Little fallout from Asia Defense companies say the crisis is barely crimping sales

Products are popular

Washington planning to help keep military deals alive

Defense industry

January 25, 1998|By Greg Schneider | Greg Schneider,SUN STAFF

If a homeowner gets into a financial crunch, that shiny new Lexus might not seem like such a pressing need anymore.

The economically troubled nations of Asia are facing a similar dilemma when it comes to the U.S. military gear they were planning to buy.

Several have announced plans to slow down a handful of weapons purchases, and U.S. Defense Secretary William S. Cohen acknowledged concern about the situation during his recent two-week visit to the region.

Defense companies, though, are slow to sound the alarm about a situation that is still developing.

Maryland's biggest participants, Lockheed Martin Corp. in Bethesda and the Electronic Sensors & Systems Division of Northrop Grumman in Linthicum, say they expect little direct harm from the Asian situation.

"We're inherently suspicious that this isn't good, but so far it doesn't look as bad as it might," said Joel L. Johnson, international vice president of the Aerospace Industries Association, a trade group representing the two Maryland companies and almost 50 more of the country's biggest military contractors.

Two factors appear to be working in the companies' favor, experts say: the possibility that the economic crisis won't go much further, and the widespread desire to buy U.S. military products.

So far, only a few business deals have been crimped by Asia's money woes.

Thailand wants to renegotiate the $400 million purchase of eight Boeing F/A-18 fighter planes, South Korea will delay buying four AWACS- radar planes -- also built by Boeing -- and Malaysia is rethinking plans to buy about $500 million worth of weapons systems.

But even those cases are more a matter of ironing out financing than scrapping the contracts.

"I don't think these countries' desire to have the systems has changed, simply their capacity to pay for them right now has changed. It remains to be seen what will be worked out," said William Reinsch, undersecretary for export administration in the U.S. Commerce Department.

The word from Cohen

Cohen, in a joint appearance with Malaysia's deputy prime minister Jan. 12, said the U.S. government will do all it can to keep the deals alive.

"Obviously we are interested in helping these countries that are experiencing difficulties right now also deal with their security concerns by either stretching out, or finding some other method of payment or some deferral of payments to accomplish that," Cohen said.

The government has several reasons to prevent such military sales from falling through. Defense contractors need overseas markets so they can expand during a peaceful time in which Pentagon spending is on the decline.

International competition

Not only does the global arms trade help companies preserve their politically powerful jobs base, but it also allows them to charge lower prices to the Pentagon.

Other big weapons makers -- notably Russia and the European Union -- also have dived into the post-Cold War arms bazaar, but the United States has managed to grab more than half the market.

Asia is a valuable but not yet dominant part of that market, Johnson said.

While the dollar value of military sales to the region continues to rise, Asia's percentage of overall U.S. arms exports has held steady at roughly 20 percent to 25 percent for more than a decade, he said.

$16 billion vs. $45 billion

U.S. companies expect to export weapons worth a total of about $16 billion this year.

By contrast, the Pentagon will spend about $45 billion for weapons systems.

Now that Asia has slowed its pace of arms buying, U.S. companies will look elsewhere for more immediate foreign customers, said Reinsch, the Commerce official. Top candidates: Poland, Hungary and the Czech Republic -- the new members of NATO.

"We weren't counting on Asia for our core growth that heavily. Some, but not that heavily," said Lockheed Martin Chairman Norman R. Augustine in a recent interview.

Only about 5 percent of the company's annual sales are tied to hTC business in Asia, said Keith Mordoff, who handles international communications for Lockheed Martin.

Northrop Grumman builds about 40 percent of the F/A-18 fighter jet that Thailand is struggling to buy, but the local ESSD division makes radars and had no programs affected last year by the turmoil in Asia, a spokesman said.

Too early to tell

"We're watching economic developments in the region closely at this time," said ESSD spokesman Jack Martin.

"It's too early to assess what impact, if any, the current situation in Asia might have on our division's business in the region."

Some experts think that Asian countries will have their houses in order relatively quickly and resume their arsenal shopping.

Vance D. Coffman, chief executive of Lockheed Martin, said recently that his staff projects a one- to two-year "interval" before things turn up again.

One industry official pointed out that Asia's three biggest arms customers are in good position to keep on buying.

Japan's defense budget was declining anyway, but no big programs -- such as the F-2 fighter plane being built with Lockheed Martin -- are known to be in jeopardy.

Taiwan has sent no distress signals, the official said, and South Korea has begun political and economic change that could signal a quick turnaround.

"I don't see that much impact," said analyst Paul Nisbet of JSA Research Inc.

He said he is confident the slowdown won't spread much beyond the handful of programs already announced.

Guarded approach

Reinsch said the Commerce Department is taking a guarded approach to the situation.

His export administration bureau helps defense companies develop overseas markets, but it isn't putting any pressure on Asia these days, he said.

"Really, the only right thing to do is to try to change the economics of the region," he said.

"If you can stabilize, if they start to grow, if they can restore their economies, then the sales will follow."

Pub Date: 1/25/98

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