Atlantic Council
November 19, 2013
On November 19, 2013 Linda P. Hudson, president and CEO of BAE Systems, spoke at the Atlantic Council as part of the Brent Scowcroft Center on International Security's Captain's of Industry Series.

Thank you for inviting me here today to speak on a topic of the utmost importance not just to my industry, but to our nation. And that is the need to sustain and support the critical skills and capabilities of this country’s national security industrial base during the financially challenging times we face today in order to ensure our ability to counter and defeat the national security threats of tomorrow. Of course, it’s a bit of an uphill battle preaching the wisdom of preserving industrial base capabilities for the future when our leaders in Washington seem to be caught in a constantly repeating struggle to keep our government doors open and U.S. checks from bouncing today.

How can we expect anyone to take the long view in a political environment so infected with shortsightedness? But such are the times we live in.

I know the health of our national security industrial base is a topic that is top of mind, not just for me or BAE Systems, Inc. and the other large contractors but also for the tens of thousands of our employees and suppliers who depend upon it for their livelihoods and may not survive in this constrained spending environment. And, of course, at the forefront of our hearts and minds must be the hundreds of thousands of military and intelligence end users who depend upon what we do to protect their lives and ensure the success of their mission.

I believe that cuts to defense spending must play an essential role in any balanced fiscal solution. Our sluggish economy and mounting debt are also risks to our nation’s economic security. But we need to be diligent and deliberate in how we protect this nation with fewer resources, downsize workforces in government and industry, and maintain critical design, technology and manufacturing capabilities and skills. It may sound obvious and straightforward, but a lack of clarity in U.S. national defense strategy and priorities, coupled with a Congress unable to govern and properly resource a budget to fund those priorities, makes the situation anything but straightforward and obvious. We could never run a company that way. We must live within our budget and constantly negotiate and compromise, and I can assure you this is certainly no way to run a country.

In order to be deliberate in the changes we make to preserve our skills and capabilities for this country's future security, our industry needs to know where we’re headed. In other words, “preserve it for what?” We must have a commonly shared understanding of future threat scenarios, the capabilities we need, and the missions that may evolve.

In short, before there can ever be a meaningful industrial base strategy, there must first be an agreed upon national defense strategy, resourced by a congressional budget, planned and executed by DOD and other national security agencies and departments, and supported by healthy industry partners.

I have worked in the national security space for over 40 years and it is no longer clear to me what we intend our role to be in the world today. And, even more important, what do we intend it to be tomorrow? Rather than clarify, recent events – such as the debate regarding the crisis in Syria and the more friendly outreach to Iran – have only further muddied the waters. Industry does not set national policy, nor should we, but we are an important link in making this nation successful in its global endeavors and making our homeland safe and secure. We need to understand where to point our ship.

Are we holding to our historical position that we must be able to successfully engage in two concurrent major conflicts, while also being strategically involved in regional hot spots? Is force projection a priority? What does "pivot to Asia" really mean? Do we wish to step back from the post-World War II role as global peacekeeper? Do we need the size of intelligence gathering apparatus constructed after 9-11? These are all questions that currently have ambiguous answers. In this era of budgetary belt-tightening, are financial constraints going to dictate our global posture?

Do we really believe that dominating the seas and the sky will be sufficient? Or have Iraq and Afghanistan shown us that air superiority and power projection – without boots on the ground – can’t always deliver the goods. In fact, do we really believe we can maintain our dominance in the air and sea given the flight of talent to more exciting and predictable industries who don't use words like sequester and furlough?

I’m just a CEO. A soon-to-be-retired CEO at that. I don’t get to plot national defense policy. But you can bet it plots the path that my business takes. And when that defense strategy is unclear and nebulous, that makes it very hard. Hard for my company and others like it to be ready and able to meet future threats. Hard to attract investment dollars necessary for innovation. And especially hard to attract the employees we need and will continue to need in the future.

When you read Fast Company and Harvard Business Review, it’s always an eye-opening reminder of some of the fundamental differences between commercial industries and defense. My commercial peers used to joke that they wish they had the clarity of future demand we’re provided in defense. After all, what other industry has the luxury of having its primary customer deliver a finely detailed funding plan not just for the coming year – but for the coming five?

To the outsider, it seems like a CEO’s dream come true. But we all know the truth. That plan can, and usually does, change radically year-to-year so you must believe it at your peril. When commercial industry invests big in innovation up front, it has the ability to recover that investment through strong profit margins and very well-defined demand environments down the road. Make a superior product, sell it at a great price, and you, as a company, can drive your own demand. This in turn drives not only innovation, but also drives efficiency and a lower price. Of course, normal market forces cannot moderate a market with only one customer, and an inconsistent one at that.

