Defense Industrialist

The emerging wave of consolidation is yielding more diverse competitive dynamics than emerged from the post-Cold-War restructuring.

Five years beyond the inflection marked by the Great Recession's bottom and Iraq War's end, the market for mergers and acquisitions in aerospace and defense is finally heating up and taking shape. At this halfway point through 2015, the value of transactions this year is approaching $30 billion, a pace roughly twice the trailing ten-year average. The deals comprising this surge have brought into focus three trend lines of corporate development along which we now can discern the first wave of restructuring to the aerospace and defense industry post-2010. Alongside these themes also is emerging a leading indicator of what may form a second wave. To the extent these trends have gone unremarked until now, it owes in part to slack deal flow but also to how the economic and business logic of what deals got done has defied conventional expectations.

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A role is emerging for small firms that connect defense to commercial technologies.

On his recent pilgrimage to Silicon Valley, US Defense Secretary Ashton Carter tried hard to stoke enthusiasm amongst commercial software firms for working with the Pentagon. So far, they’re not buying the pitch. To start, they’re just not interested in ten percent margins and the burdens of the Federal Acquisition Regulations. More so, as a vice president at an aerospace company out there recently explained to me, the problem also lies in Californian culture. “I sell weapons,” she said; “my husband works in the oil business. We live in Santa Monica. You can imagine that we’re really popular with the neighbors.” So there’s a gap, and no amount of hectoring by cabinet officers will close it.

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Should structure or conduct drive the Pentagon’s supply strategy?

The bids for Sikorsky are in. For United Technologies CEO Greg Hayes, they’re “at least as good as what we had hoped to see.” By the rumors, they’re from Blackstone, Lockheed Martin, Textron, and Airbus. With such a heterogenous set of bidders, a range of strategic and financial considerations are driving the offers. The tax implications are daunting for United Technologies, and even strategically arduous for Textron, so a spinoff remains in the running as the best option for shareholders. But military buyers should also care about just how the structure of the rotorcraft industry could change, and what that could mean for the conduct and performance of all involved.

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Textron's Scorpion wins on the economics. The politics need some attention.

Instead of attending the Paris Air Show this week, I found myself sitting on the couch the other night, watching Iron Man 2 with the kids. As Justin Hammer introduced his squadrons of nearly-identical killer robots (er, drones) for “the Army, Navy, Air Force, and Marines”, I thought about Textron's Scorpion jet as a problem of inter-agency politics. (Bear with me.) Almost two years ago, Bill Sweetman of Aviation Week warned that "Textron had better be prepared to commit some serious time and money to this project” if the company hoped to develop the market. After last year's Farnborough Air Show, I characterized that problem as one of “market categorization”. Plenty of smart people (like Richard Aboulafia, to start) don’t identify this plane in a separate product category, so they “don’t understand its mission, its performance relative to alternatives, or its economics..” I will try to help with that, because while Textron's story is strong, political boundaries have clouded the case.

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For improving military procurement, there’s no alternative to cultural change.

And all the brilliant private-sector managers who say if only I were running the Defense Department, I know what I’d do? Well, the first thing they’d discover is the Civil Service Commission wouldn’t allow them to fire the 50,000 non-performers as they would have done in their own business, for example.
— Deputy Defense Secretary Paul Wolfowitz, interview with the San Francisco Chronicle, 23 February 2002.

John McCain thinks he has a way. The Senate version of the National Defense Authorization Act mandates a 7.5 percent reduction in civilian staff next year across the department. By 2019, civilians at Defense should be down 30 percent. As Politico Pro reported, the Senate version further directs that the head-cutting should proceed by performance assessments: those deemed least successful are out first. This markedly contrasts with the current approach, which “gives heavy weight to seniority and veteran status to determine whom to keep and whom to let go.” Naturally, the labor unions are up in arms, as is to be expected, and no further noted. But will this make a difference? The challenge of improving the performance of the procurement enterprise depends on both people and processes. The problems therein are not easily separated, but there’s no alternative to cultural change.

