“Defense Budget Cuts Will Cost 2 Million Jobs”

Pending defense budget cuts would reduce employment nationwide by about two million jobs if they are implemented in January as planned according to a recent report by the Aerospace Industries Association (AIA).

“Unless our leaders in Washington take action, massive cuts have the potential to impact everyone from the defense worker to teachers, healthcare professionals, government employees and beyond,” said AIA President and CEO Marion C. Blakey. 

Meanwhile, mayors of Phoenix and San Diego warned that the scheduled $1.2 trillion federal budget cut is the biggest threat to their local economic recoveries.

Phoenix Mayor Greg Stanton said Arizona stood to lose 50,000 high-paying aerospace and defense jobs as a result of “Congress’s failure to deal with looming indiscriminate cuts” to the defense budget.

“That is the number one threat to our local economy,” Stanton said. “And, it would put our city, and state I represent, back in recession.”

Mayor Jerry Sanders of San Diego said the cuts would lead to a loss of confidence, and once that happens “our economy is going to go back to right where we were and cities have nowhere to go but to cut vital services.”

Beginning in January and extending for the next ten years, the Pentagon must reduce its projected spending by $487 billion according to a Congressional mandate. Non-defense spending would be reduced by a similar amount over the same time period. Those warning about the impact of the defense budget cuts hope to persuade Congress to find other ways to address the 16 trillion dollar federal deficit.

The warnings come just a year after the defense industry tallied record revenue and profit: $677 billion in revenue (up 5 percent from 2010) and  $60 billion in operating profit (up 2 percent from 2010).

Most Democrat (80 percent) and Republican (74 percent) voters favor cuts in defense spending according to a recent survey by the Program for Public Consultation, the Stimson Center and the Center for Public Integrity. Democrats want more cuts than do Republicans.

Local Ohio Economies Should Benefit

from Federal Rule Changes

Ohio hopes to benefit from federal rule changes that accelerate federal payments to contractors and reduce paperwork—making it easier to access loans and tax credits—which should help restore local economies. Ohio’s large network of defense manufacturers has a significant impact on the state’s economy.

One of these contractors, TESSEC, is a parts supplier which has been in business since 2007 to support the Joint Strike Fighter program. Two years ago, it won a large contract after securing an SBA loan thanks to the Buy American Act which requires parts to be made in the U.S. In fact, 75-percent of its work is attributed to the Buy American Act.

The rule changes raised the maximum SBA loan from $250,000 to $350,000 while streamlining the loan process. The additional capital will let TESSEC invest in itself and hire more workers; many are skilled autoworkers who were laid off in the past few years. TESSEC is retraining them and hopes to increase its workforce from 8 to 100.

Impact of Pending Defense Cuts

in Indiana is Debated

Indiana is hoping that if the cuts in Defense spending materialize, they won’t affect the kinds of work most of its contractors do: service and maintenance, and established weapons systems, rather than advanced technology and other costly projects.

In fact, some industry experts think Indiana could even win new contracts if its manufacturing capabilities and lower production costs are considered.

With $43 billion in Defense contracts since 2001 and over 1,100 contractors employing about 38,000, Indiana has established itself as an important resource.

One the flipside, since the wars in Iraq and Afghanistan are winding down, Indiana will probably lose some jobs. For example, Tri Star Engineering in Bedford works on weapons systems and other defense projects to the tune of about $50 million annually. Right now, it’s uncertain how much the pending budget cuts would affect it.

Indiana lost about half of the military contracts it had from 2008 to 2010, after AM General ended production of the Humvee armored vehicle in 2010 when the Army stopped ordering them.

Meanwhile, Global defense contractor Rolls is watching and waiting to see how the pending cuts will affect its largest engine production plant in Indianapolis. It is more confident about its service contracts with the government which represent about half of its business. 

Acquisitions Reshape Aerospace and Defense Industry

A rapidly changing market is prompting U.S. aerospace and defense companies to reinvent themselves by spinning off businesses and buying new, related ones. As a result, the supply chain will morph with many mergers and acquisitions over the next few years.

We’ve already gotten a taste of this with the planned $16.5-billion purchase of Goodrich by United Technologies, the largest industry acquisition in over a decade. Meanwhile, L-3 Communications is spinning off a $2-billion portion of its defense business; and ITT broke up into three companies late last year, including its defense division.

Cutbacks in government spending have already forced some consolidation. In May, GeoEye, a satellite imagery firm, made a hostile $792-million bid for DigitalGlobe. While hostile takeovers have been rare in the defense industry, they will be less so now.

The top contractors have large cash reserves they want to put to work; and, acquisitions provide much more attractive returns than simply holding the cash at low interest rates. Investing in research and development now, when there are few new programs to justify it, doesn’t make as much sense as acquiring companies with government contracts.

The hot business being pursued include: UAVs and ISR (intelligence, surveillance, and reconnaissance). Homeland security, cyber security, health information technology, alternative energy, and commercial aerospace are others.

As commercial aerospace manufacturers ramp up to meet the booming demand for commercial airliners, they may choose to integrate vertically. By acquiring suppliers, a manufacturer can have more control of its production.

This scenario will be played out throughout the entire supply base since prime contractors need subcontractors that provide more complete systems and require less supervision. Primes also are seeking subs with risk-sharing capital. Scalability and a desire to spread overhead to reduce costs, also encourage companies to grow. 

P2R Associates  248-348-2464  •  Email:info@p2rassociates.com  •  Website:p2rassociates.com

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