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Summit News

Defense industry not cheering Gates' retirement

WASHINGTON (Reuters) - Defense industry executives once viewed U.S. Defense Secretary Robert Gates with apprehension. But now that he is flagging his retirement, some worry about the future once he is gone.

Many executives are still hesitant to speak of Gates’ departure at all. Others suggest that maybe he will not go -- at least not too soon -- despite his recent comments that he aims to step down in 2011.

“I think those who have made a job of predicting Secretary Gates’ next move have often been proven wrong, so I’m not going to put myself in that category,” Marion Blakey, president of the Aerospace Industries Association, told the annual Reuters Aerospace and Defense Summit, which ends on Thursday.

Gates, 66, is hardly a defense industry darling. But attitudes about the former CIA director have evolved since he took the helm of the Pentagon in 2006, moving to overhaul spending priorities he believed were rooted in Cold War logic instead of today’s counter-insurgency conflicts.

The sole cabinet holdover from the Bush administration, Gates axed many big-budget items, like the Air Force’s radar-evading F-22 “Raptor” and the Navy’s DDG-100 destroyer, in the first budget proposed by President Barack Obama.

Last year’s cuts shocked many in industry and even within the military, but Gates argued that the Pentagon needed a cultural shift away from outdated pricey weapons systems toward more practical arms to protect troops in Iraq and Afghanistan.

Gates has recently announced plans to fire contractors, shut down an entire military command and oust top brass as part of a self-imposed plan to save $100 billion in overhead over five years.

But -- and this is the part that industry says is key -- Gates aims to reinvest savings and keep growing the defense budget, albeit at a very modest rate.

"He has been a staunch supporter of stable and predictable growth," said Michael Strianese, chief executive of L-3 Communications Holdings Inc LLL.N.

That is a far better option than cuts in overall defense spending, an option supported by some lawmakers in Congress worried about the yawning U.S. budget deficit. European allies have already seen pronounced declines in defense spending, a trend Gates has encouraged them to correct.

Jim McAleese, a Virginia-based defense consultant, said industry executives initially saw Gates as the enemy, but were starting to realize that he and his efficiency drive may be their best allies in an uncertain budget environment.

"The efficiency initiatives are intended to free up resources," Northrop Grumman Corp NOC.N Chief Executive Wes Bush told the Reuters Summit.

Bush said he expected Northrop to benefit from Gates’ moves, adding they “will be a positive for the companies that are best aligned with where (Pentagon) services are going.”

Pentagon suppliers said they generally expect to remain profitable despite the belt-tightening, although some said profit margins -- already lower than those of other Fortune 500 companies -- could be squeezed in coming years.

What might happen after Gates leaves is a subject few executives bring up or appear eager to discuss. Most note that his reforms have broad support within the Obama administration and even Congress, at least for now. But that could change.

McAleese said his departure could make some programs more vulnerable to attacks by lawmakers.

Company executives also laud another big Gates initiative, reforming cumbersome export controls, a move that could free up once-restricted arms for sale to allies abroad.

"I see real advantages for U.S. industry as well as our company specifically," Lockheed Martin Corp LMT.N Chief Executive Robert Stevens told the Reuters Summit.

Northrop’s Bush said: “I certainly give a lot of credit to Secretary Gates for leading it, for driving it.”

Many of Gates’ initiatives are much more divisive, though.

One of his last, big gambles may be a standoff with Congress over a proposed second engine for the F-35 fighter jet. Gates opposes an alternative engine and says President Barack Obama will veto the massive fiscal 2011 spending package unless lawmakers strike it from the legislation.

His opposition to the alternative engine has been cheered by the main engine's manufacturer, Pratt & Whitney, which would naturally prefer not to split the order in half. Pratt is a unit of United Technologies Corp UTX.N.

“We hope that Secretary Gates stays in position until the issue gets resolved,” Pratt & Whitney President David Hess told Reuters. “His position’s been very clear.”

The timing of Gates’ departure is still a big question. His staff has played down his musings about retirement to Foreign Policy magazine. Industry does not see him as a lame duck.

The manufacturers of the proposed alternative engine, General Electric Co GE.N and Britain's Rolls Royce Group Plc RR.L, are not ready to discount Gates' influence.

“I think we’re going to continue to behave like we need to defend ourselves until we see what happens next,” Russell Sparks, vice president of military strategy at GE Aviation, said when asked about Gates’ retirement.

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