WASHINGTON -- Defense spending cuts and the removal of troops from Iraq could drive some small North Carolina companies out of business and stall progress in North Carolina, which has made it a priority to help entrepreneurs take advantage of the state's large military footprint.
The federal government spends around $300 billion annually in defense contracts with a goal that 23 percent go to small businesses. Many are run by veterans who have spent years trying to win contracts to anchor their companies' future. Now they're finding their survival is often dependent on a product that the military can cut or eliminate.
"Let's say you're a small business that makes toilet paper," said Fred Downey, vice president of national security at the Aerospace Industries Association, which represents major defense and aerospace manufacturers in Washington. "If the Army is 650,000 and it goes down to 450,000, the Army will be buying that much less toilet paper a year. You would have to assume there would be fewer companies needed to do that."
The Department of Defense plans more than $450 billion in defense cuts over the next 10 years. Another $500 billion in defense spending could be cut beginning in 2013 through automatic spending cuts - a process called sequestration - triggered when Congress failed to develop a plan to reduce $1.2 trillion from the national deficit.
More details will become clear in February when President Barack Obama submits next year's budget, but in North Carolina, the defense contract budget could be cut by an estimated $351 million based through sequestration cuts alone.
Those most vulnerable include defense contractors that perform equipment maintenance and manufacturers that provide components for major weapon systems that could be reduced or cancelled, according to the N.C. Military Business Center.
In North Carolina, businesses in 86 of the state's 100 counties perform defense-related work. And defense contractors in the state received $3.6 billion in prime federal contracts in 2010 for products as varied as body armor for soldiers, parachutes, weapons components and helmet cameras for dogs.
Not everyone thinks cutting out such buying is a bad thing.
Lawrence Korb, a senior fellow at the Center for American Progress and a former assistant secretary of defense in the Reagan administration, says defense contracts are purposely spread across the country to make it harder for politicians to cut them - and the jobs they create.
But Korb said the money saved could be better used to reduce taxes or create more jobs in other industries.
"No matter how much you spend, you can't buy perfect security," Korb said. "Defense should not be a jobs program. You should buy it because you need it to defend the country."
'Mixed success'
But small businesses that have defense contracts say they are hard won.
A 2008 Rand Corp. study commissioned by the Defense Department reported "mixed success" in meeting small-business goals. The authors found that in 2007, about 20 percent of prime, or direct, contract dollars went to small businesses.
Those small businesses that do get their foot in the door say the challenges don't stop once a contract has been awarded. Technology changes so fast that companies must always be looking over the horizon to make sure their products are up to date and don't become obsolete, said Yates Davis of Z-Mar Technology in Charlotte.
The eight-person company does about $9 million a year in sales - about 50 percent of it for the military. It sells a variety of products, including bags, wrist bands and grounding devices that eliminate static electricity that can damage electronics used in planes and weapons.
Defense cuts already have affected Z-Mar Technology's bottom line. With the troop withdrawal, Yates said, the company must focus more on its commercial work to insulate itself from expected losses.
"You got to have safety valves," he said. "When we were in the conflict with Iraq and Afghanistan, we were shipping a lot of stuff to Saudi Arabia. We were shipping a lot of stuff to the bases in Afghanistan and places like that which you don't see now. I'd definitely say our military business is directly related to whether we're at conflict or not."
Some consolidation among small contractors already is occurring around the country.
Joy Thrash, executive director of the North Carolina Defense Business Association, said because of the uncertainty, employers don't know whether they should hire or lay people off.
"It just like any other business that would have a major portion of their customers go away," Thrash said. "When there is less money to go around, then there is more competition of who is going to get that money. Someone is going to lose."
It's not unlike when then-Secretary of Defense Robert Gates announced billions in budget cuts in 2010, Downey said. Many small companies that designed parts or services for weapons systems went out of business.
"There will be some who will say, 'Look, I see the handwriting on the wall. I'm out of here,' right in the beginning," Downey said. "Others will try different strategies before they do that."
Promoting growth
North Carolina leaders have been actively trying to promote growth in the state's defense industry. North Carolina has the third most active-duty service members but receives less than 2 percent of awards in prime defense contracts. That doesn't include subcontracting work for prime contractors in other states.
Last year, North Carolina's senators, Democrat Kay Hagan and Republican Richard Burr, joined U.S. Rep. Larry Kissell, a Democrat from Biscoe in Montgomery County, to host a trade show for potential defense contractors. The event attracted more than 500 North Carolina businesses and major defense contractors to Fayetteville.
Hagan said it's hard to say how much the defense contracting budgets in North Carolina would be affected by defense cuts.
But she pointed out that North Carolina ranks third in the nation in terms of military footprint and 26th in the nation in defense contracting.
"Implementing sequestration could widen that gulf and that is not an option for me," she said.
Some see opportunities.
Erik Lensch of Argand Energy Solutions in Charlotte anticipates the military will seek out companies like his that install solar panels and other energy systems to meet federal mandates for energy reduction and to save money. In 2010, the company built a large solar thermal system for the Navy Weapons Station in Charleston, S.C. He plans to bid on several more contracts at N.C. military bases.
Scott Dorney, executive director of the N.C. Military Business Center, said he thinks the defense cuts will be offset by new business for local contractors who focus on the needs of a smaller military, including specialized training, advanced electronics and vehicle maintenance.
But, Dorney added, the "federal government is not a risk taker."
And the challenges are even greater for companies who want to sell the military a new device when it's looking at major reductions.
"What's the chance of coming in there and convincing them. ... 'Oh, by the way, here is something else that you ought to have,'" Dorney said.
"In that situation it's going to get even more difficult to present unsolicited proposals."
