Sequestration: The Wrong Solution

Edited remarks of
Robert J. Stevens, Chairman and CEO
Senate Aerospace Caucus Luncheon
March 14, 2012


 
Following introduction by Marion Blakey, president and CEO, Aerospace Industries Association:

Thank you, Marion, and good afternoon, everybody. It's very good to be with you, and I'm very glad you're all here with us today. First, I want to add my voice to Marion’s and so many others in thanking Senator Chambliss and Senator Murray for their leadership on aerospace and defense issues. You've seen evidence in their commentary today as to why their sustained leadership is so imperative in ensuring that our nation has a solid program for national security and that we have a high level of vitality for the industry that supports that security. And we are very grateful for their leadership, particularly noting that that leadership is occurring against the backdrop of an increasing set of demands.

I want to thank also the members of the Senate Aerospace Caucus and particularly the members of their professional staff who are so actively engaged on a daily basis on the issues that are of interest to our industry. We appreciate their professionalism and their engagement. As Senator Murray highlighted, the industry has been a foundational source for driving technological leadership in America, with more than a century of contributions. It is not an exaggeration to say that our founding namesakes, Allan and Malcolm Lockheed and Glenn L. Martin, one hundred years ago on this very day, were working on their first series of airplanes. They were laying the foundation for the airplane businesses that they started, and they along with a handful of others started the aerospace industry in America. I am very confident if they and those founding pioneers were with us today, they would be very proud of what they see and probably a little astonished. But they would certainly share four basic observations about our industry today.  

First, as Senator Chambliss alluded to, we're a critical contributor to the economic engine of America, generating $324 billion in revenue across our industry from businesses both large and small, contributing 2.3 percent to our country's gross domestic product, driving $89.6 billion in exports with a healthy $42 billion trade surplus, which is consistently more than any other sector of our economy, and generating $38 billion in wage and income tax revenues to federal, state and local governments. We are a substantial source of economic power for our nation.

Second, we are a wellspring of innovation and creativity and technological advances. There is not a day in the lives of anybody in this room or any members of our families or anyone in this country that is not directly influenced by the work that we do: the way we travel, the way we communicate, the way we explore, the way we understand our universe and relate to our world. Many of the technologies that we've pioneered have become so ubiquitous that they've become invisible in daily life. But think of a world today without the unprecedented safety we enjoy in civil aviation and in our air traffic management system; the precision with which we are able to forecast weather and other atmospheric phenomena; the connectivity and content available through advanced information technology and networking capabilities; and the convenience and comfort afforded by GPS and precision geo location tools. Our work adds productivity and value and quality to the lives of every citizen every day.

Today there's much discussion and a fair measure of apprehension about the future of science, technology, engineering and mathematics in America. We are that future. We're the incubator. We're the proving ground. We're where discovery lives and creativity flourishes. And our work inspires millions of young people every day. The very best way to avoid a debilitating shortage of scientists and engineers in America is to invest in the work that they do.

Third, we remain the arsenal of democracy. Now that's not an idea we talk about very much anymore. Seventy one years ago, when Franklin Roosevelt first offered that phrase, our company was delivering what would amount to more than 9,900 P 38 Lightning aircraft. This is the airplane that the Germans went on to call the fork tailed devil. Since then, with the help of many industry partners and suppliers, we've designed and developed and produced a breathtaking array of advanced sophisticated aeronautical systems devoted to our nation's security. Aircraft and capabilities that define their generation, like the first U.S. operational jet fighter, the P 80 Shooting Star, the high altitude F 104 Supersonic Interceptor, the advanced technology of the U 2, the SR 71 Blackbird, the multi role combat capability of the F 16 Fighting Falcon, the stealthy attack of the F 117, the air dominance of the F 22 Raptor, and the world's only fifth generation, supersonic, stealthy combat aircraft that can also hover and take off and land in virtually any environment: the F 35 Joint Strike Fighter.

Lord knows these innovations did not come easy, without their share of risk and difficulty, setbacks and recoveries, for that is the true nature and the very essence of invention and discovery and advancement. But throughout history, we have persevered together in the face of adversity to do great things that have resulted in the strongest military on earth. Over these 71 years our industry certainly has changed. We're more technologically sophisticated, more specialized in many ways. We're smaller and leaner and more focused than we've been, but also, as a consequence, much less resilient to shocks and volatility.

