With all the troubles the U.S. defense industry has endured over the past few years, you'd think we might be ready to cut the defense contractors some slack. You'd think that, if we don't have cash to buy new weapons systems, we'd at least let our companies "go forth and conquer" new markets elsewhere, in countries that do have the funds, and the desire to spend them.

You'd think that ... but you'd be wrong -- as Lockheed Martin (NYSE: LMT) just discovered.

Yesterday, a Pentagon delegation to Taiwan broke the bad news. Congress has decided to deny the country's request to purchase 66 shiny new F-16 C/D fighter jets, a sale estimated to have been worth $8 billion to Lockheed had it gone through. Instead of the new jets, Taiwan is being given the option of purchasing $4.2 billion worth of upgrades to its existing F-16 fleet (comprised of A/B models). And while that sounds like a decent-sized consolation prize, it really isn't. The U.S. had already offered these upgrades in addition to the sale of new fighters.

What's it mean to investors?
No use crying over spilled missiles, of course. As investors, we must deal with things as they are and not as we'd like them to be (to paraphrase a certain former secretary of Defense).

As things are, today we're looking at a deal in which 146 Taiwanese F-16 A/B fighters are likely to be upgraded with new radar systems from either Northrop Grumman (NYSE: NOC) or Raytheon (NYSE: RTN), along with new electronic warfare systems from either Raytheon or ITT Corp. (NYSE: ITT). It's also likely the planes' existing engines will receive an upgrade from their manufacturer, United Technologies. For its part, while Lockheed doesn't get to sell any new planes to Taiwan, it will at least take a small cut of the upgrade work as the lead contractor integrating all the improvements on Taiwan's planes.

Foolish takeaway
Congress has essentially gutted a potential blockbuster $12 billion arms sale, and transformed it into a $4 billion pittance, split as many as five ways. A deal valued at roughly 10% of Lockheed's annual revenues would have moved the needle somewhat for Lockheed, and done good things for all the subcontractors involved in building new planes for Taiwan as well. Today's news, I fear, can't and won't.

Can Lockheed recover from this setback and find new customers in new markets to replace the lost Taiwanese sales? Add the stock to your Fool Watchlist and find out.

Fool contributor Rich Smith does not own (or short) any company named above.You can find him on Motley Fool CAPS, publicly pontificating under the handle TMFDitty, where he's currently ranked No. 452 out of more than 180,000 members. The Motley Fool owns shares of Northrop Grumman, Raytheon, and Lockheed Martin. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.