A Dangerous, Wrongheaded Deal

How the Obama administration gave Iran a win and sold out our Israeli allies.

According to the interim agreement regarding Iran's nuclear program that was reached this weekend in Geneva, not one centrifuge will be destroyed. Not one pound of enriched uranium will leave Iran. Not one American unjustly detained in Iran's notorious prisons will be released. But Iran will start to receive, in a matter of days, $7 billion in relief from international economics sanctions.

This appears to be an unfortunate case of history repeating itself. As happened with North Korea in 1994, fascination with the negotiation process has blinded American diplomats to the true nature of their negotiating partners. Substantive sanctions relief has been exchanged for vague promises that the growth of a nuclear program will be curbed. Press reports on that failed deal are ominously similar to what we are reading today:

"President Clinton on Tuesday approved a deal reached by U.S. negotiators in Geneva to stop North Korea's nuclear weapons program, saying the agreement ‘will make the United States, the Korean peninsula and the world safer'.... The accord, concluded Monday in Geneva, gives North Korea a series of economic and political benefits in exchange for promises to freeze and eventually dismantle its current nuclear facilities, which the CIA believes have been used to make the material for one to two nuclear weapons."

We all know how this story played out. North Korea lied, cheated, and stalled for time, all the while using the economic windfall from the United States to finance its nuclear program until it was ready to test a weapon in 2006.

Likewise, the mullahs in Tehran can now laugh all the way to the bank while they spend the time and money they have gained in Geneva pursuing nuclear capability. And all Americans have bought for $7 billion is the prospect of additional negotiations that might result in progress at some point down the road. But given the unfortunate results of these most recent negotiations, it is difficult to place much faith in such rosy scenarios -- especially as the existential threat represented by a nuclear-armed Iran makes North Korea pale by comparison.

Those who do not learn from history, the saying goes, are doomed to repeat it. In this case, we cannot afford to let the Obama administration learn on the job. It is time to recognize the hard lessons of the last 20 years and apply them to this process.

We should have demanded preconditions from the Iranians before any direct meetings took place, and we can at least do so now before additional negotiations begin. We can start by reclaiming the moral high ground and demand the Iranian regime immediately and unconditionally release the three Americans they are unjustly detaining, Saeed Abedini, Amir Hekmati, and Robert Levinson. American citizens are not bargaining chips, and there should be no further discussion while they are languishing in prison.

In addition, Iran should affirm Israel's right to exist as a Jewish state. The noxious rhetoric in which Israel is referred to as a "rabid dog" that is "doomed to failure and annihilation" should be utterly unacceptable to the United States. Tolerating such verbiage on the eve of the Geneva negotiations sent a dangerous signal to Iran that the Obama administration was more eager to get a deal than to stand with Israel.

Finally, the United States should be crystal clear that to gain any further sanctions relief, Iran must take concrete steps not just to pause the nuclear program but to dramatically scale it back by, for example, ceasing the enrichment of uranium, exporting any remaining stockpiles of enriched uranium, and permitting full and unconditional inspections of the Arak nuclear facility. The burden should be on Iran, not the United States, to demonstrate it is a good-faith negotiating partner.

All the smiling embraces between diplomats in Geneva after the interim deal was signed notwithstanding, the Iranian regime remains a brutal and oppressive dictatorship that pursues nuclear weapons for the purpose of dominating the Middle East and threatening America and its allies, notably Israel. President Barack Obama and Secretary of State John Kerry should reconsider their policy of rapprochement with Iran that is dismaying to Jerusalem and encouraging to Tehran.

Israeli Prime Minister Benjamin Netanyahu predicted this agreement would be a "very, very bad deal" and has now correctly identified it as an "historic mistake." Meanwhile, Iranian President Hassan Rouhani tweeted his satisfaction, saying that "breaking down the architecture for sanctions has begun."

The administration has gotten it backwards and it is time to reverse course before any further damage is done.



Is the Sky Really Falling?

The future of the aerospace defense industry is not nearly as bad as the industry would have you believe.

Let's get this straight: the Defense Department and the defense industry survived the sequester. But you'd be forgiven for thinking otherwise, given a year of dire forecasts from the aerospace industry that 2013 would see the decline and fall of the economy -- and with it America's military capability.

The forecasting failure of the Aerospace Industries Association (AIA) notwithstanding, the industry has not given up. Facing a second round of the sequester this coming January, the halls of Congress and the media are once again ringing with forecasts of doom. AIA CEO Marion Blakey is back on the hustings, telling the Senate Defense Appropriations subcommittee that another round of sequester could cut $147 billion in defense acquisition over the next five years, calling into question "our industry's ability to deliver these capabilities in the future."

Here we go again; the industry never gives up, despite some lobbyists whining to National Public Radio that they are somehow incapable of defending their interests before the Congress and the public. And some members of Congress, especially those on the defense committees, remain ever susceptible to the pitch.

In reality, the defense industry is surviving the sequester mighty well, anticipating a downturn in the budget, making corporate moves that lock in profitability, and ensuring they remain in the game, whatever the level of the budget.  

