World View : U.S. Defense Industry Heeds Call to Arms--by Foreigners : * With the Pentagon buying less, jobs depend on orders from abroad--which raises troubling questions.

In the middle of the mile-long Lockheed aircraft plant here, a set of massive red double doors slide open nearly once each work day and a completed F-16 jet fighter is towed out to the nearby runway.

Ever since World War II, the plant has been producing front-line combat aircraft for the U.S. Air Force. But the Pentagon plans to end its orders by 1994. Then, for the first time in history, the plant’s production would be exported to foreign military customers.

The same is true on the McDonnell Douglas F-15 jet-fighter line in St. Louis, the Air Force’s other current-generation fighter program, which will soon be supported entirely by foreign orders. And the General Dynamics plant in Lima, Ohio--the nation’s only remaining tank plant--already exports all of its production.

When the Cold War ended, it was widely assumed that arms sales were headed for a worldwide collapse that paralleled the end of the superpower arms race. Although international deliveries of weapons have dropped since their peak in the 1980s, there are signs that orders for future arms deliveries are back on the rise and that the United States has emerged as the dominant global arms merchant.

American defense firms, through security-assistance agreements negotiated by the State Department, signed up $32 billion worth of weapons orders in fiscal 1993, up from $28 billion in 1992 and $12 billion in 1991. (Those weapons would be delivered over a period of several years.)

While U.S. defense spending continues to tumble and with more than a million U.S. defense jobs expected to be lost by the mid-1990s, the importance of the foreign defense market as a source of sales, jobs and support for American weapons technology is growing year by year.

The foreign market cannot fully offset the drop in Defense Department purchases, which have gone from a peak of about $120 billion in 1986 to about $70 billion in 1994. But without the $32 billion of additional foreign orders last year, the industry’s current slump obviously would be far worse.

How long foreign sales can continue growing is less clear. Some industry executives and analysts say 1993 has marked a sales peak, attributable to Middle East nations replenishing their forces after the 1991 Persian Gulf War.

But others cite rising arms sales in Asia and the potential for heavy purchases in Eastern Europe and South America. In addition, the former Soviet Union had exported $28 billion worth of weapons a year in the mid-1980s, but Russia’s sales have collapsed to just a few billion dollars annually. American contractors have taken up some of the slack.

The U.S. military withdrawal from Asia and Europe will leave those regions providing more of their regional security, driving the need for additional weapons. As the sole remaining superpower, the United States has never been a stronger sponsor for sales of its weapons sales. Since the collapse of the Soviet Union, U.S. firms’ share of the world arms export market has climbed to about 50%.

As a result, the U.S. defense industry is undergoing a fundamental redefinition, moving from a focus almost exclusively based on the Pentagon’s needs to an international focus of competing in a global industry.

Wolfgang Demisch, aerospace analyst at BT Securities in New York, says the new international orientation of U.S. firms is a “very promising strategy.” Demisch believes that most foreign nations may be compelled by regional instability to raise their defense spending from the immediate post-Cold War lows. With global economic output at $25 trillion, Demisch says, nations around the world could be spending $750 billion on military needs--an enormous market that U.S. contractors have yet to fully tap.

“It’s enough to allow the U.S. industry to remain alive and kicking,” Demisch said. “The difficulty is whether the U.S. government will let them do it.”

So far, the Clinton Administration has given no hint--other than unofficial statements about the need for restraint in arms trade--that it intends to stop the growth of U.S. weapons exports.

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But America’s role as the leading supplier of weapons around the world is raising troubling questions for a society that has never had to rely on such big arms transfers for its economic well-being.

The Cold War battle against communism had for more than 40 years provided an ideological basis for U.S. security assistance to friends and allies, whether democracies or dictatorships. Virtually every arms transfer was legitimized by the Cold War.

But with the collapse of the Soviet Union, it is not yet clear what policy rationale, other than the economic benefit to U.S. workers and the support of the U.S. defense industrial base, will guide U.S. arms sales in future years.

“These are issues of national identity--whether we want to be the arsenal of democracy or the arsenal of the world,” said Kenneth H. Watman, a RAND Corp. analyst who is directing a study of arms assistance for the Army. “There is a lot at stake here, politically and financially.”

In recent Senate hearings, State Department and Defense Department officials all but sidestepped explaining U.S. policy, saying the matter is under review. Both agencies turned down requests for interviews, because of the policy study.

So far, industry executives say they have seen little change from the Bush Administration’s policy, which substantially lifted the tight restraints on arms sales clamped on by President Jimmy Carter.

In 1990, Lawrence S. Eagleburger, assistant secretary of state, issued an internal memorandum that ordered U.S. embassies to “get on board” in supporting U.S. arms exports, countering a longstanding Carter directive. At about the same time, the State Department’s Office of Munitions Control, which had thwarted many deals, was reorganized as the Center for Defense Trade.

To be sure, many defense executives are not convinced that the international market has much growth left or that it has any potential to significantly offset Pentagon budget cutbacks in the next few years.

“We believe that any company that becomes dependent on foreign sales has embarked on a precipitous, risky course,” said Robert Trice, vice president for business development at McDonnell Douglas Aerospace. “While we have had massive declines, the U.S. market remains the most viable in the world. Our primary strategy is to meet the national-security requirements of the U.S.”

Indeed, American contractors looking abroad face two serious problems: Potential export markets in Europe are shrinking, and European contractors will themselves be looking for more overseas business to preserve their own base of strategically important industries.

Just how hard defense industries have been hit globally can be seen by figures provided by the London-based International Institute for Strategic Studies:

Between 1985 and 1995, defense spending in 1993 dollars is expected to drop from $27.8 billion to $22.3 billion in Britain, from $26 billion to $19 billion in Germany. French defense spending has declined over the past five years by $1.7 billion, according to the investment firm Morgan Stanley.

