TO OUR SHAREHOLDERS, EMPLOYEES, AND CUSTOMERS:
Our share of global arms agreements quadrupled between 1988 and 1994.
Strong growth in lean years is the hallmark of competitiveness, and USArms has had a very competitive year. Some shareholders were worried by my campaign promise to “press for strong international limits on the dangerous and wasteful flow of weapons to troubled regions,” but I assure you that I have held fast to the course set by former CEOs Ronald Reagan and George Bush. The end of the Cold War has caused a drop in both domestic and Global arms demand; USArms has responded by spending shareholder money to develop export markets in Asia and the Middle East. As a result, our share of global conventional arms agreements rose from 17 percent in 1988 to 70 percent in 1993. And, thanks to the efforts of our marketing team, the majority of our 1993 sales were to a promising new market–the developing world. in order to ensure stability, unelected governments and developing countries feel the need to acquire more arms; we are reaching out to them vigorously. Where we once catered to Cold War political allegiances, we now aggressively respond to supply and demand. With Russia, our major competitor, still severely crippled, we can look forward to several years of spectacular growth.BILL CLINTON, Chief Executive Officer
1993: A YEAR OF OUTSTANDING SALES GROWTH
By increasing a country’s offensive-strike capacity, combat aircraft promote more regional arms competition than any other USArms export.
USArms has been able to strengthen our worldwide market share through the efforts of our arms export and production team. Our marketing division–the Pentagon, the State Department, and the Commerce Department (under the brilliant leadership of Secretary Ronald Brown)–has worked with subsidiary defense contractors like Martin Marietta to expand international markets and sustain our industrial base.
With all of us pulling together, 1993 saw USArms leading the globe in exports of combat aircraft. We expect that 1995 will be the first year we sell more fighter planes to foreign governments than we do to our own. And by 1996, exports of these aircraft will outpace falling domestic sales by more than five to one.
LOW-INTENSITY CONFLICTS: A BOOMING MARKET
Low-intensity conflict merchandise: To suppress possible postelection rioting, Mexico recently purchased the Cobra Riot Control Vehicle from USArms.
Overall, trade in large weapons systems is in a downward trend. Therefore, we are diversifying our products and developing new marketing strategies.
Worldwide, many post-Cold War leaders are faced with conflict within their own borders, which they must quell as quickly and quietly as possible. The beginning of 1994 saw 18 full-scale ethnic wars raging, 38 low-intensity conflicts for control of regions like Northern Ireland and the Israeli-occupied West Bank, and 8 potential conflicts repressed by supervigilant states.
USArms helps the world’s leaders control civil conflicts. Small arms and sophisticated riot-control vehicles are less expensive than major conventional systems and therefore easier for poor nations to buy. And under the Arms Export Control Act, we can sell weapons valued under $14 million without government interference.
For us, the benefits are obvious: These products fill a small but important market niche that supplements our high-dollar trade in larger systems. We estimate that USArms exports of products designed to control low-intensity conflicts will escalate from $1 billion in 1991 to $1.5 billion by the end of 1996.
TARGET: THE DYNAMIC GLOBAL ARMS MARKET
Overall, USArms has seen our domestic arms sales tumble in recent years. With demand for weapons from America’s traditional allies also dropping, USArms has developed creative entry points into the global arms market.
We are marketing intensively in regions experiencing conflict and in countries torn by ethnic uprisings. In particular, we have taken an aggressive approach to those countries that spend more on military budgets than on social programs, on the grounds that political pressures should not interfere with our fiduciary obligation to sell products. Despite a 48 percent drop in global arms deliveries to the third world between 1988 and 1993, our Third World deliveries rose 7 percent due to our successful marketing efforts. Some examples:
Respectively the number one and two buyers of major weapons systems in the world (not just from USArms), Greece and Turkey are locked in a frantic arms race. In 1993, the two countries combined to purchase 1,603 tanks from USArms–up from a previously unprecedented high of 1,180 the year before. USArms sends sophisticated technology to both countries, each of which now licenses technology for Stinger air-defense missiles. We anticipate that such sales will increase pressure to develop more sophisticated weapons for U.S. security, in case our allies should ever turn against us.
Turkey, situated between the Balkans and the Middle East, is a vital security partner for the United States. In 1993, USArms sold 22 attack helicopters to Turkey–almost four times as many as in 1992. Moreover, Turkey is reportedly using USArms planes to intensify its battle against the Kurds and is engaged in a tense arms race with its historic rival, Greece, which is also a booming arms market.