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Business is booming, but think twice before sending more guns.

A quick look around the world reminds you that small arms are the tools of choice for those wishing to propagate violence. Indeed, from France’s war in Mali to the conflict in Ukraine to the Islamic State’s reign of terror to Libya’s disintegration, small arms are the fuel adding to the world’s burning fire. It is was therefore important to pick up the latest Small Arms Survey release, the yearly report that discusses how small arms—“revolvers and self-loading pistols, rifles and carbines, sub-machine guns, assault rifles, and light machine guns”—impact global violence. The entire report is worth reading, as the chapters serve as in-depth case studies on how these weapons impact different aspects of worldwide conflict ranging from poaching in Africa or the rise of insurgencies in northern Mali. Yet the report has a few key points of interest to those interested in national security, international violence, or the defense industry.

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Testing today’s drones should not be curtailed just for “fairness” in procurement.

Navy Secretary Ray Mabus really likes drones. He now has a whole deputy assistant secretariat for them. In contrast to the US Air Force, his people aren’t yet burned out from operating them around the clock for over a decade. This April Fool’s Day even brought the annual joke about another aerial demonstration team—this time the Blue Angels—going unmanned. Except that if Cirque de Soleil can do it already, maybe the idea just isn’t that far-fetched. For those X-47B UCAS-Ds—Unmanned Combat Air System Demonstrators—bought from Northrop Grumman have been taking off from carriers, landing on carriers, and refueling from 707s. That bodes well for the forthcoming UCLASS—Unmanned Carrier-Launched Airborne Surveillance and Strike—competition. But for all that the secretary likes those drones from Northrop, further tests and evaluations of the airplane will proceed judiciously, so as not to give“the people that made UCAS a huge advantage over what the next iteration is.” And that may be a mistake.

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Why Russia Focuses on Electronic and Drone Warfare

Russia’s war in Ukraine has brought into question the very notion of NATO’s Article 5, as concerns grow that Estonia might lie next in the Kremlin’s attention. Russia’s posturing in Ukraine, however, should be seen as that of a weaker power trying to avoid confrontation with a stronger power. It is not that Ukraine could defeat Russia in an outright war, but that Russia actually fears a confrontation with NATO. This is partly why Vladimir Putin has been employing his so-called hybrid warfare, which is essentially war without declaring war. In order to conduct such an operation, one needs soldiers in well-trained in asymmetric operations, sophisticated electronic and cyber capabilities, and excellent intelligence. The Russian drive for army modernization has thus focused on the use of electronic and cyber systems, and drones. In this regard, NATO members need to recognize the threat from these seemingly less menacing tools of war, and improve defenses against them to counter future assaults.

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Even broadly available technologies are not equally well exploited by all powers.

At a speech on Tuesday at the Center for Strategic and International Studies, Northrop Grumman CEO Wes Bush urged the US Defense Department to temper its enthusiasm for commercial technologies. As Politico Pro reported, Bush observed that the wonders of commercial markets notwithstanding, no one but actual defense contractors would build stealth aircraft, hypersonic missiles, and offensive cyber software. “All R&D is not equal when it comes to national security,” Bush continued, because “commercial technology, being inherently broadly available, offers no national security advantages by definition.” Or does it? On the contrary, a country’s strategic position, its armed forces’ absorptive capacity, and its industry’s skills in systems integration can substantially determine who will garner the military advantages of commercial technologies.

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The Pentagon needs a comprehensive rethinking of its public and private industrial support.

The US Congress isn’t allowing another Base Realignment and Closure process (BRAC). People at the Pentagon aren’t even supposed to think about it, at least not on the job. But at least the House version of the 2016 authorization bill does require yet another comprehensive review of "force-structure plans and infrastructure inventory.” Infrastructure sounds like BRAC, and the need for another round hasn’t receded. But better yet would be factoring the Defense Department’s business needs into another BRAC, so that public and private capacity can be better balanced for future needs.

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