The Washington Diplomat / June 2002
By Larry Luxner
Sept. 11 may have changed the world, but Washington's new focus on anti-terrorism and homeland security doesn't mean that foreign governments from Australia to Zimbabwe suddenly want our missiles, bombs and fighter jets.
In fact, it's business-as-usual for the U.S. defense establishment, say officials at Lockheed Martin Corp., Boeing, Co., Northrop Grumman and other big weapons manufacturers.
"That is a press-manufactured frenzy," said Jim Fetig, spokesman at Bethesda-based Lockheed Martin, which has 125,000 employees and is the nation's largest defense contractor. "Most of the large increases in defense spending aren't for procurement, by the way. We don't expect to see any windfalls of any kind related to Sept. 11, because governments don't buy procurements costing hundreds of millions if not billions of dollars related to a single event. They relate to broad national policies and strategies."
Joel Johnson, vice-president/international at the Aerospace Industry Association, says foreign countries buy only a fifth of what the U.S. military industry produces.
"About 80% of what we produce is purchased by the Pentagon, and about 20% is for export," says Johnson. "That 20% is probably double what it was 10 or 15 years ago, not because exports have gone up, but because domestic procurements have gone down."
In fact, after peaking in 1989, during the Reagan administration, Pentagon spending on jet fighters, weapons systems and other military hardware began sliding, reaching a low of $42 billion in the late 90s. This year, however, total Pentagon procurements should hit $62 billion.
According to Johnson, 35% of U.S. military exports during the last decade went to Europe and Canada, another 29% to the Middle East and 27% to the Far East, Australia and New Zealand. The remaining 9% of U.S. weapons were purchased by developing nations in Latin America, Africa and South Asia.
Interestingly, the world's two most heavily populated countries -- China and India -- hardly figure into the equation, since arms sales to the Chinese have been prohibited since the 1989 Tiananmen Square massacre, and India has traditionally looked to Moscow for weapons.
"The Third World is not an important market for the United States, and we're not an important supplier to them," said Johnson. "If these countries disappeared tomorrow, it wouldn't much difference to the arms industry. Most of their stuff comes from Europe, China, Russia and Israel anyway."
The nation's No. 2 defense contractor is Boeing Co., right behind Lockheed Martin. But if Northrop Grumman's proposed $6.9 billion takeover of TRW goes through, the combined company -- with total revenues of around $24 billion -- will surpass Boeing in defense sales. Last year, Boeing lost the largest U.S. defense contract in history, the $200 billion Joint Strike Fighter project, to Lockheed Martin.
Yet few observers feel sorry for Boeing. In April, the Chicago-based aerospace giant won a $4.5 billion contract to build 40 fighter jets for South Korea. Boeing's F-15K beat out the Rafale made by French firm Dassault in the race to build a fleet of new jets for the South Korean air force by 2009.
Other contenders for the juicy deal were Russia's Sukhoi Su-35 and the Eurofighter Typhoon, but both were eliminated in a first round of bidding in March. Even though the Su-35 was the cheapest plane to buy and maintain, and the Rafale deal offered the most generous technology transfer, Boeing's F-15K won out thanks to South Korea's close military ties with the United States -- and despite allegations of political favoritism, bribery and industrial espionage.
U.S. officials denied exerting undue pressure, and went to lengths to avoid appearances of impropriety. President Bush studiously avoided the subject on a February visit here and Boeing says it has asked top officials to stay away.
But U.S. military officers and Boeing supporters in Washington were clearly irked by other countries' efforts to break the near-monopoly that American contractors have held since the 1950-53 Korean War.
Defense News reported that despite the buildup for the war in Afghanistan, the U.S. military flew three F-15Es from Alaska -- at Boeing's expense -- to South Korea last October to display them at a big air show in Seoul, and U.S diplomats helped make sure Boeing's arguments were presented to South Korea's top brass.
"Every embassy goes to bat for its companies," said a U.S. official quoted by the newsletter. Touting the F-15, he said: "Every senior-level encounter that takes place includes our emphasis on the quality of the product and its acknowledged track record."
According to the report, the French weighed in with their own diplomatic pressure, which included sending a special envoy with a message from President Jacques Chirac urging South Korea to keep the competition fair. In the end, Boeing's efforts paid off.
"This is a great shot in the arm, a great boost in morale to a team that could sure use the victory at this time," said Jerry Daniels, president and CEO of Boeing Military Aircraft and Missile Systems, in a prepared statement. Daniels noted that the South Korean contract will sustain at least 1,000 employees in the St. Louis area whose jobs had been in jeopardy following the loss of the Joint Strike Fighter project to Lockheed.
Asked about the Boeing sale to South Korea, Johnson declined to comment.
"We generally don't get involved in specific procurements. We're more policy-oriented," he said. "Boeing is perfectly capable of taking care of itself. If there were a policy issue, then we would get involved. For example, we were heavily involved in trying to change our Latin American policy."
That policy, which remained in effect for two decades, effectively banned U.S. sales of advanced weapons to Latin America. President Clinton lifted the arms-sales embargo in 1997, and the first sale to take place under the new policy was a $500 million contract by Lockheed to supply ten F-16 fighter jets to Chile.
