The Coming Defense Bonanza

By Alexander Taylor

The Pentagon goes shopping for ships, planes, missiles and more

A the Bath Iron Works in Bath, Me., officials anxiously await the Government contract order for more new $200 million guided-missile frigates. At Litton Industries in Beverly Hills, executives are putting final plans together for a $64 million expansion to accommodate expected new Pentagon business. A few miles away in Hawthorne, Calif., the Northrop Corp. is preparing to quadruple production of the Navy's F/A-18 fighter plane to two per month.

These are some of the increasingly frequent signs of the growing boom in America's defense industry, as contractors await a sales bonanza from the Reagan Administration's military buildup. The sums of money involved are immense. The President wants to boost the Pentagon's budget from the $171.2 billion allocated by the Carter Administration this year to $226.3 billion in fiscal year 1982. That amount is twice as much as Saudi Arabia earned from crude oil exports last year and twice the gross national product of Switzerland. Moreover by 1986 Reagan wants to increase the defense budget to a staggering $374.3 billion, or more than double this year's level.

The President now seems likely to get most of what he wants. Last week Democrats in the House of Representatives proposed their own version of the 1982 budget, but it cut defense expenditures by only $4.3 billion. Even those minor reductions are unlikely to remain in the final House bill. In the Republican-dominated Senate, the Budget Committee last week approved spending even more on defense in fiscal 1982 than the President had requested.

The full impact of the new Pentagon spending, however, will not be felt for several years. Military expenditures in peacetime always involve long lead times because of the problems involved with developing new weapons and starting up production facilities. Executives at General Electric's aircraft engine division in Lynn, Mass., do not expect to receive big payoffs from the Reagan spending before 1984 or 1985. The Army, for example, wants more of GE's T-700 engines for its Black Hawk helicopters, but it will be at least a year before any additional machines can be produced. Said one company executive: "You know it's not like making more toasters or light bulbs."

The biggest share of the new military orders will go to the giant aerospace and shipbuilding companies. Some of the major gainers from the Reagan buildup:

McDonnell Douglas. This St. Louis-based aerospace manufacturer is now the second largest defense contractor, but it is likely to be the biggest winner from the new program. McDonnell Douglas currently supplies the Air Force with the F-15 Eagle fighter. The company has already delivered 600 F-15s to the Air Force for $7.2 billion and expects orders for 200 more at a cost of $2.4 billion. In partnership with Northrop, the firm has started production of the F/A-18 Hornet strike fighter. It expects to sell 1,377 of them to the Navy and Marine Corps at a total cost of $24 billion. McDonnell Douglas is also cooperating with British Aerospace to produce for the Marines a vertical short-takeoff and -landing fighter known as the AV-8B. Orders could reach 336 for a total cost of $3.4 billion. In addition, the Reagan budget provided $482 million to buy eight KC-10 military cargo planes, the military version of the company's DC-10. Carter's defense spending program for 1982 had wiped out those sales.

General Dynamics. Currently the Pentagon's largest supplier, General Dynamics expects to sell 1,388 new F-16 fighter planes to the Air Force over the next ten years. Known as the Fighting Falcon, this is a versatile, lightweight fighter, which is also capable of launching land and sea attacks; the F-15 is designed primarily for air-to-air combat. General Dynamics' Electric Boat Division in Groton, Conn., makes the SSN 688 nuclear-fueled attack submarines as well as the trouble-plagued Trident missile-launching subs. The Navy has ordered eight Tridents, and cost overruns have now pushed the price to more than $1.2 billion each. The company also has contracts for 48 sea-launched Tomahawk cruise missiles at a total cost of about $96 million.

Tenneco. Plans to increase the Navy's fleet of major combat vessels from 450 to 600 by the end of the decade have pumped new life into Tenneco's shipyard in Newport News, Va. The labor force has swelled by 3,000, to nearly 25,000, over the past two years, and $100 million has been invested to expand the capacity of the 95-year-old facility. Tenneco has a $1.2 billion contract to build a fourth 1,092-ft.-long nuclear carrier for delivery in 1987. A fifth carrier may also be built as part of the Reagan program. Last month the Navy awarded a $1 billion contract to Tenneco for the construction of three SSN 688 nuclear submarines, after a bitter dispute with General Dynamics over the quality of workmanship and cost overruns at the Groton plant.

