A New Front for Defense Contractors

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Weapons procurement is a major source of concern among defense contractors. There's a dichotomy between McCain's ideological stance on defense spending and his reputation for populist policy choices aimed at reining in government spending, says Aboulafia. Case in point: McCain's intention to press for eliminating multiyear procurement contracts, without which contractors find it hard to plan beyond one year. Locking in a project for four or five years allows them to buy materials in bulk, to negotiate better prices with suppliers, and to plan their workforce, cutting overall costs more than 10%, he adds.

Obama's lack of experience with the Armed Forces and shorter trail of public policy statements make it harder to predict what his Defense Dept. would look like if he's elected. "We don't know what Obama will do, but he's likely to stick with the experts' recommendations, whereas McCain has a record of promoting his popular image with bad policy," says Aboulafia.

Boeing's Strategy

Obama's platform isn't without its own paradoxes, though. While he leans toward protecting U.S. jobs, "he's putting forward something completely different in his policy proposals on international affairs," which favor stronger transnational cooperation, says Kevin Michaels, a principal and co-founder of AeroStrategy, an Ann Arbor (Mich.) consultancy to the aerospace industry.

The Pentagon's decision to reopen bidding on the $35 billion contract for airborne refueling tankers—after rescinding the initial award to the Northrop Grumman (NOC)/EADS alliance—could highlight that paradox. Boeing's (BA) announcement that it may pull out of the tanker competition (BusinessWeek.com, 8/22/08) if the Defense Dept. doesn't give it six months to submit proposals for the larger plane with greater fuel capacity might be a bet on an Obama victory, on the assumption the company stands a better chance to win the contract if the Democrat wins the White House.

Although Obama is against exporting jobs and would presumably come down on the side of Boeing, he also wants to improve transalantic relations. "If the tanker deal is pulled back from EADS, that would not go down well in Brussels or the rest of Europe and might signal a shift to U.S. protectionism, just as markets are starting to open up," says Michaels.

More U.S. Jobs

These days, favoring competitive bids that give foreign companies a shot at U.S. military contracts doesn't necessarily result in American jobs being lost. When EADS was awarded the light utility helicopter program in 2006, it expanded its North American division, adding plant space and jobs. That program also opened the way for more European suppliers to set up manufacturing in the U.S., a requirement under the contract, he says.

Military contractors are increasingly making their money by selling spare parts and doing maintenance and repair work for the Armed Services. In the future, Michaels says, the U.S. will be looking to adopt a practice that has become popular in Britain, where contractors own the weapons programs and lease them to the government. Michaels believes Obama might be more open to that practice than McCain.

The difference is clearer between the candidates' views on putting weapons into space. Obama opposes it and has argued that the capability of missile defense systems has yet to be proved, while McCain has affirmed their importance and "the use of space as an asset in warfare," says Marion Blakey, president and chief executive of the Aerospace Industries Assn. in Washington.

Obama's stance on more general investment in America's space program is more elusive and has evolved over time. Last fall, he talked about diverting some spending from space exploration to education, while recently he has been more supportive of spending on space programs to keep up with other countries' advances, as well as on programs that would contribute to a better understanding of the effects of climate change on the planet and to eventual solutions.

From tanks on the ground to advanced hardware in space, the defense industry has a lot riding on the outcome of the November Presidential contest.

See BusinessWeek.com's slide show on how the election could impact several big U.S. weapons projects.

Bogoslaw is a reporter for BusinessWeek's Investing channel.