Defense contractors hope to profit from surges in demand for war materiel WAR IN THE GULF

January 27, 1991|By Graeme Browning

War seems to be proving very, very good to the makers o what the defense industry calls "expendables."

Whenever a defense contractor speeds up, or "surges," production of an expensive item such as the Patriot missile to replace those consumed in the war, for example, overtime and other charges boost the per-item cost as much as 10 percent to 20 percent, industry analysts say.

Whether those benefits will continue in the long term, however, or whether they will spread to the makers of tanks, planes and other military hardware, is more problematic.

The Pentagon has yet to release its own estimate of the cost of fighting Iraq, but industry sources, speaking on the condition of anonymity, provided prices ranging from $34,000 for the Paveway "smart bomb" to $1.01 million for a Tomahawk cruise missile.

With the exception of Raytheon Co. and Martin Marietta Corp., which manufactures some components and the launchers for the Patriot, contractors refuse to say whether they have received new orders for their sophisticated munitions since the war began.

"Perhaps in normal times we'd talk about those things, but under the circumstances we'd prefer to refer those questions to the Department of Defense," said a spokeswoman for Texas Instruments Inc., maker of the Paveway III laser-guided bomb.

But analysts say it's likely that the U.S. government has asked manufacturers to add extra workers and speed up their assembly lines, which the defense industry calls "surging" production.

Government contracts typically call for the production of a certain number of items over a period of years, with a specified number to be delivered each year, analysts say.

Most of the armaments being used in Operation Desert Storm -- from missiles to the 20mm missile-killing rounds made especially for the Phalanx anti-missile gun on Navy ships -- are being made under contracts concluded long before the war began, the analysts say.

"The government would say, for example, to a Raytheon, 'We have 500 Patriot missiles scheduled for delivery over the next three years. Now we want to accelerate that schedule and get those 500 missiles delivered in six months,' " said Donald M. Coakley Jr., a partner with the accounting firm Stegman & Co. who specializes in government contracts.

In fact, right after Iraq invaded Kuwait in August, the Army asked Raytheon to speed up delivery of an order of Patriot missiles with modified software that was not scheduled to arrive until early 1991, a spokeswoman for the Lexington, Mass.-based company said.

Raytheon began running 24-hour shifts in September and delivered the missiles four months ahead of time, she said.

Makers of high-technology armaments aren't the only ones getting speed-up requests. "Things that get consumed -- food, boots, gas masks, hospital supplies -- are all in a real boom now," said Terry Miller, an analyst with Government Sales Consultants Inc. of Great Falls, Va.

Many of the contracts for those items were probably signed after the outbreak of war, under the national-emergency exception to the government's rules on competitive bidding, Mr. Miller said.

Except in an emergency, government agencies must advertise their needs and give suppliers 30 days to respond. "But if you're in a sky-about-to-fall spot, and somebody like the deputy secretary of defense says, 'We've got to get X in a week,' then you go," Mr. Miller said.

The cost of Desert Storm is already becoming a matter for spirited congressional debate.

Representative Leon E. Panetta, D-Calif., chairman of the House Budget Committee, has estimated that the war in the gulf could cost the United States $500 million to $750 million daily. Federal Reserve Chairman Alan Greenspan puts the figure at "somewhere under $1 billion" daily.

In any case, accelerated production of military goods will add to those costs, analysts say.

When they speed up production, manufacturers usually have to add extra shifts, keep plants running day and night and buy components on the open market, which is far more expensive than buying them in bulk from suppliers, Mr. Coakley said.

In that circumstance, it is standard practice in the defense industry to increase the per-item price to the government to cover the extra costs, analysts say. "You pay a premium when you want something in a hurry," said Gordon Adams, director of the Defense Budget Project.

Analysts estimate extra costs for accelerated production at 10 percent to 20 percent.

The Army "does pick up overtime costs" for production of the Patriot, "but there's no additional funding for the sake of acceleratedproduction," said Chip Manor, a spokesman for Martin Marietta. Mr. Manor said he did not know what the overtime costs totaled.

Texas Instruments Inc., Raytheon, General Dynamics Corp. and Olin Corp., which makes ammunition for the Phalanx gun, declined to discuss the matter.

Even though expendable munitions and supplies are being consumed rapidly, it is too early to tell whether large new contracts will be signed when current contracts run out, analysts said.

The number of Patriot missiles the military had at the beginning ++ of the war, for example, will be a key factor in determining whether more will be ordered. Defense officials might also decide to replace used materiel with newer models or not to replace it at all.

"The war won't have much effect on hard goods," Mr. Miller said. "We have so many M-1 tanks that even if thousands get destroyed in the war, they probably won't be rebuilt."

Mr. Adams of the Defense Budget Project added, "This is a come-as-you-are war. You only get to fight with what you've got or what you can surge in time, like missiles. By the time we'd get a new bunch of M-1s built, this war will have been over for a year."

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