Execs: To Survive Downturn, Companies Must Focus on Commercial, Overseas Markets

SAN DIEGO — Maintaining the health of the U.S. defense industrial base as the Pentagon slashes spending will require creative offerings of commercially available technologies and an expanded overseas customer base, according to company executives.

Speaking to the AFCEA West conference Feb. 13, senior officials from makers of unmanned systems, jets and Navy ships agreed that business strategies must change in an era when contract awards are few and far between.

“There’s probably not going to be more money,” said Jeffrey Napoliello, vice president of strategy and business development for Lockheed Martin Mission Systems and Training. “We can sit as an industry-government team and lament the fact that budgets are coming down, but the structural forces are going to continue to push that. Barring some unforeseen event, we’re probably going to have to live with this environment for some time.”

Industry understands the Defense Department is focusing on affordability and doing more with less as it enters a post-war drawdown period, Napoliello said. But in some ways, a lack of government spending and affordable products from industry are mutually exclusive, he added.

Ellen Lord, president and CEO of Textron Systems Corp., agreed. Entire weapons systems and platforms may never be developed because without an anticipated return on investment, spending internal research-and-development funds on high-end technologies is a tough sell to boards of directors.

“Why is that? It’s because quantities and volumes are low,” she said. “These are critical areas where we need the government to understand that [its] discretionary dollars would be very well spent because industry cannot afford to develop one of those … engines or unmanned aircraft systems.”

The use of commercial best practices is going to help companies remain competitive as their primary customers — the U.S. government and military — spend less on weapon systems and vehicles, she said.

“We need to have efficient product development,” Lord said. “There aren’t going to be a lot more dollars out there.”

Lord offered as an example the Cessna light attack aircraft that was developed from a blank slate to a fully functional jet in less than 24 months. Cessna was able to achieve a cost-per-flight hour of less than $3,000 because 80 percent of the aircraft’s components were already in the military’s inventory, she said.

Industry should look at existing technologies, like smaller relatively inexpensive unmanned aerial systems, and “ask how they can be stretched a little bit further,” Lord said.

“An example: We have almost one million hours in our unmanned aircraft systems,” Lord said. “Why not take those and their command-and-control systems and bring them to the sea” instead of developing new systems specific for maritime environments? The Navy is experimenting with unmanned mine-hunting surface vessels that are controlled using technologies that matured during use with unmanned aircraft, she said.

“We want to make sure that when we introduce new products they come in at a very mature state and high technology readiness levels,” Lord said. “How do we do that? We reuse systems. We have an unmanned surface vessel that utilizes what we’ve learned in the air domain, so we are able to very affordably bring a mature system to surface warfare.”

Lord also cited the Navy’s consolidated afloat network and enterprise systems as an example of using commercial, off-the-shelf technology. Commonly called CANES, the system will consolidate the service’s diverse array of communications and computing systems onboard ships and streamline the hardware and software used throughout the fleet. CANES and its ashore cousin rely largely on commercial hardware and software and have established periodic technological update programs much more frequently than the government’s traditional acquisition process.

“With the use of commercial, off-the-shelf technology, we can really keep pace with commercial product introduction and reduce cost and improve sustainability,” Lord said.

The U.S. military must also expand industry's access to foreign military sales markets, Lord said. Countries have refused to do business with companies hamstrung by the often lengthy and Byzantine FMS process, she said.

“A lot of us are spending resources trying to find business overseas – both direct commercial and foreign military sales,” she said. “These dollars are really what is keeping the U.S. industrial base for defense afloat. We have customers that have money they are willing to spend today that are waiting 24 or 36 months to get their products.”

These customers are knowingly buying inferior equipment because the United States will not make deals, Lord said.

Napoliello urged companies to focus on export markets, especially U.S. allies in the Asia-Pacific region when developing and marketing products.

“We have to continue to focus on the exportability of our products” to ensure that the U.S. military can operate in tandem with its allies and as a way to expand business opportunities, he said.

“Getting enhanced capabilities into the hands of our trusted international partners helps us in terms not only of leveraging their force structure, but it helps us maintain and sustain the industrial base.”
In doing so, weapon and vehicle manufacturers should focus on flexible systems that are modular and can be adapted to suit different missions affordably over time, he said.

“One thing that we’ve proven, if you look at aircraft, if you look at aircraft carriers … one of the things that make them such great assets is their inherent flexibility,” he said. The surface Navy is moving to adopting the power of modularity. It’s allowing us to lower cost … and build common products across platforms.”

While the U.S. military focuses on building affordable, multi-mission platforms, potential adversaries will have to respond with systems that cost proportionately more because predictable, static platforms are easy for enemies to adapt to, Napoliello said.

“But if we continue to push for common systems, for modularity and those types of architecture … we’re going to be able to do more with less,” Napoliello said. “On the other hand it’s going to require our adversaries to spend relatively more to be able to respond to an uncertain future.”

Mike Petters, president and CEO of Huntington Ingalls Industries, said expanding overseas and commercial sales are industry-wide responses to an austere future.

“Every single one of us is trying to figure out how to take the capabilities we have and apply them to some of the problems that other people have,” he said.
HII, which builds nuclear submarines and aircraft carriers for the Navy, has toyed with an expansion to the commercial nuclear sector and other energy opportunities in an effort to keep its shipyards open.

In the end, however, Petters said the company builds ships because the military needs them not because they create jobs. But the quality of a ship once at sea is directly related to a healthy shipbuilding workforce, he added.

“A lot of times the argument comes around the industrial base … that we need to build another ship because we need jobs. That’s really not the case. We need to build another ship because we need freedom of the seas. We have a momentum in the industrial base that can affordably support that requirement. When we start to break that, things start to become unaffordable and requirements begin to become unattainable.”

Topics: Business Trends