Nonchalance About Sequester Causing Frustration in Defense Industry
Defense industry executives last week wondered when their “FAA moment" would happen. There was speculation that once the Pentagon started furloughing its 800,000 civilian workers, there would be enough public outrage to spur Congress into action. But the Defense Department has taken steps to soften the blow for civilians by shortening the projected length of civilian furloughs, and is even considering ways to reallocate funds to avoid furloughs altogether.
Pentagon contractors have privately wondered what, if anything, the industry should be doing to change the perception that sequester is a fake crisis. They concede that earlier lobbying efforts flamed out, partly because they overstated the impact of the cuts. The industry has to repair a credibility gap with Congress and begin to better communicate the effects of sequester, one official said during an off-the-record industry gathering. Excessive sequester hype in the months leading up to the March 1 deadline backfired on the defense sector, the executive recognized. Congress and the public, he said, have yet to appreciate the real damage that automatic cuts are causing to the military and its suppliers.
Companies across the United States that do business with the Defense Department are laying off workers, downsizing and some are shutting down for good. Air Force combat squadrons and Navy air wings have been grounded, and Army training drills suspended. None of these sequester effects has been damaging enough to shake up the body politic, the executive lamented. “Nobody seems to be concerned about the [military] readiness crisis, the public doesn't see it.”
Industry officials now say their best hope for “clarity” on where spending is headed is the 2015 budget. The chaotic 2013 budget cycle likely will be repeated in 2014.
The Defense Department must reduce spending by $37 billion between now and Sept. 30. Although the Pentagon’s 2013 budget was $614 billion, the cuts are being enforced during the last five months of the year, which is causing significant disruption because a lot of the money already has been spent. The Defense Department did not start planning for the sequester until December, even though Congress had passed it into law a year earlier. The administration’s 2014 budget request ignored the caps set in the 2011 Budget Control Act, in hopes of working out a compromise to cancel sequester.
Sen. Carl Levin, D-Mich., chairman of the Senate Armed Services Committee, and Sen. James Inhofe, R-Okla., the committee’s ranking minority member, have asked Defense Secretary Chuck Hagel for a revised 2014 budget that achieves the $52 billion reduction required by the Budget Control Act. Hagel is expected to submit new budget guidance to the committee by July 1. He also directed Deputy Defense Secretary Ashton Carter to conduct a “strategic choices and management review” to identify areas in the budget that could be targeted for cuts. Hagel said the review would allow the Pentagon to set priorities and avoid across-the-board meat-cleaver sequester cuts.
George A. Price, industry analyst at BB&T Capital Markets, said it is too soon to predict how sequestration will harm different portions of the defense sector. “We are still in the early days of sequester impact,” he said. “Sequester won’t start to bite with any magnitude until the middle of the year.”
The Defense Department's chief of industrial policy, Brett Lambert, recently warned industry tobrace for more bad news as the effects of budget cuts trickle down the supply chain.
Gordon Adams, professor of international relations at American University and a former budget official during the Clinton administration, said defense industry has been “relatively spared from cuts up to now.” The U.S. defense market is down 20 percent over the past three years, while the overall defense budget declined only 10 percent pre sequestration,Adams wrote in ForeignPolicy.com. “Contractors have been responding for two years already, by consolidating businesses, hiving off unwanted capacity, and laying off workers. But the sequester rules did not take money away from existing contracts, somewhat delaying the impact,” Adams said. “That impact will come, however."
As Pentagon contracting begins to slow down or dry up in some sectors of the industry, small businesses are most definitely feeling the bite, said Tom Lederle, vice president of NEST Energy Systems, in Prescott Valley, Ariz. The company supplies solar-powered generators and other green-energy products to the Defense Department and the Department of Homeland Security.
“The majority of the businesses being hurt are small,” he said in an interview. “Big companies slow down hiring or delay research-and-development projects,” said Lederle. “Small businesses don't have the ability to make changes.”
NEST started preparing for the downturn months before sequester went into effect, he said. The company cut down on office space and staff. It is looking for commercial customers to offset declining government contracts. Energy efficiency is a “pretty good market” in the commercial world, he said, although military contractors will find that it does require an adjustment. While the military is more focused on mission, commercial buyers hone down on economics.
Lederle said he has spoken with many small business executives who were caught unprepared for the sudden drop in defense work, and are now barely hanging on. Technology firms are especially affected because they are not able to retain skilled workers. “If this goes on much longer, some places will lose their best people,” he said. “We are going to survive. We started recognizing what was going to happen a little sooner than others, and started redirecting our efforts to commercial buyers.”
Among his Marine Corps customers, there is also growing dissatisfaction about cutbacks in training. These are young officers who joined the military to acquire skills and education, said Lederle. The sequester cuts ultimately will “chase away talent that we can really use.”
NEST’s home base in Northern Arizona is a staunchly conservative area where most people are philosophically opposed to government spending. “But as long as the government is spending on local companies, it's ok,” said Lederle. “With sequester, the money is not flowing at all, so everybody is getting hurt."
Photo Credit: BAE Systems
Topics: Business Trends, Doing Business with the Government, Defense Contracting, Defense Department, DOD Budget, DOD Leadership