Magazine article National Defense

Companies See Bright Spots in Bleak Market

Magazine article National Defense

Companies See Bright Spots in Bleak Market

Article excerpt

* Military contractors were recently warned by a senior official that they are about to be "punched in the face" as the defense market takes a beating over the next several years.

That statement comes as no surprise. Sequestration and gridlock will be taking a huge toll on Pentagon spending. Budgets for new weapons will be plummeting by at least 20 percent. And Pentagon buyers will be hesitant to spend what they have, as they are still scarred by a decade of procurement flops.

Remarkably, there are still companies that have the stomach to invest in defense. Some actually view these tough times as an opportunity to win new business.

Textron just unveiled a new light-attack surveillance aircraft that can carry spy sensors and is based on a commercial Cessna business jet. The aircraft, named Scorpion, is a private investment by Textron and a partnership of 22 vendors.

But in today's bleak market, how long can a company wait for a Pentagon order before investors lose their patience?

Textron executive Edward Hackett says the company is not expecting to "drive decisions" within the Defense Department. But he hopes that products such as Scorpion will help open the debate on the "value" that industry can bring to the Defense Department.

The company decided to take the plunge in response to what it has been hearing from Deputy Defense Secretary Ashton Carter and Undersecretary for Acquisition, Technology and Logistics Frank Kendall: Industry, keep investing, please. Bring us solutions.

The business model is rather simple: Build an aircraft at a fraction of the cost of a government-developed system, mostly by using commercial components from the Cessna line.

It remains to be seen whether industry-funded hardware such as Scorpion sparks interest within the Defense Department. Some industry insiders appear impressed by the idea. Maybe the Pentagon is not ready to buy a commercial jet to replace F-16 fighters, but other countries that have less money might consider it. All Textron needs is one customer that is willing to be the first to buy one of these airplanes. Then, others probably will follow, or so some business leaders believe.

Another company that sees the downturn in a positive light is Saab North America, which spends 8 to 9 percent of its approximately $4 billion in revenues on research and development. That's at least two to three times what top prime contractors spend, on average, on corporate R&D.

Saab executives will admit that investors do not always like to see so much money poured into research ventures. "It takes a lot of leadership to do it," says Vice President Brian Lawrence. But that is the only way the company believes it can compete with the bigger primes. Saab's story is a cautionary tale for defense companies that primarily rely on government funding to develop new products. In the 1980s, 90 percent of Saab's revenues were from sales to the Swedish government. After the end of the Cold War, it faced a sink-or-swim moment. It decided to start funding its own product development and branched into the global market. Now 50 percent of Saab's business is outside Sweden.

Non-US. defense firms understand the politics of jobs and the industrial base and have no problem pouring funds into domestic production, licensing or codevelopment, if they are reasonably sure that the U.S. government intends to buy the product. …

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