Military spending surges, creating boom for arms makers

The Ukraine war and the possibility of superpower confrontations are prompting efforts to ensure that the military industrial base can respond to surges in demand

The prospect of growing military threats from both China and Russia is driving bipartisan support for a surge in Pentagon spending, setting up another potential boom for weapons makers that is likely to extend beyond the war in Ukraine.

Congress is on track this week to give final approval to a national military budget for the current fiscal year that is expected to reach approximately $858 billion — or $45 billion above what President Joe Biden had requested.

If approved at this level, the Pentagon budget will have grown at 4.3 per cent per year over the past two years — even after inflation — compared with an average of less than 1 per cent a year in real dollars between 2015 and 2021, according to an analysis by the Centre for Strategic and Budgetary Assessments for The New York Times.

Spending on procurement would rise sharply next year, including a 55 per cent jump in Army funding to buy new missiles and a 47 per cent jump for the Navy’s weapons purchases.

On Dec 16, Jake Sullivan, Biden’s national security adviser, put the build-up in strategic terms, saying the war in Ukraine had exposed shortfalls in the nation’s military industrial base that needed to be addressed to ensure the United States is “able to support Ukraine and to be able to deal with contingencies elsewhere in the world.”

Lockheed Martin, the nation’s largest military contractor, had booked more than $950 million worth of its own missile military orders from the Pentagon, in part to refill stockpiles being used in Ukraine. The Army has awarded Raytheon Technologies more than $2 billion in contracts to deliver missile systems to expand or replenish weapons used to help Ukraine.

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“We went through six years of Stingers in 10 months,” Gregory J Hayes, Raytheon’s CEO, said in an interview this month, referring to 1,600 of the company’s shoulder-fired anti-aircraft missiles sent by the US government to Ukraine. “So it will take us multiple years to restock and replenish.”

But those contracts are just the leading edge of what is shaping up to be a big new defence buildup. Military spending next year is on track to reach its highest level in inflation-adjusted terms since the peaks in the costs of the Iraq and Afghanistan wars between 2008 and 2011, and the second highest in inflation-adjusted terms since World War II — a level that is more than the budgets for the next 10 largest Cabinet agencies combined.

Even more orders are coming in to military contractors from US allies in Europe and Asia, as they, too, have concluded that they must do more to arm themselves against rising global threats. Japan moved this month to double its spending on defence over the next five years, putting aside a pacifist stand it has largely maintained since 1945.

And none of this counts an estimated $18 billion of planned but now delayed weapons deliveries by the United States to arm Taiwan against a possible future attack by China.

The combination of the Ukraine war and the growing consensus about the emergence of a new era of superpower confrontation is prompting efforts to ensure that the military industrial base can respond to surges in demand. The issue has become urgent in some cases as the US and its NATO allies seek to keep weapons flowing to Ukraine without diminishing their own stocks to worrisome levels.

The Ukrainian military has run through years’ worth of the missile production capacity of Western suppliers in a matter of months. At the same time, contractors remain concerned about investing to meet growing demand for weapons that could dry up again when the war ends or politics shifts course.

“The difficulty of starting a production line back up, that doesn’t come for free,” Tom Arseneault, president of BAE Systems, which is now considering restarting its M777 howitzer manufacturing line, which the company had been in the process of shutting down. The M777 is a highly accurate, towed gun that fires 155 mm artillery shells, which are also in diminishing supply.

The annual military authorisation bill that passed the Senate on December 15 prevents the Air Force and Navy from retiring aging weapons systems that the military would like to take out of service, including certain C-130 transport planes or F-22 fighter jets. At the same time, it includes billions of dollars in extra money to build even more new ships and planes than the Pentagon asked for, including $2.2 billion alone for an extra Navy-guided missile destroyer, according to the Senate Armed Services Committee.

And there is $678 million to expand ammunition plants in spots such as Scranton, Pennsylvania; Middletown, Iowa; and Kingsport, Tennessee, where contractors work with the US army to manufacture the ammunition that Ukrainian artillery crews have burned through at an alarming rate.

Spending could be even higher, as Congress is also considering a request for an extra $21.7 billion for the Pentagon, above the already expanded 2023 annual budget, to allocate more money to resupply materials used in Ukraine.

In an indication of how government policy is shifting to rebuild industrial capacity for the military, Congress this year has moved to allow the Defence Department to more broadly make multiyear spending commitments for certain weapons systems and shipbuilding operations. That is a provision that industry lobbyists have long pushed for, arguing that it gives companies certainty that investments they make to start production will see continued returns in future years.

“We have to make a commitment with the industry,” said Senator Deb Fischer, (Republican), a member of the Senate Armed Services Committee, who supported the change. “Then the industry will step forward to restart or grow their production lines.”

That move alone suggests $73 billion in additional munitions orders could be on the way in the next three years, contracts that will largely benefit the big players like Lockheed and Raytheon, according to an analysis by Myles Walton, a military industry analyst at Wolfe Research, a Wall Street research firm.