In the world of defense, we too can invest in developing a great product. We too can set a good price. But we cannot drive demand. Not possible. Demand is a function of politics, appropriations and DoD budget requests. And it changes year-to-year. It’s hard to expect substantial investment in innovation when the return on that investment is constrained by regulation and uncertain at best – when the funding spigot for any program could be arbitrarily shut off at any moment. It’s completely unreasonable to expect contractors to take on such a high degree of risk without a clear expectation of robust financial returns.

Again, we need a clear and agreed upon strategy and a predictable and steady budget in order to be strategic and purposeful in addressing the needs of our customers today and the industrial base challenges for the future. Case in point, the combat vehicle industrial base is at a critical juncture. During the Iraq war funding for vehicles, particularly mine-resistant variants, was in the many billions. Today we are looking at lumpy demand in the hundreds of millions with many programs currently planned to have large funding gaps in the years ahead with no continuity. Specialized design skills that yielded the safest, most survivable vehicles in the world have no equivalent commercial application. Once lost, they may never be able to be reconstituted. Production tradecraft like blast-resistant welding of armored steel or titanium, isn't in strong demand for general industry – but try building a combat vehicle or ship without them. It takes over a year to train and certify such a worker. We ignore this at our peril.

I am encouraged by recent discussions with the Defense Department and service leadership on this topic and their increasing concern and realization that something must be done. It is hard, requires a different way of thinking and difficult decisions must be made. I, along with many other leaders in the industry, remain committed to finding a way to make this work. Our work is specialized. Integrating a complex weapon system is intricate.

And the supply base? Well, you can’t go to Pep Boys for a part for a Bradley or F-16. These parts and the supporting tooling rarely have a commercial dual use. Once you close the doors of these plants, once you let these employees go, it will take years and hundreds of millions, perhaps billions, to rebuild – if it is even possible. Yes, this environment presents a business challenge for companies such as mine. But the real challenge is for our troops and intelligence agents who need our products and services to survive in the next conflict. And if history has shown us anything, it is that a next conflict will arise. Whether it is another conventional fight or a devastating cyber attack, we know there are enemies, both state and non-state actors, who mean to do us harm.

We’ve all been through the ebb and flow of national security funding before. But typically the ebb stems from an ebb in need, not an ebb in dollars. Typically, the ebb reflects a greater view, by some or many, that something has happened to make the world a safer place. Post Vietnam it was clear we were not going to resource for another long, faraway war - right or wrong. There was clarity. Post Cold War, when the wall came down, everyone talked about a peace dividend and the neutralization of our primary super threat. Not so today. I hear no one saying the world today is a safer place or that we are prepared to articulate a diminished role in the world, not to mention we still have troops deployed and remain a country at war.

Many would argue that the threats are only increasing. My son-in-law is about to deploy for the fourth time and I cannot help but worry about reduced funds for training and maintenance and decreasing support for his family left behind again. While I have stressed the lack of clarity and the absence of a budget, I would be remiss if I did not point out the third leg of that stool - the flight of talent. When the general public hears the words “industrial base,” they typically think of steel and grease. They conjure images of calloused hands and sweaty brows leaning over presses and lathes. But, as many in this room are keenly aware, an industrial base isn’t just about production lines and tooling.

The most important work often doesn’t happen here. It happens here. It’s about people. Know-how. Skills. And talent. And when you mothball a program or close down a facility, you can’t just neatly crate-up that talent, put it in storage, and expect it to be there when you return. At the Reagan National Defense Forum this weekend I pointed out that young engineers, mathematicians, programmers, cyber technology specialists rarely graduate today anxious to work in national security. They have exciting choices - Google, Amazon, Instagram, Microsoft, McAfee.... To name a few.

Making processors for computers is something tens of thousands of skilled workers around the globe can do. But how about making radiation hardened microprocessors like our electronics business produced for NASA to power the Rover’s trip to Mars? Much of this talent is now being produced outside the US, but, unlike Silicon Valley who can hire immigrant technology talent with an H1B visa, I need US citizens to work on classified programs. We are rapidly losing our technological superiority in America, and immigration can be an important tool to fill the gap.

However, in the national security space those immigrants need a path to citizenship to help keep our nation safe. In this fiercely competitive, resource-constrained business environment, it’s going to be the companies, industries and economies that can attract and retain the best and brightest, most skilled, experienced and creative workforce who not only survive, but thrive. Science, technology, engineering and math grads are the lifeblood of our industry. Unfortunately, we’re letting that blood spill away, and the supply is increasingly limited.

One of the most significant challenges my industry faces is our shrinking workforce. Our workforce is getting older and a massive number of retirements are imminent. But we’re having a hard time finding, luring, satisfying and retaining the young people we need to replace them. A lot of the tools our industry once used to retain employees – pensions, rich benefit packages, stability – they just aren’t in our toolbox any more.

