War Bad for the Defense-Industrial Complex

Thomas Barnett cites a subscriber-only article in a recent issue of The Economist which notes that “the war in Iraq is surprisingly bad news for America’s defence firms.”

Surprising to the Economist perhaps, but I made this argument with some force in the first chapter of Blueprint for Action.

The Pentagon lives to dream up fabled future opponents and then program against that desired foe. In concert, the defense firms live to build those massive and expensive platforms and weapons and communications systems for that desired scenario.

You have some nasty and real like Afghanistan and Iraq intrude on that dreamy future, and guess what? Stuff doesn’t get bought.

Not surprising whatsoever. Asymmetrical, fourth-generation warfare doesn’t favor the few and the absurdly expensive, but the many and the cheap.

Of course, facts seldom change preconceptions. People will go right on believing that we go to war at the behest of defense contractors.

FILED UNDER: Economics and Business, Iraq War, Military Affairs, ,
James Joyner
About James Joyner
James Joyner is a Security Studies professor at Marine Corps University's Command and Staff College and a nonresident senior fellow at the Scowcroft Center for Strategy and Security at the Atlantic Council. He's a former Army officer and Desert Storm vet. Views expressed here are his own. Follow James on Twitter @DrJJoyner.

Comments

  1. Steven Poole says:

    Poor defence contractors. Still, the wars have at least turned out very pleasingly for oil companies (keeping prices high) and the big logistical contractors for “reconstruction” projects.

  2. legion says:

    Well, another theory is that some areas of the industry (KBR is just one, but probably the best-known example) are reaping enormous short-term profits from no-bid contracts that they generally aren’t actually performing on. This leads to repeated expenditures by the gov’t to get the same job done (if at all – see “Iraqi Infrastructure”), which sucks more cash, until the gov’t can no longer afford the longer-term programs DI companies are used to. Killing the golden goose, as it were.

    We _should_ be continuing to buy stuff, especially smaller consumable stuff, but the money just ain’t there. Generations will be paying off Bush’s Folly*.

    (* – I’m talking about the invasion of Iraq specifically here, BTW)

  3. Not to mention that many and cheap isn’t right either. Last time I looked our forces continue to shrink in size. Meanwhile the Pentagon is trying to make each of them ever more capable, and amazingly that turns out to be expensive as well.

    Having been there, I think it is safe to say the defense contractors are adjusting to this brave new world.

  4. Cernig says:

    Go on James, email this one to Noah at DefenseTech and see what he says. I bet he needs a good laugh.

    Multi-billion dollar destroyers, subs, stealthfighters etc. and a budget that now is roughly equivalent to the whole of the rest of the world, not to mention all those lucrative new deals in Pakistan, India, Saudia and others that the war on terror has made possible.

    How exactly does Barnett explain away the record profits and share prices for every major defense firm? Between 2001 and 2005, the profits for the 34 largest defense companies have climbed 189 percent. Profits for U.S. corporations as a whole rose 76 percent.

    Or are those just pesky facts again? Like the doubling of defense firm average CEO pay while they are supposedly “hurting” this much? Before 9/11, the gap between CEOs of publicly traded companies and army privates was already a galling 190 to 1. Today, it is 308 to 1. The average army private makes $25,000 a year. The average defense CEO makes $7.7 million.

    Regards, Cernig

  5. James Joyner says:

    Cernig: Interesting. I don’t have a copy of the original ECONOMIST piece Barnett refers to. Presumably, it’s talking about the firms that manufacture big ticket items and such. We’re probably buying fewer new jets and such than we would have otherwise, owing to the costs of the Iraq War.

    We’re spending a ton of money on sustainment and expendables but we were outspending the rest of the world BEFORE Iraq.

  6. Cernig says:

    Hi James,

    Yeah,I noticed Barnett didn’t provide a link or any quote from the article. Here it is. The first paragraph only talks about the cancellation of the C-17 transport.

    So I decided to see what others were saying about the various defense firms.

    Jan 26, 2006 Lockheed Martin quarterly profits up 53% “Profits topped Wall Street estimates as sales rose 2.6 percent to $10.2 billion. Net income was up $568 million, compared with the fourth quarter of 2004 when earnings were $372 million.

    The company is raising its earnings forecast for this year from $4 a share to $4.25 and has declared a quarterly stock dividend of 30 cents a share.”

    April 26, 2006 Boeing 1Q earnings up 29 percent to $692M

    Net income was $692 million, or 88 cents per share, up from $535 million, or 66 cents per share, a year earlier.

    Revenue climbed to $14.3 billion from $12.7 billion, up 12 percent although below the $14.5 billion expected by analysts.

    The defense unit’s operating earnings declined 4 percent and revenues were down 6 percent, leaving it just ahead of the commercial airplane division at $7.2 billion. The company said operating margins for the Integrated Defense Systems division increased by 11 percent, driven by gains in military aircraft programs such as the C-17, F/A-18 and Rotorcraft.

    Those are the big two and both are reporting making big bucks from big-ticket military items.

    Northrop Grumman showed an increase 3.6% in profits from 2004 to 2005, Raytheon a 5.8% increase, United Technologies 10% and General Dynamics 7.22%. (All data from Fortune magazine)

    Accross the pond, BAe are also showing increasing profits.

    BAE said net profit for the 12 months ended Dec. 31 was 553 million pounds ($969 million), up from 2 million pounds in the previous year. Revenue rose to 11.02 billion pounds ($19 billion) from 8.82 billion pounds.

    Finance Director George Rose said earnings at the company’s programs unit were driven higher by the Eurofighter military jet program as deliveries ramped up to European nations.

    Last year, 37 Eurofighters were delivered to air forces in Britain, Italy, Spain and Germany. BAE is making the planes along with partners European Aeronautic Defence & Space Co. and Finmeccanica SpA.

    Overall sales were boosted by BAE’s acquisition of its Arlington, Virginia-based rival United Defense Industries Inc., the maker of the Bradley Fighting Vehicle.

    The purchase, completed in the middle of last year, made BAE the world’s second-biggest producer of tanks and armored vehicles behind General Dynamics Corp. and the Pentagon’s seventh-largest supplier.

    The company said that defense spending in the United States, the world’s biggest market, continues to be robust for the near term.

    Either the Economist is full of it or we can file Barnett with Timmerman and Taheri under “neocons and the lies they tell”.

    Regards, Cernig

  7. The Heretik says:

    Here’s The Economist link which opened fine for me.