Budget squeeze could spur defense industry Shakeup.

• Author: Erwin, Sandra I.
• Position: Defense Watch

To borrow a line from Casey at the Bat, there is no joy in Mudville. Defense industry executives, with good reason, are experiencing considerable anxiety as Pentagon budget cuts lurk around the corner.

The true scope of future cutbacks to weapon programs may not be known for some time, but contractors already are bracing for the end of business-as-we-know-it.

In anticipation of what could be a contentious environment for selling products and services to the Pentagon, some suppliers have taken steps to downsize and curtail spending. Others, especially small businesses that are hanging on to few contracts, expect the worst.

As industry waits for the budget dust storm to settle in Washington, several hot topics are dominating the conversation in corporate suites. One is whether the Pentagon will make any sweeping changes in how it buys equipment. Another bugaboo for the industry, which surfaces in every defense downturn, is whether the Pentagon will make any provisions to protect some industries that might need to "surge" production if there is another major conflict.

Top industry executives believe that even if the "doomsday" scenario of a trillion dollars in cuts over the next decade is avoided, based on past history, reductions will be deeper than the currently projected $480 billion. They worry that if cuts come too abruptly, the industry will be forced to make impetuous decisions on whether to ride out the storm or exit the defense market.

Even the cash-rich upper-tier Pentagon contractors are anxious. They see the potential shakeout of the subcontractor base as ominous, because as prime contractors, they depend on smaller suppliers for key components. Executives also are sounding alarms about the newly accepted wisdom in the Defense Department that industry should bear more of the financial risk of developing new technologies.

The military increasingly is asking for "mature technologies," says Elizabeth Ferrell, a partner at McKenna Long & Aldridge government contracts group.

Saving money and simplifying the procurement system are "admirable goals," she says. But some of the latest acquisition guidelines, "from the contractor's perspective, place the cost of development on contractors ... with no assurance that they're going to be able to recoup their investment with future sales."

Ferrell cites the Army's "buy fewer, more often" approach as an example of policies that are giving some executives heartburn. Defense Department officials...