Northrop Deal Reflects a Becalmed Defense Field
Northrop Grumman’s sellout to Lockheed Martin, climaxing the rapid consolidation of the U.S. aerospace industry, is a signal that we can expect world peace and no growth in the defense business in the early years of the next century.
The global military situation won’t change much from what we see today, with global commerce undergirded by the vast superiority of the U.S. armed forces.
The Cold War with the Soviet Union ended almost eight years ago, and since then maintenance of the status quo has been the order of the day for U.S. military planning and budgets.
Defense spending is now down to 3.5% of the U.S. gross domestic product, from 6% in the 1980s. And defense budgets will decline to 3% or less of GDP in the next five years as military spending remains unchanged in an economy that continues to grow.
Weapons procurement budgets, the lifeblood of the defense industry, will tick along at $62 billion a year--with no increase from present levels. Military research and development spending will also remain level at roughly $38 billion a year.
Those expenditures sound like a lot and they are, but that only reflects the great cost of maintaining a military of 1.4 million armed forces personnel and replacing ships, planes and weapons because of normal wear and tear.
New weaponry, including a fighter plane for use by all the forces, will be developed slowly.
It was argued last week that the Defense Department, by allowing its major suppliers to consolidate down to three companies--Boeing, Raytheon and Lockheed Martin--will forgo the innovation that half a dozen competing contractors gave it.
And that’s true. But the Pentagon in a time of relative world peace doesn’t need much innovation. In fact, military weapons planners are being told to buy commercial off-the-shelf technology because private industry is developing computers, electronic components and software much faster than the military can.
That’s a dramatic contrast to the defense industry of the 40 years after World War II, when a dozen or so major companies developed advanced aircraft and missiles, and defense expenditure underwrote research in university and industry laboratories.
Military research funding spurred development of sophisticated electronic circuitry, laser guidance and advanced optics. The high-tech weapons that resulted, coupled with the sheer weight of U.S. defense expenditure, convinced the Soviet Union to throw in the towel.
And it also laid the groundwork for today’s high-tech industries in telecommunications, computer networking, video transmission and other fields.
But there is no threat today to warrant an urgent new push for advanced weaponry. In fact, the Pentagon’s lack of interest in backing technology was a factor persuading Northrop to sell out, Chairman Kent Kresa said on Thursday.
The world’s focus today is on economic development, in Asia and Africa, Latin America and Eastern Europe and the states of the former Soviet Union. If there is to be a new world military power in the 21st century--in China, say--it is still in the early stages of emerging.
That doesn’t mean no excitement in defense and related industries. The next trend in global aerospace is likely to be cross-border competition possibly leading to multinational mergers. European companies led by Germany’s Daimler-Benz Dasa aerospace are intent on developing a $60-billion Eurofighter program. But Lockheed and Northrop, with the forthcoming F-22 fighter, will compete for orders in Europe, particularly among the new Eastern European member states of NATO.
Commercial aerospace rivalries will intensify. The European Union’s official opposition to Boeing’s merger with McDonnell Douglas is meant to protect the interests of Airbus Industrie.
And with stagnant defense budgets continuing into the next century, Washington will see increasingly bitter arguments over which armed service should get funding for weapons programs. William Odom, former head of the National Security Agency, is already arguing publicly for a shift of funding from Navy aircraft carriers to Air Force planes to fulfill the U.S. global peacekeeping mission. Others argue that U.S. naval presence is essential to keeping peace in Asia.
To understand the future, it is useful to look to history. Wolfgang Demisch, aerospace-defense analyst at Bankers Trust New York, makes a pointed analogy: “In 1815, the British defeated the ‘evil empire’ of that time, Napoleon. The Royal Navy then ruled the seas for for most of the next century, extending and protecting the British empire.
“But it did not develop new kinds of ships, no steam vessels until the 1850s, even though Britain in the 19th century was undergoing massive innovation in railroads and steam engines.”
Similarly, U.S. military forces today are maintaining world peace with weaponry developed in recent decades while all around them technological breakthroughs are occurring in biology and the information sciences.
The big companies being created by defense consolidation, such as the $35-billion-sales giant that Lockheed would become with Northrop, are not likely to be great innovators. “They’re bureaucracies,” Demisch says.
In fact, the big defense firms will resemble utility companies, serving the nation as weapons and equipment suppliers. As there are few major contractors, each will be assured a level of business. To earn profits, they will have to keep costs in line. For sales growth, overseas markets will be important.
There will be room for small, innovative companies, which may be bought up for their expertise. Logicon of Torrance, which was in the process of being acquired by Northrop and will be part of the Lockheed purchase, is a harbinger of things to come. A relatively small ($500 million in sales) innovator of defense communications software, Logicon has seen its stock rocket to $67 a share from $25 in the last year thanks to defense consolidation.
Financial markets recognize that defense won’t be a growth industry. The combined market value of all three aerospace giants--Lockheed Martin, Boeing and Raytheon--is less than half the market value of Microsoft.
The U.S. defense business, and military budgets, will grow again when there is a challenge--a military threat or new kinds of weapons being developed elsewhere. The British Navy remade itself with Dreadnought battleships early in the 20th century when ambitious Germany began to build new kinds of ships.
When and if military confrontation emerges in the 21st century, U.S. electron beam weapons and other space wizardry, now developing on the back burner, will come into play. But for the present, Americans on the Fourth of July weekend can cheer the technological brilliance of the unmanned Mars lander, from Pasadena’s Jet Propulsion Laboratory, and the relative world peace that ultimately brought about the Northrop-Lockheed deal and the rest of the defense industry’s consolidation.
