Atlantic Council Captains of Industry Series

The Captains of Industry Series is a platform for senior defense industry executives to address the public interests their companies serve and the public policies that shape their markets.
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    Last week, the attention of the defense sector turned to San Diego for AFCEA WEST. Co-hosted by the US Naval Institute and the Armed Forces Communications and Electronics Association (AFCEA), the conference convened leaders across the armed services and private industry to address the salient theme of “lower budgets and higher demands.” The three-day event featured expert panels and keynote addresses with remarks from many central figures in this conversation, such as Deputy Defense Secretary Robert Work, Former PACOM Commander Admiral Tim Keating, and Ellen Lord, the president and CEO of Textron Systems. Over the course of the conference, dialogue ranged through the Navy’s outlook on the Asia-Pacific “rebalance,” the campaign against ISIL, the military’s participation in humanitarian assistanc and disaster relief, and spotlights on big-ticket defense systems, such as directed energy weapons and unmanned systems.

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  • Transcript: Playing the Long Game




    DECEMBER 10, 2014




    GRUNDMAN: Good. Good, let's check. Yeah, afternoon. Good afternoon, and welcome to the Atlanta Council. Thanks very much for coming.

    I'm Steve Grundman, the Lund fellow for emerging defense challenges here at the council. I'm the producer of this Captains of Industry series. Our purpose this afternoon is to hear from Mike Petters, the president and chief executive officer of Huntington Ingalls Industries, who will make and address entitled Playing the Long Game. Following Mike's prepared remarks, I will join him on the platform to lead a discussion and then moderate questions from the audience.

    Before we cast off into the substance of this afternoon's event, I have a couple of administrative notes. First, the entire event is public, on the record, and we are live streaming it over our Web site. So if I call upon you during the Q&A portion to ask a question, please wait for the microphone -- wait for one of our staff members to bring you the microphone -- and identify yourself and your affiliation clearly before asking your question. Second, we are Tweeting this event at the #accoi and can even receive questions over that channel that you may want me to -- on your behalf if you're out in the Tweetersphere, Twittersphere -- convey to him, which my staff will -- will bring up to me on a piece of paper. Finally, I -- I want to underscore that the event must conclude by 1:15.

    Mike Petters' appearance here is the 11th in this Captains of Industry series, the purpose of which is to make available a prominent platform from which senior executives whose businesses contributor to national security can address the public interests their companies serve and the public policies that shape their markets. Among those who have preceded Mike on this stage are Dave Melcher, the CEO of Xcelis, who launched the series a little over a year ago; the CEO of United Launch Alliance, Tory Bruno, who spoke just last month and I know several of you in the room today were here for that address; and another, who is, himself, here in the audience today, former deputy secretary Bill Lynn, who is now the CEO of Finnmeccanica North America and DRS Technologies. Thanks for coming, Bill.

    By engaging the perspectives of these business leaders, our Captains of Industry series is cultivating a constituency, I hope, for finding practical solutions to the challenges and opportunities that lie at the interface of defense ministries and industries. Mike's address is entitled Playing the Long Game, which I have come to understand he employs as a metaphor for addressing a wide range of problems he sees threatening our national security and economic prosperity. Building a better -- building a better bridge between business and government requires that we, he says, "play the long game." So, too, does building the infrastructure of our foreign relations, and recapitalizing the human resources we have to do science, technology, engineering and math in our technology industries.

    I obviously will permit Mike to elaborate on this theme himself, but will confess off the top that I am, myself, highly susceptible to this slogan as some kind of a touchstone of corporate strategy as well as government industrial policy when it comes to defense in the 21st century. I now want to invite to the stage Mike Brunner to introduce our featured speaker. Mark is the senior advisor to Virginia Senator Mark Warner and is the senator's principal legislative aide on matters concerning defense, foreign policy and energy. Before joining the senator, Mark was a U.S. Navy officer, a career that involved him in a wide range of assignments that included flying helicopters in the Arabian Gulf and advising the U.S. mission to the European Union.

    Important to us here at the council, Mark is also a member, long-standing of the council. He has known Mike Petters, as you can imagine the Virginia senator's legislative aide for defense might have come to do, for some time. And I thank you, Mark, for coming here today to add a personal touch to our introduction of Mike Petters, our speaker.


    BRUNNER: Great. Thanks, Steven. I just want to be sure it's clear that it's not a requirement that the Virginia senator's legislative aide introduce Mike Petters. That this is something I was -- I was enthusiastic about doing. But -- but, Steve, I appreciate, too, this series of events on -- especially on defense acquisition, where I think you've been ahead of the curve at rethinking how we buy weapons and also what the long-term implications are for the industrial base. So it's a terrific series. I try to make as many of these as I can. And as -- you know, getting off the Hill, getting downtown, is not easy. But I always make this a priority. So appreciate that you continue to invite me.

    But today I want to introduce Mike Petters, the president and CEO of Huntington Ingalls. Mike serves as the president of one of the largest manufacturing companies in America. HII has almost $7 billion in annual revenues and employees 38,000 people in Virginia, Mississippi, Louisiana and California. He's responsible for leading the design, construction and overhaul of ships, submarines and aircraft carriers, as well as a number of other business lines that he runs. Mike graduated from the Naval Academy, is a former submariner, and he began his business career in 1987 when he joined the Los Angeles class submarine construction division at Newport News Shipbuilding.

    Mike holds an MBA from William & Mary, and is an executive committee member of both the Aerospace Industries Association and vice chairman of the Virginia Business Council. Now, the title of Mike's address today is The Long Game, and we couldn't have a better speaker on this topic. While many of us in D.C. are focused on short-term budget gymnastics like annual sequestration cuts, continuing resolutions and CRomnibuses, Mike has the challenging task of trying to keep his head down and chart a sustainable course that delivers a product whose development -- development and construction spans multiple budget years and several Congresses. Again, aircraft carriers are 50-year platforms.

    And to do this, Mike has been a proponent of innovative financing. In fact, when I first met him I was on the staff of Senator John Warner from Virginia about a decade ago. And he was talking about how the government could save a lot of money with multi-year buys on this new program called the Virginia class submarine. Well, I'm happy to announce that this year, partly due to Mike's diligent efforts and his partnership with the navy, that the navy signed the largest contract in its history for 10 Virginia class submarines. And the costs savings on this one multi-year buy were so significant that essentially we bought nine subs and got one for free, which is not a bad deal for the taxpayers.

    Mike was also a great partner for Senator Warner and I when we were hit, in January, with the unwelcome news that the administration was gonna retire one of our aircraft carriers. We worked with Mike and his team to fight for the refueling of the George Washington. And I'm proud to say that last night the Appropriations Committee agreed to add almost $1 billion to refuel the George Washington and ensure we get the full service life out of this national asset.

    So without further adieu, Mike Petters.

    PETTERS: Well, thanks, Mark. I -- I appreciate those very kind remarks. And none of that happened because of anything that I particularly did. But we have a great team involved with great issues, and that comes to pass. But this idea that we're getting 10 submarines for the cost of nine, or that we're getting one free, while it may be mathematically true my friends in New York on Wall Street may not like to hear it that way. So we might want to find a -- a little bit of a different slogan.

    And, Steve, I want to thank you for inviting me. We were at a dinner about a month ago and we started having a conversation, and the next thing I know I got a phone call and said, hey, can you come -- can you come do this and carry that conversation on? And the conversation we were having was what's your horizon, how do -- how do you make decisions, and -- and do you make decisions based on short-term pressures or long-term views. And so that's -- that's sort of the genesis of this. And I also applaud you and this organization for the series. Because I do that that, you know, people need to be heard.

    Sometimes, in Washington, I've -- I've head an expression. That all the things have been said, but not all the people that need to say it have said it yet. So -- so some of this is -- I'm afraid is gonna come across as being things have been said before. It's just add me to the list of people who are saying some of the same things again. On the other hand, maybe we can -- maybe we can have a conversation about some -- some more tangible activity that could come out of this. So I'm really happy to be here, I'm really happy to engage with you.

    You know, I think of the things that, you know, sort of in the aftermath of the most recent election I think it's kind of interesting to kind of watch and see how people have responded to this. If I could -- if I could have my druthers I think that I would go to the dictionary people and I would take the word "mandate" and cross it out of the system, and not ever let anybody ever use that again. Particularly in the political sphere. Because I think that to -- to read that you have one vote more than the other person as a mandate is a very, very dangerous thing to do for -- for a politician. But I think it's very dangerous for the country, as well.

    You know, we've had some events here over the past several -- several -- couple of months, where we -- we are reminded -- whether you think about what's happened in Missouri or in New York or even across some of our other fine institutions -- you're reminded that it's -- it really is an act of faith for the 49 percent to allow the 51 percent to govern. That's truly an act of faith. And that, I think, is one of those things that sets America apart from just about anywhere else in the world. Because if you're in the 49 percent in any other country, in some countries that means you can go get your guns. And -- and it creates a real challenge.

    And so -- so if you are in that place, why would the 49 percent allow the 51 percent to govern? Because the 49 percent believe in the process, they believe in the fair -- they believe that there's fairness, they believe that there's equity, they believe they will be heard, and they believe that there will be engagement. And so as long as you have those things in place you can create a coalition or cohesion to move forward that is not in the definition of mandate. And so I think that that's one of the things that this election has kind of taught me, or that I've seen happen here. And -- and my hope is that, going forward, we will -- we will move beyond this idea that somebody -- you know, that there's a mandate on one side or the other.

    In fact, what I -- when we were at the Reagan Forum a couple of weeks ago I talked to -- I had a chance to be on a panel. And I pointed out that I really don't think that the current election was about picking Republicans over Democrats. I think it was a -- it was a message from the electorate to say we're interested in economic growth and we're interested in creation of jobs, and we're not happy with what we've had so far so we're gonna let the other guys do that for a little while. But be aware that if the other guys don't get this right we'll try something else. And so -- so I think that if -- I think that going into it with that spirit can create a -- a -- an opportunity for cohesion.

    In -- in the main, I think that we actually have an incredibly good process. Our process for setting national priorities and applying resources against those priorities has served us very, very well. It's painful to participate in, as Mark was -- was talking to. That you have to engage, it's not a passive process. It's an emotional process. Frankly, it's pretty ugly to watch sometimes. But in the main, we end up with a -- a reasonable set of priorities and we end up with a reasonable set of resources to apply to those priorities.

    And so one of the things, if you're gonna play the long game and you're gonna do this right relative to our government and our -- and our society is, you got to allow that process to work. And I -- quite frankly, for the last couple of years we haven't. We've been in a -- we've been in a place where we've said we're gonna do things by formula, and, you know, instead of doing nine out of 10 things -- which every household in America would do if they had to -- if they had to tighten their budgets -- we're gonna do 90 percent of everything. Which is a really -- a really tough environment for -- for us to be in.