Beyond the flashy big-ticket items, defense dollars will be trickling down to lesser-known contractors. For example, Raymond Tower, the president of Chicago's FMC Corp., told defense industry analysts last week that he expects his company's military sales to double in the next two years to about $1.2 billion. FMC last month won a $102.5 million order for 1,002 armored personnel carriers equipped with single 50-cal. machine guns. Money for the vehicles had been in Carter's defense budgets, but the company is now planning a more expensive second generation of troop carriers, known as infantry-fighting vehicles, that carry antitank missiles and are capable of nighttime fighting. Total value of the contract: $400 million.

The biggest single item in Reagan's 1982 defense budget is $2.4 billion for development of the MX missile, the new mobile intercontinental ballistic weapon. Prime contractors include Martin Marietta, TRW, Rockwell International and Boeing. Construction has so far been delayed because the Reagan Administration wants to review whether the weapon should be based on land, in submarines or, incredibly, in dirigibles.

The largest new weapons system in the Reagan defense plan will be the $25 billion program to develop and build a new manned bomber to replace the vintage B-52s. Three and a half years ago, President Carter killed plans for such a plane, when he scrapped the B1, which was being built by Rockwell International. But the company will be back in the bidding for the new bomber with a modified design of the B1, now renamed the LRCA for Long Range Combat Aircraft. The Air Force is also considering a stretched version of the General Dynamics FB-111, a swing-wing bomber that can fly at twice the speed of sound and would cost approximately half as much as the B1.

The surge in new defense contracts will place a heavy strain on an industry that has been coasting along in second gear since the end of the Viet Nam War. Most companies cut payrolls sharply during the late '70s, and they now face shortages of both experienced aerospace engineers and blue-collar employees, including skilled production-line workers and tool-and diemakers. Says Hugh Johnson, vice president of First Albany Corp., a New York brokerage firm specializing in the defense industry: "Labor is going to be a real problem. Conservatively, the shortage of engineers ranges between 15% and 20%."

Even though contractors are spiritedly jousting for new contracts, manufacturing facilities will be strained to meet demand. A House Armed Services Committee report last year concluded that the "defense industrial base has deteriorated and is in danger of further deterioration in coming years." It warned that without the addition of new facilities, the U.S. will be "attempting the impossible: the re-establishment of a first-rate military force on a second-rate industrial base." John Richardson, president of Hughes Aircraft, admits: "The defense industry will be hard pressed because of shortages of critical materials and a declining network of industry suppliers."

Many economists have long considered defense spending inflationary because it increases incomes and demand in the economy without enlarging the supply of goods and services. Military expenditures also absorb capital investment that might have been used to increase productivity in other areas of the economy. The Viet Nam War, for example, is generally blamed for starting the current 15-year-long bout with inflation.

Budget Director David Stockman insists, however, there will be no repetition of that this time. He argues that the outbreak of inflation in the 1960s was caused by the combination of Great Society spending programs, Viet Nam War expenditures and the absence of a tax increase. As long as other Government spending is sharply reduced, Stockman maintains, the increased Pentagon expenditures should not add to price problems.

Economists generally agree that the Reagan defense buildup should not necessarily cause more inflation. Says Joseph Pechman, director of economic studies at the Brookings Institution: "Defense spending does not automatically add to inflationary pressures. Buying a weapons system is not economically different from buying a dam or paying somebody to teach on an Indian reservation." But after the Viet Nam experience, skeptics will be watching closely for any signs of added inflation from the new military buildup. --By Alexander Taylor.

Reported by Barry Hillenbrand/Boston and Joseph J. Kane/Los Angeles

With reporting by Barry Hillenbrand/Boston, Joseph J. Kane/Los Angeles

This file is automatically generated by a robot program, so viewer discretion is required.