Oshkosh ‘Confident’ About Outcome in JLTV Protest
The Army last week ordered Oshkosh Defense to stop work on the recently awarded $6.7 billion contract to build a joint light tactical vehicle after one of the losing bidders filed a protest.
The cease-work order could stay in place for several more weeks as the Government Accountability Office has until Dec. 17 to issue a ruling.
But the company is not putting the brakes on JLTV marketing. Oshkosh executives did not want to let the protest by competitor Lockheed Martin put a damper on efforts to promote the vehicle this week at one of the Marine Corps’ largest weapons shows in Quantico, Virginia.
“We were working the program at 100 percent. We would prefer that there be no protest,” said John Bryant, senior vice president of Oshkosh Defense.
A retired Marine Corps colonel who managed big-ticket procurements, Bryant has seen the process work both on the government and contractor sides. “A delay is not good,” he said in an interview.
“But the GAO process is very well defined, it’s a rigorous process, I’m confident in the fairness of that process, confident that the process is not subject to outside influence.”
The JLTV is a make or break project for Wisconsin-based Oshkosh. The contract that Lockheed is challenging covers about 17,000 trucks, but there could be a lot more work beyond that. Marines said they plan to buy up to 5,500 vehicles by 2040, and the Army is expected to acquire about 50,000 trucks to replace a portion of the current Humvee fleet. Altogether it could be worth up to $30 billion.
“With a contract the size of JLTV, we can’t say we are really surprised that somebody would attempt to protest,” Bryant said. “Oshkosh is fully prepared to hit the ground running as soon as the protest is completed.”
Bryant believes the Army’s decision will stand legal scrutiny. “In setting up the source selection process for JLTV, the government really took the time to do it right,” he said. “I have never seen a more robust process than what has been involved in JLTV.”
Since the August announcement that Oshkosh had been awarded the highly contested JLTV franchise, analysts have noted that they were not surprised by the decision and wondered on what grounds Lockheed might be able to challenge the award. “Lockheed Martin was always a long shot for JLTV in our view given its limited past performance in ground vehicles,” said a research note by
Royal Bank Canada. “In our meetings with Lockheed Martin management they also acknowledged that their industrial base argument had less political impact as they wouldn't be shutting any factories from not winning.” According to Wells Fargo analysts, “Since Lockheed Martin is not in the vehicle manufacturing business, we do not think expectations were high Lockheed would be selected.”
Whereas the impact of losing JLTV would be negligible for the world’s largest defense contractor, analysts said, for Oshkosh investors this win is regarded as pivotal. Even though the projected quantities of JLTV trucks that the military will buy are relatively small, the profit margins for Oshkosh would be higher than those of the Army’s family of medium tactical vehicles, although JLTV profit margins would be lower than what the company makes in the M-ATV armored truck program.
Estimated revenues from JLTV would range from $350 million to $570 million per year in 2016 and 2017. If production ramps up as scheduled starting in 2018, annual revenues would exceed $1 billion for 20 years.
“Our gut feeling is that the JLTV program, ultimately (protest or not), will stay with Oshkosh,” said Drexel Hamilton analysts. That prediction is based on analysts’ belief that “production readiness” should favor Oshkosh. The JLTV is viewed as a close cousin of the M-ATV, which the company has been manufacturing since 2009 and so far has delivered 8,700. According to Bryant, the JLTV is one-third lighter and 70 percent faster off road than the M-ATV.
Lockheed Martin built a JLTV manufacturing plant in Camden, Arkansas, where it makes vehicles for its missile defense systems. The site passed a government production readiness evaluation last fall, “but large volume vehicle production experience is clearly not one of this competitor's strengths,” advised Potomac Research Group.
Defense industry consultant James McAleese, of McAleese & Associates, observed that Lockheed protest threats were seen as a "stalking horse" negotiating strategy to recover costs, and negotiate a potential Oshkosh subcontract work share.
Bryant suggested that one of the considerations should be whether taking the contract away from Oshkosh would weaken the supplier base. Archrival AM General, which makes the Humvee, is the only other specialized truck manufacturer. “The health of the tactical wheeled vehicles industrial base can be assessed by the level of competition of every major tactical wheeled vehicle program,” he said. “Over the last 30 years or so, every major TWV program has been awarded after a full and open competition.”
Throughout every phase of the JLTV competition, he added, “it was clear from heavy industry participation and the large number of proposal submissions that there is a strong capability within industry.”
The plan set by the Army and Marine Corps would require the company to produce only a few hundred trucks the first year. “You’re probably not going to be over 1,000 trucks until the third year,”
Bryant said. A full rate production decision is scheduled for 2018. Even at the highest rates of 3,500 vehicles a year, that is still far fewer trucks than what Oshkosh was producing during the heyday of the M-ATV program. According to Bryant, the company was delivering as many as 1,000 per month at the peak of the program.