefe told HASC members during a July 18 hearing.
O’Keefe, who testified both as head of EADS North America and as chairman of the National Defense Industrial Association, joined a witness panel that also included Lockheed Martin Chairman and CEO Robert J. Stevens, Pratt & Whitney President David P. Hess and Williams-Pyro President Della Williams.
Rep. Buck McKeon, R-Calif., a leading defense hawk who is spearheading efforts to repeal sequestration, summoned industry CEOs to help him amp up the pressure. This was his committee’s seventh hearing dealing with sequestration.
Unless Congress agrees to a new debt-reduction deal, the sequester mechanism that the law mandates would chop $53 billion from the Pentagon’s fiscal year 2013 budget.
The Budget Control Act of 2011, which Congress passed as a condition to allow an increase in the nation’s debt ceiling, requires federal spending cuts of $1.2 trillion over 10 years, equally divided between Defense and civilian agencies.
In his written testimony to the committee, O’Keefe laid blame on both the legislature and the White House for turning the Pentagon’s budget into a political football, and not contemplating the real-world consequences of sequestration.
“We recognize that reconciling federal spending to revenues is absolutely essential in securing lasting economic stability and national security,” O’Keefe stated. “But we fear that the government's reluctance to make difficult choices and apply a well-aimed fiscal razor will mean that the federal budget, and particularly defense, will get the equivalent of a shave with a chain saw.”
The implementation formula prescribed in the law, he said, “Treats the contract for protective armor and the cost to cut the grass on military bases to be of equal priority.”
The impending sequestration cuts, O’Keefe added, “Will be driven by our collective inability to make hard choices. In effect, this is a self-inflicted wound.”
There is still time to avert serious damage, if Congress could agree on a spending-reduction plan that would be time phased and coordinated with the Defense Department, O’Keefe suggested.
“Working with a select group of congressional national security leaders, the secretary [of Defense Leon Panetta] could produce a difficult, but acceptable, plan to meet necessary budget targets,” he said.
To undo sequestration, Congress and the Pentagon could set a “realistic budget reduction target, repeal the across-the-board sequester, and delegate the creation of a spending reduction plan to the secretary of defense,” he said.
O’Keefe also laid out a series of “economic stimulus” recommendations that would help reduce government spending and spur economic growth “by removing some of the self-imposed administrative impediments that blunt market activity.”
The defense industry could operate more efficiently if it were unburdened from excessive regulations, and it could reduce the price of U.S. weapon systems if companies were able to increase exports, O’Keefe said.
“The administration has done a decent job of starting to make export control rules less rigid. But more can be done to truncate prolonged reviews by multiple agencies that discourage U.S. industry from seeking overseas markets,” he said. “At the same time, Congress can help by streamlining current export control laws that negatively impact trade.”
A similar approach could be applied to domestic government programs, he said. “The cost of doing business with the government can add more than 20 percent to the price of goods. This is especially true when it comes to defense. The extensive array of regulations that push up prices and drive out potential competitors could be suspended by executive order.”
The current regulatory load stunts competition and increases the cost of doing business, O’Keefe said.
In the near term, Defense Department suppliers simply want answers on how Congress and the administration plan to implement the automatic cuts. The uncertainty that has built up over the past year already has caused a significant slowdown in Pentagon work and pullback by investors, industry CEOs told HASC at the hearing.
Industry groups had hoped that dire warnings of mass layoffs and plant shutdowns by now would have helped break the partisan gridlock and force action to repeal sequestration. But the jobs card strategy so far has had limited impact.
With no sense of whether or when a resolution might come, industry CEOs are now calling on the administration to communicate how it plans to implement sequestration. Panetta consistently has stated that the Defense Department is making no such plans.
The public and the nation’s armed forces deserve to know how the spending cuts will be allocated, O’Keefe said. “The current uncertainty has effectively put sequestration and its consequences in motion. In the absence of any guidance, industry is already holding back investments, questioning the fairness of ongoing competitions, doubting the viability of existing contracts and starting to trim capacity.”
The current state of confusion is a “recipe for endless argument, litigation and gridlock,” said O’Keefe. “And it will ultimately drive up costs to the point that they exceed the savings that sequestration was enacted to produce.”

Topics: Business Trends, Doing Business with the Government, Defense Department, Defense Watch, DOD Budget, Procurement