Advice to Military Vehicle Suppliers: Find New Customers
At the height of war spending, the Pentagon bought nearly $5 billion worth of trucks in just one year. Orders are expected to plummet to under $400 million in 2015.
It is indeed a depressing outlook for military vehicle manufacturers that rely predominantly on Defense Department business, analysts said. Many companies might not survive this downturn unless they figure out how to wean themselves off government sales.
"There are very few opportunities on the horizon in the tactical wheeled vehicles market," noted James Tinsley, managing director at the consulting firm Avascent.
The only new truck the Army and Marine Corps still plan to buy is the joint light tactical vehicle, or JLTV, to replace old Humvees. But one program alone cannot sustain the current supplier base, he said. Three companies — Oshkosh Corp., Lockheed Martin Corp. and AM General — are competing for a future production contract.
The next several years are going to be a “very quiet time from an engineering perspective," Tinsley said. He has advised companies to shift gears and become less dependent on U.S. military contracts. In the truck market, that means courting commercial and non-U.S. government buyers, and investing significantly more money in research and development rather than wait for government funded R&D.
"Some companies might first introduce international variants of a vehicle. Since tactical wheeled vehicle price points are much lower globally than in the U.S., starting with a low-cost vehicle may broaden the addressable market," suggested anAvascent white paperwritten by Tinsley and senior associate Kristin White.
Truck manufacturers cannot afford to wait around for the next opportunity, Tinsley told National Defense. "After JLTV, there's very little that can sustain the manufacturing base." Surprisingly, he added, some companies still harbor illusions that the Pentagon will somehow find a way to protect its suppliers. "What I'm most cynical about is when industry tells me the U.S. government is going to make it all right," Tinsley said.
The largest buyer of military trucks is the U.S. Army. At a recenttactical wheeled vehicles industry conference in Reston, Va., the Army's senior acquisitions executive Heidi Shyu hailed JLTV as a "model program" because it offered the Army a wide array of designs and technologies to choose from. About a dozen companies competed in various phases of JLTV since it was launched in 2007.
JLTV has been successful because there was a thriving industry that had been bolstered by war funding, Tinsley said. "In the future, will there be an industry there to have a competitive landscape like the one that led to JLTV?"
A belief that future programs should be like JLTV assumes the vibrancy of the industry, said Tinsley. Again, this is wishful thinking. "In five years, I don't know who will come."
It is remarkable that five years ago, the "model" truck program at the Pentagon was the mine-resistant ambush protected MRAP. The program earned loads of praise as a poster child for rapid procurement and for mobilizing the "best of industry," Tinsley said. "That was an expedient model when the money was flowing."
The Army is now holding up JLTV as a template that is the complete opposite of MRAP. The new light truck is a protracted development program that is focused on reducing risk and is designed to eventually be maintained in Army government-owned depots. In JLTV, the government will own the rights to the vehicle's design so it can compete future maintenance and production orders. "That is a shift back to where we were before MRAP," he said. "It's a healthy shift, because MRAP was not a healthy way to continue to develop capabilities."
Many industry CEOs believe there will still be lucrative work in vehicle maintenance and upgrades as new production orders dry up and the Army is forced to invest in the current fleet. That might be an overly optimistic assumption, however, said Tinsley. The Army views its contractor logistics support contracts as "unaffordable," he said, and intends to insource more work to its depots. "This market is due for some changes over time, to more of a balance between depots and contractors."
To survive, military contractors need flexible production lines that can cater to defense and civilian customers, he said. The Pentagon also would benefit from industry diversification, as it can no longer afford to develop most of the technologies it buys, and will have to purchase commercial equipment that can be militarized.
The conventional wisdom during the post-Cold War downturn was that defense companies were ill suited for commercial work and should focus on their "core" military products. That worldview no longer holds for the majority of the industry, said Tinsley. Financially strong defense conglomerates such as Lockheed Martin and Northrop Grumman are under less pressure to diversify and will always be around to support the Pentagon. But niche players, many of which are in the vehicles sector, cannot expect the Pentagon to save them.
In fact, the Army increasingly is focused on building up its in-house industrial base at the expense of the private sector, Tinsley said. Army depots are "very much in competition with the organic base of private industry. Everybody realizes that." The Army encourages companies to "partner" with depots and share work but that does not preserve a manufacturing base at all, he said.
"Nationalization is not the way to go. But it's clear that not everyone in industry will survive. You can't wait for the government check to come."
Survivors have to find a way to be competitive commercially, said Tinsley. "I don't think the depots are going to help them. I think they are just more competition."
The government at times has taken steps to help its suppliers become more commercially competitive, he noted. A case in point is the Navy’s investment in the General Dynamics NASSCO shipyard in San Diego. The Navy encouraged NASSCO to adopt commercial practices from world leading South Korean shipyards. "This is exactly what should be done in the tactical wheeled vehicles sector," he said. The Defense Department should cheer industry efforts to not depend on the U.S. government as its only customer and help them find alternative pathways, instead of trying to preserve the industrial base through the traditional means, by manufacturing vehicles the military doesn't want.
The Pentagon also should help companies market internationally and identify opportunities not linked necessarily to U.S. military objectives, said Tinsley. The goal ought to be to "create a self-sustaining industrial base, rather than try to save the industrial base."