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The National Missile Defense system now being developed and tested comes at a critical time for the U.S. defense industry. Since the end of the Cold War in the early 1990s, American arms manufacturers have suffered a significant drop in orders from the Pentagon. Indeed, to stay afloat, defense contractors have undergone a wave of mergers and acquisitions.
The consolidation trend is crossing national boundaries, with European giants vying for entry into the $60 billion U.S. weapons market. In June, for example, Britain's BAE Systems announced plans to buy the military electronics unit of Lockheed Martin Corp. -- the result of an earlier merger between defense giants Lockheed and Martin Marietta.
The merger wave is putting pressure on defense contractors. “Defense-company stocks are doing terribly because they've found out that the consolidations didn't give them the savings that they wanted,” says Lawrence J. Korb, vice president of the Council on Foreign Relations and a former vice president of Raytheon, maker of the “kill vehicle” being developed to detect and destroy incoming missiles.
It's uncertain what impact the recent merger activity will have on contractors involved in the U.S. missile-defense program. “Industry consolidation has happened at all levels of the defense industry,” says Loren B. Thompson, a defense-industry consultant and chief operating officer of the Lexington Institute, a research group in Arlington, Va. “But because missile defense really wasn't big business before, it's one of the areas of the defense industry where probably the least amount of consolidation has occurred.”
Another source of uncertainty for contractors interested in missile defense is the ongoing debate over what form, if any, the system will eventually take. “It's all very nebulous at this point because the Clinton administration's approach to national missile defense has gotten off to a rather shaky start,” Thompson says.
If the full-scale Clinton program proceeds to deployment, the company with most at stake is Seattle-based Boeing Co., which was chosen in April 1998 as the prime contractor for NMD for 10 years.
“Boeing has the most to gain or lose from the program for two reasons,” Thompson says. “First, they are the overarching prime contractor and systems integrator for the whole NMD system, at least as it's presently conceived. Secondly, they have made a conscious effort over a period of years to be a leader in the development of technology for missile defense, and they've really spent a lot of time and money trying to get there. What that means is that Boeing is the biggest potential winner -- and also the biggest potential loser if this program doesn't come to fruition.”
If critics of NMD have their way, the outcome for defense contractors would be altogether different. Many Republicans, for example, support an alternative plan that would utilize the Navy's existing Aegis theater defense system to intercept missiles shortly after launch. Unlike the land-based system envisioned under NMD, such a system would be sea-based, deployed aboard the Navy's new Arleigh Burke destroyers.
The submarine-launched Trident ballistic missile is manufactured by Lockheed Martin Corp., the world's largest defense contractor. (Newsmakers)
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“General Dynamics and Litton Industries are, respectively, the nation's fourth- and seventh- largest defense contractors, but they do virtually nothing in missile defense,” Thompson says. “However, they make the current generation of destroyer, the Arleigh Burke. So even though neither of those companies has invested any real money in missile defense, if a decision were made to go that route, it would automatically create big, billion-dollar-level business for them in the form of new destroyers.”
Not all advocates of the Aegis-based alternative agree that it would prove lucrative to defense contractors. “Most of those ships are already bought and paid for and deployed,” says Frank J. Gaffney Jr., president of the Center for Security Policy and a long-time supporter of missile defense. “So will somebody get hugely rich out of making the Aegis system into a missile killer? I doubt it.”
Even if a future president were to choose a more elaborate, space-based missile defense, Gaffney says the economic impact of such a move is uncertain. “If we go to space, which is the obvious thing to do, there will be still more money going into it,” he says. “But will it in the end prove to be a major bill-payer for these guys? I don't know. It all depends on how much of it you decide to do and how fast you decide to do it.”
But some analysts predict that companies involved in missile defenses, whatever program is chosen, stand to profit handsomely, even more than they can from traditional defense contracts. “This is a good program for the contractors in the sense that it's big money, and it's not as expensive for them,” Korb says. “It's not like you've got a production line to turn out a couple of thousand planes. Missile defense is less labor-intensive, and it's high-technology, so the contractors don't have to hire hundreds of thousands of workers to work on it. For that reason, the profit margins would be pretty good.”
Similarly, Korb says, there are fewer jobs riding on the outcome of missile defenses than there were for earlier defense programs. Not only has the economy expanded greatly over the past decade, reducing unemployment, but defense spending has shrunk. “I don't think [defense-related] jobs are as critical as they used to be,” he says, “because defense is a much smaller portion of a much larger economy.”
For now, analysts differ over the economic impact of NMD. “Although everyone knows there's a pot of gold here somewhere, so far it's been about as substantial as the pot that the Leprechauns chase,” Thompson says. “We've been having this debate for 40 years now” about various missile defense systems. “First there was Nike Zeus, then Sentinel, then Safeguard, then Star Wars and now there's NMD. And it's not that we haven't spent a fair amount of money on it, but it never really pans out the way industry was hoping.
“Typically, these programs don't make great profits until they get into a procurement stage, and this is a program that never seems to get out of research and development.”
But critics of NMD say the program has already turned into a massive boondoggle for defense contractors. “They've already skedaddled off with $75 billion,” says John Pike, a weapons analyst with the Federation of American Scientists. “Normally, when we spend tens of billions of dollars, something comes out the other end, but in this case the money's just vanished. The only thing that this program has demonstrated is a profound capacity to intercept taxpayers' dollars. It's extremely efficient at doing that with very, very little to show for it.”
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