    You know, it's a little trite to say it's hard to build 90 percent of a ship. But, in fact, it's really hard to build 90 percent of a ship. You know, and -- and as Mark pointed out, and Steve pointed out as well, we are building -- we are building platform today -- we're building unit son the John F. Kennedy, the CVN-79. The Kennedy will deliver to the navy in the early '20s. It will come back in the mid to late '40s to the shipyard to be refueled. And it will come back to the shipyard in the early '70s to be inter-activated. Now, I grant you that my horizon is probably a lot further out than just about anybody else's. But what does it take to be successful when you have to push your horizon out there?

    I -- I think leaders have to understand that -- that they are -- in just about any circumstance, the leader of an organization has to have the longest view of anybody in that organization. There will be -- everybody around the leader will have a shorter view. They will have pressures on them that are gonna push them to say you need to do this by Friday, you need to do this by -- by next month, or whatever it is. The leader is the one that has to stay the course and have eyes on the horizon, whatever that horizon is. And my horizon is out to the '70s, but I understand there can be businesses where the horizon might be to the end of the month. But you need to have an idea of where that horizon is, and then -- and then -- and then focus on it.

    When -- when we think about where we are in -- in the national security arena, though, let's think a little bit about how those stakeholders are. The stakeholders are -- you know, clearly the Pentagon is our customer and the Congress as our -- as our representative of the taxpayers. And those of us that are in the business of national security never, never, ever forget that that's who we're working for. Think about the institutionalization of things in that environment that are driving everybody to be short term-focused. You know, our customer -- frankly, the navy has a 30-year plan, which is a -- which is a godsend relative to what a lot of the other services have and a lot of the other companies have to deal with.

    But that plan changes every year-and-a-half, 2 years. It -- it moves around a little bit. So it's notional and directional, and it's not -- it's no decisional. We talk about budgets. If you -- if you think about how a business operates, we operate in an environment where we make investments and we look for returns. And if you think about how our customer and how our Congress operates, it's we'll establish a budget and we'll measure expenses against that budget. Good programs are identified as programs that run under budget. Now, think about what that means for a minute.

    If I have a department in my organization and I said, OK, your budget for the year is $1,000. And towards the end of the year the department manager has spent $900. Now, he comes in at $900 for the end of the year, he's a great leader and a great manager. But if he took $100 -- and let's say this was 20 -- 2005. If he took that $100, and instead of giving it back and being a hero in 2005 he had gone out and bought stock in Apple. Well, he wouldn't be a hero in 2005, but by 2014 he would have an investment that would have paid many, many times over his -- his -- his budget.

    And so there is a contrast between thinking short-term and thinking long-term. And I think the real challenge that businesses have is that we think about everything in terms of investment and return, and our customer and the taxpayers think about it in terms of budget and expense. And -- and where that intersects in our business, that intersects in the contracts that we sign. And so the people that are working on those contracts actually have to understand that they're doing a translation. That can be very, very challenging. And I -- and I frankly think that as we move forward I think that's gonna become even more of a challenge.

    Budget pressures are going to create incentives for contracts to have a little bit more scope, a little bit less fee. Maybe we'll incentivize a quarter less -- a quarter of a point less on fee return, but that's the investment return that's needed to sustain the business going forward. And that can be, you know, heroes today create problems for tomorrow. Now, you -- you take the business and you think about customers and the political environment, and turn around and think about how our owners are and think about what drives them.

    I read over the weekend that half of the shares that trade on the exchange today will be traded by high-frequency traders. Now, high-frequency traders serve a purpose. They create liquidity and they do lots of things to allow the -- the efficient allocation of capital, which is what -- which is really a miracle in this country. But at the same time, high-frequency traders are not terribly interested in what I have to say about strategy or where the company might be in 2016 or 2020, or that delivery of the ship in 2022. They're interested in what the price says today.

    And that's an interesting thing to think about is what the price is. Because if you have perfect knowledge of everything that's going on inside of a company, and you have perfect knowledge of everything that can happen to that company, you can come up with what the value of that company is. No one has that knowledge, no one. Not even me. And so in some ways, the stock price that shows up on any given day is not really the value of your company. It really is an opinion about the value of your company, right? And so as the opinions move up and down, people are trading on the change in opinion.

    In the meantime, there are a lot of things you can do to influence that. You can buy back shares, you can raise your dividends, you can -- you can do lots of stuff that will actually affect the -- the -- the perceived value of your company. But they may not be doing any -- they're not investments, necessarily, that are creating new value inside of your business. And that's an environment that we're all struggling with right now because it's -- it becomes really hard for us to describe what we're doing that's an over-the-horizon description of our strategy. Because it's really hard to -- to talk to that when -- when you're getting literally instantaneous feedback on -- on what's happening with your share price.

    And so the lens of value, the institutionalization of the short-term -- you know, high-frequency trading is, you know, down to nanoseconds -- you get weekly reports from -- and comparisons to how you did each week on -- to all the other companies in your industry. You have quarterly earnings reports, you have annual reports that come out. You know, if you're building a product that takes 8 years to build, and you have a 1-year annual incentive program that you're trying to work with your shareholders to incentivize your workforce, you know, you got to make sure the folks in your organization don't try to maximize this year at the expense of next year. That's the leadership challenge.

    So -- so as you think about where your horizon is and what all these pressures are, we can go on for as long as you like about all the different -- the different pressures. I -- I thought I'd share -- is what -- how I think you have to think through as a leader of an organization. Number one, you have to think that you're the longest person, you have the longest horizon, in the room. And that you're -- you're gonna have a view that is about creating value in your organization that is longer and -- and -- and farther out than anyone else. Number two, you have to really decide on what are the things that you really believe in.

    Now, I'll tell you what I really believe in, but it -- but I think this is fair game. Any -- any leader can do this. When I was at the Reagan Forum, one of the things I saw in the library was that Ronald Reagan, underneath everything else that he had to say or did, the one thing that his -- was his touchstone was that he believed in the human dignity of every single individual person. Whether -- whether you were a rocket scientist or a painter or a cleaner or an engineer, it did not matter. There was dignity in that person and there was value in that person. And that's -- that sort of was the foundation of -- of -- of philosophy of the world.

    You know, my view is I -- I -- I won't -- I won't say that the president was a -- a -- an inspiration for me. But as I saw that, I thought about -- it made me think about what are the things that I believe in. The first thing that I believe is that everybody that comes through the gates our business every single day wants to do a good job. And the challenge for the leadership team is to make sure that we do everything we can to give them every opportunity that we can for them to do their very best work. Now, think about that for a minute. What does that mean That means they have to have tools. That means we have to invest in the capital for -- for -- for their success.

    But it goes beyond that. We have decided, for instance, that we're going to put health clinics in our business. We have decided that we're going to allow those clinics to support our folks, and they're gonna be right on-site so that our folks can use them without having to take a day off to go to the -- to go to the -- to go to the doctor. And their families will use it. Now, what have we done there? You know, there's sort of the magician. You know, the right hand is the one he wants you to watch, but pay attention -- really watch the left hand because that's where all the action is. What's going on there? Number one, we care about our employees. Number two, we're investing in them.

    Number three, we want them -- we want to capture the return on what -- on -- on that investment. And we want them to help us capture that return. Now, here comes the left-handed part of the magician's thing. Number four, we're breaking the fee for service model of medicine because doctors will be on salary to us. Which means that they don't have to go and spend 6 minutes with a patient every -- you know, 6 minutes -- every 6 minutes get a new patient so that they can make their numbers for the day. They get 30 minutes with an employee. And if they have 30 minutes with an employee, and they have a discussion with the employee and they say, "Look, you probably ought to give up smoking," or , "You need to probably walk around the block three times a week."

    And that turns into a health consciousness in one of our employees, that means that that person is a productive member of our society and a productive worker for this business for a couple of more years. That's really, really good for us. And so that's one example of how we take this view that I don't know where the -- I don't know where the health care system's going to go. I don't -- I think there's as many opinions about that as there are people in the city. But I know what's right for our businesses. That we're investing in our folks, we want to give them an opportunity to capture the investment on that -- capture the return on that investment. And -- and we're gonna sustain that and create a sustainable approach for going forward.

    Beyond that, the other thing that I believe in. If I believe that everybody that comes through my gates every day wants to do a good job, the second thing that I believe in that probably is more about my leadership style than anything else is that when the shipyards decide that they want to do something it gets done. And the challenge of the leadership team is to persuade, cajole, whatever you want to call it: get to the point where the shipyard decides that it wants to do something. It's not enough to stand up and say we need to go over to the right. It -- you know, if -- if -- if President Teddy Roosevelt -- if he had decided to go up San Juan Hill and no one had ever followed him, you know, what would have happened? I'm not sure how that would have turned out.

    The thing about the shipyard is, there's so much deep talent in what we do that when -- when the shipyard, as an organization, decides that we're gonna go to the right we go there better than anybody else. And so -- so for me, it's always been about make sure that you -- you do the -- the kinds of things that are gonna create support. And what I found is, that's actually true whether you're talking about inside of my business or outside of the business. And Mark talked about a couple of the things that -- you know, whether it's a multi-year procurement for Virginia class submarines or multi-year procurement for aircraft carriers or the engagement -- the full court engagement -- on the value of 11 carriers in the fleet or the discussion that we've been having for the last year about amphibs and the amphibious industrial base, all of that requires -- it's not enough to just stand up and say that's the way we're going. It does require you to go out and -- and create support and get the institution to believe that that's the right direction to go.

    And when that happens, then good things happen. And I think that long game leaders have got to become -- you know, to be a successful long game leader you have to understand that and be willing to put the energy into it to go create those kinds of long term coalitions. So with that, I'm gonna stop at that point and open it up to our discussion and questions.

    So -- and I appreciate the chance to be here, and thank you for your time.

    GRUNDMAN: Great. If you could sit right there. That's terrific, Mike. Thank you very much. That -- again, you're not the first to exemplify what I -- I'd hoped this series would draw out of senior business leaders whose businesses affect national security. That was -- that was right on the mark.

    So let's develop some of what you've said, and -- and -- and raise a couple other things. Your -- your introduction, I -- I mentioned that you were a Naval Academy graduate and a naval officer. But what I want to know is how'd you get in this business? Turns out to be an interesting answer, when I ask, typically. How did you -- how did you get in this business?

    PETTERS: You know, when I -- when I was making the transition from to navy to a career outside of that I -- you know, being nuclear-trained, I had a chance to do -- go work in the power companies. And when I interviewed with the folks at Newport News I actually saw an opportunity to do more than just be an engineer inside a reactor. And, you know, I went to Newport News thinking that I'll use this platform of what I know how to do to pursue an MBA, and -- which is William & Mary's right there.

    GRUNDMAN: Yeah.

    PETTERS: And so we did that, and -- and in the course of pursuing my MBA, Newport News decided to throw bigger and bigger jobs at me. And so, you know, once you buy your second set of steel toes in the -- in the shipyard you're a lifer. And -- and I'm on about number four at this point. So.

