Last updated at: (Beijing Time) Wednesday, April 23, 2003

Iraq War Brings No Windfall for US Defense Giants

The United States-led coalition has toppled Iraqi President Saddam Hussein's regime with an apparently easy win, but victory has not brought American defense giants an easy and big windfall that some people predicted before the Iraq war.


The United States-led coalition has toppled Iraqi President Saddam Hussein's regime with an apparently easy win, but victory has not brought American defense giants an easy and big windfall that some people predicted before the Iraq war.

Before the war broke out last month, some people who thought war was always good for the defense sector, had predicted the war would bring a windfall for American defense contractors, including swarms of new orders and soaring share prices of those companies. But from developments in Iraq over these days they have found their prediction coming to nothing this time.

Since the war started on March 19, most US defense companies have had "business as usual", as sluggish as before. Most stocks in the sector, which have fallen some 30 percent from their highs reached last June, have hovered around the 52-week lows hit of March 12.

The US defense industry has traditionally benefited from previous wars, including those as distant as the World War II and the Vietnam War, and those as recent as the Gulf War in 1991 and the Kosovo War in 1999. So why is this war different?

One of the reasons, observers here say, was that the war consumed only a small part of a robust Pentagon inventory of weapons and ammunition. During the war, the US forces dropped more than 20,000 guided and unguided bombs, but Air Force officials said they were not worried about running short of bombs since the military had stocked enough before the war.

The only possible exception was the Tomahawk cruise missile, made by Raytheon Corp.. Nearly 800 of the low-flying, highly maneuverable weapons were used out of inventory of about 2,000.

Because the war was a battle between two sides with unbalanced strengths, the US forces did not suffer huge losses in heavy equipment such as fighter jets and tanks, eliminating the emergent need for replacement for these bread and butter items of major defense companies.

In the war, in which the number of precision-guided bombs accounted for 70 percent of all bombs dropped in Iraq, the JDAM targeting kit produced by Boeing Co. played a major role. But the kit, which is used to turn dumb bombs into satellite-guided "smartbombs", costs only 25,000 US dollars each. Even a significant increase in orders will have little impact on the revenue of the 54-billion-dollar industry Goliath, industry analysts say.

Among the 20 billion dollars spent in the war, only about three billion was cost associated with consumption of ammunition and weapons, according to the Pentagon. It is obvious that the war, which lasted less than a month, would have been registered as a blip on the balance sheets of the biggest defense companies.

For US defense giants, a war is a free "showcase" for new weapons they have designed. After its debut in the Gulf War, the M1 Abrams tank produced by the General Dynamics became the world's best seller among various types of tanks.

Most of the advanced weapons used in the latest Iraqi war, however, were used already in the Kosovo War and in the Afghanistan War in 2001. So these, such as unmanned reconnaissance planes and precision-guided bombs, provided little surprise for potential weapon purchasers.

In the war, the upgraded Patriot missiles PAC-3, made by Lockheed Martin Corp., have destroyed at least 10 Iraqi missiles fired at US forces. But they have also been involved in "friendly fire" incidents, downing a British fighter jet killing its two-man crew, and is suspected of causing the crash of a US Navy F/A-18C Hornet. Outside observers are still not sure about their performance, reports said.

The Gulf War turned into a windfall for some defense contractors because Middle East nations such as Kuwait and Saudi Arabia went on a buying spree after the conflict. But now those countries cannot absorb new purchases and a shopping spree for US weapons is not expected.

All these said, the US defense industry will still enjoy long-term benefits from the defense policy of the Bush administration. Since George W. Bush came into office in 2001, the country's defense spending has steadily expanded.

Built on a 15-percent increase in defense spending for 2003, Bush's budget for fiscal 2004 calls for another four percent increase for the Pentagon, to 379.9 billion dollars. The White House estimated that US military spending will reach 480 billion dollars by 2009, surpassing the highest level reached in the peak of the Cold War. Most of the spending would be on purchase and design of new weapons.

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