Losing Contracts, Defense Firms Head Overseas

By Yochi J. Dreazen
Thursday, June 23, 2011 | 9:35 p.m.
America’s largest defense contractors, looking to offset coming Pentagon cutbacks, are stepping up their weapons sales in the Middle East, Asia, and other global hot spots.

Boeing, Raytheon, BAE Systems, and other defense giants now get about a quarter of their total revenues from overseas sales, up sharply from just a few years ago. On Wednesday, Raytheon signed a $1.7 billion deal to upgrade Saudi Arabia’s Patriot air and missile defense system.

The moves reflect both raw economics and geopolitical reality. The Obama administration has made no secret of its desire to reduce America’s defense spending, which has roughly doubled since 9/11. In February, the White House unveiled plans to slice $78 billion over the next five years. More recently, the administration said it wanted the Pentagon to cut an additional $400 billion over the next 12 years as part of a broad push to close the nation’s yawning budget gap.

Overseas, key U.S. allies have been sharply boosting their defense spending in response to perceived threats from their neighbors. In the Middle East, the United Arab Emirates and other oil-producing nations are building up their armed forces because of concerns about Iran’s nuclear program and support for Shiite political movements inside the Sunni-dominated states. In Asia, countries such as South Korea and Taiwan are seeking to buy advanced American-made armaments to counter China’s ongoing military buildup.

“Everyone is talking about the international market as a way of making up for the slack that we’re starting to see in the U.S. market,” Thomas Culligan, the CEO of Raytheon International, said in an interview. “When you see the country that represents half the world market start to slow down, you need to look for new opportunities, and those opportunities are offshore.”

Culligan, a former Air Force officer, said that many of Raytheon’s overseas customers want to buy his company’s products because of “a perception of a threat” from their neighbors. Earlier this year, Raytheon agreed to sell Saudi Arabia $475 million worth of equipment capable of turning conventional munitions into precision bombs that could be used against Iranian targets. In December 2008, Raytheon signed a mammoth $3.3 billion deal to provide the UAE with Patriot defensive systems. International sales accounted for 25 percent of the company’s total revenues in the first quarter of 2011, up 7 percent.

The deals are difficult to complete and can be deeply controversial. Any weapons sale to a foreign country requires congressional approval, and Israel’s political allies have regularly lobbied against selling arms to Saudi Arabia and other Arab nations.

Some of the larger pacts have also been clouded by instances of bribery and misconduct. Last year, BAE Systems paid $400 million in fines to end a long-running probe into allegations that it paid billions of dollars to Saudi officials over the past 20 years.

Still, the companies believe that overseas weapons sales are critical to their future well-being.

Dennis Muilenburg, Boeing’s president and chief executive officer, said in an interview that the company’s international business had increased from 7 percent of its total revenue five years ago to 17 percent in 2010, and he expects it to reach 25 percent by 2013. The company has signed recent deals to sell India billions of dollars worth of C-17 cargo planes and P-8 surveillance aircraft and Saudi Arabia tens of billions of dollars worth of F-15 fighter jets and Apache attack helicopters. Boeing’s Saudi sales are part of a planned $60 billion purchase by the kingdom, the largest overseas arms purchase in history.

“Our view is that we anticipate flat to declining defense budgets in the U.S. and Europe but growing defense budgets in the Middle East and Asia in particular,” Muilenburg said. “The international market is hugely important to us.”

The companies also argue that foreign sales have a direct effect on the size of their domestic workforces. Raytheon’s 2008 deal with the UAE restarted production of Patriot systems at a Massachusetts factory, averting layoffs there. Boeing had been planning to shut down a C-17 assembly line in California but will now keep the facility open because of the India sales.

“These kinds of deals help keep production going,” Culligan said.

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