Defense Industry Caught In Crossfire

by Categorized: Aerospace, Defense, Economy, Government Date:

If it wasn’t immediately clear as the shutdown started that defense firms would suffer heavy collateral damage, United Technologies Corp. put an exclamation point on the issue late Wednesday with its bombshell furlough announcement.

Read the story here as it develops.

Now we’re seeing more evidence, including work backing up at Electric Boat and an aerospace parts export from a Connecticut firm that’s held up for lack of an approval by the U.S. Commerce Department, a tense story relayed by a Stamford lawyer.

Is UTC making a political statement by announcing the furloughs of 2,000 Sikorsky workers, starting Monday, the sixth day of the shutdown, and another 2,000 workers at Pratt & Whitney next week?  Or are the furloughs strictly a prudent business decision based on the fact that defense work can’t happen without Pentagon inspectors on the factory floor?

You might think a $60 billion-a-year company would have the wherewithal to keep its folks busy at least for a couple of weeks, so maybe this is in part a message to Congress and Obama. UTC would be in its rights for sending such a message, but then again, its own workers are the ones who would suffer for it, not to mention its shareholders, whose stock fell by 1.2 percent Thursday, as the defense index slid by 2.3 percent.

Clearly, the Pentagon’s factory inspectors ought to be exempt from the shutdown. Then again, so should the folks who send out checks for Head Start, along with the money for that and other social programs.

UTC isn’t talking beyond the terse press release it sent out at 5:30 p.m. Wednesday. That could be because it’s in the so-called quiet period before the release of quarterly earnings, and it could be UTC’s culture.

Regardless of whether theatrics are involved, the threat to UTC’s business is real and it illustrates just how tightly the ultra-lean, just-in-time aerospace manufacturing culture runs. There aren’t piles of parts, components and assemblies lying around for weeks, waiting for the next step. Everything is a giant machine that operates in sync, or it shuts down — and government inspection is part of that.

Broadly, it illustrates that government, at least the core function of it, is not a drag on industry or an umbrella over industry — it is built directly into the entire American commerce system. That’s why we can’t calculate the economic cost of a government shutdown by adding up the lost wages of bureaucrats and subtracting that money from the system.

In Stamford, attorney John Fusco at Edwards Wildman Palmer LLP is living with a perfect example. His aerospace client, which he can’t name, makes a certain aviation part that it has exported to several nations.

Last month the Commerce Department rejected a bid for the firm to ship an order worth $80,000 to a certain country. Rejections are common and they’re followed by an appeal request — which in this case, had a deadline of Thursday.

“I can’t file that request,” Fusco said. “We can’t find out why it was denied nor can we appeal it simply because the government is not open.”

It’s not clear whether the deadline clock stops with the shutdown, Fusco said. But it is clear that the firm’s owner has a lot of money tied up in this decision as his customer awaits the shipment.

“Depending on the length of the shutdown, it may cause him to be in breach of his contract,” Fusco said.

Multiply that across the thousands of decisions that literally hundreds of government agencies make in Connecticut alone every day, and the picture comes clear. Some aerospace and defense firms had seemed confident they could weather a short outage of federal employees. Their defense contracts were in place, they reasoned, so they could keep working.

The Pentagon even rushed out billions of dollars in contracts last week, figuring that would smooth the way for defense firms during the shutdown, according to a story in the CT Mirror by Ana Radelat.

But now we see that even a short federal shutdown hurts this industry. That’s a national concern not only for defense but also for the economy as a whole.

It should be enough to see poor city residents suffer with Head Start programs closing, and a backup of food assistance payments in the Women, Infants and Children program. That should be enough. But if it takes a message from a company on the Dow Jones that one of the last great American industries is threatened now, not next week, not next month, but now — then the message is worth sending and must be heard.

 

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One thought on “Defense Industry Caught In Crossfire

  1. StevenRosenbaum

    Does Kaman Corporation suffer the same ways as UTC? Why does one entity seem to thrive while the other seems dependent upon the federal government for its well being. It would appear that Kaman’s 2Q 2013 was quite impressive.

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