Defense industry at risk from slowing demand

WASHINGTON, Sept. 7 (UPI) -- The U.S. defense industry, currently top of global rankings with a record $700 billion turnover in 2009, risks losing its pre-eminence due to slowing demand and growing competition from rivals in Asia and South America.

Warnings of an impending slump followed a spate of defense cutbacks in Europe, the end of U.S. combat role in Iraq and predictions of a drop in U.S. military procurement. The Obama administration's plans to cut $100 billion in Pentagon overhead from 2012-16 is also set to affect on the industry overall.

Although U.S. Defense Secretary Robert Gates has characterized the cutback as part of an efficiency drive to protect future allocations for military modernization, industry analysts saw the savings drive as part of the trouble on the horizon.

Dublin's Research and Markets said in a report this week the U.S. defense and aerospace industry remains the largest in the world, driven by an almost 50 percent U.S. share of the global defense outlay at a staggering $700 billion.

The report said the growth was driven by the Sept 11, 2001, attacks on the United States followed by the conflicts in Iraq and Afghanistan.

However, it added, after "years of waging campaigns across several theaters against terrorism coupled with the ramifications of the worst-ever global economic crisis since the great depression, the U.S. economy has started showing signs of a potential economic overstretch and a potential resurgence of the classic, military-economic conundrum, once again."

Research and Markets said the U.S. defense industry landscape was "changing and evolving" and cited several restraining forces alongside key drivers that would shape the future of the industry.

U.S. government contracts are likely to be subjected to greater scrutiny and tougher negotiations and government contracts generally are likely to be harder to obtain because of the huge deficits facing procurement departments.

Analysts said slower growth in demand and loss of business could drive businesses to shed unprofitable operations, causing job losses.

Despite the slowdown, the largest contract still on the horizon remains the $50 billion refueling aircraft deal being considered by the U.S. Air Force. The Boeing Co. is in tough competition with its European rival EADS.

Analysts said the defense industry, in particular its aviation part, could tide over any coming difficulties if the current trend toward revival of air transport and substitution of aging aircraft with news continued into the coming years.

Based on current forecasts, future orders for Boeing's 787 Dreamliner plane alone could inject a lot of new cash into the multifaceted aircraft industry and avert a crisis.