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San Diego companies lead state in '11 defense contracts

Region has plenty to lose under sequestration

San Diego County led the state in the amount of defense contract dollars won in fiscal year 2011, or $11.76 billion, but that also means the region has the most to lose as a result of spending cuts.

The Washington, D.C.-based Center for Security Policy, a national defense advocacy group, took a look at how each U.S. city, county, state, congressional district and category of business owners would fare under the bleak budget environment.

The report shows how national average defense budget reductions could affect regions using actual 2011 data for revenues received by local contractors.

The planned federal cuts will reduce overall defense spending by $487 billion, or at least 9 percent, starting next year.

As a result, San Diego County’s defense contractors could see their contract revenues drop $1.06 billion a year over the next decade, estimates the center.

A 2011 law requires “sequestration,” or cutting another $500 billion over the next 10 years, or at least 18 percent when combined with the $487 billion cuts, unless Congress takes action this year.

If sequestration occurs, San Diego’s defense industry stands to lose $2.12 billion a year in contract revenue.

Contributing to the massive $11.76 billion pot, made up of 9,360 contracts, were BAE Systems San Diego Ship Repair Inc., which pulled in contracts worth nearly $348 million, and National Steel and Shipbuilding Co., which won $952.5 million in awards, according to the data.

Northrop Grumman Space & Mission Systems Corp. also was a big winner, with $250.3 million in contracts.

Los Angeles County came in second in the state, with $10.77 billion in contract revenue in 2011. That pool of money stands to fall by $1.94 billion each year, should sequestration occur.

No. 2 state

California was the No. 2 state in 2011 in the total number of contracts awarded (57,008) and the amount of contract revenue ($43.7 billion). But should sequestration occur, that number would dip by $7.87 billion.

Virginia was No. 1, with 58,938 contracts and $54.8 billion in contract revenue.

Rear Adm. James Rodman, chief engineer at Space and Naval Warfare Systems Command (SPAWAR), said San Diego's specialties and services will give the region an upper hand during uncertain times. He spoke during a SPAWAR Industry Executive Network panel held by Connect on Aug. 23.

“It’s pretty clear we are starting a next generation of warfare with regards to unmanned vehicles, used for surveillance, reconnaissance or warfighting capabilities,” he said.

San Diego-based General Atomics Aeronautical Systems Inc. has emerged as a leader in that space with its Predator unmanned aerial vehicle (UAV).

The company pulled in a whopping $1.67 billion in contracts in 2011 and calls the U.S. Air Force and CIA customers.

San Diego's geographical position also gives it a leg up in retaining defense dollars. The U.S. Navy is shifting its focus and strategy toward the Pacific.

“One region that provides that support is San Diego,” Rodman said.

San Diego houses the largest concentration of military in the world; it is the homeport to more than 60 percent of the ships of the U.S. Pacific Fleet and more than one-third of the combat power of the U.S. Marine Corps.

Sequestration would cut military down to its smallest size since before World War II, at a time when the United States faces growing threats from Iran and North Korea, a rising China, regional threats in the Middle East and an ongoing war in Afghanistan.

The cuts present a huge threat to national security as it relates to moving goods between countries, said Christine Brim, chief operating officer of the nonpartisan, nonprofit Security Policy center.

“How do we keep global trade going? It requires the ability to maintain a military presence around the world,” she said. “With these cuts we may not be able to do close to what’s required to keep the peace.”

Some of the commerce coming across the Pacific passes through potential conflict zones.

“The South China seas are turning into a dangerous neighborhood,” she said.

Lost earnings

The projected job loss for California is at least 125,789 jobs, and the state economy stands to lose $7.41 billion in lost earnings, according to a 2011 nationwide economic impact study from the Center for Regional Analysis at George Mason University.

There's already evidence that defense dollars are drying up.

“Companies along the supply chain have given notice their contract options may not be exercised again," said Brim. “Termination of contracts or simply delays of renewing contracts is happening a lot now.”

California’s small businesses could be the first ones on the chopping block when sequestration arrives.

“In 2013 we will see the industry contract and work to protect their bases with less outsourcing,” said Mark Kohlheim, vice president of San Diego-based Cubic Defense Applications Inc., who spoke on the panel Thursday. “That could have a negative impact on small business.”

Of the 467 small defense businesses in California last year, their combined $1.32 billion in revenues would shrink by $237.3 million.

“A lot of those companies operate on 2 to 5-percent margins. So it would be hard for them to stay in business at that point,” she said.

The 1,354 women-owned businesses would see their $1.24 billion contract revenues shrink by $223.16 million.

There were 1,505 minority-owned small businesses in the state last year, with contract revenues of $2.93 billion. If sequestration should occur, that number would be cut by $527.8 million.

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