    GRUNDMAN: OK. That's the -- that's the mark. You alluded to the -- the dinner, where you and I first started talking. And the -- the formulation of your business's strategy -- it's the way I heard it, I'll let you decide if that's the way you want to articulate it -- but the formulation that really struck me was, my words now, "I'm not a shipbuilder, I'm a company that does engineering processes." And I'd ask you, if you could...


    PETTERS: Sure.

    GRUNDMAN:... develop that because I think it's interesting.

    PETTERS: Yeah, we -- it -- well, it's -- you have to kind of think about who you are. And when -- when you see or think about the shipyards, the first thing you think about are the big cranes and the big ships and all the great folks that do that work. And -- and they are the heart and soul of -- of who we are. But behind all of those folks -- all the welders and the painters and the riggers and machinists -- behind those folks are the engineers. And it turns out that we're a really big engineering company. We have 5,000 engineers and designers in shipbuilding. And what we found over the past 3-1/2 years, since we left Northrop Grumman, we've been going through a process.

    You know, we're closing the shipyard in Avondale. And we started that process -- it's a -- it's a grueling, terrible process to go through. We started that process with 5,000 employees there, and we actually started trying to figure out how do we redeploy our manufacturing employees into a new space. That -- because that's what our opportunity was. And we have been, you know, I'd say completely unsuccessful at that. What we also found, though, was that when we brought our engineers to talk to engineers in other spaces it takes about a minute for them to get synched up and start using the same language and talking about all the same things.

    And so what we've -- we've come to realize in that process -- I -- this is not one of those things where I just had a blinding, you know, vision of this is one of those brute force recognitions -- is that we really are an engineering company that makes a lot of really cool stuff and our engineers do really cool stuff. And now when you step back and think about, OK, you're an engineering company, who are you providing that for, well, we only have one channel. Our one channel for our engineering capability is towards the Pentagon. And, you know, it's a -- if you have a -- if you're any company, and you have one channel for your -- for your product, and that customer or that channel is, you know, pick your choice -- it's flat, it's capped, it's uncertain, however you want to put it -- you need to think about how do you open other channels.

    And I think everybody -- everybody, in every business -- is to always try to figure out how do I open another channel. For us, we decided that we could open another channel for that engineering capability in a place where there's a high demand for engineers. Today, the -- we -- we've been doing work with the Department of Energy, taking advantage of our nuclear capability inside of Newport News. We've been on a team Fluor down at Savannah River, supporting that team for, gosh, that's probably been 6 or 8 years now. And that's going really well.

    But we have -- as we've tried to pursue other opportunities in the Department of Energy space we -- we have organically been almost completely unsuccessful. And what we found was, we have this tremendous capability and we have this tremendous depth, but we don't really have any access. And in January, we acquired S.M. Stoller Corporation, which is a small engineering services firm. They have 25 -- they -- they are on-site on 25 DOE sites. Their biggest issue on a day in and day out basis is staffing. And so if you take -- you know, to borrow some -- some phrase, some terms -- if you take 25 sites of bandwidth and you marry it up with 5,000 engineering designers of depth you have an opportunity to create value there that was not there before.

    I mean, Stoller was gonna go continue to pursue things, we would continue to pursue things. But now you marry that bandwidth and depth up and you might actually be able to capture -- pursue and capture things that were not there before. And so in that case, we -- it makes sense for us to -- to bring that together. You know, in the DOE space there's going to be several re-competes (ph) of several of their sites over the next 5 years or so. And we see that -- while the total dollar value is kind of, you know, eyewateringly (ph) large, participation in that is going to be substantially more than what we've seen before from our business standpoint.

    So that just seemed to make sense for us to -- to got down that path and open up that channel. We took another step towards the oil and gas space in -- in May, where we said, OK, we -- we can open another channel here because this is a space where the demand for engineering talent is exceptionally high and the supply is exceptionally low. And so as we -- we acquired UniversalPegasus in May, they have sites in Houston, Calgary and Aberdeen. And frankly, they have engineers -- they have over 1,000 engineers and designers all over the world. They understand how to be successful in that business, and we can bring a solid -- a solid balance sheet to support them, solid contact and capability for staffing to support them, and engineering disciplines that they don't have that they can use.

    And we've already had cases where the folks in Houston or the folks in Calgary have called into our shipbuilding business and said, "Hey, have you got somebody that knows how to do lifting and handling," as an example. You know: "We've got a customer that has a lifting and handling issue, and we'd like to apply that resource." So we've been able to do some of that. And so I believe that that's going to be another place where we're gonna be able to create value that, between us, would not have otherwise been there. But in the end, this is a long game, right? And -- and -- and my business in shipbuilding, for the last 30 years, has been focused on process. How do we do what we do and how do we do it better?

    If you look at our R&D investments, it's really -- we -- we invest in some gadgets and gizmos along the way but, really, it's about how -- we're gonna invest in the -- in the TV screen for the welder so he could weld better, right? And so we make those investments. We're looking at a Pentagon that's going to move to a more competitive environment. And -- and, it's going to move to an environment where commercial standards are going to become more -- gonna come more into play. Well, you can just stand up and say, OK, we're going to be more competitive and we're going to be more commercial. And now you run the risk of being, you know, the guy that ran up the hill and normal nobody followed him up the hill.

    But if you bring into your organization the culture of an organization that, every single day, the folks in that organization are waking up and their first thought is how do I run faster, how do I outrun the other guy, how do I -- and you bring that, that's what's happening in the oil and gas space. And you bring that mindset, and you start to -- sure, sure, we can support from a staffing support or financial support to that space, but the next thing that happens is it starts in infect back into our space. And so you could think of that as sort of a vaccination, if you will.

    GRUNDMAN: OK. Another good metaphor.

    So that segues to something else I wanted to ask you about, not -- not as an ersatz equity analyst, but because I think it's a strategic question. And that is, directly, what is your capital deployment strategy? Part of was buying a couple companies outside your main lane, but...


    PETTERS: Yeah, we...

    GRUNDMAN:... what's the -- what's the whole of that story?

    PETTERS: We've been -- we've tried to be pretty clear that we're gonna continue to be very balanced. We need to invest in our -- in our navy facilities to continue the franchise that we have. I mean, we're -- we're a principal partner with the navy and the fleet that they build today. There's no future for this business that doesn't see that that's going to be the case in 5, 10, 20, 30, 50 years. And so we will continue to be investing in our facilities. We will bring our shareholders along, you know, at a -- at an appropriate pace. And we will continue to think about our -- think our way through are there -- are those -- are there those kinds of investments where we are a better owner of that business that takes advantage or opens a channel or creates value that was not there otherwise.

    You know, if all we do is go and -- and acquire a bunch of companies that there's no -- there's no reason for us to own them over anybody else, then that doesn't make any sense. But, you know, in -- in a case where we have a capability inside of our -- inside of our government business, or even if we have a capability in, say, UniversalPegasus, that now could be married up with a different capability in the oil and gas space. I mean, I -- I think that there's -- there's -- we're gonna be open to those opportunities. But we're gonna do that with a -- with a -- with a, you know, pretty clear-eyed view of the risk of that.

    You know, I -- I -- I understand that defense companies have got a pretty checkered record of being able to do this. And I -- and I think that one of the challenges is that when defense companies have tried to do this and it hasn't gone well, and you look at times when defense companies do this and it goes well, what's the difference? I think there's two -- two things. One is, when it doesn't go well sometimes it's led -- it is because the -- the -- the defense company went in and said, "You know, because I can build aircraft carriers I can do anything else." And they go into this -- they go into this greenfield, if you will, and say, "OK, I'm here," and they find out that, yeah, you know, you got a lot of capability but you've been thinking about process for 30 years and, you know, we -- we're thinking about -- we're thinking about efficiencies here. And things fall apart.

    So we're avoiding that. And the second thing that they do is, they make the mistake of going into those spaces and saying, "You know, I -- if I'm -- if I can be in charge on an aircraft carrier I could be in charge in this space." And so our approach has been we're not looking to go out and be in charge. We're looking to apply our capability to legitimate partners who already know how to be successful in that space. You know, if they already -- and UniversalPegasus knows how to be successful in that space, S.M. Stoller knows how to be successful in the DOE space, now you've got that part of it as part of your portfolio. Now you can figure out the best ways to support that and be successful.

    Is that going to be the principal driver of our -- our overall capital deployment? Frankly, no. Because if you list the first 10 things that have to happen between now and 2020 for my business -- you know, Mark had kind of talked to them about it before -- we got to finish CVN-78, we got to get a contract for CVN-79. There's probably a long lead contract in there for CVN-80. There's a refueling contract for 73, there's a -- the next block of submarines needs to be done. ORP has to happen. The Amphib LPD-28 needs to happen. The follow-on LXR program has to happen. LHA-8 will be up there. And there's a competition for destroyers. I just rattled off the 10 -- the 10 top things that have to happen for my business in the next 5 years.

    I didn't mention Keystone, and UniversalPegasus is a key supplier to the Keystone project, right? So -- so when we say "balanced," you know, you start with the capital and investment in our process to preserve that franchise with our -- with our navy customer. We will look for opportunities to -- to give our capabilities other customers, if that makes sense. And we're gonna bring our shareholders along.

    GRUNDMAN: Somewhat apropos of this theme, I wonder if I could draw you out on -- on what you're trying to do at Avondale, which also has an energy angle to it.

    PETTERS: Sure.

    GRUNDMAN: Which I hadn't heard until I did a little homework for our conversation.

    PETTERS: Right.

    GRUNDMAN: So I think it's an interesting story...

    PETTERS: Yeah.

    GRUNDMAN:... Although maybe a developing one.

    PETTERS: Yeah. I mean, it's a tough story. You know, it's -- it's -- 4 years ago, when we were part of Northrop Grumman, we made the decision -- it became pretty clear that there just was not enough navy work to preserve that facility. And if you go back, when we built 600-ship navy back in the '80s we had six major shipyards doing that, right? Avondale was one of the six.

    GRUNDMAN: Right.

    PETTERS: This is the first of those six to actually face the prospect of not having business. And so working your way through the -- through the what do you do with a site like that and how do you -- how do you manage your way through that has been quite a challenge. What we always said from the beginning was -- the -- two things. First of all, when this decision was made I actually went to the Northrop Grumman board and I said, "It's not conventional, but I need you to make sure that we leave the two ships that are there to finish there." Because usually, when a business goes...


    GRUNDMAN: Which were the...

    PETTERS: It was the LPD-23 and LPD-25.


    PETTERS: You know, there were two reasons for that. One was, if we picked those ships up and stopped them in there, and tried to go take them to Ingalls, it would have been so disruptive to Ingalls. And we were just starting the recovery at Ingalls, you know, to get that sorted out and we didn't need to add that complexity to what was happening at Ingalls. And so that was sort of my first motive for that. But the second motive was, I knew it would take, you know, 3 -- 3-plus years to do that, 4 years as it turned out. And I could use that time to try to figure out what to do with the site. And we tried everything.

    GRUNDMAN: And the assets are on your balance sheet, or navy...


    PETTERS: Yes.

