Bloomberg News

Periscope Maker Closes as Small Vendors Near Fiscal Cliff

September 20, 2012

Small Businesses Lack Flexibility in Facing Fiscal Cliff

Government contractors gather at a rally to protest against sequestration in northern Virginia in July. Source: Northrop Grumman

After a half-century of making periscopes for armored vehicles, Miller-holzwarth Inc. shut down, having struggled with U.S. military budget cuts and the threat of more reductions to come.

Jennifer Moll, 45, owner of the Salem, Ohio-based manufacturer, said she was out of options. So during lunchtime on July 30, she delivered the bad news. She and her 47 employees were out of work.

Small contractors such as Miller-holzwarth have been called “the engine of job growth in our economy” by the Obama administration. They also may be the most vulnerable if $1.2 trillion in automatic U.S. budget cuts take effect in January, contract attorneys and some lawmakers say.

“Last year cut into the muscle, this year cut into the bone,” Moll said in an interview. With the sequester looming, she worried that she’d “get the rug pulled out from under” her, Moll said.

The federal government’s small vendors already have taken the brunt of U.S. spending cuts. Their awards fell 5 percent during the fiscal year that ended Sept. 30, compared with a 1 percent decline for all contracts, according to procurement data compiled by Bloomberg.

‘Sweeping, Unfocused Cuts’

The shrinking budget has exacerbated the effects of the recession on small businesses. The automatic budget cuts through 2021, known as sequestration, might inflict more pain if President Barack Obama and Congress don’t agree to delay or alter them. They may combine with tax cuts scheduled to expire at the end of the year, setting up a so-called fiscal cliff that lawmakers from both parties say they want to avoid.

“The sweeping, unfocused cuts of sequestration are certain to have unintended negative consequences, including for America’s small businesses,” Representative Sam Graves, chairman of the House Small Business Committee, said at a hearing today on the subject. “I think we all agree the patient is sick, but I’d prefer that the surgeon use a scalpel rather than a meat cleaver.”

With fewer small businesses, the government will have to deal with less competition and innovation, as well as higher prices, the Missouri Republican said. His committee heard testimony from company owners, academics and Mike McCord, a principal deputy undersecretary for the U.S. Defense Department.

Unlike large vendors such as a Lockheed Martin Corp. (LMT:US) and Raytheon Co. (RTN:US), small contractors have a number of disadvantages.

Niche Market

The small firms are more likely to be in the supply chain for only a single program, leaving them more vulnerable than large companies that work on several projects, said Holly Roth, a partner at Los Angeles-based law firm Manatt, Phelps & Phillips LLP, who specializes in government contracting.

“There are a lot of small businesses that have developed a niche market to meet one government need,” Roth said in an interview. The government may decide that product isn’t necessary, she said.

Tom Mason, a Washington partner at law firm Cooley LLP in New York who focuses on government procurement, said that “the smaller the company, the less experience they have in negotiating the right kinds of contract clauses” to protect themselves from terminations.

Small business suppliers could be caught off guard if larger prime, or lead, contractors decide to cut costs due to sequestration, Mason said.

“Small businesses are extremely exposed,” Stephen Fuller, director of George Mason University’s Center for Regional Analysis, said at the hearing. “They are sitting ducks” and at the mercy of their prime contractors, he said.

Minority Contractors

Laurie Moncrieff, president of Burton, Michigan-based Schmald Tool & Die Inc., said in prepared remarks for the hearing that “further degradation of the small business base could result in the loss of sectors that are costly to rebuild, if not impossible.”

Moncrieff testified on behalf of the National Defense Industrial Association, an Arlington, Virginia-based trade group for military contractors.

Sequestration may also disproportionately hurt small businesses owned by minorities, women and veterans, said Daniel Goure, vice president at the Lexington Institute, an Arlington, Virginia-based research organization.

Federal contracts to black-, Hispanic- and women-owned small firms fell last year for the first time in a decade or more, declining at sharper rates than awards to all companies, according to data compiled by Bloomberg.

Ballistic Glass

McCord and Richard Ginman, director of defense procurement and acquisition policy at the Defense Department, said in joint remarks prepared for the hearing that “while we can foresee the many harmful impacts of sequester, we cannot devise a plan that would eliminate or even substantially mitigate them.”

Moll’s company, Miller-holzwarth, didn’t have much “flesh to cut into,” she said. The firm “ran lean” and didn’t have the same flexibility that comes with having more money and operating in many different sectors and programs, she said.

The manufacturer, which started out in the 1950s making hospital beds, produced ballistic glass in addition to periscopes for military vehicles such as the BAE Systems Plc. (BA/) Bradley Infantry Fighting Vehicle and Textron Inc. (TXT:US)’s M1117 armored vehicles.

For more than a year before the company closed, it had gotten increasingly difficult to rely on the federal government, Moll said.

Miller-holzwarth had a hard time winning military contracts due to budget cuts and “frustrating” changes in procurement practices, she said. The threat of sequestration, a “nebulous concept” she couldn’t quantify for her company, was a major factor in her decision to close, Moll said.

“Up until the last minute, I was trying to figure out a way to keep the doors opens,” she said. “I ran out of rabbits to pull out of the hat.”

To contact the reporter on this story: Danielle Ivory in Washington at divory@bloomberg.net

To contact the editor responsible for this story: Stephanie Stoughton at sstoughton@bloomberg.net


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Companies Mentioned

  • LMT
    (Lockheed Martin Corp)
    • $173.82 USD
    • -0.18
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  • RTN
    (Raytheon Co)
    • $96.39 USD
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