Defense to Give New Life to Tech Industry

The military buildup, just beginning in the wake of the terrorist attacks Sept. 11, is going to be bigger than most people think. Indeed, it could be comparable to the great defense buildups of past decades--during the Cold War, the Vietnam War and the Reagan years--that set a direction for the whole U.S. economy.

The defense budget for fiscal 2002, which begins Monday, already includes added funds authorized last year. Now more additions are being made for the war on terrorism. That could take defense spending to $360 billion in fiscal 2002, up 16% from the previous year, and on to $400 billion in 2003.

Investment analysts, seeing congressional eagerness for beefing up U.S. military capabilities, predict the defense budget will hit $500 billion annually by 2005.

But this surge in spending will be different in many ways from traditional military buildups, just as the war on terrorism will be different from past wars--as Defense Secretary Donald Rumsfeld and military leaders have been telling the nation.

The war on terrorism could well boost employment for software and electronic engineers and other high-tech workers who are suddenly in the job market after the collapse of the dot-com boom.

That’s because spending will concentrate as never before on “network-centric� warfare--using weapons systems that employ sensors, lasers, optical scanners, data networks and other communications tools to identify and attack targets, all in a single motion.

Orders will rise for cruise missiles, air defense radar systems and reconnaissance aircraft, particularly Global Hawk pilotless planes flown by computer.

“The rise of network-centric warfare stems from the enormous explosion of the digital environment in the last decade. It uses much more software as a critical element,� says Kent Kresa, chairman of Northrop Grumman Corp., a company that in recent years has staked its future on defense electronics and information technology. Northrop Grumman is developing the Global Hawk.

Traditional planes, tanks and ships also will be ordered in the new buildup. The F-22 fighter and the Joint Strike Fighter, on which teams led by Lockheed Martin Corp. and by Boeing Co. are competing, will obtain funding.

“Both F-22 and the Joint Strike Fighter may get funding because the momentum is running so strong in Congress to strengthen the defense system,� says Robert Paulson, head of Aerostar Capital, an investment firm working with defense subcontractors.

“Lightweight armored vehicles will be ordered for the new military, which will rely on small mobile combat units,� says Pierre Chao, defense analyst of Credit Suisse First Boston.

Transport aircraft, such as the C-17 and C-130, and fast maneuverable ships will be ordered. “The reconnaissance plane that went down on Hainan Island will be upgraded and renewed,� says Loren Thompson, managing director of the Lexington Institute, a defense research organization.

The new military spending will be one part of a broad effort to combat terrorism, and to expand the U.S. role as world policeman. “Orders may go directly to Silicon Valley companies for high-tech security systems,� says Jon Kutler, head of Quarterdeck Investment Partners.

Outlays for the military could recall the early 1980s under President Reagan, when defense spending rose to 6.4% of the gross domestic product--the total value of goods and services in the economy. The defense budget at present is less than 3% of a much larger GDP. In this buildup, spending will rise to 4% of GDP, experts say--pushing spending to about $500 billion in the next few years.

But will it really boost the economy or drag it down? That is open to debate. Many economists and Wall Street types argue that defense spending is a “dead weight� because it uses resources that might be better utilized to create wealth in the civilian economy.

Critics of defense spending note that in the ‘90s, with the Cold War over and defense budgets down, the U.S. economy unleashed a torrent of innovation and enjoyed extraordinary growth and productivity.

Yet other economists and experts look at the role of defense spending since World War II, in developing jet aircraft, integrated circuits, lasers, satellite communications and the Internet itself. Foundations of the ‘90s boom lay in defense-financed research, these experts maintain.

Since before World War II, defense spending played a central role in developing the economy of Southern California.

“Dead weight is totally wrong,� says Kresa, who worked in the Pentagon’s Advanced Research Projects Agency before joining Northrop in 1975. “It is a stimulus to the economy. We have requirements today to retain and gainfully employ people who are unemployed because of downturns in other sectors of the economy.

“Defense spending has been an economic engine in America in the past and will be again.�

It is an interesting debate but somewhat beside the point at the moment. The U.S. has been attacked by terrorists and the nation’s political leadership in the White House and Congress has decided it must beef up military capabilities.

California, especially Los Angeles and neighboring counties, will benefit particularly from the new buildup. It is an irony that an industry presumed dead in the late 1990s and expected to be supplanted by commercial technology companies in Los Angeles will once again become a force--while the dot-coms have been swept away.

Software engineers already were being hired by the thousands by Boeing’s space division, based in Seal Beach, for a new spy satellite project. And Raytheon, which has extensive operations in El Segundo and in Goleta in Santa Barbara County, was hiring 2,000 software engineers for new work on radars.

Palmdale, site of Lockheed Martin’s Skunk Works research and development operations and of production of Northrop Grumman’s Global Hawk, will see a boost.

Boeing, in both its space division, in satellite work and in the former McDonnell Douglas operation in Long Beach, will see new and expanded contracts.

TRW Inc. in Redondo Beach and elsewhere in the area will continue to develop sensors and spy satellites under classified contracts. The company is widely regarded as the leader in high-powered lasers.

It’s notable that a lot of defense work will be concentrated in Southern California even though most of the giant contractors--Boeing, Lockheed Martin, Raytheon--have their headquarters in other parts of the country.

Rising defense spending is not new. Pentagon budgets have increased since 1998 because equipment and weapons systems that had been used in the 1990s in Bosnia and Kosovo needed replacement and upgrading.

Military strategy also was due for an overhaul after some disasters in the 1990s, such as the failed U.S. mission in Somalia in 1993. Military leaders were determined to avoid such failures in the future.

But then came the terrorist attacks Sept. 11. The world changed and so did the magnitude of planned defense spending.

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James Flanigan can be reached at [email protected]