Magazine article National Defense

Long-Term Remedy Needed for Ailing Defense Industry

Magazine article National Defense

Long-Term Remedy Needed for Ailing Defense Industry

Article excerpt

Business is good! Isn't it? The stock market keeps climbing, corporate profits continue to rise, each quarter seems better than the last, and employment has dropped to record-low levels. But is this true for all industry? Specifically, is it true for defense industry? And if it isn't, should we care?

First, let's look at defense industry, and review what has happened since the Berlin Wall came down and the Soviet Union imploded. The most direct result of our success in the Cold War is that investment in defense equipment has dropped by 70 percent with a consequent and predictable impact on the defense industry.

Back in the spring of 1995, former Defense Secretary Bill Perry hosted a dinner (later known in industry as "The Last Supper") that kicked off several years of intense defense consolidations. Currently, the top five defense firms were formed from 50 firms just a few years back. All of these actions enamoured Wall Street and caused defense stocks to rise handsomely. At least, initially.

However, recently, we've seen some problems arise. Defense industry profits have been down and many companies' debt loads are up as a result of the mergers. The aftermath of the mergers continues to occupy significant management time as many of the "Big 5" wrestle with the rationalization of their merged elements.

So defense business isn't particularly good. But do we need to be concerned? INDIA suggests we definitely should be concerned because our defense industry is part and parcel of our armed forces-analogous to a "fifth service," albeit non-uniformed. And it is that "fifth service" that provides our forces the great technological advantage they must have if we are to continue to prevail against the broad spectrum of threats that continue to evolve.

Some observers react to declining profits in defense industry with no concern-or almost glee-that the high-flying have been brought to earth. We submit that is a shortsighted and parochial approach. Consider that we are already down to two to three competitors in each major weapons area. If we slip lower, we risk losing the most important force in our free market system: competition! And it's not only costs that will rise if we lose competition. We will lose the principal driving force for innovation. It is the products of that innovation that provide the leverage for our forces to win, to win big, and to minimize both our own casualties as well as those of our enemies.

A corollary to competition and its impact on innovation is the growing difficulty faced by defense industry in attracting the best and brightest from our colleges. Unfortunately, defense is often considered old, staid, unexciting. Not so with the "dot com's" and their stock options, exploding market values, and lack of constraint by a Pentagon-like procurement system. …

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