By Soyoung Kim
Published: 7 September 2011
(Reuters) – The defense industry would face devastating consequences if Congress fails to find a solution for reducing U.S. budget deficits by the end of the year, the Pentagon’s industrial policy chief said.
The Defense Department is already cutting at least $350 billion from previously projected spending, and additional cuts of as much as $600 billion could kick in if Congress fails to find at least $1.2 trillion more in deficit reductions by year-end.
While the Defense Department is working to meet the initially proposed cuts, any additional reduction would mean big uncertainty for the already struggling industry, Brett Lambert, deputy assistant secretary of defense, manufacturing and industrial base policy, said at the Reuters Aerospace and Defense Summit in Washington on Tuesday.
“The only certainty of that uncertainty is that it would be devastating to the department and to the industry if implemented as currently envisioned,” Lambert said.
“What has made (the defense industry) less attractive in the last few years is the uncertainty, not the fundamentals,” he said.
Global weapons makers are bracing for cuts in defense spending, sparked partly by this summer’s U.S. debt-ceiling deal, as well as planned U.S. troop withdrawals from Iraq and Afghanistan.
Lambert expects the challenges facing the industry to spur more mergers and acquisitions in coming years as companies look to cut costs and improve efficiency. But he said consolidation among prime defense contractors has largely run its course.
“Knowing that the industry will go through this period of transformation — we believe there is going to be more activity in mergers and acquisitions and spin-outs — my office is preparing to deal with more activity over the coming years,” Lambert said. “We think that’s healthy, that’s natural and we expect it to be robust.”
But the Defense Department believes the current number of prime defense contractors is adequate to ensure a viable supply chain.
“We feel comfortable with the current number of primes we have. We’re not precluding or we’re not ruling anything out, but we are comfortable with the level of that number, we think that number serves the department well,” Lambert said.
(Reporting by Soyoung Kim; editing by John Wallace)