Security Driving Wave of Defense Spending by Sean OíDriscoll The contrast between European and U.S. defense contractors is greater now more than ever. While U.S. forces are mopping up the last pockets of Iraqi resistance, the heads of Europeís three largest defense companies have drafted a letter to European leaders warning that large numbers of jobs are at risk unless governments substantially increase defense spending, saying that large increases in U.S. defense budgets have left U.S. companies far ahead of their European rivals. Back in Washington, however, the thought of Americaís three largest defense companies having to beg for contracts to keep up employment seems almost laughable, particularly in light of the proposed 2004 defense budget of nearly $380 billion. Not since the Reagan era have defense companies found business so easy, and itís reflected in the confidence of defense company forecasts. The big winners from the post-Iraq military spending boom include Lockheed Martin Corp., whose massive $70 billion F-22 fighter jet program was in serious danger of being scrapped by the government only a few short years ago. The Bethesda, Md.-based company, which continues to be the Pentagonís largest contractor, has now stepped up its F/A-22 and F-35 Joint Strike Fighter programs, which accounted for a 57 percent increase in aeronautic sales last year. Air Force Secretary James G. Roche, who late in the war said the F/A-22 was necessary because it can carry weapons internally and hold advanced sensory equipment able to pick out mobile rocket launchers, helped boost this increase. However, one senior congressional staff member who did not wish to be identified questioned the long-term viability of the Joint Strike Fighter programs. ìThe big winners will be those companies producing drones, not aircraft. Ultimately, they are what decided this war,î he said. Drones, known in military speak as unmanned aerial vehicles (UAV), have won wide praise by U.S. military officials for their ability to stay in the air for long periods of time, which proved critical in surveillance and reconnaissance missions during the Iraq war. The 2004 defense budget includes $860 million for a drones program (not including combat and undersea UAVs), and over the next decade, the Department of Defense intends to spend at least $4 billion developing a new generation of drones capable of flying for months nonstop. All of this is good news for General Atomics of San Diego, which manufactures one of the main types of drone used, the Predator. Dyke Weatherington, deputy of the Pentagonís UAV Planning Task Force, said the use of drones during the Iraq war was extremely important. ìThey were absolutely critical to the speed and scope with which the coalition was able to press the attack,î he said. This new shift in air defense is also very good news for the nationís second-largest defense contractor, Northrop Grumman, whose long-range Global Hawk drones have garnered the company $1.6 billion in contracts since 1995 and were recently used to spy on Iraqi troop movements. The Air Force also used the Global Hawkís radar and infrared cameras to pick out Iraqi targets during the severe sandstorms that halted troop movements for several days in late March. However, Steven Kosiak, director of budget studies at the Center for Strategic and Budgetary Assessments, is critical of the spending on UAVs. He said that only about half of the funds earmarked for UAVs in the 2004 budget will go to long-range UAVs, which are widely considered one of the keys to the rapid U.S. successes in the Iraq war, noting that Congress and the Defense Department are wary of making decisions that could ultimately make defense spending much more focused and cost effective. However, one sure winner on the 2004 defense budget will be Raytheon Co., maker of the Tomahawk cruise missile, which was also heavily used in the Iraq war. The Pentagon bought up thousands of Tomahawks in the months before air strikes began, offsetting the large loss Raytheon suffered on the sale of a business last year. Another huge area of spending will be research and development, which is expected to total $61.8 billion in the 2004 defense budget, a nearly $5 billion increase over fiscal 2003 research and development spending and a $20 billion increase over 2001 levels. According to Kosiak, however, the administration repeatedly uses the buzzword ìtransformationî when discussing defense projects but is unwilling to take the big steps necessary to change research and development spending. The big winners in this research and development extravaganza, he said, will be mostly older projects that undergo new changes, rather than completely new and innovative ideas. The simulator industry is another huge growth area as the military becomes more and more high tech and seeks to use this technology to better prepare its soldiers before going into battle. The U.S. market for battle simulation and training is expected to grow by 3.5 percent through 2008, with Pentagon spending expected to reach at least $4.78 billion in 2008. Defense officials are still examining how simulation technology helped plan the accuracy of targeting during the Iraq war, but initial results are positive and that is good news again for Lockheed Martin as well as L-3 Communications, which together lead the overall simulation market. Raytheon is also involved in the simulation market, as are General Dynamics and Northrop Grumman. In fact, a new range of simulator technology has helped both Raytheon and Northrop Grumman land a multibillion-dollar contract to design the Navyís new fleet of warships. However, according to Winslow Wheeler, a senior fellow at the Center for Defense Information and a former congressional defense advisor, at the moment, the government seems impressed by just about every defense contractor in the field. ìNeither the Department of Defense or Congress has the discipline to say no to anything,î he said. ìIn the midst of declaring victory, Congress is going to throw money at everything military without proof Ö it works.