By Andrea Shalal-Esa
Published: 7 October 2011
(Reuters) – Defense contractors are losing faith that they have an ally in former chief weapons buyer Ashton Carter, who is now the No. 2 official at a Pentagon battling to stave off massive cuts.
Carter, a former Harvard professor and nuclear physicist, initially charmed industry executives by his willingness to engage with them.
But they have grown wary as Carter pushed through aggressive acquisition reforms including more fixed-price contract terms, and failed to deliver on promises such as a commitment to keep defense spending stable.
“The DOD goal is to cut the fat in the budget without cutting into muscle. However, they are cutting into muscle already,” said Caren Turner, a Washington-based lobbyist who represents suppliers to the defense industry.
Carter, who was nominated to the No. 2 spot in August, will have increased clout and will now be in a position to directly terminate ailing programs that are over budget.
His promotion comes as defense contractors such as Lockheed Martin, Boeing, and Northrop Grumman are in an increasingly vulnerable position.
The White House has an agreement with Congress to cut $489 billion in spending from Pentagon budgets over the next 10 years.
Military leaders may be forced to trim up to $600 billion more if a congressional super-committee fails to reach agreement on $1.2 trillion in cuts by the end of this year.
Carter has gone through a daunting savings drive before.
He was at the Pentagon in the early 1990s — after the end of the Cold War — when his friend and mentor, William Perry, then serving as deputy defense secretary, kicked off the last big consolidation in the defense industry at a dinner later dubbed “The Last Supper.”
He has gotten kudos for working hard, often arriving at the Pentagon in the very early morning hours and showing up nearly every weekend, but the industry is wary that work ethic will translate into any real benefits for them.
Carter told a Wall Street conference in February — before the latest round of defense cuts were on the horizon — that the department was open to mergers and spin-offs among second- and third-tier defense companies, but not at the very top.
Now industry executives and defense officials are beginning to wonder whether Carter may have to rethink his position.
Turner said layoffs had already begun at some of the leading companies in the defense sector, and industry executives were openly musing that further defense cuts could result in the elimination of at least one major weapons maker.
She said the department needed to stand firm against further cuts since they would result in massive job losses.
EXECUTIVES BRISTLING AT ACQUISITION REFORMS
Carter has also drawn fire from some quarters for his lack of experience managing a large business.
One former senior Pentagon official, who was not authorized to speak publicly, said many executives felt Carter did not fully understand the complexities of their business and was not fighting hard enough to maintain the industrial base.
“There’s a real need to work with the industry and manage this downturn, but instead the administration has moved to a ‘the contractors are our enemy approach,'” said the official.
The Pentagon’s insistence on fixed-price contract terms, often early in the development of new weapons, delays in contracts, and lack of clear guidance on possible consolidation in the industry, have frustrated some executives.
One senior industry executive said companies were cutting costs and trying to improve performance, but even when they delivered weapons on time and on budget, Pentagon acquisition officials were reluctant to give them bonuses and rewards.
“We just can’t win,” said the executive, who asked not to be identified given the sensitivity of his company’s relations with Pentagon officials.
Officials involved with Lockheed’s F-35 Joint Strike Fighter program were dismayed at a hearing this summer when Carter retreated from his prepared remarks lauding the program’s progress in the face of blistering attacks by Republican Senator John McCain.
Industry is also bristling at increased scrutiny of manufacturing and overhead costs by Carter’s director of defense pricing, Shay Assad, a former Raytheon Co executive. Assad acknowledges that his work is making companies uncomfortable but said the efforts will continue.
Assad said one lawmaker told him recently: “You’re really upsetting industry. Good work.”
While industry executives grumble that Carter’s reforms may be cutting too deep, some government watchdogs fault him for not doing enough to cut spending on wasteful weapons programs.
Winslow Wheeler, a long-time congressional aide now with the Center for Defense Information, said Carter had failed to get a grip on troubled acquisition programs, including the F-35, the Navy’s Littoral Combat Ship, whose costs have doubled, and assorted satellite programs that remain over budget and behind schedule.
Carter remained unwilling to engage in the massive restructuring of the F-35 program that was needed, Wheeler said, and still had not addressed what he called “the fundamental unaffordability” of the airplane, or its long-term maintenance costs, now projected to be around $1 trillion.
“Simply because he’s not dressing in a cheerleading uniform …. doesn’t change the fact that he is the primary defender of the program,” Wheeler said.
(Additional reporting by Jim Wolf; Editing by Steve Orlofsky)