Post-Gulf Weapons Bazaar Open

Middle East shoppers line up, but budget constraints make Pentagon a picky customer DEFENSE INDUSTRY

IN Andover, Mass., assembly line workers at Raytheon Corporation pridefully turn out Patriot missiles for Saudi Arabia while the price of company stock continues its rise. But in Warren, Mich., assemblers of the M-1A1 Abrams tank for General Dynamics will receive pink slips as production is cut by over half this year and eventually shut down.

In Los Angeles, Lockheed Corporation workers hope the performance of its F-117A Stealth fighter in the war will bode well in competition over rival Northrop to win Air Force contracts for the next generation of ATFs (Advanced Tactical Fighters).

Following the coalition win in the Gulf has come the game of tallying winners and losers in the United States defense industry. The short- and long-term prognosis is for defense cuts of 5 to 8 percent per year in real terms for the foreseeable future. In line with the trend already under way before the invasion of Kuwait, a period of merger, consolidation, and shifts away from armaments is in store for many contractors.

But the post-cold war environment still carries the heady unknowns of foreign demand generated by worldwide images of laser-guided, thermal-imaged, and radar-escaping weaponry that brought Saddam Hussein to his knees.

"Countries are turning up the level of attention [in the Patriot Missile]," says Raytheon's Robert Skelly, mentioning United Arab Emirates, South Korea, and the United Kingdom among a growing client base of 21 countries. "There's nothing like prime-time television to do that."

Lior Bregman, an analyst at Oppenheimer & Co., says: "The Gulf crisis will shape the military industry for the next 10 years. In terms of what is emphasized, outmoded, upgraded, the world has looked to the Iraq war for its lessons."

Lessons debated

Debate over the true lessons of the war will undoubtedly be heated for some time: Some argue, for instance, that success of Patriot missiles against relatively primitive Scud missiles should not ignite a mad scramble for the Strategic Defense Initiative (SDI or "star wars") missile shield which would require protection from nuclear-armed missiles.

But several points are less arguable. There is general agreement that high-tech weapons surprised even critics, performing superbly and saving lives. "The American preference of substituting high-quality machines for high quantity of manpower was demonstrated with glowing results," says Michael Balch, a historian at the Army War College from 1986 to 1989. "We can expect this emphasis in future defense requests."

Among the winners: Tomahawk cruise missiles (McDonnell Douglas, General Dynamics), short-range attack "smart bombs" (Rockwell's "Hellfire" and "GBU 15"), and weapons systems used with A-10 "tank killer" aircraft (Fairchild).

"Congress is likely to smile favorably on these systems in the future," says Mr. Balch.

The sheer number (50 according to Raytheon) of Scud missiles launched into Saudi and Israeli cities has argued for antimissile defense programs for civilian areas. But despite its success, the Patriot is only the low end of existing programs that will now get a boost.

More public and political enthusiasm for the highly controversial SDI missile shield (benefitting Lockheed among others) is expected. A long-term, $41 billion Pentagon package for SDI is on the table, scaled back from an earlier $146 billion proposal.

Another lesson involves tactical intelligence as a force multiplier. Through state-of-the-art satellite reconnaissance, signal intelligence, and superior battlefield information processing, American military strategists coined the phrase "electronic battlefield" - one they could see and the enemy could not. Such advances, coupled with the laser guidance and computer components used in weaponry, underline the new reliance by military contractors on electronics systems, which account for 25.7 percent of $ 214 billion spent by the Pentagon in the last fiscal year.

Newer firms, such as Loral Corporation of New York and E-Systems of Dallas, which specialize in military electronics are challenging such defense stalwarts as Lockheed, TRW, and Martin Marietta. Even if defense programs are cut, the military will need to upgrade planes, tanks, missiles, and ships with the latest electronics.

Greatest successes

The great successes of tactical air power were the Apache attack helicopter (McDonnell Douglas), and A-10 "Warthog" (Fairchild) which took out Iraqi tanks, artillery, and combat vehicles one by one, using infra-red surveillance by night. Even though funding for the Apache has already run out, there will be future demand for such technology, says Lawrence M. Harris, an analyst at Kemper Securities Group.

In such quick, in-and-out scenarios, a high-ticket item like the B-2 Stealth bomber ($800 million) is far too costly even though its utility, says Defense Secretary Richard Cheney, was demonstrated in the Gulf by its cousin, the Stealth fighter (F-117A).

Though the cold war is over, many second- and third-world countries will be shopping at US industries for offensive and defensive programs. How to respond to that demand will be the subject of one of hottest debates of the decade.

"The long-term survival of a number of important domestic arms programs is tied to foreign sales," says Ken Saterfield of the Defense Security Assistance Agency, the Defense Department's arm for foreign sales. He mentions the Abrams battle tank, Blackhawk helicopter, and Hawk surface-to-air missiles.

"They provide jobs for Americans, increase the US balance of trade, and provide longer production runs which reduce the unit costs for weapons systems of interest to us," he says.

Nations placing orders

"Certainly, a number of Mideast countries were caught off-guard by the Iraqi invasion and are placing orders for defense hardware," says Kemper's Mr. Harris. He mentions Egypt, Saudi Arabia, Kuwait, Israel, and Turkey. "We will see a variety of claims on the US [defense industry] given the fact we are withdrawing so quickly."

Besides the prospect of more defense cuts, the decade-long, prewar period of consistent cost overruns by contractors has hurt the entire industry. Evidence: the January cancellation of the A-12 Avenger - at $57 billion the largest military contract ever - with McDonnell Douglas. Other Pentagon documents have shown that some weapon costs are escalating at such a rate that even a smaller military may be difficult to equip. The Navy's program to build the Seawolf submarine is one such example. Each Seawolf now costs about $2 billion, excluding research expenditures.

With no easing of budget pressures in sight, the mood among defense contractors is "skittish, apprehensive at best," according to McDonnell Douglas spokesman Lee Whitney. Though the Pentagon's proposed $290.8 billion budget will be batted around at least until June, this year's ball game is more complex than most. Force reductions announced in January - 25 percent by 1995 - eventually hurt the major, prime contractors most: McDonnell Douglas, General Dynamics, Northrop, Grumman.

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