Downturn in Military Truck Market Produces More Losers Than Winners

By Eric Beidel
The Army and Marine Corps have spent the past decade fighting two land wars that required significant improvements in the trucks that carried troops around the battlefield.

The past 10 years saw the development of mine-resistant ambush-protected (MRAP) vehicles, crucial upgrades to Humvees and other enhancements that created a steady cash flow from the Pentagon to the industrial base.

But the last of those wars is winding down, and the Defense Department has begun to curtail its spending. Officials now say they will shift their focus to the Asia-Pacific region and operations in the air and sea.

Tactical wheeled vehicles will play second fiddle and become an “industrial capability” that the military can ramp up when needed just as it did with the MRAP, analysts say. The quick design and purchase of more than 20,000 of these heavily armored vehicles generally is seen as an acquisition success, but it didn’t come with any guarantee to sustain the supply base it created once the need was met.

The frustration and anxiety among suppliers in the tactical vehicle market is palpable. The armed services have begun to terminate, delay or cut back on anticipated truck programs. Soon they will begin to thin their fleets by getting rid of older vehicles instead of spending the money to reset them. And manufacturers have very little to look forward to in terms of large production contracts.

Envisioned as a replacement for aging Humvees, the Joint Light Tactical Vehicle (JLTV) has dominated the conversation and become the center of industry focus. But even that program, which Army officials have called one of their top-three priorities, creates a muted sense of optimism among companies with production lines. The program calls for just 22 vehicles during the engineering and manufacturing development phase and low-rate initial production not until 2016 or 2017.

Companies will have to wait a long time for large volume production opportunities, said James Tinsley, a land systems analyst at consulting firm The Avascent Group.

“JLTV is the only game in town right now so they are all focused on it,” Tinsley said. “But I expect the industrial base will suffer over the next few years.”

President Obama’s budget request states that JLTV will be critical to maintaining a strong base that can supply trucks to the military, especially because the family of medium tactical vehicles ends production in 2014.

Army officials speaking at the National Defense Industrial Association’s recent annual tactical wheeled vehicle conference in Monterey, Calif., tried to address the cutbacks in lighthearted ways. One official used a cartoon of a giraffe unleashing a string of profanities while drowning in quicksand. Another modeled his speech after a priest’s sermon, commanding industry to go forth and find cheaper ways to develop products. They suggested that companies would have to find out where they fit into a new truck strategy that is being defined by shrinking fleets and fewer buys.

The Army has completed three studies that recommend reducing the fleet of 260,000 vehicles by 24,000. Now officials want to define more clearly what the service will need come 2020, said Maj. Gen. James L. Hodge, commander of the Combined Arms Support Command sustainment center of excellence.

“You can be sure that additional tactical wheeled vehicle reductions will be a part of those designs,” he said. Army research shows that there is a tactical wheeled vehicle for every four soldiers, and that ratio probably won’t stand, he added.

“While that shows we have a very mobile force, it also comes with a significant sustainment cost,” Hodge said. “This is especially true due to the many older tactical wheeled vehicles that remain in our fleet.” The money needed to repair and maintain the older vehicles could be spent on other priorities, he said.

The Defense Department is focusing on capability, and no longer the quantity of trucks, said Paul Mann, assistant deputy director for ground systems in the office of the undersecretary of defense for acquisition, technology and logistics.

“You have to learn how to count your dollars and you have to learn how to count our dollars,” he told industry representatives in Monterey. “We have to have enough to do everything we need to do, and we can’t spend a lot of money on stuff we don’t deliver.”

The JLTV program, which officials repeatedly touted as a success story, will be the military’s first attempt to craft a program where affordability is a key criterion, Mann said. It will provide the model going forward, officials said.

The program almost died after the Army and Marine Corps seemed at odds over requirements and lawmakers recommended eliminating it. Teams led by Lockheed Martin, BAE Systems and an AM General-General Dynamics Land Systems consortium called General Tactical Vehicles delivered prototypes for a technology development experiment that saw its share of challenges with weight and cost. But the services were able to get on the same page and eventually a request for proposals for an engineering and manufacturing phase was issued to industry.

Army officials said the service plans to buy 23,000 new trucks by 2025 to replace a portion of the up-armored Humvee fleet. The Marine Corps has stated its intention to buy 5,000 or so. Another program to upgrade Humvees, some of which date to the 1980s, had become less ambitious over time and eventually was terminated.

In its most recent state before cancellation, the Modernized Expanded Capacity Vehicle program would have recapitalized nearly 6,000 Humvees. Even though it had come down from higher estimates, industry still viewed it as a crucial program potentially worth billions down the line.

The MECV appeared to be the most viable program for sustaining the production industrial base because it called for more rapid acquisition than JLTV and had the potential for higher volumes in the future, Tinsley said. The cancellation was devastating for companies that had not positioned themselves to compete for JLTV, he said.

“It hurt the entire industry in that the Army and Marine Corps expected companies to bring mature solutions to the table through [internal research and development] with the promise of a strong [return on investment],” Tinsley said. “When they curtailed the program to about 6,000 vehicles, the business cases began to evaporate. When they cancelled it, they left companies unable to capitalize on the investments they had made.”

One of these companies is Textron Marine and Land Systems, which had teamed with newcomer Granite Tactical Vehicles to offer a blast-resistant crew compartment known as a “capsule.” The concept would have retained about 80 percent of an existing Humvee and replaced the body and suspension.

Industry sources said that the only winners to come from the MECV cancellation are at the depots, where AM General, the original manufacturer of the Humvee, will continue to handle low-level recapitalization activities.

