Arms makers eye exports to offset Pentagon cuts

WASHINGTON Mon Sep 5, 2011 11:26am EDT

Five U.S. Air Force F-16 ''Fighting Falcon'' jets fly in echelon formation over the U.S. en route to an exercise in this undated file photograph. REUTERS/USAF/Staff Sgt. Greg L. Davis/Handout/Files

Five U.S. Air Force F-16 ''Fighting Falcon'' jets fly in echelon formation over the U.S. en route to an exercise in this undated file photograph.

Credit: Reuters/USAF/Staff Sgt. Greg L. Davis/Handout/Files

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WASHINGTON (Reuters) - Lockheed Martin Corp's (LMT.N) political backers are stepping up a drive to meet Taiwan's request for 66 new F-16 fighter jets, a sale that would help the Pentagon's largest supplier weather possible cuts to its big-ticket weapons programs.

Such a sale, valued at more than $8 billion, would anger China, which deems self-ruled Taiwan a wayward province subject to unification by force if necessary.

Arms sales will be among the subjects explored at the annual Reuters Aerospace and Defense Summit in Washington September 6-8. Company executives, Pentagon officials and analysts will discuss projected cuts in U.S. military spending that nearly doubled in the decade after the September 11, 2001, attacks.

Notwithstanding the possible harm to U.S.-China ties, nearly half of the 100 U.S. senators and 181 of the 435 members of the House of Representatives have urged President Barack Obama to move quickly to meet Taiwan's F-16 request, informally pending since 2006.

"We are deeply concerned that further delay of the decision to sell F-16s to Taiwan could result in closure of the F-16 production line," 45 senators said in a May 26 letter to Obama.

Economic arguments in favor of sensitive arms sales may gain traction as the U.S. jobless rate is stuck above 9 percent and campaigning for the 2012 elections is starting in earnest.

The Obama administration has begun consulting Congress on plans to sell Global Hawk spy planes made by Northrop Grumman (NOC.N) to South Korea, Reuters reported this week. This would require a waiver of the Missile Technology Control Regime, or MTCR, a voluntary arms control pact involving at least 34 countries.

Then-Defense Secretary Robert Gates said in October 2008 that the United States was "very sympathetic" to South Korea's interest in the high-flying drone but that there were MTCR issues to overcome.

The Global Hawk's range and payload capacity subject it to the pact created in 1987 to curb the spread of unmanned systems that could be used to deliver weapons of mass destruction.

The State Department declined to comment on a possible MTCR waiver pending formal notification of Congress of any such proposed Global Hawk sale.

Northrop Grumman Chief Executive Wes Bush complained in an August 17 speech that export curbs on unmanned systems were harming U.S. industry without making the United States any safer.

"The good news," he said, "is that the Defense Department is promoting what is clearly the best export reform policy -- build higher walls around fewer things."

Arms sales to the Middle East, India and East Asia have always been freighted with diplomatic and political considerations, including maintaining balances of power.

Now they are increasingly important to U.S. and European arms makers preparing for security-related spending cuts sparked in part by an August 2 debt-ceiling deal between President Obama and Congress.

The Pentagon is trimming at least $350 billion from its previously projected spending through the next decade under that deal. Additional defense-related cuts of up to $600 billon are set to kick in if Congress fails by the end of the year to find at least $1.2 trillion more in deficit reduction over the same period -- a "doomsday mechanism," as current Defense Secretary Leon Panetta puts it.

Such cuts may mean there is not enough work to go around for Western firms, on top of a recent round of defense-related budget belt-tightening in Europe.

Foreign military sales are "clearly a way to grow to fill the revenue gap which is expected," said Tom Captain, head of global aerospace and defense business at professional services company Deloitte.

Boeing Co (BA.N), the Pentagon's No. 2 supplier by sales, is aiming to boost its defense, space and security-related sales toward 25 percent by 2015 from about 17 percent in 2010.

Defense unit Boeing Military Aircraft expects its foreign sales to account for as much as 40 percent of Boeing's total warplane sales by the end of next year, up from 25 percent in 2010, said Jeffrey Kohler, a Boeing vice president for business development.

TAIWAN FIGHTER

The Taiwan fighter-plane issue has been forced to a head in recent weeks by Senator John Cornyn, a Texas Republican on the Armed Services Committee.

Fort Worth, Texas, is home to the Lockheed Martin plant that assembles both the F-16 and the F-35 Joint Strike Fighter, the Pentagon's costliest program, projected at more than $382 billion for more than 2,440 aircraft over the next two decades.

Cornyn used a senatorial privilege this summer to hold up consideration of President Obama's choice of William Burns for deputy secretary of state, the State Department's No. 2 job.

In exchange, he obtained Secretary of State Hillary Clinton's promise to say by October 1 what if anything the administration plans to do to boost Taiwan's aging air force. Cornyn subsequently lifted his "hold" on Burns.

The Obama administration says no decision has been made yet on new F-16s for Taiwan. It has been mulling what it may view as a half-step -- an upgrade of some or all of Taiwan's 146 old F-16 A/B models that would include active electronically scanned array AESA radar built by either Northrop Grumman or Raytheon Co (RTN.N).

"The administration's decision will not be the final word there," Cornyn said last month after touring the production lines in Fort Worth. That facility, he said, represented about 15,000 jobs and a boon to the local economy.

Cornyn said he was weighing the possibility of mandating the sale of new F-16s to Taiwan, for instance as an amendment to the annual defense authorization bill expected to reach the Senate floor in October or November.

The senator has another point of leverage. He could put another "hold" on a top Obama nominee: Ashton Carter, the Pentagon's top arms buyer and Obama's choice to be the next deputy secretary of defense.

"We'll wait and see what the administration does, but I think we're not without fallback positions or other remedies," Cornyn told reporters in an August 23 teleconference.

He followed up the next day with a warning about Lockheed's F-35 program to Carter, who is preparing for a September 13 nomination hearing before the Senate Armed Services Committee.

"I strongly encourage you to step up your defense of this key program," he told Carter.

In a report commissioned by Lockheed Martin, the Perryman Group, a Waco, Texas, economic research and analysis firm, said in June that a Taiwan F-16 program would be "a notable source of economic stimulus" for the sputtering U.S. economy.

The project would generate $8.7 billion in output, almost $768 million in federal tax revenue and more than 87,660 "person-years" of employment, the report said. Laura Siebert, a Lockheed spokeswoman, disclosed that the report had been commissioned by Lockheed in response to a query from Reuters.

If the company does not get a new F-16 production order by the end of December, it will need to start notifying suppliers in a prelude to shutting down the line, she said.

(Reporting by Jim Wolf; Editing by Phil Berlowitz)

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