î According to Wheeler, Congress does not yet have the relevant information from the Iraq war to make the right decisions about how to allocate the 2004 defense budget. ìThey lack the information to say what worked and what didnít work and are skeptical of any information that anything didnít work,î he said. ìThe army will say, ëWe need all 10 divisions and we need x, y and z.í Even if [Defense Secretary Donald] Rumsfeld said that the military should be reduced, Congress still wouldnít go along with it.î Charles PeÒa, a defense policy and program expert at the Cato Institute, said that some of the $380 billion in the 2004 defense budget could be saved by cutting back on forward deployments around the world. ìThe only way to see true reductions, not just reductions in the margin, is if you rethink American foreign policy and the defense policy that goes along with that,î he said. According to PeÒa, the U.S. Navy will consume a significant chunk of the 2004 defense budget on aircraft carriers and other heavy ships that are of little use outside wartime and are being overtaken by more modern technology. ìWe could fly planes out at short notice from the United States if we had to and land a missile within a meter of target,î PeÒa said. ìThe old, very expensive equipment is not needed to defend this country. No matter which political party is in power, nobody is willing to make those decisions.î PeÒa also cited U.S. spy satellite technology as another leftover from the Cold War era where the taxpayer could make huge savings. ìA lot of that is in what we call ëblack-world programsí [top secret programs known only to select Pentagon officials and a limited few in Congress]óitís hard to get a handle on cost associated with overhead reconnaissance. They are inside the intelligence community and when they go up to Capitol Hill, they are all classified briefings,î he said. According to a senior congressional defense expert with more than 20 years experience, who did not wish to be identified, ìend itemsî such as tanks and missiles will be the big winners in next yearís defense budget, along with research and development programs. The House Budget Committee, he said, is very keen to stick closely to the White Houseís defense budget but will rearrange the figures to give more money to ìsexyî projects that look good in the publicís eyes. He said the way this will be done will be to take money from general maintenanceóan area of spending that is unlikely to gain any headlines. ìThey will pay for it by somehow seeing savings in things like operations and maintenance, which is a big pot of money without a lot of small subaccounts,î he said. ìItís easy for Congress to target that area.î And lobbying to div ert those funds toward certain corporations will undoubtedly continue, he said, until the budget has been settled. ìIím sure the [House] Tactical Air and Land Forces Subcommittee and other relevant committees are being well visited by lobbyists making big claims.î The Department of Homeland Security meanwhile, with its $40 billion budget, is another venue attracting investors and lobbyists. The sheer amount of homeland security lobbyist firms, for instance, has skyrocketed: The number of companies that use the words ìhomeland securityî or ìterrorî on their registrations has gone from 157 in 2002 to 569 today. The big winner in all of this lobbying is a company named Blank Rome Government Relations LLC, which is staffed mostly by Homeland Security Secretary Tom Ridgeís former staff while he was governor of Pennsylvania, including his former chief of staff. The war on drugs, once the media catchphrase of the í80s and early í90s, has now been replaced in the publicís mind by the war on terrorism, and, significantly, Clinton drug czar Barry McCaffrey, is now a homeland security lobbyist, along with former Defense Secretary William Cohen and former Secretary of the Department of Health and Human Services Louis Sullivan. All of this lobbying and spending on defense and homeland security has sent a huge wave of excitement through technology companies battered by the Internet stock crash and the slump in computer sales. ìThe government is the one spending,î said Doug Barry, a partner with Selby Venture Partners, a venture capital fund in California. ìObviously, this is all being driven by the war and 9/11. Itís also the Bush administration in general.î However, as with the Internet boom of the 1990s, Barry sees the defense boom as reaching a saturation point. ìSecurity is getting overfunded,î he said. ìEveryone is funding security companies. What we may see here is a bubble.î However, many financially troubled startups hovering around Silicon Valley see the defense boom as their way out of trouble and into multimillion-dollar contracts. Bay Microsystems, founded in 2000 to sell networking chips to other companies, was struggling until the defense contracts began to roll in. ìWe were incredibly upset and struggling to determine how we could survive,î said co-founder and Chief Executive Officer Charles Gershman. Late last year, however, Bay Microsystemsís fortunes changed when it won a contract with the U.S. Naval Research Laboratory for a secure communications network. Soon, the company won deals with half a dozen other defense and intelligence agencies, and 80 percent of Bay Microsystemsís profits for this year will come from the government, Gershman said. However, Wheeler of the Center for Defense Information is convinced Congress does not have the ability or the will to assess the massive defense contracts being awarded to defense companies. ìPeople confuse the defense budget with supporting the troops,î said Wheeler, warning that huge amounts of money will end up in the hands of large-scale and inefficient defense contractors. ìThe best form of support people may be able to give is to not build systems that blow away money needed for other things. Thatís not a level of logic where politicians are operating.î Sean OíDriscoll is a contributing writer for The Washington Diplomat.