    GRUNDMAN: There's navy...


    PETTERS: No, they're ours. They're ours. They belong to us, yeah. And it's about 260 acres. It's on the west bank of the Mississippi River. It's -- you know, it's been -- at the time that the announcement was made in 2010 it was the largest employer in the -- in the state of Virginia. And -- I mean, state of Louisiana, sorry.

    GRUNDMAN: Yeah, yeah.

    PETTERS: And so it's been really -- really challenging. And as we've -- as we've worked our way through that, we've said that if we're gonna successfully redeploy that -- now think back to what I just said. If you're gonna do this you don't want to really be the guy in charge, and you need to partner with somebody that really knows how to be successful in a different space, right? So we've -- we have picked up a lot of rocks and looked under the rock to see what we could find. In fact, I even picked up the commercial shipbuilding rock again for a few months, and then put that one back down. It was -- that one was kind of hot and, you know, didn't hang to that one for very long.

    But we looked. We looked. We tried all that sort of thing. Where we are today on that is, we're finished -- all of -- we're finishing up. In fact, we're pretty much done with all of the navy work that's going on in that site. And so we're -- we're -- we're pretty close to now closing that. But we're having -- we're doing a -- we're doing a study with Kinder Morgan on how you redeploy that site and what's the best way to use a site like that's located on the west bank of the Mississippi.

    GRUNDMAN: For those who don't know that brand, Kinder Morgan is...


    PETTERS: Kinder Morgan is, you know, one of the -- one of the most successful companies in the oil and gas space. They -- they operate just about every aspect of the oil and gas they're involved in, and operate terminals and storage and warehouse around the world in support of that. And it's -- you talk about a credible partner, there's probably no more credible partner in oil and gas than Kinder Morgan.


    PETTERS: So more to come. We haven't figured out yet exactly how that's gonna play out, but that's where it stands.

    GRUNDMAN: Yeah. Let me -- let me turn to -- and -- and I -- I will take questions from the audience. We got a lot of breathing space here, so just stand by and let me run through a couple other things.

    I'm interested in -- in a little bit more discussion about your relationship with your primary customer, the -- the U.S. Navy and -- and the Pentagon. You know, again, in part because I'm -- I'm just picking up one of the primary themes of this series and of -- of -- of practically every conversation that -- that I'm party to around here in Washington. And I -- and I guess what I -- what I'm interested -- what I'm particularly interested in with respect to you and your business is that you're a unique -- not every company I would say this of. You're a unique company, right? You are a, let's politely call it, a "sole source supplier," or nearly so, of a couple of major products in -- in the U.S. arsenal.

    And -- and -- and a customer who it -- itself, right?, under the guise of better buying power, is trying to flex its monopsony -- to use a fancy word -- power a little bit. How -- how -- how is that relationship, that monopsony versus -- again, polite term -- "sole supplier," working -- working out? Has it changed, is it the same, is there something at play right in this juncture?

    PETTERS: You know, it -- it -- it's a dynamic relationship. I -- I would -- I would say that when we think about negotiating our contracts, you know, a lot of folks are -- would say, well, the negotiation but how do you set the price? And -- and for us, on -- on some of the contracts you (inaudible), like the carrier contract in particular, it's really not about price. It really is about coming and -- and settling in on a scope of work and a -- and a -- an agreement on how much risk there is in that scope. Because, you know, everybody kind of knows what the -- what the budget is, we know what the cost cap is, we know what our portion of it. We -- we -- you know, when you -- when you go to sit down to -- to do this negotiation, the cards are all kind of up on the table, right?, at least in terms of how much money is in the room.

    GRUNDMAN: Yeah.

    PETTERS: And so now, how do you take that and decide how does that translate into scope and -- and risk and return on that risk, and how do you adequately create a profile that makes sense for both the taxpayers and the -- and the company. It's a challenge. And -- and -- and that discussion is exactly what I was talking about when you say that -- when I -- when I point out that, you know, our government operates on an annual budget and expense kind of mindset. And we are operating on a -- on an investment and return mindset. And that translation is, how much scope do I get, how much risk am I taking, and how much return do you get on that kind of a risk.

    That's pretty tough. And when you -- and when you go and stick on top of that -- you know, in the case of the carriers -- the taxpayers have actually been very emphatic about "and we are not going to pay any more than this much." And so they've created cost caps. And -- and so here we are, in the last, you know, year and a piece of -- year-and-a-half or so, less than a year-and-a-half -- of the forward delivery and everybody on the program is committed to getting the ship done for less than the cost cap.

    GRUNDMAN: Right.

    PETTERS: That cost cap was set in 2006. That -- at the same time that that cost cap was set, the taxpayers set another cost cap for the 79. So we're sitting here negotiating the 79 for a ship that's gonna deliver in the early '20s, and the -- and the -- you know, the boundary condition was set in 2006. And so that makes for a really tough negotiation, really tough negotiation. And what it points out is that the real competition on those parts of my business are not with -- as you point out, there's nobody else that's gonna build an aircraft carrier, but the competition is with the budget. And the competition is with other folks who are looking for pieces of the budget. And so we've got to figure out how to be that affordable.

    GRUNDMAN: So the several -- several indicators that have -- that have come through the Atlantic Council and elsewhere indicate -- suggest that this -- I -- I -- I like your formulation of the -- the contracting folks being them who have to translate between return on investment and -- and program -- program price, budget, versus cost execution. The -- the several indicators are is that it's -- it's bad. The government is bad at this, and getting worse. Now, I'm not asking you necessarily to criticize your customer, but let -- let -- let me flavor the -- the -- the -- the question by saying when I was in government I thought MAV-CO8 (ph) was a darn good monopsonist. And I wonder are -- is MAV-CO8 (ph) a darn good monopsonist, or are -- are things bad and getting worse in their capacity to make that critical translation.

    PETTERS: Well, I'm glad you didn't ask me to...


    GRUNDMAN: On nuclear ships, at least.

    PETTERS: Yeah, that's right. So -- so I -- I think that, you know, there's two pieces of the conversation with the -- the citizens of the United States that could be improved.


    PETTERS: OK? One -- one is the budgeting process itself. You know, in the -- when the cost cap for the carrier was set in 2006, the budget for the carrier was actually set many years before that, right? And so by the time -- we didn't sign the contract for detail, design and construction on the ford (ph) until 2008. And by the time you get to the place where you're -- you know, the process that we have, by the time you get to the place where you're actually negotiating, you know, our piece of it you're many years away from when the first estimate was put together and -- and a bud was created.

    GRUNDMAN: The GAO baseline, if I may invoke it, right?

    PETTERS: Yeah. Whatever -- well, it's actually the -- it's the first time it show up in the fit-up (ph) is -- is kind of where it goes. And -- and so if you were to go and -- and go back to the -- the original set of assumptions that were made to create that number in the fit-up (ph), and you were to say, OK, how many of those in -- that was in 2003 or '03, and how many of those have actually played out and are we living through and turned out to be correct in 2014 or will be correct in 2016, I'm gonna predict that that would be a very, very short list. And so the question of how do you get that process to be -- for there to be more accountability in that process, because it's very -- it's -- there's a lot of -- there's a lot of time that removes the budgeting process from the execution process.

    And how do you create more accountability back -- you know, if you go into a program, as I said before, you go into a program and you get it wrong -- you get the budgeting process wrong -- if you get it wrong on the low side you're a bum because the risk of running over and -- and the fact that you run over is a lot higher. So you ran over your budget you're a bum. If you get it wrong on the high side you're a hero, right? But you don't have this kind of money sitting around that you can allow everybody to be wrong on the high side.

    GRUNDMAN: But -- and no one's accountable for what you could have bought with the money you didn't need (ph).

    PETTERS: Right. So -- so this budgeting thing, this challenge of getting the estimates right and getting the budget right and -- and finding some way to create some more dynamism in there and accountable in there, is something that I think -- I don't have a solution for it. I just see that as being something that overwhelms the process that goes forward. And -- and then, you know, the -- the second thing is that when we -- when we actually have a conversation with the taxpayers about what -- what it is they're buying we don't do a very good job of describing how much risk there is in what we're buying for that price.

    So if I sign a contract -- I -- I sign and contract and -- says I'm gonna get it done for this target price, I have a path to get it done for that price. I also have agreed that there's a set of risks. That I have to retire that risk. And I may have to retire, you know, 80 percent of the risk to get to that price or 50 percent of the risk or 20 percent of the risk or 100 percent of the risk, right?, to get to the target price in there. But if I only -- if -- if -- if I have to retire 50 percent of the risk to get to the -- to the target price, and I only retire 40 percent of it, I'm a bum, right? And we're moving into an environment where I think that we would be happy if the risk was at 50 percent.

    Because I think the risk is going to be in the 80 to 100 percent. And you're gonna be sitting here now, making decisions where, you know, I'm gonna sign a contract for -- with -- with -- I have to retire 100 percent of the risk to be on budget.

    GRUNDMAN: Right, right.

    PETTERS: And, boy, if my guys are great and -- and the shipbuilders, you know -- I -- I got plenty of time to tell you how great the shipbuilders are. They retire 90 percent of the risks, then we're bums.

    GRUNDMAN: Right. And -- and to -- by this term "retire risk," just in palpable terms, is I'll be able to get this material cost to thus, I'll be able to weld this kind of a seam at this -- is that what you mean?

    PETTERS: Yeah, exactly. I mean, we'll -- you know, especially on a platform where you are putting in new technologies, you're gonna -- you know, we put in -- well, in fact, some -- some new technology here, right, Roger? And -- and, you know, you make some assumptions on how that's going to go. And -- and the one thing that I know is that when you make those assumptions you've either -- you're gonna be wrong. You either -- you either got it way right, you -- you know, with a lot of margin, or you got it way wrong with a lot of -- a lot of miss. It's hardly ever that you get the assumptions exactly right.

    GRUNDMAN: Right. The only thing you know for sure is it'll be wrong.

    PETTERS: It'll be wrong, right. So -- so -- so that -- so that's the challenge. And when you're -- and the -- the hard part is how do you have that conversation on the front end. I'm -- you know, I'm gonna pretend to be a little naive here, and say we ought to be able to have that conversation. But the realist part of me says that if you start having that conversation and -- and suddenly programs that we've always been able to get done somehow we start to recognize how much there -- risk there is in there -- I'm reminded, when I came Washington, you know, gosh, 25 years ago I was told about the Serengeti rule. The Serengeti rule is, if it limps it dies.

    GRUNDMAN: Ah, yes.

    PETTERS: Right? And so if you have a program that suddenly starts to limp, in this environment, you are creating hazard to the program. So how do we have a conversation where we can actually talk about the risk that there is in this program without creating the -- the machinery to -- to force the program off the table? That -- I think is -- that's -- to me, those are the two parts of this. Whether you're a monopoly in a monopsony kind of relationship, or even if you're in an environment where you're -- where you're -- you've had a competition for a program and the program is planned out and now you're trying to move into some kind of production run, how do you have that conversation with -- with the organization, with the -- with the country?

