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Jun 29 2012

Won’t Someone Think of the Defense Contractors?

This website reports on a recent speech by the CEO of one of the world’s biggest defense contractors whining about the entirely mythical “sudden and serious cuts” that the sequestration deal, which almost certainly isn’t going to happen anyway, would make in defense spending.

Senior executives of major defense companies rarely seek publicity. They also seldom openly criticize their customer, the Department of Defense, or the organization that provides that customer with funds, the U.S. Congress. So it is noteworthy when Robert Stevens, the outgoing CEO of Lockheed Martin feels it necessary to publicly warn of the consequences of sequestration, not just for his company or the defense industry but for the U.S. military and the nation’s security…

The U.S. defense industry is one of the most heavily regulated sectors of the U.S. economy. Companies in this sector must abide not only by the rules and regulations that apply to all other businesses but the special contracting and reporting requirements imposed by Congress and the Pentagon. Walmart does not have to provide detailed cost data to its customers or certify the prices charged by its vendors but defense companies do. General Motor’s customers do not get to tell the company how to design cars, make changes to that design while the cars are going down the production line or, having signed a contract, decide to change the terms of the agreement or even cancel the order entirely just for that customer’s convenience. But the Department of Defense can.

For all this aggravation you might think that defense companies earn extraordinary profits. Sadly, such is not the case. The top 20 defense companies in terms of dollars on contract have an average 2011 profit margin of 2.85% and an operating margin of 6.22%. This compares to the Dow 30 average of an 11.64% profit margin and operating margin of 16.04%. Return on assets was 3.84% for the top 20 defense contractors and 10.95% for Dow 30 companies. Return on equity for defense contractors for 2011 was 21.01% and 22.41% for Dow companies. The total revenues of the top 100 defense companies from Pentagon contracts were less than total revenues for Walmart or Exxon alone.

The injustice of it all almost brings tears to your eyes, doesn’t it? Companies that get hundreds of billions of dollars from taxpayers actually have to file reports saying how that money is being spent! And they have to make their products the way the Pentagon tells them to make it! And they make so little money that it’s hardly worth it! Why, for the last decade they’ve only made close to $25 billion a year! Who can live on such a pittance? Maybe we can start a telethon or a bake sale to help support this terribly oppressed industry. Who’s with me?

20 comments

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  1. 1
    Loqi

    You know, you’re right. I’m going to head down to the local grocery store right now to pick up a missile or two. Then I’ll probably donate it to the local food shelf, since I’ve already got an abundance of missiles.

  2. 2
    dmcclean

    Wow, less than Walmart?

    And to think, those slackers only clothe, furnish, feed, medicate, diaper, feed, entertain, and feed a mere 20% of the country!*

    How can we possibly defend ourselves with only 11 carrier groups, 53 attack subs, and 18 missile subs? I mean, it might take 2 or even 3 of those missile subs to entirely obliterate one of our enemies and make the world unlivable for basically everyone! What if someone destroyed the other 15 or 16 before we noticed?

    *or something like that, you get my point

  3. 3
    MyaR

    EDITOR’S NOTE: The author, Lexington Institute CEO Loren Thompson, has acknowledged being a paid lobbyist on behalf of Lockheed Martin.

    But we should all listen to him and probably hold a bake sale.

  4. 4
    John Pieret

    Maybe we can start a telethon or a bake sale to help support this terribly oppressed industry.

    Do we get to make CEO pot pie?

  5. 5
    AsqJames

    Put like that it’s no wonder nobody starts a defense contracting business (or continues to do business in that market) without being forced to do so by fiat in the entirely government run, command economy which currently exists in the US. If the US weren’t a communist one party state there’s no way it could could continue to be the world’s only super-power.

    What? You mean they’ve actually got a choice?

  6. 6
    kermit.

    Re CEO pot pit:

    MRS. LOVETT:
    Seems a downright shame…
    TODD: Shame?
    LOVETT:
    Seems an awful waste…
    Such a nice, plump frame
    Wot’s ‘is name has…
    Had…
    Has!
    Nor it can’t be traced…
    Bus’ness needs a lift,
    Debts to be erased…
    Think of it as thrift,
    As a gift,
    If you get my drift!

    No?

    Seems an awful waste…
    I mean, with the price of meat
    What it is,
    When you get it,
    If you get it…

  7. 7
    Trebuchet

    General Motor’s customers do not get to tell the company how to design cars…

    Oh yes they do. They do it by buying Toyotas and Hondas. An option the DOD doesn’t have.

