Defense companies face supply challenges as demand for US weapons rises

Northrop Grumman chief executive Kathy Warden has delivered good news and bad news: The aerospace group expects increased demand for its weapons systems, but supply chain issues could hamper efforts to expanding production.

“For the moment, it is a question of knowing how to adapt the production to fill the stocks? Warden said Wednesday at the Economic Club in Washington, DC. She also acknowledged labor shortages.

America’s largest aerospace defense contractors are set to enjoy a windfall as Western governments recalibrate security strategies and increase defense spending after Russia’s invasion of Ukraine.

The chief executives of Lockheed Martin, Raytheon Technologies, Boeing, Northrop Grumman and General Dynamics – prime contractors for the US Department of Defense – acknowledged in April that they would benefit from increased defense spending. The stock prices of Lockheed, Northrop Grumman and General Dynamics have risen 12-15% since the start of the war.

Contractors are now expected to ramp up production to meet demand from the US and European governments, which have renewed defense spending commitments due to the war.

But companies have supply chain issues, labor constraints and inflationary pressures that could dampen efforts to increase production.

Raytheon chief executive Greg Hayes told analysts it had proven difficult to find new non-Russian titanium sources and that the Stinger would need an electronics overhaul because “some of the components are no longer available. in trade”.

Stingers and Javelins, two shoulder-fired missiles, have become the signature weapons of the Ukrainian conflict, as the country’s soldiers use them to fend off Russian forces. US President Joe Biden visited a Lockheed factory in Alabama on Tuesday to tout the Javelin. The United States has committed more than 5,500 Javelins to Ukraine.

See Also:  Toyota will invest $ 3.4 billion in battery production. Reedus

According to Mark Cancian, a former Pentagon official currently at the Center for Strategic and International Studies, a think tank, a quarter of US Stinger stock went to Ukraine.

But the Stinger is produced at negligible levels – there is only one active international customer and the US hasn’t bought one for 18 years. Hayes said large orders aren’t expected until 2023 or 2024 because “we have very limited inventory of material for Stinger production.”

A similar timeline is expected for Javelin orders, Hayes added. It could take two years to bring Javelin production to its peak of 6,000 per year, Cancian said. Raytheon and Lockheed produced 866 Javelins for $207.2 million for the United States in 2021; the Pentagon wants 586 for $189.3 million in 2023.

Long-range systems will take over from medium-range Javelins in the current phase of the war in Ukraine as it shifts to a “more conventional conflict in the east” of the country, said Greg Sanders, deputy director of the Group defense industrial initiatives of CSIS, which means that these weapons could be at the top of procurement lists.

“Globally, there is a paradigm shift underway regarding national security, and several allies have committed to increasing defense spending accordingly,” Warden told analysts on Northrop’s first-quarter earnings call. Grumman. This “will allow us to accelerate the pace of our revenue growth in 2023,” she added. The entrepreneur expects 2022 sales to range between $36.2 billion and $36.6 billion, compared to $35.7 billion in 2021.

German Chancellor Olaf Scholz has shaken up his country’s decades-long defense policy by announcing a 100 billion euro military fund and a pledge to raise spending to 2% of gross domestic product. Meanwhile, Sweden and Finland are increasingly interested in these countries joining NATO.

See Also:  NFL Draft – Defensive Players | A defense of champions

“The sad reality is that the last 30 years of [relative peacetime] may well be an aberration,” said Richard Aboulafia, aerospace consultant at AeroDynamic Advisory.

« [People thought:] “We won the Cold War. Now that’s the end of naked human aggression – great – let’s start a unicorn petting zoo and you’ll be fine. ‘ And it didn’t work. ”

Defense companies said it was too early to predict an increase in sales and revenue. But Morningstar analyst Burkett Huey updated his sales estimates across a range of products by 1.5% to 3% in the final years of his 2022 to 2026 forecast.

The Biden administration’s proposed $773 billion defense budget for 2023 is expected to grow significantly before final congressional approval, potentially by tens of billions of dollars, as the range of potential security threats grows. widens and becomes more complex. As the biggest military spender, the United States accounted for 38% of global defense spending in 2021, which exceeded $2 billion for the first time, according to the Stockholm International Peace Research Institute.

While Russia is an acute threat, the Pentagon has made it clear that the Indo-Pacific region remains its priority theater. In its budget, the department “has prioritized investments in core capabilities that address our challenges from both China and Russia,” Undersecretary of Defense Michael McCord told Congress recently, noting the need to acquire agile systems capable of carrying out bifurcated strategies.

“We were moving towards this pivot to Asia, which involved deprioritizing land systems and the benefits going to air and navy,” Aboulafia said. Now that the United States is “dragged into Europe.” . . it really becomes a struggle between land systems and naval systems for resources.” Air systems are the most flexible.

See Also:  Tennis Tournoi WTA de Birmingham 2021

After the Cold War, the defense industry began to consolidate at a rapid pace: since the 1990s, the Pentagon’s 51 major defense contractors have shrunk to five highly diversified companies, meaning that each of the Big Five will get big slices of the pie.

In 2020, defense contracts accounted for 58% of Pentagon spending, the highest level in 20 years, according to CSIS. Of the $421 billion distributed that year, 36% went to Big Five contractors, up from 19% in 1990.

European companies collectively produce a wide range of weapons, but industrial capacity is not sufficient to reach the level of production needed to meet demand, industry experts have said. This will send European governments to American companies. Some US-made weapons will also be better suited to the needs of some governments.

Eastern European countries will be inclined to buy Americans not only for the technological aspects, but also for the nominal connection with the United States, because “with American companies integrated into their military forces, it just gives them a little more feeling,” Cancian said.

Leave a Comment

This site uses Akismet to reduce spam. Learn how your comment data is processed.