    GRUNDMAN: Permit me to speculate that maybe the oil and gas industry has figured out how to manage this in -- in a way that you could draw back into your business. With one last question, I will -- one last of my own question, I will open up the conversation to questions from those of you in the audience. My last question is this. In a platform that's gonna last 50 years, among today's buzz words is "modularity." I -- we had the DARPA director here on this stage 6 months ago, and -- and -- and she had some almost truly fantastic ideas for -- well, actually, not just ideas. She was investing in technologies that would enable defense systems, my words, "to keep pace with Moore's Law," almost literally.

    Is there -- in this latest class of CVNs that are moving into trials, is there something about modularity that they -- they have deliberately designed to accommodate?

    PETTERS: Absolute -- oh, absolutely. I mean, it -- the most obvious example is we have -- you know, so many times we've delivered an aircraft carrier only to have it go over to Norfolk and the first thing that happens is they rip something out because they got to put a new system in it.

    GRUNDMAN: Right.

    PETTERS: And that happens a lot in the combat system and in the -- in the communications systems. What we did was, we stepped back from that. This is one of those examples of -- of work that we did that was really not process-related. But we stepped back and said how do we create a space that's reconfigurable. How do we -- how do we take this open architecture idea that everybody's using in -- in weapons and sensors and communication systems, how do we take that and turn that into the platform. And we actually -- our guys sat down and figured out how to create a -- a space that's like this, that has heat, power and light for whatever systems you want to put in there and it's shock-qualified and shock-tested.

    And we've demonstrated that our apprentices can go in and take a space that's this size, we can turn it into a combat center. And in 8 hours we can turn it into a special forces meeting room or a -- or a skiff or whatever it is that they need. But the main thing is, you don't have to go and cut foundations out.

    GRUNDMAN: Literally cut.

    PETTERS: Literally. You don't have to cut them out, you don't have to -- you know, you just -- it's a -- it -- you bring it back in, you use the -- I mean, there's fixtures that you have to use, and it's a special equipment. But you can bring it in and you can set it up, and it -- and it's shock-qualified and it's hardened and it's ready to go, and -- and a -- and will be -- that's one of those life cycle savings ideas that's going to pay off for 50 years. That's just one example.

    GRUNDMAN: Yeah, sure.

    PETTERS: I mean, there's lots more.

    GRUNDMAN: Sure, thanks.

    OK, first hand I see it Harlan Ullman. Although please identify yourself, just as I implored everyone to do. Here's the microphone.

    QUESTION: I'm Harlan Ullman with the Atlantic Council. Thank you for your comments. I'm taken with the long view. My question, Mike, really is for a slightly shorter version of the long view, the next 2 to 5 years. When you were talking, I was thinking about Roy Ash at Litton Industries 40 years ago, and Gerstner at IBM. And you had the defense company that was gonna be a conglomerate, and then you had Gerstner who shifted IBM to something else. I would guess, the next 2 to 5 years, you're gonna see really dramatic cuts in procurement in defense and DOE. And I would not be -- I would be surprised to see a navy of above 250 ships, maybe.

    Now if that's true, and you have a real compression over the next couple of years, how do you see making this shift to what Steve alluded to, which was the oil, gas and energy sector which, to me, is an area for prime growth? Because what you're suggesting, it seems to me, between the lines is looking to straddle both the private and public sector as a means of hedging your strategy in the event that defense does head south. Do I understand that correctly, or am I exaggerating the case?

    PETTERS: Yeah, I've -- I've -- I'm not doing it so much because I think defense is gonna go south. I -- I'm -- I don't share your view that we're headed to 250 ships or 200 ships. I -- what I -- what I look at is, when we stack up the -- the priority -- you stack up the order of battle in the 300-ship navy today. And you start with -- you put -- you put on top of that list the most complex ships there are -- carriers, submarines, destroyers, amphibs -- what you see is, you see a lot of alignment in the industry and the navy around those not only are the most complex platforms, they actually are our priorities, you know. And -- and -- and so when you have the marriage between the navy and the industry saying that these are all -- you know, the navy recognizing that the complexity is their advantage and the complexity makes it a priority, I think that there's a scrum below that level.

    I think the amphibs are kind of in the -- in the mix there of the scrum. But I think the small surface combatant is in there, I think some of the auxiliaries are in there. That's where -- that's where your -- the -- the real battle is going to be over what are these platforms -- are gonna look like. I think it's pretty clear, based on, you know, what Mark said here today, that -- that there's a strong commitment on the part of the country to stay with 11 aircraft carriers. And if you stay with 11 aircraft carriers you are setting the size of the navy to be something that supports that. But, you know, whether it's 306 ships of 285 ships, I -- I'm not sure how you count it.

    But I -- but I think that that creates a structure there. So I -- I'm not looking to take my business and go over to the oil and gas space. I -- actually, as I said, I'm -- I believe that our partnership is the key -- our partnership with the navy is the key franchise of this business. And there is no future that I see where that's not true. If we are successful with DOE or we're successful with oil and gas it'll be on the margins and it'll be -- it'll be incrementally helpful. But it'll be helpful both ways. It'll help -- it'll help us with some low capital investment kind of returns in the business, which we can use. It'll also help us with our learning how to think a little bit differently about our business.

    GRUNDMAN: There's a question, a gentleman in uniform in the back row?

    QUESTION: Per Rasmussen from the Danish embassy in Washington, D.C. Thank you for a very enlightening presentation. I hear two things. One is going towards commercial standards, and I hear modularity. In Denmark, we don't do things for the past 35 years. I just wonder, if it isn't made here it doesn't work? Why don't you look around? Why do you create your own organization to deliver these things? Thank you.

    PETTERS: Yeah, I mean, I think part of it is that we're operating in an environment where we have some legal structures that force us down that path. You know, we have 5,000 suppliers in this country. We don't have very many suppliers that are not -- not in the U.S. And that we have some -- we have some -- the taxpayers have made some rules about how we can engage. I -- I do think, though, that things like commercial standards and modularity are going to be brought to bear to wrestle with the size of the budgets and how much of -- how much of the budget can be applied to the platforms.

    But I think that -- I -- I also think that if you look around the industry, you're hearing us talk a little bit about oil and gas. If you scratch out oil and gas, and you put in -- pick another word, "international?" -- you know, the discussion's the same. It's -- other companies are using the international space as a way to describe they're gonna open up another channel for their capability. I -- in shipbuilding I'm not a believer that the international navy shipbuilding business is a real opportunity. I just don't think that it is. And I am convinced, having scars, that the commercial shipbuilding business is not a real opportunity for my business. And so -- so we've had to try to figure out a different way to open up a channel.

    GRUNDMAN: Is there any reason at all to worry about the flip side of that, which is commercial hulls being sold to the navy? Hulls, maybe just.

    PETTERS: It's about -- I think it's about mission, you know. Because I think -- I think that, you know, there's a really good program that's going on today, the MLP program, that -- not in my business, but -- but our friends at General Dynamics have got a nice program there where they have a ship that's built to some commercial standards and it's providing some capability to the Marines that the Marines need. And they're doing it in a pretty affordable way. But that's not a platform that's gonna go and knock a door down if you need to knock a door down, which the Marines get called on to -- to do from time to time.

    And so you -- you have to kind of step down to what is the mission, you know, and -- and do you have the survivability to perform that mission if you just are relying on commercial standards. And, you know, a lot of -- a lot of the missions that we have laid out there won't lend themselves to that.

    GRUNDMAN: OK. There's a question in the fourth row, right in the middle, please?

    QUESTION: Hi. Andrea Shalal, with Reuters. Mike, I wanted to follow up on this kind of ongoing discussion about innovation and -- and how that applies to your sector specifically. Yesterday, Bob Martinez of the -- of CSBA, you know, talked about a report in which he sort of focused on the extended range, unmanned capabilities and -- and sort of said, along the way, that perhaps some of the current modernization programs would have to be scrapped. One of the things he mentioned was amphibs. He mentioned that amphibs are in that scrum space. I mean, how are you translating all of this discussion about innovation into what you're gonna be doing in that very long view? And where are the connections, and what -- what does it mean that China and -- and, you know, is -- is developing missiles that can be -- you know, that will make those ships that you build less safe?

    PETTERS: Wow, there's a lot in that question. I should...

    GRUNDMAN: Just a couple minutes.

    PETTERS: Yeah, I should just start out by saying, you know, I'm not really a geo-strategist of some kind. And I don't really get too involved in the discussions inside the Pentagon about missions and capabilities and -- you know, and -- and counter-capabilities and those kinds of things. Where that translates into my business is, it turns into the requirements of the ship, right? The requirement -- we get a set of requirements, or we engage with our customer, on what are the requirements of the ship. Often, we don't know how those requirements trace back to whatever the -- whatever the perceived threat might be.

    And so I -- I'm -- I'm gonna be a little -- be a little standoffish on this and say I'm not -- I'm not exactly sure how all of that comes together. What we do is, we look at the sets of requirements and we try to identify those requirements that are -- we would suggest, and we -- we have done this on every ship that we -- that we build. We do go back to the navy and we say, "Here's a set of requirements that, if these were changed, could reduce the cost of this ship. From our perspective, they don't change the functionality of the ship or a capability of that ship to meet what we think the mission is." The navy will do a review on that, and then in -- you know, in some cases they accept it, in some cases they say no, we have to have it this way.

    But, you know, that's our -- our attempt is to kind of try to keep the -- keep going at what are those things that are really driving the cost and -- and can -- can we change that or can we -- can we approach that a different way and get at it in a more efficient way. So, you know, beyond that it's -- it's a -- it's really about what are -- what are the requirements that come to us. We've -- we do have discussions sometimes that are nice and interesting to talk about what's the navy after next look like. But, you know, that becomes really hard to act on, and -- and from my standpoint the most important thing for us to do is to recognize we've been doing process for 30 years; we've got to do more than that now.

    Because the environment in the future, whatever the missions, whatever the capabilities are, it's gonna require efficiencies. And -- and we've got to -- we've got to become ever more efficient every single day. And so that's kind of the way we're going after it.

    GRUNDMAN: We have time for one last question. From the second row, Ralph Crosby?

    QUESTION: Hey, Mike. Ralph Crosby.

    PETTERS: Hi, Ralph. Good to see you.

    QUESTION: Good to see you. Down at the -- kind of the base level, and to go to the point you made at the -- at the end about efficiencies being important, Steve tried to get at the question of how good is your customer. I kind of think of the customer -- I mean, look, if you want to run up San Juan Hill you don't have to just have 5,000 shipbuilders with you. You got to have 4,000 GAO, DCA, DCMA, contract managers with you. And I think one of the fundamentals of kind of defense contracting that we face going forward is do we have the competencies to really -- to really execute what -- after you get past the requirement stuff, what we commit to do.

