Defense Industrialist

On Paring Back Clearance Lists for ID/IQ Contracts

At our inaugural Captains of Industry event last week, Excelis CEO Dave Melcher had a few sound ideas for the folks who run procurement policy at the Pentagon. I've been reading over those, and one which stood out concerned the Defense Department's current approach to indefinite delivery, indefinite quantity (ID/IQ) contracts. I liked his complaint, and so wanted to add some thoughts and a few recommendations of my own.

Read More

On Friday, the Turkish government announced that China Precision Machinery Import and Export Corporation (CPMIEC) had won the country's T-LORAMIDS program for a new, long-range, high-altitude air defense system. The company's FD-2000, the export version of its HQ-9, appears to have beaten Raytheon's Patriot, Almaz-Antey's S-400, and Eurosam's SAMP-T (with land-based Aster 30 Block 1s) with a roughly $3 billion bid. The system has been described as roughly analogous to Almaz's S-300; according to Defense Update, the FD-2000 consists of a Type 120 low-altitude search radar, a Type 305A AESA search radar for countering ballistic missiles, and a YLC-20 passive sensor for improving its capability against stealthy targets". Fairly, CPMIEC is only the marketing arm for the state-owned arms industry—in this case, the actual missiles are built by China Aerospace Science and Industry Corporation (CASIC)—but given the opacity of Chinese industrial structures, the shorthand is convenient.

Read More

I mentioned Apple and Microsoft the other day, in the context of innovation, and writing that reminded me of another useful comparison in defense. 

Microsoft CEO Steve Ballmer announced his pending retirement back in August, and in the week thereafter, a slew of periodicals wrote about how his departure couldn't possibly be bad for the company. Perhaps most salient was Derek Thompson's face-punch in The Atlantic by the title "Why Steve Ballmer Failed." For the past ten years, he wrote, Microsoft's stock (NASDAQ:MSFT) "has functioned like a thermostat set to $25." The world had changed, most of the stories went, and despite some successes with XBoxes and server-side software, Microsoft had repeatedly missed opportunities to change ahead of it. Reaction, the company could manage, but buying most of Nokia would still bring it no iPhone, or even a Samsung Galaxy. As Christopher Mims at Quartz put it, Microsoft today remains a "pile of vaguely related businesses" without a clear vision for its future.

Read More

For several years now, we've been hearing a chorus of laments about how military contractors have been deploying their excess cash. Heck, we've probably contributed to that noise on occasion. For some time now, seemingly the reflexive choices have been dividends, special dividends, and share buybacks—all means of returning that cash to shareholders. While this attention to the owners is laudable—it's certainly better than feather-bedding or empire-building—it's hardly investment in the enterprise. To the contrary, it's a sign that management believe that their average investment opportunity available to the average shareholder is better than what they've got available in the company. As the tendency towards managerial hubris is empirically sound and well-documented, such a frank admission likely supports a stark conclusion: the defense industrial base is not an attractive investment.

Read More

In our inaugural comment, we noted that since the 1990s, we've been hearing about the need for rationalization and integration in the defense industry. The reason, whether supported by hard analysis or just common narrative, is that all those companies in Europe and North America simply have too much capacity chasing too few programs. That capacity costs money, and ultimately customers pay for it one way or the other. And we doubt that we have heard the last clarion call for consolidation from the European Defence Agency or denizen investment bankers, offering yet another (or just the same) set of sound microeconomic reasons for strengthening a smaller industrial base in Europe or across the alliance. But in preemptive defense, we offer at least two four reasons for tempering those hopes.

Read More

If you work in or around the business of defense—whether in industry or in government procurement—you've likely heard many times that yours is a unique market. Your study of Econ 101 had to be followed by Defense 102: monopsonists, oligopolists, complex technologies, and fundamentally unquantifiable risks. Your grasp of business has required reinforcement with hefty doses of policy and engineering. And whatever the reality, you never stop hearing that it's all a mess.

Read More