Secretary Of Defense’s War On Spending Ramps Up
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Since early this month the Secretary of Defense Robert Gates and other officials have been making speeches about the need to reign in defense spending. This is especially true for money not supporting current fighting in Afghanistan and Iraq. This “war on spending” is either an attempt to redirect funding to what Gates’ believes are higher priorities or laying the ground work for major cuts to the defense budget in the next few years.
Gates’ in a speech to the Navy League stressed that the United States can no longer afford to invest in multi-billion dollar aircraft carriers and their supporting ships. This questions the whole organization and focus of the U.S. Navy. He stressed development and procurement of cheaper solutions to the Navy’s potential missions which included a new emphasis on submarines
Ashton Carter, the Undersecretary of Defense for Acquisition at one of his presentations mad clear that the current Administration did not believe it could afford the second engine for the F-35 Joint Strike Fighter (JSF). In fact he said that the whole program must become affordable to be successful. The second engine has been promoted as risk reduction by Congress in case the main engine made by Pratt & Whitney, a part of United Technologies Corporation (UT) is not ready in time or cannot be made in enough quantities. There are criticisms that the project amounts to pork for General Electric (GE) and Rolls-Royce (RR:LSE) and Gates has tried not to fund it in his 2010 and 2011 budgets.
At the very least the budget will stay flat and if it is reduced these proposals will set up a battle between the Administration, Congress, industry and their supporters as they struggle to find the right mix of investment, weapon systems and deficit spending reductions. These reasons include:
- Continuing budget pressure from operations in Afghanistan and Iraq the Navy and Air Force especially are seeing their budgets reduced. The Army and Marine Corps does the lions share of the work in South West Asia and they need more money. Reducing large ship building and aircraft modernization programs is one easy way to get it.
- Potential cuts to the defense budget. If it is heavily reduced then aircraft carriers and their escorts which are costly to build and run would be a prime area to reduce. The Navy had sixteen in 1988 at the end of the Cold War now they are down to eleven. Losing one aircraft carrier battle group, its associated air wing, personnel and other supporting assets will cut a big chunk out of the Navy’s total budget and is a discrete way to do that.
- F-35 costs have increased dramatically over the last five years as the schedule continues to get later and later. Eliminating the second engine would save $400 to $500 million a year. Last year Congress funded despite the request not to by “finding” money and not using core JSF dollars for it. That solution may be offered again this year but it still ultimately takes money from other priorities in the defense budget.
The U.S. cannot keep on its path of trillion dollar deficits. The largest piece of discretionary funding is the defense budget and while in the recent long term plan produced by the Senate there were no reductions in spending it was a flat budget with no planned growth. The Administration will say that it has to cut defense spending in areas that do not seem to contribute directly to the fight against terrorism. The use of affordability and efficiency will maintain core capabilities while lowering total spending.
What does this all mean to the world of defense contracting? Not anything good to say the least. The big contractors make their money on ships, aircraft and army vehicle systems. Many other companies of all sizes make parts and provide support to these programs. If they start ending or being severely reduced in size then these companies will see major effects to their bottom lines. As in the Nineties when the last significant reduction in defense spending occurred there may be a wave of M&A activity or companies just leaving the defense business.
One of the two major ship builders for the Navy, Bath Iron Works, (BIW), said that they agrees with Gate that ships must be cheaper. Why wouldn’t they? They will need to accommodate the Navy and DoD wishes. Without those contracts the company will have no work. Look for contractors to begin saying their proposals are more affordable and efficient then the competition.
Of course there is already starting to be push back to these comments. Senator Jim Webb (D-VA) who is a former Navy Secretary and Naval Academy graduate has already openly criticized Gates’ statements. Webb has said the Navy needs eleven aircraft carriers and was backed up by the Navy leadership. Virginia is one of the major bases for these ships as well as where they are made and receives a major economic impact from them.
The problem with these types of plans is that affordable contracts often turn out to have problems and end up costing a lot more then planned. In the past this has happened because often the lowest bid may be from a company with less experience and there cost estimate was not as good. That does not mean big companies like Lockheed or Boeing (BA) can’t make the same mistakes but it is hoped that there experience and capabilities minimize the chances.
Affordable and efficient may end up being the synonyms for not enough needed capability.