    And for example, on the side that I was always in, I think the U.S. Air Force at one point in time had developed the most exquisite capability of best-value contracting that ever existed, which has now disappeared. And I'm wondering -- disappeared and been disavowed. And I'm wondering, in the sense of innovation, efficiency and so forth, are we doing enough -- as the customer, the government customer -- to ensure we have the enlightenment and the capacities to -- to -- to get those efficiencies and -- and -- and the leverages that we ought to get for the dollars that we spend in your business.

    PETTERS: Wow. You know, Ralph, that goes -- that cuts across not just defense; that cuts across everything that the government's involved in, right?

    QUESTION: But defense is the best at buying things of any part of this U.S. government.

    PETTERS: That -- that's true.

    QUESTION: (Inaudible) talk about that.

    PETTERS: OK. So I -- can't figure out where to start with that. The -- the -- the challenge that I think we have is that we -- we are moving to a place where -- kind of back to we're institutionalizing so many short-term things that it makes some of these long-term investments that you're talking about really hard to -- hard to come to fruition. I know of a case -- without naming any names, I know of a case where a company won a competition to build a prototype and worked with the government to build the prototype. When the prototype was finished, the government decided to hold a competition for the production. The other companies that were involved in this, one of them decided to go do it on their own.

    And as I understand it, the -- the -- the government company prototype team had developed this prototype towards a set of standards. But when they went to the competition, they had to relax the standards so they could have a competition. Now, that -- that makes no sense to me. You know, that -- if you're gonna go -- I mean, it -- it's almost as if you're saying you'd be better off not to win the prototype competition so that you could go and participate in the real competition. And I think that's just an example of we're not thinking long-term enough; we're just not thinking long-term enough, and we -- we've got rules and regulations and -- and -- and requirements that are causing us to institutionalize short-term thinking that's keeping us from making some of these long-term decisions.

    And I -- I just think that continues. It's -- I -- you know, my -- my bottom line point here is that I don't know that I -- other than to say I can vent about it and say it's a really bad thing, it would be nice to point out that, you know, as we go through acquisition reform I -- you know, there -- there's a big challenge here in acquisition reform to try to figure out how do you get back to a place where you can think a little bit longer term about some of these programs. The ships that we build, we're not building them for this administration. We're not even building them for the next administration. We're building them for the administration after that.

    You know, there's a -- there's a great history story of when George Washington wanted to buy the first six frigates in the U.S. Navy one of his most vocal opponents was a guy by the name of Thomas Jefferson. And when Thomas Jefferson became president, what did he do? He sent the six frigates over to take care of the Tripoli pirates. So, I mean, you know, there's -- this is -- this is a real challenge for this country. It's a real challenge for leaders to stand up and be heard on. And it's really important, I think, for -- for folks to stand up and make the point that you're making, Ralph.

    GRUNDMAN: That historical reference, I think, makes a perfect arc to the conversation, or -- or -- or draws the conversation to a perfect conclusion. Do you have any final words, Mike, before I thank you.

    PETTERS: Well, again -- no, I thank you. I -- this is a -- it's been a great experience, and I -- and I applaud what you and the Atlantic Council are doing here.

    GRUNDMAN: Thank you. Thanks, again, very much for coming. And thanks again to Mark Brunner for participating in the event. Thanks to all of you for coming. We'll do it again probably next month or the month after. Stay tuned.



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  • Playing the Long Game

    On Wednesday, December 10, 2014 the Atlantic Council's Brent Scowcroft Center on International Security hosted Mike Petters, president and CEO of Huntington Ingalls Industries, for a discussion on the need to plan further ahead in defense-industrial issues. The speech, entitled "Playing the Long Game," is the latest in the Atlantic Council's Captains of Industry series, a platform for senior executives in the defense industry to address the public interests their companies serve and the public policies that shape their markets. The event was moderated Steven Grundman, M.A. and George Lund fellow, with an introduction by Mark Brunner, senior adviser to Senator Mark Warner.

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  • Are Lockheed, Raytheon, and L-3 "Ripe for a Spinoff"?

    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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  • Transcript: Endless Possibilities for the Future of Space Launch

    Atlantic Council

    Endless Possibilities for the Future of Space Launch

    Intro: Magnus Nordenman,
    Deputy Director,
    Brent Scowcroft Center

    Jeffrey Roncka,
    Renaissance Strategic Advisors

    Salvatore "Tory" Bruno,
    President and CEO,
    United Launch Alliance

    1030 15th Street, NW,
    12th Floor (West Tower),
    Washington, D.C.

    Time: 4:30 p.m. EST
    Date: Thursday, November 13, 2014

    Transcript by
    Federal News Service
    Washington, D.C.

    MAGNUS NORDENMAN: Good afternoon, everyone, and welcome to the – to the Atlantic Council. Lots of familiar faces in the audience, and it's good to see everyone back. And for those who haven't been here before, again, welcome to the Atlantic Council. Good to have you.

    I'm Magnus Nordenman. I'm the deputy director for the – for the Scowcroft Center here at the Atlantic Council. And I'm standing in for Steve Grundman, who is the director of our Emerging Defense Challenges initiative and the producer of this – of this series. But unfortunately, he was delayed in his travel back to Washington, so Steve sends his apologies.

    So we're all here for the 10th edition of the Council's Captains of Industry series, which is our public speakers' forum for senior leaders in the defense and aerospace industry. And we are pleased to have with us today Tory Bruno, who's president and CEO of the United Launch Alliance. And what we're hoping to do here is to engage business leaders in order to form practical solutions to the challenges found at the nexus of policy and industry. And previously, we have hosted, among others, Textron CEO Ellen Lord, Tom Enders of Airbus and former DEPSECDEF and now Finmeccanica CEO Bill Lynn. So we're thrilled to now add Tory to that impressive lineup.

    I really can't think of a better time to host Tory here at the Council for his thoughts on the – on the endless possibilities for the future of space launch. And as – space launch is obviously one of the – one of the most talked about sectors in the defense and aerospace industry today, and ULA is very much at the center of that – of that conversation. And in fact, just recently, ULA announced a new partnership with Jeff Bezos' Blue Origin venture to develop new rocket engines that will be powered by liquid oxygen and liquefied natural gas, which is an exciting development. So I very much look forward to Tory's remarks and thoughts on the future of space launch and the broader industry.

    Before I go ahead and introduce Tory and our – and our evening's moderator, Jeff Roncka, I just have a few housekeeping items – the standard list to keep in mind. This event is public and on the record, and we are live-streaming it over our website, so please, everyone, be on their best behavior. If our moderator calls on you for a question, please wait for the microphone and identify yourself and your affiliation before asking your question. And third and final, we are tweeting this event, and we can take questions through that channel as well. So please use that – the hashtag #ACCOI – #ACCOI if you would like to use that medium for questions to our moderator and our speaker.

    So now it's my pleasure to introduce Tory, who you're actually here to listen to. And before becoming president and CEO of United Launch Alliance, he served as vice president of Lockheed Martin strategic and missile defense systems, and before that he has a long and distinguished career within Lockheed in a – in a wide range of engineering and program management positions related to, among others, the Trident system and THAAD. He's also, perhaps most interestingly, the author of two books on the organization of the Knights Templar from the perspective of modern business management.

    And he will be – he will be moderated by Jeff Roncka, who's a close friend of the Council and a managing partner of Renaissance Strategic Advisors here in Washington. And before joining Renaissance, he was the vice president of Charles River Associates, and he's also served as the vice president at Global Technology Partners and as an industrial analyst in the office of the undersecretary of defense for acquisition and technology.

    With that, I want to turn over the podium to Tory. Tory, many thanks for coming to the Council. It's great to have you here and the podium is yours. (Applause.)

    SALVATORE "TORY" BRUNO: Well, thank you for all having me here and turning out. I'm very excited to be in front of you. And, you know, before I start, I just want to say I'm always really feeling at home when I'm with a group like this – aerospace professionals and space enthusiasts – you know, it's – this is home for me.

    And, you know, the reason that I am always so comfortable with a group like you all is because you understand a lot about our industry, and you understand it in a way that other people do not – because the missions that we do are so critically important for the country and for the world and that's something that you all grasp. You know, when – you know, when that kid in Afghanistan is climbing up a hill with 90 pounds on his back and he knows what hill he's on, it's because of space. And he knows what's on the other side of the hill and whether it's safe to go there because of space. And if they get into trouble, they can call for help because of space. So lives are at risk and are protected by the work that we all do.

    And the work that NASA does in science – I mean, it's just – it's revolutionizing our understanding of the sun, of the effect on our climate. And they are now about to go out and do the rest – and the same for the rest of the solar system. And if you're closer to my age, I've got some bad news for you: Everything they taught you about the sun in school is wrong. It's all been changed and it's because of the work that NASA has done; that has been possible only because of the observatories that they have been able to put into space.

    And so these missions are more than important. I mean, they're transcendent. And the job that we do is really not just a job; it's a calling. And so all of us in this community have answered that calling. And so that's why I'm always at home with a group like this and why I'm at the same time, you know, sort of humbled to be in the presence of such luminaries as all of you.

    And so I thought, you know, I would talk a little bit about our industry. But, you know, as I stand here in front of you today, I just have to tell you that I am – I am gripped by a sense of irrational optimism. You know, despite everything that's going on in the world – you know, sort of the darkening security environment and the – and the budget constraints that we all operate under and things like sequestration and all those challenges that we have to get up every morning and go in and deal with when we work in this industry, I just know – I know deep down – I feel it every day that we on – are on the very verge of a new era of space exploration, and it's going to change everything. And so we're going to go through these challenges, and we're going to find that we're about to head on this great adventure of a – of a greatly expanded human presence in space. And the accessibility of space is going to be so much more widespread than it ever has been before that will change, you know, what we do there. There will be missions that we have never conceived of in the past. It's going to be a completely new thing. And of course, now, you know, I'm proud to say, with our partners at Boeing, we are about to start returning Americans to the space station on American rockets, and I'm very proud of that and very proud of our teammates. So I'm really thrilled to be at ULA at this – at this moment, which I think is really, you know, an important moment in human history, when all this is about to happen.

    And, you know, I'll tell you I have been building rockets my entire life – and I literally mean that. I built my first rocket when I was probably 12 or 13 years old. And I know some of you are thinking, well, that's not that remarkable; lots of boys and girls build rockets when they're kids. But, you know, the smart ones went to their parents, and they got them to buy them, you know, the Estes rocket kits, and they built those rockets and they flew them. I was not one of those smart kids. I found a box of moldy old dynamite about 80 years old in the back of my grandmother's barn. And being a dumb kid, I didn't know why it was all wet. You know, I later learned that it was because it had sweated out the nitroglycerine. So I took my pen knife and I cut open to sticks and I pulled out the powder and I pulled out the paper and the cloth and I built my own rocket engines and I built my own rockets. And, you know, I'm proud that I can tell you a couple of them actually got off the pad before they exploded. But I'm more pleased to tell you that I survived it, and I'm here with you now. So I feel that I was spared to be with you here at the Atlantic Council tonight.

