Boeing Seeing Domestic Defense Business Problems

Boeing (BA) is starting to understand that the American defense market may be worse in the next few years. At a recent forum on the defense industry the company’s Vice President of Business Development, Christopher Raymond, discussed how the company is looking at overseas markets to make up for the expected down turn in domestic business.

Boeing has already made major efforts to sell F/A-18 aircraft overseas with submissions of bids to India and Greece for their new fighter programs. Unfortunately they are in competition with Lockheed Martin’s F-35 Joint Strike Fighter (JSF), SAAB, Eurofighter and Rafael for a limited number of contracts. Most of the NATO countries are turning to the JSF to replace their F-16 aircraft due to standardization issues. The F-35 like the successful F-16 will see part and assembly production occurring in many of those countries.

Boeing believes that its commercial products help it with establishing relationships with the foreign customers. They often have a large presence in those countries to support their sales and the maintenance of their aircraft. This may allow the company an ability to provide offsets with these products over military ones.

Many of the larger foriegn buyers are requiring offsets either connected directly to the awarded contract or to their economy in general. Both India and Brazil are looking at significant investment from whomever wins their new fighter order. They do allow however the ability to manufacture the aircraft overseas which aids in speedy fulfillment of the order while establishing an assembly or full production plant in the country would take several months or years.

Boeing is also starting to understand that shortages of major new programs in the United States be they space or aviation related will cause work force problems. They cannot attract a new, younger employee without new work. The existing contracts keep current employees going but do not add growth. Without the new programs being won they cannot really increase their workforce especially with entry level engineers and scientists. Those are the people who will provide future breakthroughs and new ideas. If the company cannot offer challenges or promotion then they will go work elsewhere.

The biggest concern with the U.S. defense budget is that not only is it cut so much that new programs don’t start but that even existing programs and systems are not fully funded. This is what happened in the Seventies and the U.S. military saw an erosion of readiness and capability as what equipment they had were not used regularly let alone upgraded or replaced. This situation also will affect the defense contractors. There will be little work for development and maintenance of existing systems. They would see reductions in capability and work force as well.

In the world’s current economic and competitive state that capability may not be recoverable. There has to be some kind of investment in the U.S.’s industrial base overall. One way to keep this investment up is to sell systems overseas when the domestic market won’t support it. It will have to be seen if Boeing and the other large defense contractors can do this.