The global security environment has also changed. The complexity and breadth of today's challenges would have been hard to imagine even a generation ago. It seems there is a certain persistence to some threats. Sea piracy has been around a long time. The first reported incidents of sea piracy were in the fourteenth century BC, and we're still confronting sea pirates today. Nation states still find themselves at odds with respect to values and aspirations: witness Iran and North Korea and perhaps some others. It's very apparent that there are evolving and emerging challenges as well, like global terrorism and cyber security. And there is no dispute that the velocity of world events is only accelerating, with consequences that are both difficult to predict and potentially severe.

What has not changed is that our country remains an essential force for good in this uncertain world. We remain a vital security cooperation partner with interests around the globe. And, as our fellow citizens forward-deploy to protect those interests, our industry believes firmly that we have a moral obligation to protect them as they move into harm's way, that we must remain strong and focused and well prepared for any eventuality. And history instructs that there will be unforeseen eventualities.

And finally, we have a workforce that is second to none. Today our industry supports over one million direct jobs, generating $84 billion in wages and more than three and a half million jobs in total employment. And these aren't just any jobs. Our employees represent the best of our highly skilled workforce. As America seeks to reconstitute domestic manufacturing, after the loss of so many jobs, I encourage you to visit our factories, visit those throughout our supply chain, where you will see a measure of excellence and global leadership. Our workers throughout all disciplines continue to exemplify the highest standards of professionalism, pushing the boundaries of superior performance and defining state of the art. And each shares a deep and abiding commitment to ethics and integrity in business conduct.

Beyond their skills and technological qualifications on the job, our employees are outstanding citizens. Many are distinguished veterans of military and government service. They give generously to philanthropic initiatives, contributing tens and tens of millions of dollars each year to charities and millions of volunteer hours at projects of vital interest to the communities in which we live and work. We honor their work ethic, their dedication and their many contributions.

In the coming months, the Congress will undertake a number of critical decisions that will affect our aerospace and defense industrial base—decisions that will affect the capabilities that we'll be able to carry into the future and will establish whether we will remain global leaders for the next century. Let me highlight a few issues around which we have very strong convictions.

The Department of Defense is already on a path to reduce spending by $487 billion over the next 10 years, consistent with the requirements of the Budget Control Act. Forty seven billion dollars of that reduction will occur in fiscal 2013. The effect of this reduction is now being felt throughout industry, and industry is responding to these changes by reducing overhead expenses, constraining capital, reducing research and development, consolidating facilities and engaging in painful but necessary reductions in force. As difficult as these actions are for us and the people who look to us for leadership, we understand the need to address our nation's fiscal challenges, with debt levels exceeding $15 trillion and trillion dollar deficits. We intend to do our part, and we will.

However, the prospect of additional severe reductions in January of 2013, under sequestration, is for us another matter entirely. The reduction of another $492 billion, with an additional $53 billion impact in 2013, constitutes a challenge for which we have no good response. In this, I believe we're in good company. Secretary of Defense Leon Panetta has spoken in the strongest possible terms against sequestration, which he described as having catastrophic consequences to our nation's defense. We support this view completely.

The sequestration process has occurred independent of any correlation with strategy, force structure, technology needs or operational reality. While the precise detailing of the adverse impacts of sequestration are yet to be determined, the United States would likely have the smallest ground force since 1940, the fewest number of ships since 1915, and the smallest Air Force in our history. The impact on industry would be devastating, with a significant disruption of ongoing programs and initiatives, facility closures and substantial additional personnel reductions that would severely impact advanced manufacturing operations, erode engineering expertise, and accelerate the loss of skills and knowledge, directly undermining a key provision of our new national security strategy, which is to preserve the industrial base, not dismantle it.

Our petition to you today on sequestration is very clear. We ask that we not let an automatic budget trigger, a default position, become the dominant force for allocating resources that will shape our nation's security posture and our industry, and we strongly urge action to stop this process. In the same breath, we would like to take this opportunity to thank the Congress for passing a four year FAA reauthorization bill. This multiyear authorization provides stability to allow the next generation, air transportation system, or Next Gen, to thrive, and allows the FAA, the aviation community, to plan effectively. We are certain that Next Gen offers significant improvements in safety and efficiency of the air traffic system and encourage sustained investment in this essential capability that will offer superior returns.

