Global tensions may be sky high and foreign countries may be desperate to increase their military might, but local defense contractors continue to face one of the worst markets in years.
A combination of tight government restrictions on the exports of weapons and technology, plus a severe recession in many markets, are providing a one-two punch.
“Nearly everyone who wants to buy from (U.S. defense contractors) doesn’t have any money, and those that do have the money we can’t sell to,” said Cai von Rumohr, an analyst at Cowen & Co. in Boston.
Like other industries, the local defense industry is feeling the ill effects of the economic meltdown in Asia.
The Asian arms market, estimated by the Stockholm International Peace Research Institute in 1995 to be worth $165 billion a year, has nearly vanished.
In recent months, Thailand has indefinitely postponed its announced purchase of 18 F/A-18 fighter jets. That deal, in addition to its short-term benefits to U.S. defense contractors, was expected to lead to orders for dozens of additional planes into the next century.
The delay and possible loss of the Thai deal is hurting Northrop Grumman Corp., which builds many parts for FA-18s accounting for about 40 percent of each plane at its plant in El Segundo. It is also hurting myriad subcontractors in the L.A. area.
Despite the continuing threat from North Korea, the government of South Korea has suspended plans to buy four AWACS surveillance aircraft from Boeing Co.
While Boeing, L.A.’s largest private employer, will suffer most from the loss of the South Korean deal, Northrop is also being hurt because it manufactures much of the electronics for the AWACS aircraft.
U.S. arms sales to Indonesia, Japan and the Philippines also are down, as is business with Middle Eastern nations, whose defense budgets have been squeezed by falling oil prices.
Since the end of the Cold War, the U.S. Defense Department’s annual weapons procurement budget has fallen to around $44 billion, down from more that $100 billion in 1987.
To adjust, defense contractors shifted their sales efforts overseas, even supplying arms to the former Soviet bloc. Northrop Grumman, for example, is currently negotiating to sell FA-18s to the Czech Republic.
The end result is that defense contractors are now more dependent on exports than at any time since World War II. In 1997, U.S. defense firms’ export sales exceeded their sales to the U.S military for the first time.
High-level officials at Boeing, Northrop and other defense contractors were in England last week attending the Farnborough Air Show, the biggest event of the year for commercial and military aircraft sales.
However, Joel Johnson, international vice president for the Aerospace Industries Association in Washington, confirmed that more-stringent export restrictions would indeed hurt the U.S. defense industry.
“All the growth there has been on the export side,” he said. “If those surpluses don’t materialize, it will put added pressure on the defense contractors to find more creative ways to shrink.”
Making matters worse for local contractors is a growing tide of opposition by politicians and civic groups against the exporting of weapons, especially high-tech equipment such as satellites and rockets.
“If anything, since the end of the Cold War the Clinton administration has not paid as aggressive attention to these kinds of exports,” said Robert Paulson of Aerostar Capital Inc. “But now people are saying, ‘Whoops, maybe we need to pay more attention to these deals.’ ”
Those tensions were heightened last month as a series of terrorist attacks in Africa and North Korea’s testing of a long-range ballistic missile raised fears that exported weapons technology could one day be used against the United States.
Besides rogue nations like Iran, Iraq, Cuba and Sudan, U.S. arms makers are prohibited from selling to China, India and Pakistan and the former Soviet republics.
In addition, legislation now being considered by Congress would restrict arms exports to all undemocratic regimes.
“It is not healthy economics to sell weapons to dictators who hurt their own people and threaten their neighbors,” said Rep. Dana Rohrabacher, R-Huntington Beach, who co-wrote the bill.
A few of the countries that would fall under the legislation are Nigeria and Indonesia, and even traditionally close U.S. allies Turkey, Egypt and Saudi Arabia.
Just recently, the State Department blocked the sale of 10 attack helicopters to Turkey, which buys about 80 percent of its weapons from the United States, in response to that country’s attacks on its Kurdish minority population.
The growing anti-export sentiment was seen last week as a congressional committee voted to include language in the annual defense authorization bill that would bar China Ocean Shipping Co. from leasing space at a newly developed shipping terminal on the site of the former Long Beach Naval Station. The stated fear is that allowing the former Naval Station to be leased by Cosco, which is owned by the Chinese government, would pose a national security threat.
“This kind of resistance is not unique,” said Rep. Jane Harman, D-Torrance, whose district is home to many of L.A.’s defense contractors. “However, I think China-bashing in particular has been rampant of late.”
It is the second provision in the defense authorization bill that would strike a blow at trade between China and the Los Angeles area.
Already included is language banning U.S. satellite launches in China. That ban came following allegations that satellite makers Hughes Electronics Corp., based in El Segundo, and Loral Space & Communications shared missile technology with the Chinese in order to reduce the possibility of a launch failure.
With a shortage of launch vehicles worldwide, a ban on Chinese rockets would sharply reduce the number of U.S. satellites being launched per year. That, in turn, would slow business locally at Hughes and at other contractors that supply the satellite industry.
In testifying before the Senate Governmental Affairs Committee, Hughes Vice Chairman Steven Dorfman said, “I strongly urge you to take particular care when legislating in this area. It is all too easy to sacrifice for the sake of perceived short-term security benefits the long-term ability of our country to be preeminent in the critical technology of satellite communications.”
But many politicians have turned a deaf ear to such arguments.
“It is frustrating to us as an industry that if you look at the facts, there are no indications that the Chinese are receiving technology from the satellite launches,” said Johnson.
Whether such protectionist measures ultimately will be signed into law remains to be seen. President Clinton has consistently taken a pro-export stance. There is also considerable opposition in the Senate to the anti-export provisions of the defense authorization bill.
“The House is capable of passing some pretty extreme stuff,” said Harman. “But it usually gets stuck in the Senate.”
Faced with such political hurdles and a weak international economy, defense contractors are hoping that after years of downsizing, the U.S. will start to rebuild its own military forces. These expectations became more pronounced amid Russia’s political meltdown and North Korea’s saber rattling.
That would suit Rohrabacher, who says he would much rather see U.S. dollars spent to defend America from terrorist missiles than on propping up totalitarian regimes overseas, or even on aiding U.S. military allies.
“I believe that rather than spend money on NATO, we should use that money to develop high-tech weapons that would provide plenty of jobs right here in Southern California,” he said.