  8. 8
    YankeeCynic

    I should have guessed that this was from the Lexington Institute.

    What’s amazing is that corporations like Lockheed-Martin, in their incompetent project management, have ensured that costs have skyrocketed to such an extent as to make these cuts inevitable. And as for their impact on defense, the fact these programs have become too big to fail means that the DoD has to cut things Iike Brigade Combat Teams, which are probably the most used element of our force projection today, just to keep them alive.

    In other words, it’s like a person who intentionally lit a wild fire complaining that suddenly his home is at risk. If you were worried about that,mother you shouldn’t have been playing with matches.

  9. 9
    YankeeCynic

    *than, not mother. Goddamned autocorrect.

  10. 10
    wscott

    The U.S. defense industry is one of the most heavily regulated sectors of the U.S. economy.

    Having known people who work for defense contractors, I’d have to say he’s probably correct there. Totally irrelevant to the rest of his argument, but not wrong.

    @ Tebudhet 7: Well put.

  11. 11
    sivivolk

    “Walmart does not have to provide detailed cost data to its customers or certify the prices charged by its vendors but defense companies do. General Motor’s customers do not get to tell the company how to design cars, make changes to that design while the cars are going down the production line or, having signed a contract, decide to change the terms of the agreement or even cancel the order entirely just for that customer’s convenience. But the Department of Defense can.”

    …Did they just compare contractors to retailers? They do know that the people who supply Walmart and GM have to provide cost data and estimates, and have to produce goods to spec, right?

  12. 12
    slc1

    Re Trebuchet @ #7

    I don’t know about Toyota that has been forced to recall some 10 million cars over the last 3 or 4 years. It seems to me that the recovery of GM and Ford are, in part, due to Toyota’s troubles. Honda and Nissen have also profited from those problems.

  13. 13
    d cwilson

    Companies in this sector must abide not only by the rules and regulations that apply to all other businesses but the special contracting and reporting requirements imposed by Congress and the Pentagon. Walmart does not have to provide detailed cost data to its customers or certify the prices charged by its vendors but defense companies do. General Motor’s customers do not get to tell the company how to design cars, make changes to that design while the cars are going down the production line or, having signed a contract, decide to change the terms of the agreement or even cancel the order entirely just for that customer’s convenience. But the Department of Defense can.

    Yeah, you’d think the Defense Department would realize that their primary mission is to keep military contractors in business.

  14. 14
    sithrazer

    The difference between GM or Walmart and defense contractors is, although somewhat simplified, the difference between selling things produced and being commissioned to produce goods.

  15. 15
    lofgren

    Interesting little factoids, nonetheless.

  16. 16
    John Hinkle

    For all this aggravation you might think that defense companies earn extraordinary profits. Sadly, such is not the case. The top 20 defense companies in terms of dollars on contract have an average 2011 profit margin of 2.85% and an operating margin of 6.22%.

    Wow. That sucks. If Merrill-Lynch can make my friend 18% (anecdote alert!) in the last 1.5 years, why the hell would a defense corporation, filled with smartypants, settle for such a pittance?

  17. 17
    puppygod

    Wait. Lockheed Martin? Aren’t they the guys who made the most expensive air superiority fighter of all times? You know, the one that pilots refuse to fly because they sometimes faint due to faulty oxygen installation? I’m pretty sure they don’t listen to anybody telling them how to design planes.

  18. 18
    Doug Little

    Waaaaaaaaah

  19. 19
    tfkreference

    I’ve never seen a $700 toilet seat at Walmart.

  20. 20
    Olav

    YankeeCynic says:

    Goddamned autocorrect.

    Just turn it off, man.

    Also, can Americans please kill their military-industrial complex dead? It is annoying us over here too. Thank you.

    Oops, now I got caught in all kinds of “national security” filters. Oh well.

    I admit we (in the Netherlands) have our own government to blame for the situation as well, fixated as they seem to be on purchasing American F-35 (“JSF”) fighter planes that keep getting more and more expensive and appear to never get finished or delivered. This while several reasonable options for European-made airplanes are instantly available.

    It’s that wonderful “trans-atlanticism” again. Phukkit. Not that I don’t like (some) Americans. Or jazz music. Thank you for that, actually.

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