Cutbacks Causing Crisis, Defense Industry Warns

Warning that the American public has yet to feel the worst effects of defense spending cutbacks, Rep. Dave McCurdy (D-Okla.) on Friday opened the first of a series of congressional hearings in Los Angeles that are looking into the future of the defense industry.

Executives of major contractors and some smaller subcontractors in Los Angeles testified that the defense industry is under financial duress, which they contended was the result of a series of punitive regulatory steps by the Pentagon in recent years.

Although the issues were held to be critical to national security, only nine people attended the hearing.

Kent M. Black, executive vice president at Rockwell International, testified that the defense industry is facing a crisis in which its profitability has eroded and its ability to modernize its plants has diminished.

Rep. Mel Levine (D-Santa Monica) asserted that the Bush Administration has undermined U.S. industrial capabilities by allowing the sale of U.S. defense firms to foreign corporations. He cited the case of the purchase by the Japanese firm Nippon Sanso of Semi-Gas, an electronics supplier that has developed special electronics capabilities with a Pentagon subsidy.

Excessive federal regulation has inflated the industry’s costs, he said. In Rockwell’s electronics business, for example, administration accounts for 3% of all costs in the commercial sector but 5.5% to 6% in the defense sector.

Although a downsizing of the industry is inevitable, Black and the other industry representatives said the federal government must be careful to preserve technology essential to the nation’s security, even while spending cuts are made.

To help defense firms maintain the world’s best weapons technology, Black said, the Pentagon should pay for all of the independent research and development costs at prime contractors. At present, an industrywide ceiling of $5.6 billion is maintained.

Among other key reforms, the executives called for the government to increase progress payments, which are periodic payments made during the life of a contract. On July 1, the rate increased to 85%, but that is still less than the historical rate. They also called for tax relief, citing the loss of tax breaks allowing them to forgo tax payments on federal contracts until they were completed.