Shrinking defense budget worries small businesses; drawdown from two wars

Jan. 22, 2012
Shrinking defense budget worries small businesses
Franco Ordonez | McClatchy Newspapers

WASHINGTON — The obstacles small businesses face trying to win their first Defense Department contracts will likely grow, and some existing small defense firms could be driven out of business in the coming years, amid billions in planned defense cuts and the drawdown from two wars.

The cuts could stall progress in states such as North Carolina, home to the Army's Fort Bragg and the Marines' Camp Lejeune, where leaders have made it a priority to create jobs by helping entrepreneurs take advantage of the state's large military footprint.

Business and political leaders in Florida, South Carolina and other states have created public-private organizations in recent years to help entrepreneurs capture money from the Defense Department. The potential is staggering: The federal government spends about $300 billion annually on defense contracts with a goal that 23 percent go to small businesses.

Many of the small businesses are run by veterans who have spent years trying to win contracts that could anchor their companies' futures.

Experts say those small businesses are the most vulnerable during reductions because they're less flexible. Their survival often is connected to one or a few specific aspects of the military that can be cut or eliminated.

"Let's say you're a small business that makes toilet paper," said Fred Downey, vice president of national security at the Aerospace Industries Association, which represents major defense and aerospace manufacturers in Washington. "If the Army is 650,000 and it goes down to 450,000, the Army will be buying that much less toilet paper a year. You would have to assume there would be fewer companies needed to do that."

For companies trying to break into Defense Department contracting, the obstacles are even tougher now.

James Carawan and his wife, Monica, have sunk much of their savings into their Elizabeth City, N.C., business. They built a machine, called the Scorpion, which allows soldiers to replace the thick protective liner in Humvee tires so they can continue to run even when damaged.

The North Carolina National Guard purchased one this fall and expects it to more than cover the $25,000 paid for it by the end of the year, according to Capt. Daron Webb, who manages the Guard's maintenance facilities. Carawan has sold two Scorpions to the Georgia National Guard. And Carawan has gained the ear of Sen. Richard Burr, R-N.C., whose staff has reached out to the Army on Carawan's behalf.

"There is not an easy route into the Army," Carawan said in an interview. "I don't think it's possible for small business to actually introduce a product that is going to see the light of day without a big company to back it up."

Burr's aides acknowledged they're working with Carawan, but a spokeswoman declined to discuss their efforts, citing policies not to talk about casework.

In emails to Carawan, Army officials told him that they can't buy his machine because they don't have a "requirement" for it. That means there is no specific funding in place.

But federal documents show the Army has, however, purchased similar machines for soldiers in Afghanistan from larger companies without giving other businesses the opportunity to bid. The procurement documents state that no other known company meets the government requirements.

The Army said it's not its policy to discuss equipment it isn't using. Army spokesman Matthew Bourke said a lieutenant general did see a demonstration of the Scorpion product, but that it was not part of an official evaluation.

President Barack Obama announced this month that the military is at a "moment in transition." The Defense Department plans more than $450 billion in defense cuts over the next 10 years. Another $500 billion in defense spending could be cut beginning in 2013 under a plan approved by Congress last year, in which the reductions would take effect automatically because Congress' so-called "supercommittee" could not come up with an alternative way to reduce the deficit by $1.2 trillion.

More details will become clear in February when the president submits next year's budget. But in North Carolina, for example, the defense contract budget could be cut by an estimated $351 million through automatic reductions alone.

Those most vulnerable include defense contractors that perform equipment maintenance and manufacturers that provide components for major weapon systems that could be reduced or canceled, according to the North Carolina Military Business Center, which helps local businesses win federal contracts.

There is no question some jobs will be lost, but the money saved could be better used to reduce taxes or to create even more jobs in other industries, according to Lawrence Korb, a senior fellow at the Center for American Progress, a think tank in Washington.

Korb, a former assistant secretary of defense in the Reagan administration, says defense contracts are purposely spread across the country to make it harder for politicians to cut them — and the jobs they create.

"No matter how much you spend, you can't buy perfect security," Korb said. "Defense should not be a jobs program. You should buy it because you need it to defend the country."

A 2008 RAND Corp. study commissioned by the Defense Department reported "mixed success" in meeting its small business goals. The authors found that in 2007, about 20 percent of prime, or direct, contract dollars went to small businesses.

Those small businesses that do get their foot in the door say the challenges don't stop when you get a contract. Technology changes so fast that companies must always be looking over the horizon to make sure their products are up to date and don't become obsolete, said Yates Davis of Z-Mar Technology in Charlotte, N.C.

The eight-person company does about $9 million a year in sales — about 50 percent of it for the military — selling a variety of products, including bags, wristbands and grounding devices that eliminate static electricity that can damage electronics used in planes and weapons.

Defense cuts already have impacted Z-Mar Technology's bottom line. With the drawback, Yates said, the company must focus more on its commercial work to insulate itself from expected losses.

"You've got to have safety valves," he said. "When we were in the conflict with Iraq and Afghanistan, we were shipping a lot of stuff to Saudi Arabia. We were shipping a lot of stuff to the bases in Afghanistan and places like that which you don't see now. I'd definitely say our military business is directly related to whether we're at conflict or not."

Some consolidation among small contractors already is occurring around the country. Joy Thrash, executive director of the North Carolina Defense Business Association, said that because of the uncertainty, employers don't know whether they should hire or lay people off.

"It just like any other business that would have a major portion of their customers go away," Thrash said. "When there is less money to go around, then there is more competition of who is going to get that money. Someone is going to lose."

It's not unlike 2010, when then-Defense Secretary Robert Gates announced billions in budget cuts, said Downey of the Aerospace Industries Association. Many small companies that designed parts for some weapon systems went out of business.

"There will be some who will say, 'Look, I see the handwriting on the wall. I'm out of here,' right in the beginning," Downey said. "Others will try different strategies before they do that."

More than 1 million jobs across the country are at risk if approximately $1 trillion is cut from the defense budget over 10 years, according to an Aerospace Industries Association study released in November.

California could lose more than 125,000 jobs; Texas, 91,600; Florida, 39,200; Pennsylvania, 36,200; and Missouri, 31,200, according to the study.

Some see opportunities. Scott Dorney, executive director of the North Carolina Military Business Center, said he thinks the defense cuts will be offset by new business for local contractors who focus on the needs of a smaller military, including specialized training, advanced electronics and vehicle maintenance.

Carawan, who sells the Scorpion, thinks his product would meet this need, but Dorney added that the "federal government is not a risk taker." And the challenges are even greater for companies such as the Carawans', which wants to sell the military a new device when the Pentagon is looking at major reductions.

"What's the chance of coming in there and convincing them, 'Oh, by the way, here is something else that you ought to have,'" Dorney said. "In that situation it's going to get even more difficult to present unsolicited proposals."