Defense Execs Predict Production Halts If Fed Shutdown Stretches To Mid Month

WASHINGTON – The federal government shutdown won’t hurt much this week but after two to three weeks, contracts won’t get paid or issued, testing won’t get done. and production of major weapons systems may be disrupted or halted.

That was the consensus of several senior defense executives, including Exelis CEO David Melcher, at a gathering held here today by the Atlantic Council.

If contracts are not paid, then companies’ cash flow will be hurt, Melcher said during his presentation. “I’m just not a big fan of the brinkmanship being practiced here,” he said when I asked him just what worried him about the next few weeks, especially since the federal debt ceiling must be lifted in the next two weeks to maintain America’s good faith and credit rating.

And then, of course, there’s the whole optics thing – like those World War II veterans shoving metal barriers aside to get to the ugly memorial on the Washington Mall. If you want to know how much this worries Republicans, take note of the fact that Republican National Committee Chairman Reince Preibus has offered to pay to keep the memorial open for the next 30 days.

This drew a delightful rejoinder from the progressive Truman Project’s chief spokesman. “It’s hard for America to claim a mantle of world leadership if Congress can’t keep the lights on. Mr. Preibus should have more respect for the Memorial and our nations’ veterans than to use them as a political prop,” Dave Solimini said in a statement.

In the old days (before the Tea Party) when the CEO of a sizable company came calling, Republicans would listen respectfully and they might agree. But when Exelis CEO Melcher walks the halls – as he said he plans to do over the next few weeks with groups like the Aerospace Industries Association to try and convince Republicans they must increase the debt ceiling to avoid damaging America’s credit rating and international economic standing – there’s a good chance he’ll be seen by Tea Party members as someone who supports big government because it benefits his company.

Also, few Tea Party members sit on House Armed Services Committee, so defense executives are unlikely to have much impact on their views.

In other news, Melcher made the intriguing prediction that the defense industry will begin a new round of consolidation come 2015. This won’t be like the enormous round of mergers and acquisitions that marked the 1990s after the famous Last Supper dinner in 1993. It will probably be marked by defense service companies getting gobbled up, to be followed by lower level consolidation on the product side, Melcher said. He said he thought the Pentagon would approve most such mergers as long as they didn’t involve critical national technologies or a diminution of the defense industrial base.

How robust is the industrial base? “In almost every case where problems crop up in programs, it’s almost always related to the supply chain,” Melcher said today.

At a time when even defense industry leaders like him say they are worried about the “durability” of the defense industrial base, mergers could only take place if the financials and product mixes were compelling. Let’s see if Deputy Defense Secretary Ash Carter or acquisition head Frank Kendall say anything new about the Pentagon’s views on merger approvals in the next few months.