Survival of the fittest in the industrial base.

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

The drumbeat from Wall Street analysts has been pretty consistent on the defense industry: Top Pentagon contractors have weathered the post-war slump remarkably well, and their financial performance in fact has exceeded expectations.

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But down in the lower echelons of the military supplier chain, the mood is not quite as upbeat. There has been no soft landing for many of the small and mid-size companies that sell equipment to the military, and the downturn has been especially tough on contractors whose livelihood for years was tied to war spending.

"It's a cold business," says Stephen Speakes, president and CEO of industrial equipment manufacturer Kalmar Rough Terrain Center, near San Antonio, Texas. A retired Army lieutenant general, Speakes oversaw military procurements during the war buildup and was hired by Kalmar in 2011, "when the good times were over."

The company is the U.S. subsidiary of Sweden's Kalmar. The Texas plant opened in 2009 to support the Army's gargantuan demand for forklifts and other specialized logistics vehicles to move cargo containers into warzones. Kalmar built about 1,000 "rough terrain container handlers"--nicknamed the "wretch"--that the Army ordered at a cost of nearly a billion dollars. Then, one day, sales stopped, and the company has struggled to stay afloat, Speakes tells National Defense. "We are trying to remake ourselves for the future. We tried to commercialize, but it's not easy."

It's always a bad day for a CEO when he has to let employees go, and Speakes has had many such days over the past year. A workforce of 200 is now down to 130, and more layoffs could follow if military contracts keep drying up.

Speakes was in Washington recently trying to convince Army leaders that they should allocate funds for repairs and upkeep of the wretch fleet so vehicles are ready for service if needed. The response from Army officials: We agree, but we have no money.

The idea that the Army would spend a billion bucks on new vehicles but not have the money to maintain them for later use baffles the mind of anyone who is unfamiliar with the ways of Pentagon procurements. And it illustrates the chaotic nature of war buildups. When contingency operations budgets topped $150 billion a year, the Army ordered all the hardware it needed to supply troops at war. Since 2008, spending on equipment has plunged about 74 percent. Over the past five years, the Army also has had to absorb steep cuts in...