Now, Lockheed is on the verge of landing a $909 million contract with Brazil, also for F-16s. The Pentagon has given its blessing to the deal, in which Lockheed will offer 12 of the fighter jets. They will be armed with up to 52 state-of-the-art medium-range air-to-air missiles that can fly at four times the speed of sound and are capable of hitting out-of-sight targets 40 to 50 miles away.
Congress may object to the potential sale to Brazil, but lawmakers on Capitol Hill don't appear to be too concerned. Brazil is also expected to review bids from French, Swedish, Russian and other U.S. companies over the next month.
"The Pentagon has given its blessing, but that doesn't mean it's going to happen. As far as I know, the Brazilians have decided between the F-16 and the Mirage 2000 made by the French firm Dessault," said Johnson. "The French own a piece of Embraer, the Brazilian aircraft manufacturer, so the assumption has been that the French have the inside track."
In fiscal 2002, total Pentagon procurement came to $53 billion; major components of that were aircraft ($17 billion); missiles ($5 billion) and ships ($7 billion). The remaining $24 billion consisted of defense electronics and communications. The procurement budget for fiscal 2003 is expected to reach $68 billion.
"The defense budget has gone up substantially, but the procurement budget has not," Johnson explained. "As you increase the tempo of operations, you use the military equipment you've got more extensively than before Sept. 11. That means the older equipment is getting older even faster, which means your maintenance budget keeps going up. And that eats into the budget to the point where you can't afford to buy new stuff. And so much of the budget has gone into salaries. With an all-volunteer army, you pay a lot more, so your personnel costs have gone way up."
On the other hand, said Johnson, the industry has seen business picking up from the Far East, specifically countries like Japan, Taiwan, Singapore and, to a lesser degree, Thailand and Australia.
"As the Asian crisis recedes, we're seeing Asian countries get back to modernization programs that they have started some years ago," he said. "Like the Korean fighter-jet sale, the Malaysians again are looking at a few MiGs or F-18Fs. The Taiwanese are looking at Aegis submarines, but none of that has much to do with the war on terrorism."
The Middle East remains an important market for U.S. armsmakers, particularly oil-rich Saudi Arabia, which until recently was spending between $4 billion and $5 billion a year on defense needs. Other key buyers of U.S. weaponry include Egypt, the United Arab Emirates and Israel.
"We give the Israelis about $2 billion a year, of which they're allowed to spend $500 million purchasing from the Israeli defense industry," said Johnson. "It's the only country in the world allowed to spend our grant aid on themselves. Right now, most of the remaining $1.5 billion a year is going to F-16s."
Yet in Western Europe, whose economies are growing much more slowly, defense spending has hardly risen at all. Said Johnson: "We don't see many signs of the Europeans adding to their military capabilities at a faster rate than they intended to before Sept. 11."
Lockheed, which remains the nation's top defense contractor, enjoyed sales last year of $24 billion, and profits of $1.5 billion. The company's biggest source of revenue, 62%, is the Pentagon, according to spokesman Fetig. Another 17% were foreign orders, 5% were commercial orders and 16% was for U.S. civil government use. That percentage is not expected to change significantly, despite the war in Afghanistan or the aftermath of the Sept. 11 terrorist attacks against New York and Washington.
"International arms purchases are functions of U.S. policy. They generally take months or years to arrange and organize," he said. "Normally, contractors which make a particular piece of equipment compete in international competitions. So every competition that's ongoing at the moment was ongoing before Sept. 11."
Lockheed's F-16 fighter jet is currently competing in two competitions -- one in Poland and one in Austria -- though Fetig says the U.S. government recently withdrew from a similar competition in the Czech Republic in which the F-16 was a contender. Another competition was lost in Hungary to the Grippen, a joint-venture fighter jet made by BAE and Saab.
At the moment, says Fetig, Lockheed's best overseas customers are NATO member countries as well as Egypt, Israel and the United Arab Emirates (which last year purchased sixty F-16s).
In Europe, several key contracts are tied to the Joint Strike Fighter (JSF) program led by Lockheed. By the end of this month, Italy and the Netherlands will decide on the extent to which their governments will participate in the program. Pentagon officials say Dutch involvement at Level 2 could generate between $8 billion and $10 billion for companies in the Netherlands. The British government, which signed a memorandum of agreement in January 2001, is the only full partner in the JSF program; Norway and Turkey are expected to decide on their level of involvement within two months.
"It's important to remember that no one in this phase is committing to buying a JSF," Pentagon spokeswoman Kathy Crawford was quoted by Aerospace Daily as saying. "That's not guaranteed. But hopefully, by participating in this phase, it will come to that."
Lee Ewing, editor-in-chief of Aerospace Daily and Homeland Security & Defense, both of which are published by McGraw-Hill Companies here in Washington, said he hasn't seen a great surge in demand for U.S. weaponry among European allies.
"There's an anomaly in that politically, European leaders say they want to be more independent of the United States for reasons of national security, and yet their governments have shown great reluctance to appropriate more money for defense," he said. "Therefore some of their efforts at international cooperation even within Europe are sputtering."