AM General declined to comment for this story. The company has supported recapitalization efforts at the Letterkenny Army Depot, Pa., and the Red River Army Depot, Texas.

The cancellation of the MECV program will save the Army $900 million, a small bite out of a monstrous budget. Still, the termination is a sign of what is to come. Affordability is the name of the game and officials are looking for requirements they can retreat from, alter or at the very least debate, Mann explained.

“We’re not going after the profits of companies, we’re going after the cost,” he said. “We want the price to come down.” Efficiency isn’t a stunt, Mann said. “You don’t do that once. You do it again and again.”

During a keynote address, Lt. Gen. William Phillips, principal military deputy assistant secretary of the Army, urged companies to play their own versions of “money ball,” taking inspiration from Oakland Athletics general manager Billy Beane, who assembled winning teams despite having one of the lowest payrolls in the league.

“We all run businesses and we have shareholders, stakeholders, employees and families,” said Pat MacArevey, vice president of government business at Navistar Defense. “Whether it’s good news or bad news, sharing our customer’s outlook is incredibly valuable to our planning process . . . Though it may not be, ‘We’re going to buy a lot of trucks in the future,’ it’s real and we appreciate it.”

The bleak outlook has some in industry looking to the international market, but opportunities there may be fewer. Overseas requirements are not necessarily geared toward American standards, which far exceed the needs of foreign militaries. The Humvee is an exception and has been popular overseas. However, the emergence of Italy’s Iveco light multirole vehicle, Switzerland’s Mowag Eagle and other armored light tactical vehicles may make future Humvee sales more difficult.

It was thought that MRAP would have strong international sales potential, but the buys so far have been limited.

“Countries that have deployed troops to Iraq and Afghanistan have purchased U.S. vehicles but MRAPs are not practical for a lot of other missions,” Tinsley said. These nations most likely will wait to grab up MRAPs that the United States chooses to sell rather than buying them new, he added.

Military leaders often cite the MRAP program as a prime example of how to deliver much-needed equipment to troops quickly. But its model also can cause nightmares for an industry seeking to weather tough times. A surge in orders and production improved the fortunes of companies up and down the supply chain. But quick spikes in business, such as that for MRAP, put industry in a tough position, Tinsley said.

The lack of “ramp-down” buys on the back end of programs, delays to next-generation programs and constantly shifting priorities at the Pentagon have created imbalances in the industrial base. And winner-take-all competitions, such as those for FMTV and M-ATV, have been destructive.

The Army has been preaching a mantra of “buy less, more often.” It is an approach that can sustain the industrial base by spreading funds to several suppliers to reap the benefits of continuous improvement and competition, proponents said.

But opponents say it is impossible to make long-term plans based on this approach, especially without significant research-and-development investments from the government. Industry research- and-development budgets currently are soaring among competitors because they are doubling down on the few remaining programs. But that won’t last much longer without revenue, Tinsley said.

Companies have been spending their own money to come up with products for programs that are disappearing or shrinking. Fewer technologies will emerge as these in-house funds dry up and firms see no business case for continuing their investments. Industry would be able to make rational decisions on exit, consolidation or investment if there were more predictability in future buys, Tinsley said.

In Monterey, Army officials said that they still need to determine how they will go about buying fewer vehicles more often and how that approach will affect their suppliers. Officials need to find a sweet spot, where the industrial base has a mix of opportunities to remain “warm and resilient enough so it can bounce back when we need it,” said Col. Stephen E. Farmen, the Army’s chief of transportation.

Critics have said that the government is making decisions with its tactical vehicle fleets that fly in the face of traditional approaches aimed at preserving an industrial base. But times are changing, Farmen said. The days of committing to a line of vehicles and keeping it in service for 30 years may no longer be the reality in the future.

“We really need to start thinking differently about how we view the industrial base,” Farmen said.

It’s not all doom-and-gloom, said Christopher Lowman, assistant deputy chief of staff and director of maintenance policy and programs for the Department of the Army.

“As our modernization budgets come down and our production requirements come down, there’s an opportunity here to partner with those [manufacturers] and other companies to help sustain our fleets of equipment,” he said.

Companies will have to find their opportunities in retrofit work and in niche segments of the market, according to a 2011 study by analysts at Frost & Sullivan. “While market growth will be negative over the next five years, growth will occur in individual parts of the market,” Frost & Sullivan industry manager Wayne Plucker said.

That is where a small company like Massachusetts-based Incident Control Systems sees an opportunity.

“With large quantities of vehicles returning from overseas combat operations, the need for new armor kits is strong,” said the company’s finance director Jim Mitchell. “We see opportunities arising in just about any tactical vehicle program that requires lightweight, low-cost armor.”

Incident Control Systems is bullish about their chances in the after-war truck market because of a new product called Revolution Armor, a steel-based composite that could replace high-cost ceramic systems, Mitchell said. The company describes the material as the perfect alternative “when steel is too heavy, aluminum is too thick and ceramics are too costly.”

Analysts agree that the military truck industry is as vibrant and innovative as it has ever been, but it won’t be easy for companies such as Incident Control Systems to carve out a place in a shrinking marketplace. Industry and military officials both say that they need to align their definitions of affordability. To industry, it often seems driven more by what the Army and Marine Corps can pay for rather than what they are asking companies to deliver.

The government and industry need to operate hand-in-glove, Farmen said, and they will have the next few years to figure out the most effective way forward. The Army’s tactical wheeled vehicle fleet is in good shape until 2017, he said. “What concerns me is 2017 and beyond.”                                                                  

Topics: Land Forces

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