As domestic demand for military goods begins to soften, the U.S. defense industry is seeking to sustain profits by selling more of its products overseas. Although the United States already generates about two-thirds of all cross-border arms sales around the world, there appears to be considerable room for growth as allies and emerging partners move to replace aging Cold War weapons and keep pace with trends in military technology. Among the big system integrators, Raytheon currently leads the defense pack in the portion of its military revenues generated from foreign sources: over a fifth of sales come from international customers, and management says that share could grow to nearly a third in the near future. Boeing gets an even larger share of its sales from foreign customers, about 42 percent, but that derives mainly from the company’s commercial transport business, which sells the vast majority of its airliners in other countries. General Dynamics too gets a global sales boost from its commercial operations in business jets and aviation services, but at 19 percent its share of sales generated overseas still lags behind Raytheon.
Although Boeing and Lockheed Martin both stated an intention to grow international military sales in their earnings calls this week, many analysts do not seem to grasp just how big those sales are likely to become for the nation’s two leading defense contractors in the years ahead. In fact, Boeing and Lockheed Martin look positioned to dominate global arms markets, with each company generating more overseas weapons sales than any country other than the United States does. In the case of Boeing, the foreign sales potential derives largely from mature military aircraft lines that are being upgraded using the latest digital electronics and precision-guided munitions. For example, the company has booked sizable sales of its widely admired C-17 jet airlifter in Europe, the Middle East and India, with India alone committing to a multi-billion-dollar buy of the planes. Additional sales are likely to be consummated with India for Boeing’s P-8 maritime patrol planes, AH-64 Apache attack helicopters and CH-47 Chinook helicopters — not to mention a possible sale of F/A-18 fighters. Meanwhile, the company is moving towards a huge sale of new F-15 fighters to Saudi Arabia that could keep production of that plane alive for a decade. Over the longer term, the familiarity of foreign customers with Boeing airliners creates fertile sales potential for military versions of the 737, 767 and 787.
The international business outlook for Lockheed Martin military products is even more impressive, with foreign countries continuing to order the F-16 fighter even as its stealthy successor, the F-35 joint strike fighter, enters serial production. Lockheed executives are confident they can hold the price-tag of the most popular F-35 variant to about $60 million — the same price charged for the newest version of the F-16. If they succeed in doing so, management believes the global sales potential of the tri-service program could approach 6,000 planes, making it by far the biggest weapons program in history. But that is just the beginning. The company’s redesigned C-130J propeller-driven airlifter remains the most popular military cargo plane in the world, with vast sales potential as the installed base of planes in dozens of countries begins to age out. Lockheed also has impressive sales possibilities for its sea-based Aegis combat system and Littoral Combat Ship; the Lockheed LCS design is expected to win an Autumn down-select by the Navy, positioning it as the small-combatant warship of choice in overseas solicitations such as the Saudi eastern fleet modernization effort. So when Lockheed executives said this week they hoped to raise international sales from 13 percent of total corporate revenue to 20 percent, they weren’t just talking off the top of their heads — that’s a real possibility.
The ability of companies like Boeing and Lockheed Martin to successfully market cutting-edge military technology to foreign countries is a major plus for the U.S. balance of trade at a time when trade in commercial products is deeply in the red for America. Although the Obama Administration doesn’t seem to fully grasp the stimulative effects of arms sales on the U.S. economy, it has wisely moved to streamline export procedures that previously impeded U.S. efforts to arm overseas partners. By broadening the range of offerings to foreign friends and allies, Washington can bolster both its economic and its military security while preserving a robust manufacturing base of fungible skills and facilities. With domestic demand for military goods likely to continue softening in the years ahead, global arms sales are looking like the best option to preserve the revenues and returns of big defense contractors until the deficit is tamed and policymakers can again begin to think expansively about military modernization.
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