THE MIDDLE EAST
In 1990, 6 of the 15 countries in the Middle East spent at least two-and-a-half times more on their militaries than on health and education combined. This region is clearly a booming market. In the two-and-a-half years after the Gulf War, we racked up an impressive $43.8 billion in sales to the Middle East. We recognize that U.S. intervention in the region might mean combat against a sophisticated military that we ourselves have armed. But, as in the Gulf War, America would ultimately prevail.
In the Middle East, USArms has maintained massive sales to Saudi Arabia despite analysts’ prediction that the government might be forced to address rampant social inequalities with programs that would cut into military spending. Last year’s $12.5 billion in sales to Saudi Arabia accounted for 38 percent of our total foreign military sales. Critics say our sales to Saudi Arabia may stimulate regional insecurities and encourage a fundamentalist uprising; however, we are committed to serving our loyal customer, the Saudi government.
East Asian nations are long overdue the sort of military modernization the United States takes for granted. USArms has illustrated its commitment to the region with investments such as the $575,000 we spent on Singapore’s 1994 air show. Our sale of eight F-18s to Malaysia demonstrates our constant attention to the bottom line: In the new world order, no sale is too small to pursue.
East Asia has been concerned about China’s skyrocketing military budget and expansionist rumblings since the end of the Cold War. The result is that East Asia now represents the fastest-growing and wealthiest arms market in the world. Between 1987 and 1991, East Asia made arms purchases totaling $29 billion, about 13 percent of all USArms products delivered during that period.
USARMS: WINNING THROUGH TEAMWORK
USArms prides itself on our crack team: approximately 35,000 subsidiary defense contractors employing 2.7 million workers, 15,000 Pentagon salespeople, and you, our 115.8 million taxpaying American shareholders.
And now that times are tough, the USArms team is on the offensive. For example, when domestic demand dropped to zero for the F-15 fighter, our marketing arm at the Pentagon focused on foreign markets. Over the last two years, we have agreed to sell up to 97 F-15s (deals worth $11.6 billion) to Israel and Saudi Arabia. Those sales, in turn, keep assembly lines open at 2,070 USArms defense contractors. The Saudi sale alone saved 40,000 jobs, ensuring that a broad section of our nation’s workforce remains in the defense industry.
How do we arrange such deals? First, our employees at the Defense, Commerce, and State departments target certain countries for direct military aid. We disperse money to these countries, which then use them to purchase USArms products. In 1993, we gave just over $3.4 billion in direct aid, much of which financed Israel’s F-15 deal.
And we further subsidize targeted countries: Of the money USArms directs to the World Bank, the International Military Education and Training program, and the Economic Support Fund, much returns to our coffers in the form of increased weapons sales–$2.44 billion in the last year alone.
Our most innovative technique for opening markets involves a kind of trade called “offsets.” If a country buys our weapons, we might give them the technology to produce those arms on their own shores. Or, we might contract to buy other manufactured goods from that country. In the Israeli deal, for instance, offsets infused the Israeli economy with an estimated 70 percent of the cost of the F-15s.
That’s where you, our shareholders, come in. Opening new markets (and maintaining old ones) takes money. Although you spend more than $1 for every $1 foreign governments pay for our products, your investment is being put to good use.
YOUR SHAREHOLDER DOLLARS AT WORK
In 1993, total USArms sales to foreign clients amounted to $32.4 billion. Of course, this wasn’t just money supplied by foreign customers. You helped. The table below roughly breaks down how USArms depends on shareholders to underwrite sales.
Net dollars spent by our foreign clients: $11.6 billion (36%)
After deducting shareholder expenses and offsets, this figure represents the net dollars spent by our foreign clients. Most go directly to our subsidiary defense contractors, but we want to assure you that our shareholders are not forgotten. Of our foreign military sales for 1993, about 4 percent ($1.3 billion) was returned to shareholders indirectly–via the Pentagon’s budget.
Direct shareholder expenses: $7.8 billion (24%)
Direct shareholder expenses may seem high, but your investment is being put to good use–expanding the world market. Here’s where most of your tax dollars went: Direct military aid ($3.4 billion) Economic Support Fund, indirectly funneled back into arms ($2.7 billion) The 10 percent of our World Bank contributions that are funneled back into arms ($200 million) Bad loans from the U.S. government to foreign countries, derived from a 10-year average ($1 billion) International sales and support staff at the Pentagon and the State and Commerce departments ($500 million) International Military Education and Training program ($43 million) Air and trade shows ($25 million).