As we face budget challenges at home, we see a natural intersection between protecting and preserving the industrial base and advancing security cooperation partnerships with friends and allies. Defense trade with allies and partners enables the United States to: strengthen international relationships, project power, and increase interoperability so that the United States is not required to carry the global security burden on our own. Defense trade supports high quality U.S. engineering and manufacturing jobs and keeps the United States on the cutting edge of research and development.

We believe the existing export control system, which has remained largely unchanged since the Cold War, inhibits the ability of United States aerospace companies to compete effectively in the international marketplace and support our government's strategic objectives. The Administration has begun an ambitious effort to reform the export control system, and we support that effort completely.

Further, we understand that Congress will have the chance to become involved in the process shortly, as the Departments of State and Commerce work to modify the existing technology control lists. To assist in making U.S. industry more competitive abroad, strengthen the defense industrial base, and promote growth and create jobs here in the United States, we encourage support for export control reform and defense trade initiatives, as well as efforts to reauthorize the Ex Im Bank where action here is underway today. I refer you to Senator Murray's comments about Senator Cantwell's initiative. This is a most worthy initiative that deserves our support.

With all modesty, we treasure our industry as a crown jewel. There is no other like it on earth. Friends and enemies alike envy our capabilities and work ceaselessly to replicate what we, together, have so carefully built. They recognize that the technology that we’ve developed and produced in the extraordinarily capable hands of our customers has led to a level of preeminence and prosperity that the world has not seen before. Generation after generation of Americans have recognized this value and done all that was necessary to protect and advance our strength.

When our industry is at our best, we are working together with our customers and the Congress to meet our nation's greatest challenges: victory in war, prosperity in peace, exploring our universe, providing effective government services for our citizens. This requires a highly collaborative, supportive and predictable environment that extends over decades, where true innovation occurs, where insight is developed, where knowledge is gained. We, together, envision a future that others haven't seen, and we wrestle with all the challenges and problems attendant to creating things that did not exist before, while working daily under the bright light of public scrutiny. This is as it should be, and the United States has done this better than any other nation. And it was done through a sustained partnership between government and industry, and we need to invest ourselves in these valued partnerships. While our industry today is strong, it's also fragile. In the shadow of sequestration, it can be strengthened and bolstered and continue to assure our dominance for decades to come, or it can be broken. Now is our time to do all that we can.

I thank you for your kind attention.

Q&A session following the speech:

Q: Mr. Stevens, the Congressmen and Senators said that we can't wait, you know, for the lame duck session. What will industry have to do to get through the summer if there’s no solution?  

MR. STEVENS:  Both Senators have said industry really can't wait until a lame duck session, and that is certainly true, and I will tell you it's true in our company, and it's true in all the companies with whom we operate. We have to keep in mind a number of considerations and responsibilities that we have. I will tell you first and foremost, the very prospect of sequestration is already having a chilling effect on the industry. We're not going to hire. We're not going to make speculative investments. We're not going to lean forward. We're not going to invest in incremental training because the uncertainty associated with $53 billion more of reductions in our first fiscal quarter next year is a huge disruption to our businesses.

Secondly, in every business we have responsibilities to our employees, I think both morally as well as legally. And one of the legal responsibilities under the Warren Act is to give some indication of when we're going to have significant layoffs by geographical area. These are responsibilities under the law where you have to give something like 60 to 90 days' notice to employees. How do we start positioning our businesses in different locales to be able to advise our employees of the consequences of sequestration? These are not easy problems for businesses to wrestle with.

Again, I'll refer you to where our business—not just our company, but our industry—is at our strongest is when we have a transparent but predictable path forward, where we can take the most appropriate actions to drive real value. I think you heard both Senators say today we really have to get incremental value out of every very scarce dollar of defense investment. Well, the best way to do that is to add predictability, and the actions that we're taking around sequestration have just the opposite effect. It's inducing an incredible amount, an unprecedented amount, of uncertainty in industry, making planning and execution much more difficult.  

Q:  Can you play out his question a little more clearly for Lockheed? When would you have to start issuing 60- and 90- days notices if it looks like sequestration would be decided in the lame duck session?

