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Thu Mar 10 03:08:51 PST 2005

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 Pentagon's Global View

 By Renae Merle

  The Pentagon is increasingly shopping overseas for its weapons, ending a long made-in-America tradition that assured U.S. defense contractors of nearly exclusive sales to their best customer.

 The Navy's recent selection of a British-Italian design for the president's next helicopter demonstrated the breadth of the move toward foreign suppliers. The U.S. incumbent, Sikorsky Aircraft Corp., surprisingly lost to an international team led by Lockheed Martin Corp. In another blow to Buy America advocates, the Army will base the design of its newest spy planes on Brazilian-made Embraer jets instead of Georgia-built Gulfstream aircraft.

 Yesterday's announcement that BAE Systems PLC of Britain will acquire Arlington-based United Defense Industries Inc. further emphasizes the interplay between foreign and American defense companies.

 The new openness raises the prospect that the Air Force will seriously entertain a European bid to replace its refueling tanker planes after a Boeing Co. deal collapsed last year in an ethics scandal at the company. Sikorsky will face two foreign rivals  --  the British-Italian company AgustaWestland Inc. and Eurocopter, the world's biggest helicopter maker  --  in a $10 billion Air Force competition to build search-and-rescue choppers. Also on the horizon is an Army decision on whether to replace the M16 rifle, designed by Connecticut-based Colt Defense LLC, with a German-designed gun.

 "I have often said that we in the United States have never had a global monopoly on good ideas or on innovation," said Suzanne D. Patrick, the deputy undersecretary of defense for industrial policy. 

 The consolidation of the defense industry in the 1990s reduced the number of domestic defense companies so sharply that the Pentagon has been forced to widen the field of bidders to keep costs down, industry analysts said. For some products, only one U.S. manufacturer exists. Chicago-based Boeing Corp. is the last domestic maker of wide-body jets, forcing the Pentagon to consider Europe's Airbus SA if it wants a competition. With the Pentagon's budget squeezed by war costs and deficit concerns, military leaders are increasingly willing to buy a foreign product rather than pay more to develop a U.S. alternative, analysts said.

 The Pentagon's purchases overseas could have a silver lining for American contractors: Foreign governments may be more willing to buy U.S. products. 

 Like its counterpart in the United States, the European defense industry also has consolidated and developed expertise, and is aggressively pursing work with the Pentagon, which is still flush with cash compared with their nations' defense departments. Last year, the United States spent $454 billion on defense, including the wars in Iraq and Afghanistan, while NATO spent $172 billion and Britain spent only $38 billion, according to figures collected by the Center for Transatlantic Relations at Johns Hopkins University.

 "The policy paradigm in the late 1990s was that the formation of transatlantic defense industry teams could help ensure competition in consolidating defense markets," said Jeffrey P. Bialos, executive director of the Johns Hopkins program, who was deputy undersecretary of defense for industrial affairs in the Clinton administration. "The truth is, this administration has shown few intentions of following through on that design." The presidential-helicopter award "is a hopeful sign," he said.

 Some in Congress worry that relying too much on foreign military suppliers would hurt domestic industries and raise national security concerns. They contend that foreign governments could choose to slow or stop production of U.S.-bound products when the Pentagon needs them most. "The average taxpayer pays $1,000 a year for the Defense Department's budget," said Rep. Duncan Hunter (R-Calif.), chairman of the Armed Services Committee. "There is an equity argument to the effect that the people who pay for the defense of the free world . . . should have the right to build the defense system of the free world, or at least the American defense systems."

 The Pentagon has bought some foreign products for years. Many of the latest examples involve foreign contractors teamed with U.S. companies that act as their prime contacts with the Defense Department. 

