"The quantities of arms the U.S. is sending to Ukraine are eye-catching: thousands of artillery shells and missiles, and hundreds of thousands of rounds of ammunition, just to name a few. The total security assistance package, now worth more than $27 billion, should in theory mean a big payday for major weapons producers.
Yet the largest ground military operation in Europe since World War II isn't translating into boom times for U.S. defense contractors. Hobbled by supply-chain disruptions, a tight labor market and a Pentagon procurement process that can take years, arms makers have been struggling to respond to the soaring demand.
Lockheed Martin Corp., the world's largest defense company by revenue -- and whose Javelin antitank missiles and Himars rocket launchers have been central to Western support for Ukraine -- said last week that it expects annual sales to shrink for the second year in a row.
Weapons suppliers, such as Lockheed, and Raytheon Technologies Corp., which coproduces the Javelin and makes Stinger antiaircraft missiles, don't expect a bump in Ukraine-driven sales to emerge until 2024.
That contrasts with investor's views early in the conflict. Lockheed Martin shares rose around 20% in the two weeks following Russia's military operation in Ukraine on Feb. 24. Other defense companies experienced similar surges as global defense stocks rose 32% over the course of 2022.
"While defense moves in years, the equity market moves in seconds," said Rob Stallard at Vertical Research Partners, an equity consulting firm.
Sentiment later cooled as investors waited for Ukraine-driven demand to turn into orders and profits and repositioned themselves for a potential economic recession.
The defense sector is down about 6% so far this year, underperforming the broader stock market. Lockheed shares have fallen almost 5%, while those of Northrop Grumman Corp. -- which is building the new B-21 bomber -- have lost about 18%. Fears over federal budget wrangling with a split Congress have weighed on defense stocks.
Recent share price retreats for U.S. defense contractors contrast with the trend among European arms makers. Rheinmetall AG, which coproduces the Leopard tanks headed for Ukraine, is one of the European defense stocks that remain around record highs. European governments responded to the Ukraine with plans for higher military spending, with Germany pledging to double its own defense budget over the next three years.
A big challenge for U.S. weapons makers is the gap between what the Pentagon has said it plans to send to Ukraine, and what it is actually spending to buy new armaments from defense companies. While the Pentagon has pledged to send nearly $30 billion in military supplies to Ukraine and refill its own stocks, less than $10 billion has so far been awarded in contracts to defense companies, according to the Defense Department.
The sheer amount of weapons being used in Ukraine surprised Pentagon leaders. "One of the big lessons learned for the U.S. defense industrial base is the significant consumption rates," said Gen. Mark Milley, chairman of the Joint Chiefs of Staff.
Many of the arms being sent to Ukraine have been drawn from existing inventories, and the production lines for those weapons had gone cold or weren't equipped to respond to a surge in new orders.
When the Pentagon ordered new Stinger antiaircraft missiles -- widely used in Ukraine -- in August, it was the first U.S. order from Raytheon for the weapons in 18 years. By December, Ukraine had burned through 13 years of production, said Greg Hayes, chief executive of Raytheon. Five years' worth of Javelin missiles had also been used in the conflict.
Raytheon was still making some Stingers for an overseas customer before Ukraine, but found some suppliers had gone out of business and had to redesign parts to boost production.
"You have to re-create this entire system that was basically shut down and went scattered to the winds," the Pentagon's chief weapons buyer Bill LaPlante said.
Mr. LaPlante said the industry and the Defense Department needed to rethink the way it buys weapons. In peacetime, some of the money budgeted for bombs and bullets was routinely cut to make way for more exotic purchases, like hypersonic missiles or airborne lasers.
Over the past 20 years, stocks of munitions were deemed to be adequate as the U.S. focused on conflict in the Middle East that required more air-launched weaponry and initiated huge programs including the F-35 combat jet. With munitions orders down, companies pulled out of the business, factories closed and the U.S. was often left with one supplier for key parts. For example, the metal cases for artillery shells are produced in a single plant in Iowa.
When Covid-19 hit, defense companies secured exemptions in the early days of the pandemic that kept their factories open, avoiding many of the supply-chain challenges facing the wider manufacturing sector. That lasted until the fall of 2021, when cracks started to appear. Some workers became burned out amid the pressures of working during Covid, which required protective equipment and caused frequent staff shortages due to sickness, executives said.
Also, the rebound in air travel saw companies that had pivoted to making mechanical and electronic parts for defense equipment switch back to supplying Boeing Co. and Airbus SE jetliners.
Defense companies started to report delays in deliveries
Lockheed Martin Chief Executive Jim Taiclet has been one of the most vocal proponents of the need for defense companies and the Pentagon to react to the cracks that have appeared in the defense production and to ensure the U.S. can make what it wants, when it wants.
In May, Mr. Taiclet hosted President Biden at Lockheed Martin's Javelin assembly facility in Troy, Ala. The company pledged to double Javelin production, but estimated it would take two years to reach that rate, in part because it won't have enough rocket motors until 2024.
Lockheed Martin and Raytheon share around $4.2 billion of the $7 billion in weapons and equipment contracts so far awarded by the Pentagon to arm Ukraine and replenish U.S. stocks." [1]
1. Defense Sales Stall Despite Ukraine Effort
Cameron, Doug. Wall Street Journal, Eastern edition; New York, N.Y. [New York, N.Y]. 01 Feb 2023: B.1.
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