MR. STEVENS:  Relative to the facts here, your question is when would we have to take specific actions. You've got your finger exactly on the pulse of the dilemma for everybody in industry. What specific action? What programs will be modified? What lines of business will be impacted? What sites will be disrupted? I can't remotely predict the consequence of a bow wave of $53 billion that's about to impact industry. We've had to confront the $47 billion in reductions with the Budget Control Act, and we are. And I would submit to you respectfully across the industry, all of our colleagues are, too. They're taking responsible and necessary and very difficult actions to assure that we're tightening our belts, we're focusing on affordability, we’re focusing on value for money.

To continue to wait and then ask industry to instantly respond to a massive reduction in the availability of funding when we're already in our year of execution is a massively complicated and unpredictable approach for any business, and we don't have really rational and really good responses. I will tell you this: all of our companies have thousands and thousands of contracts that have terms and conditions in them, that are reinforced by the funding that's available. And when that funding stops, we will be abrogating all those contracts, and there will be thousands of claims for equitable adjustments from small businesses that I don't believe anybody has included in any calculus about the magnitude of the disruption that's associated with sequestration. So even the very artfulness of how we would implement sequestration, how we would abide by the law, the WARN Act and other provisions that we're responsible to abide by, how we would tailor and shrink and shape our company and how we would respond to suppliers who have an interest in whether the contracts will be ongoing, all of that is yet to be determined.   

Q:  So do you predict resulting lawsuits from some contracts that might be canceled because of the sequestration?

MR. STEVENS: Are we anticipating lawsuits? Well, I wouldn't say we're anticipating lawsuits, but the architecture of our business, the majority of the work that we undertake in Lockheed Martin is undertaken with our partners and suppliers. We have contracts that define the roles and responsibilities, the expectations and accountability for all that work. All that work in all those contracts that have been let, in some cases multi-year contracts, on the expectation that there would not be a $53 billion reduction in January, if there's no funding, I can envision a circumstance where many across the industry, not just our company, are forced to stop working. And when I stop working, I'll have to direct our subcontractors
and suppliers and partners to stop working, and they will have to do that with theirs. None of that business disruption has been estimated in the cost of products, in the schedule of their availability.

The national security strategy has not been built on this inability to have funding. It will be a massive disruption, for which I believe there will flow a substantial number of requests for equitable adjustment as people try to reset the baseline—even addressing, in the case of many highly valued, small businesses, whether they will even have a small business anymore. This is a serious matter that we should not wait to address until the lame duck session or January of 2013.

Q:  What you're saying is that you would rather let the White House and OMB and the Pentagon actually make plans for sequestration. Is that right?
 
MR. STEVENS:  Perhaps I wasn't clear. I think sequestration is a terrible idea. As I try to understand it--and I'm standing humbled in front of people who work on crafting legislation as a profession, and I admire you. It is not my forte or my strength. But when I look into how sequestration was developed, I don't see that as the epitome of public policy. I think it's a default position that we’ve backed into by stepping backwards as the worst case scenario because we have not been able, as a nation, to come to terms with at least the three elements that are necessary to address a $15 trillion debt and trillion dollar deficits.

I personally believe there certainly is a role for cutting expenses, both in discretionary and defense accounts and non defense discretionary accounts. I think there's an equal measure of attention that ought to go into examining tax policy, and I think there's another measure of examination that ought to go into entitlement programs, and I think if we focus on all three of those things in an integrated and dedicated way, this nation absolutely has the capacity to reduce the overall debt, reduce the amount of deficit, while maintaining vitality because the real answer to our economic challenges is growth in the economy. And that's what I'd like to see us focusing on.

What we're talking about now is sequestration and another half a trillion dollars out of defense. I'll remind you there is a similar half a trillion dollars out of other government spending, non defense, but we haven't talked about entitlements and we have not talked about tax policy, which I believe would frame part of an integrated approach to how we can improve the nation's economic posture. And I think it would be a terrible tragedy to break an industry and under provision our Defense Department and those women and men who serve in uniform and fail to address the real challenges in $15 trillion of total debt and deficits.

I'll say thank you very much. You've been very kind in listening to my remarks. I'm very proud to be a member of this industry. We do terrific work in the interests of this nation  and we will do everything we can to be responsible citizens and address these challenges we're talking about today. Thank you.