In such a climate, European defense contractors are hurting as much or worse than their American counterparts. Daimler-Benz, for example, whose subsidiary Deutsche Aerospace is one of Germany’s biggest defense contractors, announced earlier this month that it would shed 51,000 jobs by the end of next year.

In Europe’s recession-bound social democracies, there will also be strong pressure, both from government and trade unions, to give remaining defense work to domestic contractors. And with their own markets in free fall, European defense firms will be more aggressive than ever in third-country markets.

But U.S. firms believe that they have never been in a stronger position to win international market share from European firms, both because U.S. weapons are increasingly seen as superior in cost and performance and because U.S. policy has never been more favorable to exports.

In addition to expected strong demand from the Middle East, U.S. contractors expect to see significant growth in Asia, South America and eventually in Eastern Europe. Bell Helicopters in Ft. Worth already has received interest in its Cobra attack helicopter from Romania, said Senior Vice President Peter Parsinen.

At Rockwell International, exports account for 25% of its defense electronics business, up from just 6% in 1986. While domestic sales are slipping, the boom in international business is far from over, according to John McLuckey, Rockwell International’s president for its defense systems business.

McLuckey estimates that total global spending for weapons--both domestically produced and imported--excluding the United States, will rise from $330 billion in 1992 to $420 billion by 1997--an increase of 27%. While Europe is dropping, the East Asia and Middle East markets will rise sharply, McLuckey said.

“We are going to push legitimate international sales as hard as we can, because we believe it is in our company’s best interest and our country’s best interests,” said David Danjczek, Litton Industries vice president for international business development. “We are looking to the international market to help stabilize our business base.”

Hughes Aircraft is increasing its international marketing staff by 50% and has positioned international vice presidents in Europe and Asia, anticipating that its defense deals can enhance the company’s clout in commercial markets as well.

U.S. defense executives often have access to the highest-level foreign government officials, giving them an opportunity to leverage that access to support their commercial products, said Hughes Senior Vice President Gareth C. C. Chang.

“If the entire country’s air defense is in our hands, who are they going to trust?” Chang said.

Meanwhile, Lockheed has emerged as the leading U.S. supplier of big-ticket weapons with foreign orders for 522 F-16 fighters--more than are expected from the Air Force for its next-generation F-22 jet fighter.

“The U.S. is going to be very competitive in this new environment,” said A. Dwain Mayfield, Lockheed vice president of marketing and strategic planning. “One of Europe’s weak points is that they don’t have our infrastructure for supporting and servicing their products.”

Lockheed’s F-16 sells for just $17 million, below the competing French Mirage 2000 though higher than the $10-million fire-sale price that Russia has put on its MIG-29 jet fighter.

As Mayfield looks around the globe, he sees huge amounts of aging equipment that need replacement. Oman still has jet fighters built in the 1950s and 1960s. Such replacement markets could add another 600 to 700 orders for F-16s, Mayfield said.

“For each $1 billion of international sales, we generate 35,000 to 50,000 man-years of work in the states,” he added. “That is a hellacious leverage.”

When Saudi Arabia wanted to order $9 billion of McDonnell Douglas F-15 fighters in 1992, union and management organized under the banner of U.S. Jobs Now, successfully lobbying for Administration and congressional support.

The U.S. government’s ability to promote sales is also well funded, thanks to a 3% administrative fee added to export sales by the Pentagon’s Defense Security Assistance Agency, according to William Keller, an arms-trade expert from the Office of Technology Assessment. The fee is bringing in hundreds of millions of dollars every year to the agency.

But Keller, along with many other experts, regards the international push as only a short-term solution to the downsizing of the U.S. defense industry.

“What is going on here is the globalization of the defense business and the globalization of defense technology,” Keller said. “There is a trade-off. It allows people to keep their jobs a little bit longer, but it also allows other countries to develop their own aircraft industries. We are losing control of technology.”

Even more troubling to many experts is the idea that jobs and maintaining the U.S. defense industrial base increasingly dominate the rationale for arming other nations.

“There is something corrosive, day in and day out, seeing people shot up with American weapons,” said Watman, the RAND expert.

Ultimately, the United States must confront the probability that it will face its own weapons in a regional war--which could turn public opinion against relatively loose arms-export policies.

“The arms guys who advocate selling promiscuously weapons into regions still have to face the fact that ultimately that could adversely affect our domestic welfare,” the RAND expert said.

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Watman advocates a policy in which the United States would continue to freely export jet fighters, which would continue to support thousands of U.S. jobs, but limit exports of advanced smart weapons, such as the AMRAAM air-to-air missile, that bring foreign armies on a technological par with American forces.

But industry executives blanch at such a prospect, arguing that denial of weapons will only create incentives for other nations to develop such products and erode U.S. technological leadership. And they argue that America always can shut off the flow of training, service and spare parts to customers who stray from U.S. policy.

Meanwhile, many European leaders believe that the only sensible course for the United States is cooperation with European firms on joint systems to be sold globally--requiring a retrenchment of longstanding U.S. policy to develop its own advanced technology weapons.

“My concern is that there will be opportunities lost because there will be too much emphasis on fears in the U.S. and other countries that if they share their technology, they will lose their edge,” said Digby Waller, defense economist at the International Institute for Strategic Studies. “But the answer is clear: The way forward (for the United States) lies in collaboration--U.S.-European collaboration.”

But hungry U.S. firms appear in no mood for altruism, believing they stand ready to grab market share around the world. And international sales are extremely profitable, having helped keep profits high even while sales have slipped, said Paine Webber analyst Jack Modzelewski.

“We could win every competition for sales,” he said. “We know we can price the products the lowest, because we build the most. It doesn’t get any better than this.”