Let's start with the basics: Is the defense industry hurting as a result of the budgetary sequester? Not really. Keep in mind that the decline in defense spending preceded the Budget Control Act by more than two years. Defense budgets started coming down after FY 2010, three years before the sequester of FY 2013. What the industry is dealing with is a long-term drawdown in the defense budget and America's military forces, something that happens after every war. In every drawdown since Korea, moreover, it is procurement -- buying things from the private sector -- that goes down most deeply and most quickly.

The big guys in the industry -- Lockheed Martin, Northrop Grumman, General Dynamics, Boeing, L-3, Raytheon -- have been coping for several years now with a decline in defense buying, and coping rather well, in fact. The last quarterly results are a testimonial to their hardy survival. Lockheed Martin's net earnings were up 16 percent from last year; they generated $115 billion in orders, raising their backlog to nearly $79 billion. Northrop Grumman also did well, reporting an 18 percent increase in earnings per share. And General Dynamics reported net earnings up $50 billion over the prior year. Sounds like defense continues to be not only good business, but profitable, as well.

How do they keep this fiscal success up, in the face of AIA's doom-and-gloom scenario? At a conference I attended at the Naval War College last week, savvy industry analyst Byron Callan of Capital Alpha Partners pointed to part of the reason: unlike the 1990s, the big guys have their fiscal house in order. Their debt-to-capital ratios are healthy (low debt), the margins are great, profit rates are steady, and they have a lot of generated cash in hand.

While sales may go down (and all the companies are reporting projections of lower sales in the future), they aren't disappearing. And the Defense Department has a big stake in keeping profits up at a rate that makes it worthwhile to stay in the business. Unlike commercial players, these big guys stay out of the private market (except for Boeing, which is nicely positioned with military sales and commercial jets). When the defense giants wander into the commercial world, their record is, as Martin Marietta CEO Norman Augustine once said, "unblemished by success." Just ask Grumman how their bus business fared in the 1970s, for example.

So, how have they managed to survive so nicely? Turns out that the big defense companies are what I like to call "canaries in the coal mine" of defense budgeting. They know earlier than anyone that a drawdown is coming and, rather than die like the proverbial canary, they start doing the things they need to do to survive. They may squawk in public, but they are pedaling fast behind the closed door.

First, they started long ago to reduce their wage bills. While AIA cried havoc about job losses from the sequester, the major contractors started laying off people long before the Budget Control Act (BCA) was a gleam in Congress's eye. Lockheed, for example, reduced its workforce from 146,000 to 116,000, starting back in 2008 -- when defense budgets were still growing.

Second, they have been selling off parts of the company they figured would not do well in a declining market, like Northrop Grumman did with its shipbuilding business in 2011, months before the BCA was passed.  

Third, they have been buying companies and technologies they think will do well even in a declining defense market, like small cybertechnology firms with big upward potential, thanks to the roughly $10 billion government investment in cyber offense and defense.

Fourth, they are refocusing their efforts on the international defense market -- those places where the budgets are growing -- to make up for some of the lost sales to the Pentagon.  The market for defense sales in India has been hot with competition and Asian defense budgets are offering new sales opportunities to a U.S. industry that already dominates international arms markets.

Fear not, even with sequester, the big companies in the defense industry are thriving. Knowing your market, hitting your financial targets, shrinking the workforce, finding the niches -- these strategies usually work well.

But these are the giants of industry, the companies that integrate the components of big hardware like aircraft, missiles, tanks, and ships. How about the "little guys" -- the companies that make the components (landing gear, switches, dials, joy sticks, windshields, etc.) that the big aerospace boys put together? Are they more vulnerable to a draw down? Will their technologies and the work they do disappear, along with the jobs they create, when sales fall?

According to several experts I've spoken with, the little guys are actually often more flexible than the big aerospace firms, working back and forth between the commercial and the defense world. The landing gear they build turns out to work for commercial aircraft. Same for the canopies and windshields. In fact, a lot of what goes into a final defense product is connected in some way to the commercial market. As Peter Dombrowski of the Naval War College put it, "There's always somewhere where there is a permeable barrier between defense and commercial" when you look at an aircraft, ship, tank, or missile.

And the truth is that some of the little guys are pretty big -- Microsoft, Apple, Hewlett Packard, even Google have all entered the defense market, bringing commercial technology into the defense world ("spin on") instead of drawing technology out of the defense world ("spin-off").

If anything, the closer integration between defense and commercial technologies and parts is even more advanced today than it was when I was looking at this question more than 25 years ago. Even then, however, subcontractors in defense reported that they were pretty agile when defense dollars from the big boys dried up. They kept their hand in commercial markets, husbanded their cash, and worked at turning to new opportunities quickly.

Way back in the good old days of the 1950s, the old "defense industrial base" was more of a hermetically sealed box, but not today. As the drawdown proceeds, the emerging data suggest that the whining and fear-mongering coming from the industry is more of a false alarm than a description of reality. The big contractors whose names everyone knows are actually surviving well. And the subcontractors are more adaptable than we think.

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