Lexington on US Defense Industry Downturn Options

The USA’s Lexington Institute think tank, who discussed “US Politics and the Defense Budget” back in April 2008, has more thoughts for the industry:

“When you only have one customer and that customer suddenly finds itself spending a trillion dollars more per year than it is taking in, prudence dictates you should start developing alternatives to your current business plan. That’s the position the U.S. defense industry finds itself in today. Big cuts in weapons spending won’t happen quickly, but at some point the combination of a deep economic recession, receding threats and Democratic Party control of the government is likely to produce a downturn in the defense business. Fortunately, the industry has many options for coping with declining demand…”

American defense companies do have more than one customer, but the US military is such a large customer that its influence is usually a dominant force. That can be the springboard to long-term market dominance that outlasts American purchases, as was the case for the F-16 fighter and the Harpoon anti-ship missile. It can also create damaging distortions that sap international competitiveness, as it has in American shipbuilding. Either way, exceptions like the C-130J Hercules tactical transport are few and far between. Lexington’s recommendations include:

• Lower investor expectations
  
• Manage backlog better
  
• Steal market share from competitors who have failed to perform
  
• Expand into adjacent markets
  
• Use cash to make acquisitions
  
• Pursue a merger of equals