I think, in large part, the recruitment and retention challenges our defense industrial base faces boil down to four flaws of our industry – four problems that were an issue long before “sequester” ever became a household word, but are magnified in this environment.

One. We don’t allow. Two. We don’t include. Three. We don’t attract. And four. We don’t inspire. Let me tackle those in order.

We don’t allow. As I’ve said before, 75 percent of the people receiving PhDs in U.S. engineering schools are not U.S. citizens. Many of them we, in defense, legally cannot hire. Three quarters of the PhDs! Many untouchable by defense HR departments. In the race for top talent, our industry is running with not just an arm tied behind its back, but a leg or two trussed up as well! Now, I understand there’s a security reason for that. I get that. But what is the opportunity cost? Have we, as a nation, thought about that? And if we’re forced to forgo international talent, then we damned well better be doing something to produce that talent domestically.

Second, we don’t include. Well, I’m not going to belabor that today. I’ve already spoken at forums like this enough about our industry’s difficulty bringing in and hanging onto women, minorities, and employees from other under-represented groups. Many in this room read last year’s Aviation Week study which pointed out that despite so much progress, despite all the fresh female faces in C-suite leadership roles… Although women make up nearly half of the U.S. workforce, they still account for only 24 percent of the workforce in aerospace and defense. Suffice to say our industry is making progress in the area of inclusiveness, but we have a long way to go if we want to fully access that talent pipeline that other industries seem more eager to embrace.

Third, we don’t attract. Our industry does fascinating work, important work. And with continuing developments in things like sensor technology and big data analytics, it almost comes close to magic. On top of that, we are blessed with a tremendous sense of mission – unparalleled in other industries. At BAE Systems, we don’t sell apps. We save lives.

And for those reasons, there will always be a noble and devoted cadre of potential employees drawn to our industry. But it’s not enough. These people represent a small sip from the talent pool. We need access to the rest of that pipeline. We need to be honest with ourselves. In large part, our culture as an industry simply does not appeal to the incoming generation of workers. It’s easy to grouse about the work ethic or sense of entitlement you may feel exists in Generation X-Y-Z. But look at the amazing things that same generation is making happen in those other industries up the street. I want some of that. But we scare them away. With our hierarchies. With our cubicles. With our gray walls and our red tape.

How many here have seen a picture of the multi-story playground slide to get from floor-to-floor in Google HQ? Yes, they have a playground slide. Now how many employees do you think actually go down that slide each day? How many brilliant programmers do you think, when applying for a job ask, “Does this employer have a playground slide I can ride on? I love playground slides.” Guess what. The slide is not important. Nobody cares about the slide itself. It’s what the slide represents. Fun. Creativity. Motion. Flexibility. Youth. Google is a cool place to work.

I don’t expect the BAE Systems and General Dynamics and Lockheed Martins of the world to install teeter totters in proposal centers and monkey bars at headquarters any time soon. I doubt our government customer would appreciate that. But we can change our culture. It’s worth noting that no major defense contractor has ever been on Fortune’s 100 Best Places to Work list. At BAE Systems, we’ve set that as an aspirational goal. And we’re working hard to build the type of culture where people want to work, rather than have to work.

But when it comes to exuding a culture of cool, we all have a long way to go.

Which brings me to one of defense and aerospace’s toughest and most nebulous challenges. One that I’ll close with. We don’t inspire. At least, not like we use to. This is a bigger problem. One our industry cannot solve alone. Once upon a time, when I was a kid, JFK captured the imagination of our nation with the mission of putting a man on the moon. I became an engineer because of the space program. It captured my heart and mind. During the space race, our industry got the best and the brightest. The STEM talent race’s finish line was at our doorstep, and the science and math grads were lining up behind the velvet rope. We had the pick of the litter. Back then, our industry was a magnet for the nation’s most gifted in science, technology, engineering and math. When I was growing up, there was no greater dream than to be an astronaut.

But not today. Silicon Valley is today’s Skunk Works. Back then, it was all about having The Right Stuff. Today it’s about building The Social Network. Think I’m exaggerating? When you leave today, walk up to the first ten-year-old you see and ask them what NASA stands for? Then ask them to tell you about Twitter.

The world has changed. And it’s not changing back any time soon.

Preserving our industrial base isn’t just about hanging onto the people and capabilities we need today and tomorrow. It’s about being able to attract and develop the people and capabilities our nation will need to face the threats of the day after tomorrow.

I commend the people in this room and those in DoD leadership and Congress who have the courage to spotlight and tackle these tough issues....people who take the long view, when the short view is easier, more popular and expedient.

For decades, this country has been defined, in large part, by its technical and military superiority. That superiority is at serious risk. Forfeiting that might – military, industrial, technological … That’s an affordability measure that our nation simply cannot afford. I’m sure we have a wide variety of perspectives represented in the audience today. I look forward to hearing from you and answering your questions.

Thank you very much for your attention.

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