Defense spending: how the US defense industry prepares for a new administration?

By TOC On Nov 4, 2020

MOSCOW, (BM) – Any American will say that November 3 was the most important election in US history. But only if he does not run a large enterprise in the US defense industry. So Defense News writes about it, learned BulgarianMilitary.com citing the Russian news agency Gazeta.ru.

In their profit and loss statements, US defense industry executives predict complete calm ahead of the election. Mainly because, from their point of view, the coronavirus pandemic carries significantly more uncertainty for the US defense industry. Especially for commercial aviation companies. The fact is that, despite the many forecasts for defense budgets for 2021, regardless of who controls the White House, American industry is confident in the Pentagon’s continued commitment to further modernize the US Armed Forces.

“We continue to believe that bipartisan support for defense spending will remain strong,” Northrop Grumman CEO Kathy Warden said last week. “Although we are planning different budgetary scenarios, defense spending is largely driven by today’s growing threats, and today’s challenges require robust protection. Threats that have emerged in recent years are increasing, and we believe that both political parties are committed to effectively countering these threats,” said Kathy Warden.

“If defense companies are optimistic, then Wall Street, on the contrary, is skeptical, since this year purely defense companies have fallen (their share price is Gazeta.Ru), and they are lagging behind the stock market,” notes the aerospace and defense analyst at Capital Alpha Partners Byron Callan. He noted that partisan divisions on Capitol Hill have largely led to budgetary constraints that have plagued the federal budget over the past decade. Even if the incumbent wins, Callan said, no one can guarantee that Republicans will take control of the House of Representatives. And if it remains in the hands of the Democrats, disputes in Congress over budgets are inevitable.

Defense officials have quietly made very favorable predictions for 2021, but the US military has no idea what 2022 and 2023 will be, Callan said. In addition, Pentagon officials have warned that they will have to use the funds allocated for modernization and combat readiness for ongoing spending if Congress does not allocate about $ 10 billion in spending on defense contractors. As Democrats are ready to discuss drastic cuts in defense spending if they win elections, the bloated national deficit caused by the costs associated with the coronavirus pandemic and tax cuts under the Republican leadership is expected to lead to a reduction in the defense budget, writes Defense News.

But the industry is betting on Washington’s desire to prepare militarily for the confrontation with a growing China, Russia and an unpredictable North Korea, the newspaper emphasizes. “The next budget picture will depend on the elections – whether it will be a plane with a slight rise, or it will be the same plane, but with a slight slope. I think there will ultimately be a pretty narrow area where you work politically, given the budget deficits and threat vectors,” said Bill Lynn, CEO of defense and space conglomerate Leonardo DRS, former Deputy Secretary of Defense and lobbyist for Raytheon Corporation.

“While there were rumors that Democrats would cut defense spending, Biden would inevitably face economic and political pressure,” said Michael Herson, president and chief executive of defense lobbying firm American Defense International (ADI). The first thing Biden will worry about is COVID-19 and economic recovery, Kherson said. The head of ADI is confident that the democrat president will not agree to cut military spending, as this will lead to job losses and aggravate the country’s economic problems.

Defense Secretary Mark Esper warned that a fixed budget would force the military to make budgetary compromises and likely cut back on legacy programs from the previous administration. But the Pentagon has also pledged its commitment to modernizing the US military, and this is part of the confidence in American industry of a bright future.

The Pentagon has focused on technology competition with China in recent years, investing in artificial intelligence, next-generation networks, cybersecurity and space. The US defense industry companies saw no sign of reversing in these areas. “The US government is not making a sharp turn in terms of spending like this. And many of the programs we currently support are increasingly task-driven, which is politically predictable,” Lloyd Howell Jr., Chief Financial Officer of Booz Allen Hamilton, one of the world’s largest consulting firms, told investors.

FLIR Systems CEO James Cannon acknowledged that “pressure on the budget will continue regardless of what happens with the elections”, but he supported the statements of the leadership of the US Army that it is necessary to make “long-term underfunded” efforts to modernize the Armed Forces USA. FLIR Systems is the world’s largest commercial company specializing in the design and manufacture of thermal imagers, components and image sensors.

“The message that has been clearly sent to the industry is that after four decades that have not seen significant transformation, it is time for major redesigns,” Cannon said. In parallel, another trend is emerging: companies that do not have a stake in a particular large platform have diversified their production. Some executives pointed to investments in cybersecurity or artificial intelligence. Leonardo DRS CEO Bill Lynn said the firm’s investments in communications, sensors and computing have made his company “two-way.”

“We can go in any direction. Larger companies have more opportunities to participate in the defense budget. We are more focused on specific tasks,” he added. “We see ourselves in the development of sensors for the Ground Forces, satellite communications; we are in 10 or 12 segments of weapons, military and civilian equipment. We can target a wide variety of areas, and frankly, with a fixed budget, this diversification is essential for the continued growth of the company,” said Bill Lynn.

“The words of the CEO of Leonardo DRS are very relevant for the domestic defense-industrial complex. In particular, in Russia it is envisaged to ensure an increase in the share of high-tech civilian and dual-use products in the total volume of products manufactured by defense industry organizations, by 2020 – not less than 17%, by 2025 – not less than 30%, by 2030 – not less than 50%. This will ensure the stability of the functioning of the Russian military-industrial complex under any conditions,” Deputy Director of the Center for Analysis of Strategies and Technologies Konstantin Makienko told Gazeta.Ru.

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