These trends help explain stock market performance of the major military contractors — a small group of which control the bulk of sales to the Pentagon. Lockheed and Northrop Grumman both have seen their stock prices jump more than 35 per cent so far this year in a market whose main indexes are down overall for the year.

Opponents of higher military budgets say they are frustrated.

Military contractors are “riding high again, and Ukraine just gives them another argument as to why things need to continue onward and upward,” said William D Hartung, a fellow at the non-interventionist Quincy Institute for Responsible Statecraft.

“The trillion-dollar defence budget — that is where we are headed,” said Lawrence J Korb, who served as an assistant defence secretary during the Reagan administration and was once a vice president at Raytheon. “Nobody seems to want to make the tough choices. Even the Democrats now seem to be afraid to be seen as being soft on defence.”

The biggest barrier for growth for major military contractors — the list includes Lockheed, Raytheon, Boeing, General Dynamics, BAE, Northrop Grumman and Huntington Ingalls Industries — is finding sufficient supplies of key components, such as microelectronics and missile warheads, as well as a steady supply of new employees to assemble all these items.

“You cannot throw much more money at the seven shipbuilders that build US warships in the US right now,” Adm. Michael M Gilday, the chief of naval operations, said this month during the Reagan National Defence Forum in California, referring to a $32.6 billion shipbuilding budget in the military authorisation bill that is $4.7 billion more than the Pentagon requested. “Their capacity is about at max. And Congress is helping us max them out.”

Raytheon, which has 180,000 workers, has hired 27,000 new employees so far this year, its CEO said in October. But even with that, it is still running into bottlenecks in terms of available parts and labour shortages that are slowing sales, its executives said.

The sheer scale of the munitions and missiles sent to Ukraine illustrates just how much matériel a war can consume.

That includes more than 104 million rounds of small-arms ammunition, at least 1 million rounds of 155 mm artillery shells, 46,000 anti-tank weapons, more than 1,600 Stinger anti-aircraft missiles and 8,500 Javelin anti-armor missiles, according to a Pentagon tally.

The resupply challenge is not just a matter of money. Military contractors have nearly stopped manufacturing Stingers — Raytheon’s last contract from the US government was in 2002, Haynes said. And while Javelins are still being made jointly by Raytheon and Lockheed — in September they were awarded a $311 million contract to deliver more of them — historically they have only been able to make about 2,100 a year, or about one-quarter of what Ukraine has burned through since the outbreak of the war in February.

In total, the Pentagon as of early December had awarded at least $6 billion to military contractors to resupply these and other items sent to Ukraine.

“We’re going to ramp up,” Army Secretary Christine Wormuth said this month. “We’ve really been working closely with industry to both increase their capacity and also the speed at which they’re able to produce.”

The overall spending on national defence still remains relatively low as a percentage of the nation’s economy: about 3.2 per cent of the gross domestic product this year, compared with 37 per cent during World War II and 13 per cent during the Korean War, according to Pentagon records.

Still, companies are scrambling to avoid or resolve bottlenecks caused by the increase in demand.

Lockheed, for example, spent more than $60 million of its own money in advance of getting Pentagon contract commitment to build more of its High Mobility Artillery Rocket System vehicles, or HIMARS, which fire guided rockets carrying 200 pounds of explosives that can hit targets nearly 50 miles away. The vehicles have been much sought after by Ukraine, which has used them to devastating effect against the Russians.

Traditionally, Lockheed has been able to build 60 of these trucks per year, but it is now shifting production to 24 hours a day and seven days a week in an effort to bring that annual total to 96 units. It also now has a new $430 million contract to deliver more HIMARS, along with a new $521 million contract to build more of the rockets, called GMLRS, that these vehicles can fire.These resupply orders, while large in terms of many other contracts the federal government issues, are still relatively small for the biggest contractors. At Lockheed, for example, about 70 per cent of sales come from the US government, and most of the rest from other governments worldwide. Supply chain and labor shortage problems are cutting into sales and profits, including at Lockheed, which expects to see annual sales decline this year to $62.3 billion from $67 billion.

“The clutch is engaging but into some lower gears initially,” James Taiclet, Lockheed’s CEO, said in October, adding that higher sales might not show up for another year.

There are more of the big-ticket orders coming. In the aftermath of Russia’s invasion of Ukraine, Switzerland and Germany have moved in recent months to finalize orders for the F-35 fighter jets, collectively worth $16 billion. Overall foreign military sales notifications to Congress so far in 2022 have totaled $81 billion, the third-highest figure in the past 25 years, with an increasing share of these sales going to European and Asian nations.

Next year’s military budget also includes major investments in new hypersonic weapons that are also being aggressively pursued by China. Raytheon and Northrop Grumman in September won a $1 billion contract just to build prototypes for the Air Force.

Other companies want to replace older equipment sent to Ukraine with newer models. BAE, for example, intends to sell the Army more armored vehicles called AMPVs, in place of the more than 200 of BAE’s Vietnam-era M113 armored personnel carriers sent to Ukraine, which it no longer makes.

“Nothing’s cheap, right?” Navy Secretary Carlos Del Toro said this month at the conference in California, as he ran through many new investments the Navy is making. “Nothing’s free.”