    But, you know – you know, those of us in the industry who built rockets for a living and have done it all their lives know that they are very different kinds of machines. A rocket is a complex, powerful and unforgiving machine and every time we take a fragile, tiny spacecraft and we put it on top of one of these devices and we light that off and there's a million pounds of thrust coming out the bottom and we blast that thing on a fountain of fire up into space at impossible velocities, we are defying mother nature. It takes very special people to do that kind of work. It takes experience, it takes dedication, an incredible attention to detail and an ever-present awareness of what is at risk when we do that. The missions we lift are vitally important to our country and to mankind at large. Lives are at stake. When we launch a science mission and you sit there with the principal investigator, who is perhaps one of the world's leading experts in some topic – he's designed this experiment, he's done this research, he or she is now there in the room with you – probably their entire career has come to a focus at that moment when you put their experiment into space to find out if it's true or not, or to close that loop. And it's a heavy responsibility, when you think about it, all of that put together.

    And so we have done – you know, at ULA – what we have been asked to do by our country. We have provided a capability that will go from Leo to Pluto. We can do it all. Tiny payloads, large payloads, a full mission spectrum that has not really been performed by anyone else. And we have done that with absolute certainty. We're at now 89, a perfect record of mission success. We'll be in the 90s before the end of the year, and on to a hundred and wherever.

    When a customer comes to us and we take on that heavy responsibility, they know it will work. It will be on the pad when it's needed. And it will cost what it was agreed to cost. And so that's a great heritage. And we're very proud of that. But as we stand now on this verge of this important moment in human history when space is going to become so much more accessible and the missions have expanded to great, great bounds, we're going to have to change because now the country demands of us new things.

    And so we're going to do what we need to do in order to enable that future that I just talked about a moment ago. And so as the leader of that organization, I'll share with you that I am going to transform this company. We're going to cash in some of that experience we have now over those years – nearly a hundred flights, if we count the heritage platforms before them, a thousand – cash in that experience so that we can make our processes faster and more agile and more streamlined and more affordable, because now we know what matters, what doesn't matter, what's along for the ride, what really adds value. We have the experience to now make those choices and those judgments.

    And I'm going to reorganize our company to make it so much more agile. We'll be introducing a new business model for how we interface with our customers and sell our launch services that will make it so much more accessible for commercial customers and commercial-like missions out of NASA, but also so much more empowering for our traditional government customers.

    We'll have a basic product line offering and a basic set of services that they know what that will cost, and then they will be able to add value to that where they have unique needs and make their own cost rates and their scheduled choices and do something that they have really not been able to do in the past. It's really going to revolutionize the way both sets of customers are able to come to us.

    You know, forming the ULA was important for our country. You know, from then, you know, till today, we've really cut the cost of launch in half. We're going to go cut it half again. Then we're going to cut our cycle time to launch in half so that it will be much more easy to come to the range and have a slot and put your important mission or your important payload into space. And we will transition off of our venerable RD-180 Russian rocket engine onto an American engine and offer an American solution as part of an entirely new next-generation launch system for our company.

    Those trade are nearly done. And I promise that when they are complete, I will be back with all of you in whatever forum to let you know what that new system looks like very soon. And so I – you know, just to make the remarks brief, I see a very bright future for our industry. Don't be distracted by these daily, you know, challenges that we have, because this is a very, very exciting time. And ULA will be here to answer that call.

    And on a personal note, again, you know, I feel that I was spared. I am so fortunate to have survived my early rocketeering attempts to be able to see that happen. And I'm really humbled to be here with all of you because as – you know, as professionals and enthusiasts in our space community, it's really all of us that are going to do this. You know, I mean, ULA is America's ride to space. It's going to continue. But all of us together are going to create this tremendous, bright future. And I'm just so excited.

    Thank you all. I appreciate your attention. (Applause.)

    JEFFREY RONCKA: Well, Tory, I think sit down.

    MR. BRUNO: Oh, thanks.

    MR. RONCKA: So, hello, everyone. For those of you who have been here before, you know I am not Steve Grundman, the typical moderator, but I do have my little reporter's notebook that he typically carries.

    So this opens the public Q-and-A session of the event. And I would like to remind you all of two things and, Tory, one in particular for you is that since this is an on-the-record session, everything you say can and may be used against you. (Laughter.) And secondly, we have some council members walking with microphones, I believe. And so when you want to ask a question, I'd ask you to please stand, wait for the microphone, identify yourself and the ask the question, so that way we have a complete record of the event.

    Before turning it over to the sort of – the general session, I guess I wanted to share a few remarks. And we were talking before we came out that I actually first heard and started working on the EELV program, which of course is what ULA is built around, back in 1995 when I was just entering government service in OSD and the in the acquisition community.

    And this was, of course, they heyday of commercial dual use, taking advantage of a lot of the cutting-edge investments that were going on in the telecom technology area, and really figuring out how to leverage that in a period of constrained budgets – not too different than some of the constrained environments we're in today.

    And the EELV program was always identified as really kind of an innovative model for prime contractors sharing their investments – right, so going to invest significant money, the government will match it. But the idea really was to think about space as an integrated market and build a solution that would both satisfy the government requirement and also allow the companies to take advantage of what was expected to be significant commercial opportunities.

    And I see that really as sort of the beginning of a lot of the attempts to sort of better integrate and leverage the government-specific and the commercial space industry. And so, you know, I look back almost 20 years, you know, now and I think about how has that been? And there's a tremendous amount of success – everything from, as you mentioned, really the unrivaled launch success of the ULA – the EELV systems, launching some of the most critical payloads.

    You think about on the commercial space imagery side, there have been successes where the government has used a similar model, the Space Act, really sort of the government working with new starts like SpaceX, and not to mention on the whole communication architecture side things like worldview. So there's been great successes.

    But I'm also troubled when I think about it, from sort of a policy perspective there's some issues that would trouble me if I were in the government today thinking about this. And that is the fragility of the U.S. rocket motor industrial base, the cost issues that have been associated – not just on the launch side, but on the spacecraft side – that continue to be challenging, and, frankly, the dependence on non-U.S. sources of supply which, in a globalized world we need, but on the other hand can be tricky in certain circumstances.

    So I'd ask you, Tory, you know, having spent your career in the space sector, as you noted, what should people have learned from this 20-year history of successes and challenges? And in looking at that, you know, how does that still make you an optimist?

    MR. BRUNO: Sure. Well, you know, back in '95 things were different. I had a full bushy head of hair. (Laughter.) And I think I might have had a ponytail. I'm not sure. At least, I remember it that way. But you know, really that vision that existed then was just ahead of its time. And what we're seeing today is that that industry has finally matured.

    And that time is actually with us right now. And enlightened government customers I think embrace the economics of that and they understand that they can play a role in enabling commercial applications of space. And in doing it in the right way, can make space more affordable for everyone, including the government customer.

    You know, like all businesses, you know, the more activity there is and the higher the volume through our factories, the more affordable this can be. And right now, you know, the – our – you know, our policy leaders and our customers are actually kind of excited about that possibility. And I think they're a little bit afraid because, you know, it's a big challenge.

    But you know, they're really up to it and they're asking the right kinds of questions and they're engaging, certainly, with us and I imagine other members of the lift industry about, you know, how can they do that? How can they remove obstacles and facilitate us sort of adding to that government activity with, you know, commercial access or commercial-like models that can be applied to government work and really open up that future. So I – you know, just today I was in the Pentagon and on the Hill talking to policymakers and some of our representatives, and that was the subject of the conversation. And I think there's a very clear path around some of these challenges, and I sense that people today, in a way that they have not been in the past, are really ready to embrace that.

    MR. RONCKA: And I think one of the things that occurred to me as – listening to you speak is that there is oftentimes – would appear to be conflicting or mutually exclusive agendas. So competition – we want to lower prices, open things up to competition, global source – with yet at the same time the need to have security of supply – after all, our critical overhead architecture relies on launching sometimes very unique sized and configured things that have to go on a U.S. platform with a desire to leverage commercial investments. So how all those play into the development of an acquisition strategy? What does the contracting officer thing when you're negotiating with partners? Who has the rights to IP? On the one hand, it seems like this opportunity space that we have today – and it's really wonderful, the amount of private investment – creates sort of a Wild West atmosphere. How do you integrate those things? And can they truly be win-win for everyone?

    MR. BRUNO: I think they can. You know – you know, a lot of folks look at that landscape that you described, and they think of those as mutually exclusive kind of objectives. And I don't see them that way at all, actually.

    You know, IP is an interesting topic, you know, and when the government looks at intellectual property, you know, there is a – there is a tendency to say, well, you know, we want to own that in the government so that should we need to move a particular task or a particular activity to another company, they're able to do that. You know, the reality in my experience over the years is that, you know, having – you know, having a spec or having a drawing package is really half of what it takes to do something. You know, the experience, the know-how, the things you can't put down on paper are just as important. And so that IP is not of the same – really not of the value I think some people associate it with.

    And, you know, what I've – what – and so when companies put in their own investment, they'll do the same thing. They'll say, well, you know, we're going to reserve rights, and that's fine. But sometimes they go as far as to say we're not going to share, we're not going to provide access, even, to the government to understand what's going on. And I've never found that to be a good policy, you know. You know, our policy at ULA and the way I've done business my whole career is to be transparent with our customers. You know, I talked about this when I was at the podium. The missions are vitally important. And even though – you know, even commercial activities, commercial telecommunications satellite, you know, maybe it's not a lifesaving mission, but it could be the lifeblood of that company. I think they have a right to know and have access and that providers should be completely transparent. And sometimes we just get wrapped around these, you know, issues of proprietary information a little too tightly.

    You know, you got to remember that as I said a minute ago, there's more to it than just, you know, the paper knowledge of what it is. And there's also where you are in the life cycle. You know, all proprietary technology is perishable. All of those advantages only have a certain amount of time. If you were already doing this, and you're well ahead of your competition, chances are, either A, they've already fallen in love with their solution, and they wouldn't change even if they knew all about yours, or B, they couldn't get to your level of maturity fast enough to make a difference before you've moved on to the next competitive advantage. And so I tend to be a little bit more liberal about what things are protected and what are not.

    MR. RONCKA: OK. And the last question before I'll open it up, so get your questions ready – you are CEO of an interesting entity in many ways. So if I think about joint venture – so there is shared ownerships, and at some point in the life cycle of joint venture, interest may or may not change – you sit atop of an absolute product that is critical to national security, and you are the systems integrator for that, so you have a very strong and tight relationship with your government customers, sort of mutual dependence. And yet here we sit at sort of a policy and technological issue of changing out some of the boost phase, the rocket motors and trying to address national security concerns and political concerns. You have a choice as a systems integrators in some respects to answer and solve that in different ways.

    So it seems like the blue origin approach is proposing an innovative way of saving the government money and working to address that. But it moves down a particular path that is a little bit more vertically integrated than – there might be other options. How do you as a CEO sort of balance these things and think about sort of addressing the challenges of what – in this kind of an environment, your risk of being the sort of welcoming all technology open, I can integrate these into my system (device ?), hey, I have a really good solution, and I now have to get a little bit more vertically than the past. How do you balance those things? Because each one could work very well for the customer.

