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GLOBAL P ERSP EC TIVES | J ANE’ S US DEFENCE CON FERENCE GLOBAL P ERS P EC TIVES | JANE’S US DEFE NCE CONFERENCE

Br ief i ng : T h e A p r i l 2 2 n d 2 0 08

Jane’s US Defense
conference
By D r. J e ffrey B ra d fo rd

With under a year until the beginning of a new Presidency in the United States, defence industry, military, civil service, amend or overturn these numbers, though challenges still remain. In terms of M&A opportunities, further consolidation is likely to
business and academic players, thought-leaders and opinion-formers came together in Washington DC to consider the The Government Accounting Office regular review of major ­occur below the prime contractor level. Information Technology
issue of Defence in the next Presidency 1 ­programs identifies cost growth and over-runs with major programs. businesses will make inroads into higher margin activity, and given
the positive free cash flows open to the major players some acquisi-

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It was a particularly well chosen time, given the confluence of operational commitments, currency weakness, oil prices
ig-ticket programs include the Joint Strike Fighter (JSF) current- tion will occur.
and economic concerns which are creating a set of new challenges for the next administrations policy makers. ly valued at $299 billion, the contentious KC-45 aerial tanker For policy makers the key question of the next Presidency is likely to
The United States spends more on defence than the rest of the World combined, making the United States perspective r­eplacement ($35 billion). On the horizon is the next generation be whether or not defense will continue to be the principal instrument
important for the rest of the world as well as making the US market the most lucrative as well as possessing the largest super-carrier programme which will likely have a unit cost in the re- of an integrated national security and foreign policy ? The State De-
publicly traded defence corporations in the world. gion of $11 billion. partment is chronically underfunded by comparison to DoD with the
US Defense spending, as a percentage of GDP is at levels not seen since the Korean War in the early 1950s and nearly 25% United States having no representation in 200 cities around the world
Procurement budgets are projected to exceeded $1 billion for the with a population in excess of one million people. One could imagine
higher than at the height of the cold war in the mid 1980s (see figure 1 below). In addition the latest four-year financial first time in FY2009. However, it was apparent that a lack of discus- a Democrat Presidency seeking to redress this imbalance.
plan for the Department of Defense (DoD) has its share due to reduce further from 3.4% of GDP in 2009 to 3.0% in 2013. sion of individual programs suggest decisions regarding curtailing or
eliminating programs will be left to summer 2009 under the next Looking at the geopolitical picture, the next Presidency may well find
­Administration. One analyst noted some total $36 billion in the itself focusing on a resurgent Russia, recapitalising its cold war arse-
growth of projects. With no new money or a near instant reduction nal on the back of oil & gas exports given the symbiotic relationship

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orrying trends include the rise in health care, salaries and banking community noted, production equates to margin growth in commitments, some decisions may well be required. with China which is far more risky to engage with. Acts such as the
pensions for the armed forces, all of which eat into funds and happier shareholders. placing of flags at the bottom of the polar region, re-starting long
for procurement and R&D. At the day-to-day operational From a defense industry and investor perspective one of the key At the more general level it was acknowledged that major strides are range aerial reconnaissance and sending its lone aircraft carrier on a
level, the high price of oil is an addition problem affecting day-to-day ­concerns surrounds procurement from industry of key platforms and being taken in the integration of persistent ISR (Intelligence, deployment to the Mediterranean are indicative of a regaining of
business. A $1 rise in oil prices equates to an additional $130 million systems. It could be suggested that the pressure from operations is ­Surveillance and Reconnaissance) capabilities coupled with the confidence.
in operating costs. creating a competition between the cost of operation and mainte- ­precision strike ability of GPS guided munitions (“smart bombs”).
nance of in-service equipment (O&M) versus the investment in pro- 1 The list of speakers included Tina W Jonas, Major General Charles
The latest funding plan for fiscal years 2009 – 2013 has R&D set to curing new generations of equipment. Beyond outsourcing, operations and maintenance, it could be J Dunlap jr, Dr Kori Schake, David Trachtenberg, The Honorable
fall in favour of production. Analysts noted in particular that the fall ­suggested that the industry players best positioned for the next Jacques S Gansler, The Honorable Dolores M Etter, Allan C Cameron,
in pure research as opposed to ongoing development has been far The DoD has been successful in winning a 23% rise in procurement phase in DoD development will be those operating in the informa- Dr Loren Thompson, Byron Callan, Frank Ruggiero, Gary Powell, Rich-
steeper which could create a gap in the new domestically generated spending over 2009 through 2013 and an 18% rise in the O&M tion technology, robotics and electronics spaces. ard Hooke, Kent Schneider, Tate Nurkin, Mark Kimmit, Dr Anthony
technological advances in the next decade. As a member of the ­budget. Some may question whether a new President will seek to Cordesman, Dr Michael Pillsbury, Thomas Valasek, Olga Oliker.

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