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 July 2006 

Lawrence P. Farrell Jr.Misconceptions About the Defense Industry

July 2006

By Lawrence P. Farrell Jr.

The defense industry is probably one the least understood corporate sectors in the United States. Yet it is frequently vilified. Ask most Americans what comes to mind when they think about the nation’s industrial base and you’re likely to hear about $600 toilet seats, $400 hammers, and all-around war profiteering.

Many also will cite former President Dwight Eisenhower’s famous words of advice: “We must guard against the acquisition … of unwarranted influence by the military industrial complex.” In that 1961 speech, Eisenhower also said, “We can no longer risk improvisation of national defense.” We also must remember that, back then, defense was much larger that most other industries, which Eisenhower noted in his speech: “We annually spend on military security more than the net income of all United States corporations.”

Most Americans tend to regard defense industry as a juggernaut, while in fact it is now relatively small, when compared to other corporate sectors. The top 10 defense contractors, for example, have a market capitalization in the range of $170 billion. Wal-Mart’s market cap alone is $196 billion, and Microsoft’s is $224 billion, while Exxon Mobile’s is $ 356 billion.

Also profit margins in the defense industry are puny compared to those in the commercial sector. Compare the profits as a percentage of revenue for Pfizer, Boeing and Lockheed Martin in 2004 -- Pfizer, 21.5 percent; Boeing and Lockheed Martin, 3.6 percent. This is only partially explained by the fact that some legitimate expenses borne by defense are unallowable costs and thus not reimbursable by the government.

Despite recent scandals — such as procurement violations by a former Air Force acquisitions official and a series of critical reports by the Government Accountability Office and the Defense Department inspector general — defense industry generally can claim a better ethics track record than the non-defense sector. Witness the colossal scandals that engulfed Enron, WorldCom, and several other major corporations.

Defense firms in recent years have made a major push to prevent unethical conduct and to ensure company employees understand what’s acceptable and what’s not acceptable under the rules of government ethics. Companies have instituted in-house ethics training and have put top-down emphasis on self-regulation. Organizations such as the Defense Industry Initiative and our NDIA Ethics Committee are actively engaged. They report growing interest in ethics programs, and note that major defense corporations have appointed senior ethics officers.

But that still is not enough to establish and maintain the credibility of the industry vis-à-vis Congress and the American public. Many lawmakers clearly understand the role of the industry, even though politics, in most cases, tends to cloud honest debate.

It would be fair to say that the average citizen probably is not aware of how critical the industry is to the ability of the Defense Department and the military services to do their jobs. While the commonly known functions of defense contractors are to build airplanes, ships, tanks and weapons, the industry today performs a much broader role.

On the battlefield, anywhere our troops deploy, contractors are there — to fix vehicles, maintain computer systems, operate mess halls, and provide any number of support functions. Whatever the customer needs done, the contractors are there to do it, even in dangerous combat zones.

We need to do a better job of dealing with misleading accounts. For example, the infamous $600 toilet seat was in fact a structural assembly, specifically designed to be incorporated into an aircraft to support a toilet seat. This poorly reported story badly mischaracterized the nature of the defense business, which is to respond to needs as they arise. Rapidly evolving defense needs frequently require extensive engineering to respond to the smallest need, a process which tends to be expensive. Commercial products are “off the shelf.” The defense industry is constantly evolving systems to meet specific and demanding requirements of the combat environment.

Let us recall a time in U.S. history when the nation had no defense industry. In World War I, our aviators flew French- and British-made warplanes. Similarly, the American Army fought with French and British artillery systems. The only things we took to war that were truly American-made were the Springfield rifles and our fighting spirits.

It was only after that conflict that steps were taken by NDIA’s predecessor and other like-minded organizations to advocate what truly emerged as an arsenal for democracy. Despite efforts to dismantle the defense industrial base after the war, it became the engine that throttled the erstwhile Soviet Union and the technological innovator that made possible many of the marvels that mark our society, today.

We need to do a better job of telling the industry’s story to the public at large. It not only provides our military with the best systems in the world, the defense industrial base also continues to make tangible contributions to all our citizens. The necessity of telling the story well will be critically important with the coming resource crunch, when the Defense Department will have to justify acquisitions and force structure costs against calls for reallocation of resources to other national needs.

It will be a job for all of us and must be done well. The alternative is unacceptable.

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