Looming defense cuts: Small businesses watch and wait

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A "Throwbot" used by the U.S. Army

This soda-can-sized “Throwbot”, similar to ones manufactured in Minnesota, is just one example of the portable military technologies U.S. soldiers are using in the global war on terrorism. A transmitter and camera aid soldiers in quickly gathering more information about their immediate environment. (Photo by Chip Somodevilla | Getty Images)

ST. PAUL, Minn. — On Jan. 2, 2013, massive cuts to the Defense Department budget — $492 billion, spread out over nine years — are scheduled to start taking effect. The immediate impact will be across-the-board cuts of roughly 10 percent to all Defense programs and projects.

Minnesota has its share of major military contractors – among them Lockheed Martin, BAE Systems and Alliant Techsystems (also known as ATK) – but many contractors in the state are small businesses. They’re watching and waiting to see which of them will fall off the fiscal cliff of sequestration in January – or if Congress will turn away from the cliff by eliminating or at least mitigating the scheduled cuts.

In 2011, Minnesota businesses signed more than 8,000 contracts with the Defense Department worth a total of nearly $1.7 billion. Work on those contracts was done in all but ten Minnesota counties, according to one state report.

Defense money constitutes just 1 percent of Minnesota’s gross domestic product, according to calculations by Bloomberg Government, meaning the overall economic effect of defense cuts would not be serious. But the looming cuts could leave deep scars on communities and small businesses that depend on those dollars.

The far corners of defense spending

ReconRobotics, located in the Twin Cities suburb of Edina, produces a small, dumbbell-shaped, tough-as-nails robot equipped with two wheels, a microphone and a camera. It’s made to be tossed or driven into places where police officers or soldiers can’t or don’t want to go. Operators maneuver the robot with a big black remote control that includes precise movement controls and a high-resolution video screen.

ReconRobotics has just been awarded a nearly $14 million dollar contract by the U.S. Army for 1,000 of these throwable spybots.

Farther south and west, in the rural Minnesota community of Round Lake, Farley’s & Sathers Candy Company – makers of Now and Later, Fruit Stripe gum, and Brach’s — is doing business with the military, too. For a five-year period, between 2007 and 2011, the Defense Commissary Agency paid them more than $18 million for candy.

And not far from Round Lake, in Gibbon, Minn., the Army’s Institute of Surgical Research paid Midwest Research Swine nearly $200,000 in the same period for medical research animals.

These are stories from the far corners of defense spending.

Not your grandfather’s military-industrial complex

Peter Singer, director of the 21st Century Defense Initiative at the Brookings Institution in Washington, D.C., says many Americans have an obsolete sense of the defense industry.

“It’s now more of a services provider,” he says, “and so it’s a different kind of approach than our vision of the 1950s [with] big assembly lines spitting out fighter jets. Now you have very complex organizations that might do everything from making components for fighter jets to providing cyber security services.”

President Obama has requested $614 billion dollars for the Pentagon in fiscal year 2013, and more than ever, the huge contractors share the responsibilities and risks of defense work with small and medium-sized businesses. And right now, they’ve all got sequestration on the brain.

For 15 years, Tom Heid,  president of Aerospace Manufacturing in Eagan, has been a subcontractor manufacturing a part for the F-16 fighter jet. But something is holding the order up this year for the first time, and Heid wonders if the threat of sequestration is to blame.

“Does that mean [the order] is going to happen and we just haven’t been told?” he asks.

Todd Harrison, a senior fellow at the Center for Strategic and Budgetary Assessments (which itself occasionally does research work for the Pentagon), sees Heid’s uncertainty reflected at small businesses across the country.

“The extreme fiscal uncertainty is across the entire federal government,” he said, “but in the Department of Defense in particular, it is trickling down to those subcontractors … some of them could be very small companies with a few dozen employees and they may specialize in making a very particular piece of equipment that’s used in military applications. They have very little visibility up the chain into what’s going on and what might happen.”

BAE Systems is way up the chain. It makes fighter jets, attack submarines, missile systems and ammunition and it has a facility in Fridley, Minn. (The company is in the process of moving manufacturing work from Minnesota to Kentucky, but the company says it will retain 650 employees in Fridley.) In a statement, BAE spokeswoman Debra Parsons said sequestration cuts could result in the elimination of 10 percent of the company’s U.S. workforce – or approximately 4,000 jobs.

Opportunity in uncertainty

The uncertainties around sequestration do not mean a loss for all contractors. Some will gain, but it’s not yet clear which ones.

“If the Pentagon was to say ‘Okay, our budget is being slashed so we’re gonna buy less F-35s,’ which is a new fighter jet,” says the Brookings Institution’s Singer, “Texas would probably be hit pretty hard, because there’s a major factory for it in Texas and the workers there would suffer. In turn, workers in Missouri might go: ‘Hold it; this is a good deal for us,’ because they’re making the F-18 and the F-15 which, are the fighter jets to be replaced by the F-35. So that means their wares are more likely to stay viable and active for longer periods of time.”

Alan Bignall, CEO Recon Robotics

Alan Bignall, President and CEO of ReconRobotics (Photo courtesy of ReconRobotics)

Alan Bignall, president and CEO of ReconRobotics, the company that makes the throwable reconnaissance robots, sees another kind of opportunity in all of this.

“I’ve never been in the military, but if I put it in the context of my experience in large corporations: Whenever you challenge an organization to significantly reduce spending, it gets more innovative,” Bignall says. “And I’m sure if it was Apple looking at this or if it was Amazon or if it was Google looking at this they’d say, okay, I know how I can make money out of that. Now, the hard side of it is, part of that turns into lost or changed jobs. Those things are painful. They’re never easy.”

Bignall is in a more comfortable place than many contractors. He’s quite deliberately put his chips down on one of the defense industry’s indisputable areas of growth: robots. Still, just like everybody else, he’s watching and waiting.

This month, President Obama signed the Sequestration Transparency Act, which gives him 30 days from the day it was enacted to provide a report on how the cuts will be distributed.

The president’s list is unlikely to resolve the uncertainties. There is still the possibility that Congress will act to reverse sequestration before it is scheduled to take effect Jan. 2.

If you run a business that does contract work with the Defense Department, I want to hear from you — especially if there is something about your experience that is missing from this story. I’ve posted my questions here:

>> Are you affected by defense cuts?