The black cloud looming over defense contractors is the result of the wars in Iraq and Afghanistan winding down, and Congress failing to address automatic across-the-board federal budget cuts. These coinciding events have contributed to a 22 percent reduction in defense spending in the fourth quarter of last year, according to US Commerce Department numbers.
What does all this mean for manufacturers and service providers with defense-related contracts? No one’s really sure.
What we do know is that defense spending plays a significant role in New England’s economy. According to the New England Defense Industry Report, released last summer by the Defense Technology Initiative, the region benefits from $34 billion in DoD and Homeland Security contracts, providing more than 319,000 jobs and over $22.6 billion in payroll. Massachusetts benefits the most, with 2500 companies receiving the lion’s share of defense-related contracts, totaling $13.9 billion, followed closely by Connecticut, with 1100 companies receiving $12.7 billion in defense spending.
While there is no denying the significant and potentially far-reaching affects a major DOD budget reduction would have on the region’s defense industry, it’s unclear what exactly will happen. Many of the area’s largest defense and homeland security employers - such as Raytheon, MITRE, and Mercury Systems - simply aren’t commenting. For some, though, the timing of the possible cuts is working for them. For example, the US Navy recently exercised a 2013 contract option for 52 jet aircraft engines from GE Aviation in Lynn, Mass. with an option that could bring that total to 200 engines valued at more than $200 billion.
“All of our stuff is already on contract so there’s no significant impact for us this year,” GE Aviation spokesman Rich Gorham told Mass High Tech. “After that, it remains to be seen how sequestration plays out.”
General Dynamics C4 Systems in Taunton is another major area defense contractor that may benefit from timing. The company, which provides a wide range of tactical communications systems to the military - including its network modernization program, the Warfighter Information Network-Tactical (WIN-T) - recently received a contract from the US Army for upgrading its handheld manpack radios. Many of C4 Systems’ programs are now approaching deployment, something the company thinks might help protect it to some degree from the budget reduction.
“Things like WIN-T and the manpack are just now getting to the field,” said GD C4 Systems president Chris Marzilli. “They’re delivering capability that has been years in the making and are now ready to go, and (the military) will not want to jeopardize that.”
Still, the company is realistic in its view of the coming crunch. “Our facility in Taunton is one we’re very protective of, and we’ve made that known to our delegation in Washington,” added Marzilli. “They’ve taken a specific interest in Taunton and protecting what we’ve built over the past three decades. We’re vigilant about looking out for this workforce here.”
Of course, not all of New England’s 5,000-plus companies and institutions with sales tied to DoD and Homeland Security budgets are large corporations. Many are small businesses such as Boston Engineering, Waltham, with under 100 employees and annual sales under $10 million. The company provides unmanned underwater vehicles to the Navy with most of its product development tied to small business innovation research (SBIR) grants, and about a third of its annual sales tied directly to government contracts. Because much of their work is SBIR funded, Boston Engineering vice president and CTO Mark Smithers
is confident they may dodge the sequestration bullet.
“By law, SBIR is a percentage of the overall budget,” said Smithers. “In the government, you have the variability of what programs to cut so one prime contractor can be significantly impacted, but they can’t cut out SBIR. This makes a huge difference.”
Regardless of their level of confidence – or lack thereof – about how sequestration may affect their business, companies throughout New England remain cautious about the federal budget. If Congress does nothing to avert the automatic cuts by March 1, defense spending is expected to drop 7.3 percent. No silver lining has appeared yet in the cloud hanging over the region’s defense contractors.
Original article on BizJournals.com