As defense contractors look overseas for sales to help them compensate for declining U.S. spending, some analysts question whether the foreign market will be as lucrative as companies hope.
In recent weeks, many of the nation’s largest defense companies talked about the importance of international sales as they reported their latest financial results.
Lockheed Martin’s Joint Strike Fighter program has “an increasing number of foreign military sales participants,” said Robert J. Stevens, the company’s chairman and chief executive, in a call with investors, while Jay L. Johnson, chairman and chief executive of General Dynamics, said the company is tracking vehicle competitions in Canada and the Middle East in the hopes that they will offset a decline in U.S. military vehicle sales.
At Northrop Grumman, Chief Financial Officer James F. Palmer said he expects foreign sales to provide an opportunity.
“We have to work through export control issues, but there is demand or interest in a number of our products across the portfolio,” he told investors. “And just logically, as U.S. defense budgets are constrained, it would seem that we would want to rely on our allies to do more of what we may have done in the past.”
But some are questioning how much other countries will be able to spend. Todd Harrison, a defense analyst with the Center for Strategic and Budgetary Assessments, said many foreign countries are facing their own budget problems.
“In previous instances when we were bringing down our defense budget, what we saw is that we were able to increase our foreign sales,” he said. “This time ... many of our traditional allies, particularly in Europe, are facing economic and fiscal constraints that are just as severe if not more severe than our own.”
Michael S. Lewis, director of equity research at Lazard Capital Markets, said his research has shown that 15 countries comprised about 84 percent of global military expenditures, based on 2010 data. The United States alone makes up about 45 percent of that spending.
“Based on the contraction in most of the developed countries’ defense budgets, we do not see ... the international demand filling the hole ... from the retrenchment in U.S. defense spending,” he said.
Harrison said contractors will be looking to countries that are building up their weapons supplies, like India or countries in the Middle East.
But even successful foreign sales may have limitations. In Lockheed’s recent deal to sell 42 of its F-35 Joint Strike Fighters to Japan, the contract requires that most of the aircraft be built in the Pacific nation in a new facility that is being planned now, according to the company.
While some U.S. contractors will see increased international sales, Lewis said there will likely be winners and losers.
“It’s going to be fiercely competitive and the U.S.-based companies will not just be competing against themselves,” Lewis added. “Everyone is going to be competing for this work.”
Still, defense companies will likely continue to promote plans of increased foreign sales, Harrison said.
“Obviously it wouldn’t be wise and the shareholders wouldn’t look at it kindly if [U.S. defense contractors] said their focus was still going to be on the U.S. Department of Defense,” he said. “They’ve got to be looking somewhere.”