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Weapons Makers Look Overseas As Pentagon Cuts Back

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WASHINGTON — Foreign governments looking to kick the tires of fighter jets and cargo planes at this week's air show in Paris will likely hear a clear message from U.S. defense contractors: We need your business now more than ever.

With the United States looking to cut defense costs and rethinking the way it fights wars, many defense companies are looking for international buyers to take the big, pricey weapons that the Pentagon no longer wants or needs fewer of. U.S. contractors are chasing some lucrative deals, but could also face some legal and political hurdles as they hawk weapons overseas.

Boeing Co. and Lockheed Martin Corp. are competing to sell fighter planes to countries such as India and Brazil. Boeing is trying to spark international interest in its C-17 cargo plane. Middle Eastern nations fearful of threats from Iran are bulking up on missile defense equipment from Lockheed and Raytheon Co.

"This is a world market right now," says Chris Chadwick, Boeing's president of military aircraft.

Globalization is nothing new for many U.S. industries, which often use overseas operations and sales to tap into fast-growing areas like China and as a hedge against domestic downturns. Some of the nation's biggest manufacturers, companies like Caterpillar and General Electric, make more than half of their sales overseas.

But the defense industry is closely tethered to one primary buyer _ the U.S. government. It has been a lucrative relationship. Defense spending is up more than 40 percent over the past eight years, fueled in part by spending on wars in Iraq and Afghanistan. Much of the money flowed to defense contractors that supply the Pentagon with everything from warships to bullets.

Overseas arms sales represent a relatively small segment of defense contractor sales. But many are turning to the global markets for growth now that the appetite for big and expensive weapons is waning in the United States. The push is helped by countries worried about security threats from nations such as North Korea and Iran. Many European allies need to upgrade their aging equipment, and are turning to U.S. companies as likely suppliers.

However, budgets for big weapons are getting tighter as costs like personnel expenses eat up more Pentagon resources. Defense Secretary Robert Gates proposes spending more money on tools like unmanned drones to fight insurgencies instead of big and pricey equipment like $140 million apiece for F-22 fighters jets meant for more conventional wars.

In the 2008 fiscal year, the military spent $164 billion to buy weapons. For the 2010 fiscal year, the Pentagon proposes spending only $131 billion, though that number will probably grow when Congress adds weapons spending as it reviews the budget.

Big defense companies would take a hit. Lockheed will have to shut down its assembly line at its big Marietta, Ga. plant, putting thousands of jobs at risk. Boeing, which gets 80 percent of its defense unit sales from the Pentagon, could stop selling the $276 million C-17.

"There is a softness in the home market right now," said Richard Aboulafia, an aerospace analyst with the Teal Group.

That could grant some new life to programs that would be cut under the Pentagon's new budget.

The F-22 program is slated to end at 187 planes for the U.S. Air Force, far fewer than originally envisioned. Japan and Australia are considered potential sources of new sales, but federal law barring export of the technologically sensitive plane would have to be overturned. The prospects of that remain unclear.

Congress put eight more C-17s back into the budget. Boeing wants to make 16 per year and hopes to cover the shortfall overseas. It recently cut a deal to make four for the United Arab Emirates. The contractor is also trying to persuade foreign governments to buy the F-18 instead of the F-35, made by a team led by Lockheed.

Defense companies will display their jets, engines, missiles, pilotless drones and other hardware for several days this week at an airfield outside Paris. The show is one of the biggest that brings together contractors and militaries from around the globe to broker weapons deals.

New markets have emerged. Iraq wants to buy Lockheed fighter jets, Boeing helicopters and Abrams tanks made by General Dynamics Corp. to rebuild its military. The nation was the second largest potential buyer of U.S. military equipment last year, behind Israel, according to a March report by the Arms Control Association, a Washington think tank.

The Pentagon notified Congress it planned to sell $74.5 billion worth of U.S. military equipment to 25 countries in 2008, nearly double its proposed arms sales from 2007. Iraq accounted for $18.7 billion of that total.

Congress must approve weapons sales to foreign governments that are negotiated between U.S. contractors and foreign countries through the Defense Department. Not all notifications lead to sales and they cover mostly large purchases, but Congress has never moved to block a sale once it was formally notified.

But providing weapons to foreign governments is often politically sensitive. The Pentagon and Congress are supposed to consider the effect that helping nations increase firepower will have on regional conflicts or stability, like the rivalry between Pakistan and India or rearming Iraq in a volatile Middle East. For example, the sale of F-16s to Pakistan was long delayed due to Pakistan's development of nuclear weapons.

Regional stability could be an issue for sales to India, which is being courted by Lockheed and Boeing for the right to build 126 fighter jets, a contract potentially worth $11 billion. India already bought $2.1 billion worth of anti-submarine planes from Boeing earlier this year.

"Fighter jet sales to India would most certainly be viewed by Pakistan as a problematic development," said Daryl Kimball, executive director of the Arms Control Association.

In Europe, U.S. defense companies will face stiff competition from suppliers like Saab, European Aeronautic Defence and Space Co., and BAE Systems. Lockheed, for example, is trying to hold together a coalition of nine potential F-35 buyers also being courted by makers of the Eurofighter jet.

Affordability remains an issue, especially for European buyers saddled with struggling economies. But defense analysts said European nations that need to upgrade their aging equipment and those like India that are building their militaries will provide ample markets for U.S. defense companies.

"Weapons could be the single biggest U.S. export item over the next 10 years," said Loren Thompson of the Lexington Institute.

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