US troop surge to increase defense orders

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The US plans to send 30 000 more US troops to Afghanistan and this should generate niche orders for some defense companies but will not completely offset an expected slowdown in weapons procurement in coming years.

Defense analysts said the US build-up, due to be phased in over just six months, will spur demand for select equipment, including armoured trucks, ammunition, advanced radios, helicopters and contractor services.

But the increase in troops in Afghanistan will be more than offset by a planned decrease of some 75 000 in troops in Iraq, and will not have any major effect on already announced cuts to some major defense programs, analysts said.

One of the companies likely to benefit most is Oshkosh Corp, the Wisconsin-based company that is building thousands of armoured all-terrain trucks for US troops in Afghanistan, where 80% of US casualties are caused by roadside bombs and other explosive devices.

Oshkosh is already due to build over 6200 mine-resistant, ambush-protected (MRAP) all-terrain trucks, but deployment of 30 000 more troops to Afghanistan could result in orders for 2000 to 4000 more trucks, said Virginia-based defense consultant Jim McAleese.

Andy Hove, president of Oshkosh’s defense unit, said his company was ready and able to build more trucks if needed. He said the Pentagon’s initial requirements for the program had already called for manufacture of 5000 to 10 000 trucks.

The company, which has rapidly increased its production rate over the last few months, expects to be producing 1000 trucks a month by next month, and said it can continue producing trucks at that rate as long as needed.

More orders could generate an additional $800 million to $1.6 billion of revenue for the company, whose shares were trading 2.5% higher at year high levels of $40.74 on Tuesday afternoon. They closed 1.6% higher at $40.38.

Harris Corp and ITT Corp, which build the radios that go on the trucks, would also likely see increased orders, said Virginia-based defense consultant Jim McAleese.

Service providers like DynCorp, Fluor Corp and possibly KBR Inc, as well as companies specialized in intelligence like ManTech International Corp could also grab some new business, said Loren Thompson of the Virginia-based Lexington Institute.

Jacques Gansler, a former Pentagon acquisition chief and professor at the University of Maryland, said the Pentagon was relying heavily on private contractors to handle logistics and other services in Iraq and Afghanistan and they made up about 65 percent to 75% of the US force structure there.
"Counterinsurgency warfare is more about people than weapons," Thompson said. "This might be a boon for service providers but it’s not going to be huge boost for companies that make weapons."

Still, companies like Boeing Co and the Sikorsky Aircraft unit of United Technologies Corp, which build helicopters for the US military, could pick up a few more orders, analysts said.

The Pentagon’s drive to beef up its intelligence gathering capabilities could also spark some additional demand for sensors made by Northrop Grumman Corp, Boeing and other companies that worked in that area, they said.

Michael O’Hanlon, analyst at the Brookings Institution, cautioned against too much hand-wringing on the part of defense contractors, noting that overall defense spending remained at a high level of around $700 billion.



The new surge would benefit mainly companies that worked in the field, providing spare parts, engines and all sorts of logistics, and the Pentagon’s base budget would still likely increase 1% to 2% in real terms in fiscal 2011, he said.
"We’re largely in a treading water period. But we’re treading water in a gold soup."