Second-Tier Vendors May Fair Better During Budget Crunch

By Stew Magnuson
Michael Madsen, president of Honeywell’s defense and space division, is both a pessimist and an optimist.
The predicted downturn in defense spending is going to be worse than many believe, he said. Yet he thinks his company will weather the fiscal crisis just fine.
Second-tier suppliers to the military such as Honeywell are in a better position to make profits — even as budgets shrink — than the large prime contractors, he said on the sidelines of the Association of the United States Army annual conference in Washington, D.C.  
“I’m not sure the reality of the situation has settled in yet. The budget is going to come down and we’re going to have to find ways to help the Army do things more efficiently,” he said. Cuts will likely be higher than the $450 billion over 10 years number that has been proposed, he said.
Companies such as Honeywell can still thrive supplying spare parts and extending the life of aging equipment.  
One example is a carbon-based brake Honeywell installed on the B-52 Stratofortress for the Air Force. The 50-year-old bomber is not a platform where one would think that there are still lifecycle savings to be found, he said.  Yet the new brakes helped reduce maintenance costs and weight, and therefore fuel. 
Honeywell's products are spread out on a broad base of platforms. In baseball parlance, it looks for singles and doubles rather than the homeruns big primes look to score, Madsen said. It has les than 3 percent exposure to any one military platform, so if one program is cancelled, it would not take a big hit.
Honeywell also shares its commercial and military work force and supply chain. About 55 percent of its business is in the nondefense sector. During the economic downturn, it had some furloughs and voluntary retirements, but it did not suffer wide-scale layoffs. It was “able to keep the band together” and not lose vital human resources. Talented engineers are in short supply, and it did not want to lose expertise, Madsen said.
“I feel pretty good, regardless of what happens, we will fair pretty good over these next few years, ” Madsen said.
Another so-called second-tier vendor, FLIR Systems, is already seeing a downturn in U.S. government-related contracts.
“We’ve seen that business kind of go flat,” said David Strong, vice president of marketing. FLIR specializes in optical sensors that are placed aboard a variety of platforms. The peak was in 2007-2008 when there was a strong demand for its products in Iraq and Afghanistan.
Like Honeywell, FLIR has a strong international customer base. “That is definitely helping us to offset the lack of growth here in the U.S.,” he said. It acquired last year ICx Technologies, a company that specializes in chemical-biological-nuclear sensors, which has expanded its customer base. FLIR also spends its own money on research and development.
Its sensors are sold to a variety of non-defense customers. Private sector contracts amount to about half of its business. “We’re already way diversified and our dependence on the U.S. government is relatively small.”
FLIR, however, laid off about 100 workers last July to adjust to the new realities in the marketplace, he said. 

Topics: International, Manufacturing

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