Combined shareholder/ subsidiary expenses due to “offsets”: $13 billion (40%)
In offsets, both defense contractors and the U.S. government work to divert U.S. dollars toward foreign clients. In recent years, approximately two-thirds of foreign military sales involved offsets, which undercut those revenues by about 60 percent. Sometimes we arrange for arms production to take place overseas, which unfortunately cuts down on the number of jobs we’re able to provide our American workers. In other offsets, USArms subsidiary defense contractors buy some completely unrelated product from a foreign client to boost that country’s economy.
The F-15 success story
This popular jet fighter brought in more cash with less shareholder subsidy than most of our products. And your research dollars for the new F-22 jet ensure American air superiority should any of our F-15 customers turn hostile. By coordinating the efforts of 2,070 companies with related government agencies, your shareholder dollars helped USArms generate profits.
PRATT & WHITNEY
1993 profits: $156 million
The largest subcontract in the Saudi deal included 22 engines that enable speeds of up to 1,650 mph.
1993 profits: $693 million
The Saudi sale included Sidewinder heat-seekers, Hughes Maverick air-to-surface missiles, and jointly made Sparrow radar-guided missiles.
1993 Profits: $450 million
Vulcan Guns fire 120 shots per second out of seven barrels.
1993 profits: $396 million
McDonnell Douglas distributes business to other subsidiaries and assembles the finished product.
GM HUGHES ELECTRONICS
1993 profits: $922 million
Radar tracks small high-speed targets at treetop level.
Washington, D.C. 20310
USArms sales policies under Clinton have been subject to public criticism in recent months by some prominent shareholders from both ends of the political spectrum. In the interest of dispelling their concerns, we are providing a brief summary of their comments with our response.
On the one hand are liberal critics like Natalie Goldring, deputy director of the British American Security Information Council, Bill Hartung, senior research fellow at the World Policy Institute and author of “And Weapons For All,” and Randall Forsberg, executive director of the Institute for Defense and Disarmament Studies. All three are disappointed that Clinton is following the course set by CEOs Reagan and Bush.
Dr. Goldring says USArms should not sell arms to countries that historically have been enemies with each other, such as Israel and Saudi Arabia. She is also concerned about our sales in East Asia because alliances there are shifting so fast that our own weapons may be used against us. “In the past, the Cold War lines were so strongly drawn that bought countries generally stayed bought. That’s not true now,” she says.
Mr. Hartung says USArms has a responsibility to keep countries from “increasing their destructive potential” and therefore shouldn’t sell small arms, system upgrades, or technology that aids nuclear capability in regions of possible conflict. Ms. Forsberg agrees that USArms’ dependence on exports to sustain domestic production creates a “self-fulfilling threat.” She adds that unless we work with Russia to limit arms sales, the world arms race will spin out of control.
On the other hand, Joel Johnson, vice president international of the Association of Aerospace Industries, criticizes management for failing to provide USArms subsidiaries with the same sort of loan guarantees given to other major exporters, such as agriculture. Mr. Johnson also says the Pentagon’s fee on foreign military purchases cuts into sales by raising prices and making our aerospace industries less competitive in the weapons market. He concedes that it might be better if we didn’t sell weapons to antagonistic countries, but argues that we need to look at whether we are denying dangerous regimes access to weapons or simply limiting the USArms market.
We agree with Mr. Johnson that we need to evaluate our options–and the effect on our bottom line–before we refuse to sell weapons to aggressive countries. We disagree, however, on loan guarantees and surcharges; USArms needs to recover some of the expenses incurred in negotiating sales for our subsidiaries. As for being priced out of the international market, we believe that our buyers are getting a great deal–USArms might charge more, but we also guarantee that we will purchase products from their countries, which offsets some of their costs.
As for the objections raised by Dr. Goldring, Mr. Hartung, and Ms. Forsberg, USArms management has often heard the argument that, as the sole remaining superpower in the post-Cold War world, we have a responsibility to limit arms sales. We believe that view is unrealistic and is disrespectful of developing countries’ sovereign right to arm themselves. Frankly, we do not live in a moral world, and if USArms did not fill the global arms demand, others would.
Indeed, we are confident that by selling arms across the globe, we are not creating future threats but future customers. These critics talk about moral imperatives: USArms believes our only moral imperative is to protect the jobs and security of the American people and to sustain the industrial base that has made us the most powerful nation in the world.
Ronald H. Brown
Secretary of Commerce
USArms Vice President of Marketing