Battle over bullets

Published April 12, 2007

After winning a five-year contract worth up to $1.2-billion, the St. Petersburg firm did what has almost become a reflex in corporate America. It outsourced some of the work to Asia.

This wasn't your typical deal, however.

The client was the U.S. Army. The desired products were bullets used in M-16 machine guns and other handheld weapons. The winning bidder was a St. Petersburg subsidiary of defense contractor General Dynamics. And the subcontractor? A unit of the armed forces of Taiwan, the 205th Arsenal.

It also may be a deal that both the Army and General Dynamics Ordnance and Tactical Systems come to regret. According to a suit filed in Tampa federal court, the Taiwanese military has stopped producing bullets little more than a year into the agreement. It allegedly refuses to resume production until General Dynamics agrees to cover some unanticipated increases in raw material costs.

The deal could sideline one of the top two contractors authorized to provide small-caliber ammunition to the Army. General Dynamics Ordnance's contract commits it to manufacture up to 500-million rounds per year.

A spokesman for the company's Falls Church, Va., parent, a defense industry giant that ranks 100th on Fortune magazine's list of the highest-grossing public companies in the United States, declined to comment on the lawsuit. An Army spokeswoman said Wednesday that she would need 24 hours to respond to questions submitted by the St. Petersburg Times.

Even if General Dynamics prevails in court, getting the Taiwanese military to submit to the ruling of a U.S. court may be no slam dunk. Experts say it will depend on a variety of issues, including the terms of the subcontract, which international legal conventions the Taiwanese have subscribed to, and their perception of how much the country has to lose.

"Binding a foreign sovereign is relatively easy," said Christopher Yukins, co-director of the government procurement law program at George Washington University Law School in Washington, D.C. "Enforcing it is a separate issue."

The contract, struck with the Army in 2005, was General Dynamics' first foray into small-caliber ammunition. A news release at the time said the company would work with a team of U.S. and international partners, including companies in Canada and Israel. There was no mention of Taiwan's military.

The Taiwanese dispute isn't General Dynamics' first procurement hiccup. Its St. Petersburg subsidiary is a longtime provider of medium- and large-caliber ammunition to the U.S. military, and it is still fighting a 2004 lawsuit brought by a Florida whistleblower that accused the company of knowingly selling defective gunpowder to the U.S. military. General Dynamics denies the allegations and filed a countersuit against the ex-employee this year.

It may take a while for the new suit to kick into gear. The federal court's clock won't start ticking until a copy arrives in the hands of Taiwanese military officials in the city of Kaoshiung.

Times researcher Angie Drobnic Holan contributed to this report, which also used information from Times files. Scott Barancik can be reached at barancik@sptimes.com or 727-893-8751.

Fast Facts:

The dispute
- A General Dynamics unit in St. Petersburg has a five-year contract to provide the U.S. Army with up to 500-million bullets per year.
- A foreign subcontractor, a unit of Taiwan's armed forces, allegedly refuses to produce more bullets until it gets more money to cover rising costs of raw materials.
- General Dynamics sued the Taiwanese military unit this month to honor its contract.
- The case raises questions about entrusting the making of ammunition to a unit of a foreign army.

Fast Facts

General Dynamics
Falls Church, Va.
Employees: 81,000
Divisions: aerospace, combat systems, marine systems, information systems and technology
Earnings per share: $4.56 in 2006
Revenues: $24.1-billion in 2006
Revenue rank: 100th among public U.S. companies
Ammunition unit: General Dynamics Ordnance and Tactical Systems, St. Petersburg

Source: SEC filings, Fortune