 The Italian-designed Beretta 9mm pistol replaced the Colt .45 as the standard sidearm for soldiers in the 1980s. The Army has used the C-23 Sherpa, a small cargo jet, from Northern Ireland's Short Brothers PLC for decades. And when it holds a competition to replace the Sherpa this year it is likely to choose between an international team led by New York-based L-3 Communications Inc.  --  which has a partnership with Alenia Aeronautica SpA, a unit of Italy's Finmeccanica SpA  --  and a jet from European Aeronautic Defence and Space Co., which is owned partly by the French government. L-3's team may have the advantage, according to Wall Street analysts, because Italy supported the United States in the Iraq war. 

 Foreign incursions into the market also are threatening smaller defense firms. Arch Chemicals Inc. of Norwalk, Conn., is seeking to retain its 50-year monopoly on supplying the rocket fuel hydrazine to the Pentagon. Last year the Defense Energy Support Center said it would hold a competition for the fuel, arguing that a contest could drive down Arch's rising prices. The average price per pound for the fuel has doubled since 1995, according to the agency. 

 Arch has sued to disqualify its major competitor, United Paradyne Corp. of Santa Maria, Calif., which would license technology from a French manufacturer, SNPE SA, to help produce the fuel. A United Paradyne executive said SPNE's role is limited, but in court documents Arch argues that awarding the contract to its competitor "could effectively give a French government-owned company control over our nation's only source of hydrazine, thereby giving the French government the ability to ground all of our . . . spy satellites, and GPS launch vehicles."

 The Pentagon plays down such concerns. The only requirement is that the fuel be produced domestically even if the company relies on foreign technology, said Jack L. Hooper, spokesman for the Defense Logistics Agency, which oversees the program. 

 The franchise of Connecticut-based Colt Defense LLC also is being challenged. For years, soldiers have used the M-16 and M-4 rifles developed by the company. Now the Army is testing a weapon called the XM8, developed by Germany-based Heckler & Koch GmbH, which has interchangeable parts and barrels that allow it to be turned into a light machine gun or sniper rifle. After some members of Congress raised concerns, Heckler & Koch established a joint venture with Falls Church-based General Dynamics Corp. to manufacture the weapons domestically. "I think with a fair competition it would be a really tough fight," said William Keys, president of Colt Defense LLC.

 Not everything is open to competition. Arianespace SA, the European rocket-launch company, is hoping to work with NASA, but doesn't expect the same with the Pentagon. "Maybe in the civil space industry there will be an opportunity" for cooperation, said Clay Mowry, president of Arianespace Inc., the U.S. subsidiary. "But we haven't seen any kinks in the armor on the defense side."

 A significant sign of Pentagon policy will emerge from its decision on how to modernize its fleet of refueling tankers. The Air Force was close to a deal with Boeing but the contract fell through after the company became embroiled in an ethics scandal that led to the firing of two high-level executives.

 Now Boeing is likely to face its European rival in a competition to build the planes. The prospect will anger Boeing supporters in Congress, but the Pentagon may not have a choice, industry analysts said. Lockheed could compete but would have to develop a new plane from scratch, an expensive proposition for the Air Force. Instead, the Pentagon may be more willing to buy cheaper, established technology from overseas, the analysts said.

 While critics are concerned that the trend could reduce the already shrinking aerospace workforce, the Pentagon argues that foreign competitors are creating jobs. Last year, EADS NV, Europe's largest defense firm, opened a helicopter plant in Mississippi. Embraer SA of Brazil is leasing a 71,000-square-foot plant in Jacksonville, Fla., to assemble the Army spy planes. Foreign investment in the United States from 2000 to 2003 fell 12 percent, to $566 billion, according to a Pentagon report. But in the same period, foreign investment in the aerospace sector jumped 198 percent, to $3.4 billion.

 "Those companies have made extraordinary investments in the U.S. defense industrial base and not investments that provide no benefit to the local communities and to the strength of our defense industrial base  --  quite the contrary," said Patrick, the Pentagon industrial policy official. "I cannot see how this weakens the U.S. defense industrial base." 

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