Overseas Developments Shift Demand Signal For Defense Sector
A year ago, the future scale and composition of demand in the defense sector seemed pretty clear. Pentagon spending on technology and technical services was expected to soften in response to waning involvement in overseas contingencies, oversized deficits and Democratic Party control of the White House. Many defense companies were hoping that increased foreign military sales would help fill the revenue hole created by softening domestic demand, and some very big deals were booked, mainly with countries in the Middle East. Company executives were concerned that decade-long increases in defense outlays were coming to an end, but they thought they had a good idea of where the market was headed.
It appears, though, that the future isn't what it used to be. Recent overseas developments have weakened the prospects for big arms sales in the Middle East while bolstering the outlook for increased domestic outlays on high-tech weapons. The problem in the Middle East is clear enough: instability in Tunisia and Egypt has raised fears of popular uprisings in other Arab states, including some of the world's biggest arms purchasers. When such uncertainties loom, Washington's usual reaction is to delay rather than rushing ahead with new arms transfers. The last thing policymakers want is to deliver the latest generation of U.S. military technology into the hands of autocratic states just in time for anti-western regimes to take over and claim the weapons as their own.
This is a tough balancing act, because America owes countries like Saudi Arabia a lot for exercising a moderating influence over oil prices and relations with Israel. Washington doesn't want to send the signal that it doubts the longevity of pro-western leaders, or that it will be a fair-weather friend when the going gets tough for longtime allies. But it shudders at the prospect that a radical regime might end up owning some of the best military technology in the world -- and using that technology to undermine U.S. interests in the region. The received wisdom right now is that Arab kingdoms like Morocco and Saudi Arabia are likely to prove more stable than republics because the kingdoms are more deeply rooted in local culture and traditions, but nobody knows for sure where the current unrest is headed. So some delay is executing planned arms transfers is likely.
Meanwhile, half a dozen time zones to the east, China is beginning to show its hand on how it intends to translate economic power into military might. The flight testing of the J-20 tactical aircraft -- a long-range, semi-stealthy strike system -- fits into a pattern with other military breakthroughs like maneuvering antiship missiles to suggest that the Middle Kingdom will one day challenge U.S. military access to the Western Pacific. Policymakers in Washington have begun to realize that if China builds a military posture sufficiently robust to dominate its neighbors, it will end up controlling the industrial heartland of the global economy. The United States therefore must acquire the air power and sea power needed to contain rising Chinese influence (land power will be less useful given the local geography). If it fails to do so, countries like South Korea and Japan could eventually be drawn into the Chinese "orbit."
So there is a distinct possibility that the Pentagon will have to invest more heavily in high-end weapon systems over the next decade -- restarting production of the F-22 fighter, accelerating development of long-endurance unmanned aircraft deployable on aircraft carriers, and so on. The January recommendation of defense secretary Robert Gates to begin development of a new bomber for the Air Force may reflect official concern with China's growing military power, signaling that the labor-intensive investments required to prosecute a multi-front counter-insurgency campaign are giving way to more traditional, technology-intensive military investments. That would be good news for the big system integrators in the defense sector, who have recently seen the Obama Administration undercut their plans to grow in federal services, and now face questions about the outlook for Middle East arms sales.