Defense Industrialist

Experiences with cruise missiles, MRAPs, and Iron Dome provide a warning about the F-35. 

 

When and why do defense officials choose to procure equipment specifically to reduce wartime casualties? As recounted at a recent Cato Institute conference that I attended, there are competing answers attempting to explain why voters offer or withhold their support. Officials sometimes act in wartime for more political and calculated reasons, but even the most clever intentions can lead to unhelpful entanglements. Thinking through some recent history, I recommend caution in predicting the strategic impact of new weapon systems, and particularly the F-35.

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At a point, customer closeness becomes “the worst thing possible" for a 21st-century defense business.

 

At what point does acting and thinking like your customer pass the point of marginal value in defense contracting? Hiring those bobble-head retired flag officers as marketing representatives is clearly a widely valued strategy. In recent essay on "Assimilating Disruption, or Offboarding Innovation,” I wrote that
 
     As Peter Dombrowksi and Eugene Gholz observe in Buying Military Transformation, defense is not so much an industry but a common set of customers, and some of the value created by the Boeings of the world springs from their deep understanding of military customers, from the administrative processes of all procurement bureaucracies to the battlefield needs of end-users. If resistance to the military-industrial complex is futile, mergers and acquisitions will be the economically efficient course—for both entrepreneurs and systems integrators.

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Northrop Grumman will spend its cash buying back shares.

 

The board of Northrop Grumman (NYSE:NOC), the Wall Street Journal reports, has just authorized the company’s management to buy back $3 billion of shares next year. That means that the company will return $3 billion to its shareholders, rather than investing it in its own future. That means that the company believes that the financial markets as a whole provide better opportunities for returns than NOC shares. That means that Northrop Grumman’s management, if nothing else, has the honesty to call its company’s prospects a worse-than-average investment. That means that Northrop Grumman is not, as the hubris of many other corporate managers might want us to think, a Lake Wobegon company. It is not, in Garrison Keillor’s famous formulation, as above average as all the rest.

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DARPA’s Adaptive Vehicle Make program shows the measured promise of innovative approaches for engineering innovative armaments.

 

Anyone up for designing a new swimming tank? For counterattacks against possible Chinese landings in that first island chain, the Japanese Army wants to buy 52 amphibious assault vehicles. The most likely candidate, according to Stars & Stripes this week, is refurbished AAV7s from excess USMC inventories. That would be enough to put a whole battalion of infantry ashore at once, which may be more than most of those outcroppings of rock can take. But that very same AAV7, the USMC says, lacks the mobility that it needs for overland movement, as evidenced by its performance on campaign in Iraq and Afghanistan. So, the service years ago launched the later-cancelled Expeditionary Fighting Vehicle (EFV) program, and more recently, the Amphibious Combat Vehicle (ACV) program. The ACV is intended to be a mostly off-the-shelf vehicle, and an 8x8 wheeled one at that. But is there a better way than either buying off the lot or betting the farm on the new new thing?

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The largest defense contractors are conglomerates, and excessive conglomeration may not be helping the customers.

 

Last month I argued that the rumored spinoff of Oshkosh’s military trucks business wouldn’t be good for either the company or its customers. But anti-mergers are in the air, as evidenced by the Wall Street Journal’s almost simultaneous article "Smucker, Oracle, IBM Among Credit Suisse’s 35 Firms Ripe for a Spinoff,” (24 November). The list didn’t headline the defense contractors, but did include Lockheed Martin, Raytheon, and L-3 Communications in its set of "large companies that could tap into the spinoff trend, which has seen companies shed unwanted or slower-growing divisions at a feverish pace.” Why? As the article points out, "companies with narrower footprints are easier to manage," and by the well-known conglomerate discount, are “more fairly valued by the market.”

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Step one: eliminate whole echelons of headquarters.

 

On Thanksgiving Day here in the US, I would like to thank for their service troops all around the world, but particularly this week outgoing Defense Secretary Hagel for his. Like his two predecessors, he has had a tough time working with this White House. Each of those secretaries has also struggled with the vast bureaucracy of their own department; Robert Gates entitled that chapter of his memoirs “Waging War on the Pentagon”. So as speculation swirls about who might become secretary number four, I’ll offer this advice: plan to prosecute that war with extreme prejudice.

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Spinning off Oshkosh Defense would be bad for the Department of Defense.

 

Last summer, as Sandra Erwin of National Defense reported, the US Army consciously warned American truck manufacturers of an impending slowdown in its purchasing. The industry is now so deep in that slowdown that speculation about restructuring has become old hat. But today’s Wall Street Journal brings a new rub, as Maureen Farrell asks "Is Oshkosh Weighing a Spin-off of its Defense Unit?” That rumor, from financial analyst Jeff Wichmann of CreditSights, is unusual in that Oshkosh is more often described as a potential acquirer of struggling military truck lines. More so, the company just two years ago fought off a demand for just such a spinoff from veteran activist investor Carl Icahn. I cannot speak to what the management team in Wisconsin will do this time, but I can address the interests of Oshkosh Defense’s home customers, the US Army and Marine Corps. Such speculation is not shocking, but a spinoff is to be discouraged.

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The Pentagon is yet to explain how its twin defense-industrial strategies will interact. 

 

The Pentagon’s Better Buying Power (BBP) initiative, launched four years ago and recently in its third version, is meant to unlock the government’s monopsony power in its relations with industry. BBP speaks considerably of improving productivity, but the details of the various memoranda, and their implementation so far, have been clearly focused on reducing cost. The Pentagon's Defense Innovation Initiative (DII), launched just this month, is meant (naturally) to encourage innovation for defense, though not along traditional trajectories, and particularly from sources not typically serving the defense establishment. In contrast to BBP, then, the DII is foremost about better and faster, and not strictly cheaper. But there are issues with both big ideas, and how they may interact.

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What worked on the Soviets may not work on the Chinese.

 

Chuck Hagel’s speech at the Reagan National Defense Forum this past weekend may have been one of the most important by an American defense secretary in recent years. His new 'Defense Innovation Initiative' seems neither a DARPA program writ large nor a mere exhortation to industry to ’think different'. Rather, if we are correctly assessing the speech, and all the preparatory work preceding it by Bob Work and his former colleagues at the CNAS and the CSBA, then this is something very different. Hagel is expressing a firm belief that robotics, miniaturization,computing, and additive manufacturing are changing the art of the possible in military matters, and that force structure and investment must adjust to reflect reality.
 

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Better Buying Power may depend on human capital the Pentagon yet lacks.

 

Frank Kendall, the Pentagon's chief weapons buyer, said this week that his staff has “overreacted” at times to his guidance on improving outcomes and affordability. As Defense Industry Daily put it, this has caused some "tension with the defense industry amid the onset of tighter budgets.” Back in September, during his Better Buying Power (BBP) 3 roll-out speech at the Center for Strategic and International Studies, Kendall specifically admitted how “I know that LPTA is still of concern.” Reflexive use of a lowest-price, technically acceptable contract award criterion is just part of the problem. Mastering the difference between judicious supplier management and overzealous implementation of BBP can require some serious classroom time and on-the-job training. And that’s why the acquisition workforce’s recent self-assessment is quite so disturbing.
 

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