Last week the House Committee on Armed Services began the legislative process for crafting the fiscal year 2015 National Defense Authorization Act, with several subcommittee meetings scheduled before the full committee markup on May 7.
Congressional budget battles, which, lately, seem to be a never-ending exercise in futility, will intensify. Budget discussions and markup efforts will reflect a political landscape defined by the upcoming mid-term elections in November and resultant political campaign posturing. This reality adds fodder to the uncertainty of the budget process outlook, and suggests that congressional efforts may culminate in the eventual passage of a continuing resolution, as has become the politically convenient solution in recent years. While Congress continues to hem and haw, defense contractors appear to be navigating uncertain waters and mitigating uncertain budgetary futures by reining in expenditures, reducing employee overheard and implementing cost reduction initiatives to keep fickle investors at bay. Recent quarterly earnings appear to substantiate the industry-wide fears and consequent cutbacks.
Boeing (NYSE:BA), a multinational, American-based aerospace company, had a 6 percent decline in sales from $8.1 to $7.6 billion in its Defense, Space & Security business unit. Overall, the company did see an increase of 8 percent in revenue during the first quarter, but that gain comes as a result of a nearly 20 percent uptick in its commercial aviation division. General Dynamics (NYSE: GD), a major aerospace and defense company, sustained a 15.2 percent drop in revenues for its combat systems business unit over this quarter last year. Northrop Grumman (NYSE: NOC), a leading global security company, also took a hit, with sales down 4.2 percent from $6.1 billion to $5.85 billion, over last year. And Raytheon (NYSE: RTN), a technology company specializing in defense and homeland security solutions, sustained a 6 percent drop in sales compared to this quarter in 2013.
Fluctuations in earnings based on operational and environmental realities within the context of budget sequestration; the draw-downs in Afghanistan and Iraq; and the political battle over budget deficits seem to provide a reasonable explanation for prime defense contractors’ decline in earnings, but only to a degree.
Abroad, China continues to aggressively assert its purported territorial claims in the East with increasing militarism. Unsurprisingly, America’s allies in the Pacific remain on edge, even after President Obama’s recent trip last week, which included stop-offs in Japan, Malaysia and South Korea. But underlying the pomp and circumstance of the high-profile visits appears to be nagging indications that America’s so-called “Asia Pivot” is faltering or moving slow at best — a likely subject of concern to most US allies.
Concerns by vital Asia-Pacific allies appear to be valid. China’s military buildup looks to be diminishing America’s power and standing in the region. The belief that the US is scaling back investment in its defense capability, whether real or perceived, makes American allies in the region nervous, as it serves to embolden China while undermining iron-clad mutual defense assurances that previously served as a stabilizing mechanism for regional peace.
In a world governed by self and national interests, perception becomes a daunting reality of geopolitical consequence. And in a region where perceived absence sends the message that there’s a power vacuum, the consequent materializing juxtaposition becomes a problematic grey-area ripe for miscalculation and overreach. An unmistakable takeaway of ultimate consequence for congressional budget officials remains: the “tiger-has-arrived.”
And all is not quiet on the Western Front either. Russia’s Vladimir Putin continues to make in-roads in the Ukraine, annexing by near fiat large swaths of a once independent and territorially defined (by international law, mind you), free nation. All the while, Russia continues to conduct military exercises along the border of eastern Ukraine, which further serves to ratchet up anxieties across Europe and justify palpable fears in Ukraine’s capital of Kiev. Yet another unmistakable takeaway of ultimate consequence here for congressional budget officials is the Russian “bear-is-back.”
These two global flashpoints, along with the pervasive threat by North Korea, the continuing Iranian effort to destabilize the Middle East through its unfettered nuclear weapons program and the fractious consequence of the Arab Spring, leaves one to wonder where America’s defense contractors are pivoting to, and wondering if the reality of a security environment driven by political decision-makers is a wise, albeit competitively necessary, national security strategy for the defense industrial base.
Congressional budget officials, especially in the House Armed Services Committee, undoubtedly have a large responsibility in balancing fiscal and defense needs. Last week was fraught with political posturing, campaign issue positioning, and the promotion of party-line tactics to support the creation of a powerful re-election narrative for the mid-term this coming fall.
In the end, following 15 years since the terrorist attacks on Washington, DC and New York City, a forward looking and aspirational desire to secure a “draw-dawn dividend” without maintaining operational strength and readiness levels is like pursuing a strategy of deterrence without a stick. Let’s hope Congress acts in accordance with its constitutional duties and with a full appreciation of the true global threat landscape to America’s national security interests.
The tiger and the bear are already knocking at the door. The question is, will Congress act to counter the geopolitical opportunists lining up at our doorstep?