COTS Journal

Washington’s Three Ring Circus

By: Pete Yeatman, Publisher

Just as our small market segment begins to feel that things are starting to improve, Congress goes and shuts down the government. So now we have a government shutdown, the effects of last year’s sequestration bite, another sequestration bite this coming year, a failure to raise the debt limit, and a military budget proposal that takes none of these realities into account.

Prime contractors have been adjusting for the last two years to compensate for reduction in funding. Many still managed to report better than expected 2nd quarter earnings per share. Most of these earnings were the result of anticipated cuts in workers and other overhead costs. There doesn’t appear to be the same luxury ahead for the coming year and shareholders might be wise to consider preparing for some pain.

The military had to cut $37 billion sequestration dollars out of the 2013 budget. However, due to when funds are allocated and actually spent, the real number ended up a lot lower. This year there are less available funds shifting and the military has to cut $52 billion. Many of the more severe 2013 cuts were in training, R&D and some civilian furloughs. Things will be harder this coming year. We need to actually cancel some programs, close some bases and reorganize to make the military overhead more efficient. We also have to eliminate administrative civilian and uniformed positions. Actions need to be based on what is best for the military. Many of these required actions will be very unpopular by Senators and Congressmen—as well as senior military staff. Looming 2014 mid-term elections and Congress’ recent performance should produce nothing more than political maneuvering from many of our elected officials.

Rather than making hard decisions, budget “salami slicing,” as it’s commonly called, will be the first choice for dealing with the 2014 reductions—trying to cut every segment by another 10 percent. Those items that can’t be cut will have their cuts drawn from other areas. Many subcontractors to the primes will be hit hard. This will be most evident in companies that supply products or services that are not highly technical or require development investment. In contrast, the embedded electronics market segment will more than likely continue to improve. Our suppliers have the ability, willingness and investment in highly technical product design development. That’s a costly speculative function for primes and a concept of little interest to them at this time.

The fact that sequestration and the mil budget in general have had little visible impact on the military and have been barely noticeable to the general public, has limited any public outcry. Until there is a major impact on either employment or military readiness things will continue as they are. There will be greater outcry for shutting down the national parks, FDA, HUD, the EPA and others. It seems Congress was smart enough before implementing this shutdown to ensure that they didn’t shut down things like the FAA or anything that would visibly inconvenience a large group of people. What is baffling is that sequestration requires defense to cut an amount equal to what is required to be cut from domestic spending. You hear little if anything about what is being cut from domestic programs. Maybe that’s because the non-military federal budget is so much larger than the defense budget and the cuts are barely noticeable.

A decade or two ago pundits could have predicted how long this Congressional constipation would go on, or how long the game of chicken with the administration would continue. Things are now so screwed up that only a fool would comment on these goings-on. If you want to have fun, video record the news pundits, wait four days and then replay what they predicted four days earlier.

Our small corner of the military industry—the embedded market—is in one of the luckier areas. That being said, if all the contracts you’ve bid on or were part of have vaporized then you don’t feel so lucky. Finding programs that have funding and are critical is hard work but key to success. New and large extravagant programs are the ones in greatest jeopardy. Programs that are more modest and a continuance or upgrade are the ones with the highest probability to receive on-going and future funding. The fact that our industry mostly pays for its own product development and provides highly technical products means that we are more needed by the primes and much less disposable then other subcontractors. We need to keep our heads up and stay focused while this three-ring circus plays out in Washington.

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