How would Hagel affect defense contractors?


Chuck Hagel, a Republican and former U.S. senator from Nebraska, has been nominated to succeed Defense Secretary Leon Panetta. (Chip Somodevilla/GETTY IMAGES)
January 13, 2013

As the defense industry braces for spending cuts, some are optimistic that the confirmation of former Sen. Chuck Hagel (R-Neb.) would ensure a defense secretary knowledgeable about both defense and the private sector.

Hagel is a Vietnam veteran and the founder of cellular telecommunications company Vanguard Cellular, which went public in the late 1980s and was eventually sold to AT&T. He left Vanguard in 1987, and later served as president of investment banking firm McCarthy & Co.

He “understands how businesses operate and how they’re incented to perform,” said Byron Callan, a director at Washington-based investment research firm Capital Alpha Partners. “That should be a positive factor.”

The industry has long been expecting cuts to defense spending, but remains concerned about implementation. The pending across-the-board cuts known as sequestration, for example, have been lambasted by contractors as too simplistic and failing to take strategy into account.

Other names rumored to be considered for the defense secretary position were Ashton Carter, the deputy defense secretary, and Michèle Flournoy, former undersecretary of defense for policy.

“The prevailing view in the defense industry is that Hagel was the best candidate for the job among the names being mentioned,” said defense industry consultant Loren Thompson. “Many industry executives felt that during the first Obama administration, some of the Pentagon policymakers lacked a real-world understanding of what their decisions meant.”

Hagel has served on the Defense Policy Board, which is meant to provide the defense secretary with independent advice on defense policy issues. He declined to be interviewed for this article.

Regardless of who heads the department, contractors are expecting reductions.

“Hagel was picked in part because he can be a partner with Obama in gradually downsizing the military system,” Thompson said. “The hopeful people in industry believe that it will be a balanced downsizing that doesn’t just target weapons.”

Still, some are skeptical that the selection bodes well for contractors. Roman Schweizer, an aerospace and defense policy analyst at Guggenheim Securities, said Hagel may take a tougher look at the way the Pentagon works.

“While he has deep roots in national security, foreign policy and defense, he’s not necessarily a quote unquote product of the system,” said Schweizer, noting he may not be as quick to agree with military leaders. “He may bring a ... more outsider perspective to what folks may try to push forward as conventional wisdom.”

Ultimately, it may be too soon to say. David J. Berteau, director of the international security program at the Center for Strategic and International Studies, said Hagel’s record provides little insight into his views on the defense industry.

“This is really a very hazy area,” he said. “The general sense of his public record is he doesn’t have a strong pattern one way or the other — either pro-industry or anti-industry ... I think what it says is he’ll deal with the issues on their merits.”

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