UPDATE 1-Pentagon vows to keep defense industry healthy
* Consolidation likely in second, third tiers
* Pentagon says further cuts would "emasculate" industry
* Industry cost-cutting to be rewarded "any way we can"
By Andrea Shalal-Esa
NEW YORK, Dec 1 (Reuters) - Further massive cuts in U.S. defense spending triggered by the failure of lawmakers to cut deficits would emasculate the U.S. defense industrial base, a senior Pentagon official said on Thursday.
The Defense Department was already doing its share to reduce federal deficits and Congress should redouble its efforts to solve the nation's fiscal crisis, Brett Lambert, U.S. deputy assistant defense secretary for manufacturing and industrial base policy, told an investor conference.
"We cannot have a strong defense without a strong national economy," Lambert said. "But we will not solve this problem on the back of the Defense Department or on the defense industry."
Lambert is the latest senior Pentagon official to speak out against the dramatic consequences of $600 billion in additional defense spending cuts triggered after a bipartisan congressional committee last week failed to strike a deal to cut $1.2 trillion in federal spending by its Nov. 23 deadline.
The committee's failure triggered a process called sequestration, which mandates spending cuts across the government, including about $600 billion to be cut across the board at the Pentagon over the next 10 years.
Those cuts are on top of $489 billion the Pentagon is already budgeting for over the next decade. Republican lawmakers have said they hope to reverse the cuts but that could prove difficult until after the 2012 presidential election.
"When I think about it from an industrial base point of view, I think about sequestration more as fiscal castration. It truly will emasculate the industrial base ... if we implemented it as it exists," Lambert told a conference hosted by Credit Suisse and Aviation Week.
As currently structured, the measure would force defense officials to cut spending on procurement as well as research and development by about 27 percent, Lambert said.
Lambert reiterated that the Pentagon's fiscal 2013 budget plan, which is being reviewed by Defense Secretary Leon Panetta this week, did not include the additional cuts required under sequestration.
Lambert declined to say if the cuts would result in significant program cancellations, but said his office was being asked to review program decisions from the viewpoint of the health of the industrial base.
In general, he said, declining budgets were likely to accelerate merger and acquisition activity in the sector, especially among second- and third-tier companies, he said.
The Pentagon welcomed that level of consolidation, but felt the balance in the top tiers of industry was "about right."
While there were no concrete rules, it would "take some convincing" to approve any mergers on that level, Lambert said.
He also reiterated that the Pentagon was not out to squeeze industry profit margins and would reward cost-cutting measures "any way we can."
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