    MR. BRUNO: Sure. Well, you used the right word. It's about balance. You know, companies that are really heavily outsourced and are what we call in industry thin integrators, over time, you know, their technology skills to integrate atrophied by their lack of knowledge of those technologies. On the other hand, you know, if you are too heavily integrated, you're going to end up over time losing innovation. Good ideas come from all over. Nobody's got a monopoly on them. I mean, that's why the government encourages and I support, you know, inclusion of small businesses, for example. You know, we really want that diverse set of ideas brought to the table. I mean, these are America's most challenging technological problems. So you want to get that mix. So you want to have enough – you know, enough in-house content that your technologists are sharp and they're informed buyers when they work with their supply chain, and they know enough about, you know, the technology to make informed decisions that don't go all the way down. I find that always to be a mistake.

    MR. RONCKA: Right. Right.

    OK. So now, let's take some questions from the floor, and I'll – we'll start with this gentleman here.

    Q: Hi, I'm Pat Host with Defense Daily. Tory, I kind of have a stupid question. Do you bring any unique insight to a launch company from your experience in missile defense? Obviously, rockets are rockets. I'm just wondering if that's a unique transition or if many people just stay in, like, a space organization.

    MR. BRUNO: Well, I think I do. (Chuckles.)

    So there is a couple of things that I bring from my prior experiences. I mean, the first is an understanding of high consequence technology and the importance of mission. You know, the work that we do is so vitally important, and you have to feel that in your boots, I mean, all the way down, and understand the consequences of the decisions that you make. You know, lives can be at risk. So you bring all of that over.

    Now, the other thing I'll talk about is maybe a little specific to the – you know, to the government work and the military work that we do. You know, one of the things you do when you're a private contractor and I think in a way that sometimes the government is not able to do is to be able to step back from the daily fray and try and look far down the road, a decade, two decades; that's part of our responsibility in this government industrial partnership is to be looking way out and trying to anticipate these enduring trends. What is going to be demanded of us by our customers in the future? Because it takes a very long time to develop some of these technologies and to position the product to be able to support them.

    And so from the side of the business I came from, I have a lot of knowledge and experience and things I can't talk about that inform me about the – you know, the future needs of our government and what will be required, you know, really to ensure the security of the country going out another decade or so. And so that's a perspective that is added to what we already have on ULA, and unique in a lot of respects. So we've been able to kind of lean into that mission space.

    MR. RONCKA: Let me – let me have a little follow up, if I may, that you mentioned sort of the unique requirements and insights into things. When you look to a new supplier or new provider of engine technology or what have you, particularly with some of the very stringent mission assurance requirements levied by customers like NRO, how do you – how you do manage that process and vet them when it's a largely sort of independent development effort?

    MR. BRUNO: Sure. Well, the same thing I said I provide our customers I demand from our supply chain: complete transparency. And, you know, Blue is a great example. We had been working with them for quite some time, and one of the things that appealed to us about them was their seriousness about how they've gone about this work. They've been at it for years. A lot of people didn't know that company existed. They didn't know what they were doing if they did know they existed. And they had their head down, focusing on the rocket science, doing it in the right sort of way.

    And so that lack of hype, you know, and sort of flamboyance that we've seen in some new entrants in this industry was really absent there. These were very serious people. And we got inside and really got to know them and we started recognizing a lot of faces that we knew. Some of the best rocket scientists in the country had found their way over there, and, you know, because it matters not just what they're doing and the technology that they're exploring but how they go about the work.

    MR. RONCKA: Sure. Sure.

    MR. BRUNO: It's a serious business.

    MR. RONCKA: We had a question in the back.

    Q: Good afternoon. My name is Royce Dalby. I'm with Avascent. I have two questions, if I may.

    The first one feeds off of the initial comments that you made, Tory. You were talking about the transparency in your pricing. And unless I heard you wrong, it sounded like you were saying as well that partly that was for potentially commercial clients. And I wanted to understand – my understanding is that the provenance of commercial sales has always been with Boeing and Lockheed, and ULA has only sold to the U.S. government. So my first question is, are you going to start doing commercial sales via ULA?

    The second question is, especially in light with your partnership with Blue, what is your view of an independent DOD procurement for a new rocket engine? Thank you.

    MR. BRUNO: Sure. So let me start with the commercial thing. You know, it really doesn't matter who the prime is. You know, the types of things we're going to do with this very innovative business model are going to enable that activity for everybody. So that's really not an important issue to us one way or the other.

    I'm sorry, what was the second part of your question?

    Q: The second question was about the DOD procurement of an independent rocket engine.

    MR. BRUNO: Certainly. So, you know, I think it's important to stay focused on the big picture if you're the government. And, you know, what are you buying? You're buying launch services, OK? You're not – you're not buying an engine. You're not buying a fairing or a tank. You're buying access to space. You know, you have a valuable payload that might represent, you know, a significant portion of the nation's treasure. It's one of a kind. You know, its – you know, lives are dependent upon it. That's what you need done.

    And so I – you know, my recommendation is not necessarily to overly focus on a specific component on the rocket; you know, enable industry to develop the launch service that will satisfy the national need. You don't want to go off in a corner and develop a rocket engine that maybe is sort of a one size fits no one. Rockets are integrated systems.

    And so, you know, what I have been advising is that they enable those investments to happen by private industry with their own funding and their own policy changes so that we can provide the right solution for the country, all of us, in whatever that solution might be.

    MR. RONCKA: OK, in the front here and then we'll go to the back.

    Q: Hi, Tory. Adam Marks with Thales –

    (Cross talk.)

    Q: Hi there. Adam Marks with the Thales Group. Thank you for your contributions to national security.

    So my question is about the component in a key technology, which is rocket fuel. And you mentioned your partnership with Blue Origin. What's your – I'd be curious to your insights on, you know, the future for solid state rocket fuel versus other types, both for rockets – and then whereas solid state propellant has been the de facto choice for missiles as well, do you see that course changing in any fundamental way?

    MR. BRUNO: I don't. You know, physics are really physics. And see, now you did it. You've got rocket scientists up here and you're asking us to talk about rocket science, so you've got to cut me off when it's too long.

    MR. RONCKA: Will do. I've got the watch on.

    MR. BRUNO: OK. All right. (Chuckles.)

    So, you know, we go to solid propellants because they're always ready to go. That's why you see them in, you know, missile applications, and why some of the countries that are sort of entering the scene now, some of them not necessarily friendly, you know, they start with liquids but as they develop that mature technology they'll move to solids for their promptness and their readiness. And they have tremendous energy density and they work very well when the application is, you know, relatively small in terms of the payload that it's lifting.

    As we get larger and larger, we start becoming more interested in the higher performance of liquid propellants. The problem is, on the top of every liquid rocket engine is this giant set of turbo machinery that pumps all those high, you know, volatile fluids around. And it's heavy and it's expensive to make. So the trades, the engineering trades, tend to favor solids for little things or for incremental adjustments.

    You'll notice that many people, like ULA for example, have solid strap-ons and configurations for our rockets. We can add or subtract them. But, you know, for a small launch vehicle that's fixed, the turbo machinery doesn't – it eats up too much weight. And so, no, I don't see a fundamental change, certainly in those physics or the technology that would enable a change.

    What's interesting about the Blue Origin engine and its propellant choice is it's moved to methane via liquefied natural gas. Now, that's a propellant that's been around a long time and been used in rocketry but not on this scale. And so, you know, increasing to that size rocket engine with that propellant is very attractive because it's inexpensive, it's easily, you know, accessible and it burns very clean.

    So it enables, you know, reusability of the engine. It makes testing simpler because you can fire the same engine several times to test different, you know, situations, different environments without having to completely tear the engine apart and rebuild it. So there's a lot of attractive things about it.

    MR. RONCKA: The gentleman in the back.

    Q: Thank you. My name is Ivan Lebedev. I am with the Russian News Agency TASS and my question is about RD-180. And the question is, how many engines do you have in stock now? How many are you going to receive according to the current contract with RD-AMROSS? How many will you need to fulfill all your obligations according to the agreement with the Air Force? And is there the possibility that you will need the new contract with RD-AMROSS on these engines?

    And one more, if I may. You said –

    MR. BRUNO: You may have to keep track of all of –

    MR. RONCKA: I was going to say – (laughter).

    Q: You said in an interview with the Space News published this week that you are talking to them to get eight engines next year instead of five. And I'm just wondering, what's the reason to try to accelerate their acquisition if you have a firm contract and you know that you can – you can get them? Thank you so much.

    MR. BRUNO: Certainly. So, you know, let me say first the RD-180 is a – you know, I mean, it's a great engine. We have it underneath our Atlas Launch Vehicle. It's there because the U.S. government asked us, at the end of the Cold War, if we would not take a look at that engine and consider using it because, you know, they understood it was some of the latest technology coming from the old Soviet Union and it was advanced. And it was a great engine. It's a great engine today. It's very reliable and it has terrific performance.

    The reason we are moving past that engine is because – for two reasons. As we look down into the marketspace, we can see that now is an opportune time for us to have an engine of higher performance and update the technology from the '70s and '80s to now, you know, this era, and incorporate additive manufacturing and things that allow us to, you know, build the engine lighter and with higher thrust and more easily produced. So that's why we're changing.

    You know, the question about, well, how many do I have: I have inventory for a couple of years' worth of launch. And the reason we're accelerating the production rate of our current contract deliveries is because we're anticipating the need for Atlas to increase in the near term, and so we want to make sure we have adequate assets on hand so that we have the flexibility to do that. And there must have been another part or two in there that I missed.

    MR. RONCKA: It was about the RD-180 though.

    MR. BRUNO: It was indeed.

    MR. RONCKA: Let me follow that up a little bit, if I may, with – again, this gets back to the intersection, sometimes challenge of managing a program like yours when you have political changes both in Congress and the international scene. You know, there's language up on the Hill talking about incentivizing companies to find other sources, if I can put it that way, the 1623 provision. Sometimes the arcanery of a small provision like that can have massive implications, potentially, on not just the company but the way the industrial base responds and the time in which it needs to respond. So maybe you might want to expand on that a little bit.

    MR. BRUNO: Certainly. I can talk about that. So you're referring to Senator McCain's amendment to the authorizations act, 1623. And as it was originally drafted – and, you know, in government they work on, you know, translating policy into law and they work on the language. And, you know, they're informed by industry sometimes. We give them the data so that they can make good decisions. As it was originally drafted, it was a very harmful set of language, I think in a way that the drafters did not intend. It was very anti-competitive, really. It would have created a ban on ULA from, you know, really participating in national security lift. Simply because we had, you know, the RD-180 in our product line, we would not even have been allowed to offer the Delta, which has not – you know, does not have an RD-180 in it. I don't think that was the intention. And so, you know, when we saw the language, you know, we – you know, we understood it. We went up to the Hill and we shared with folks what this would really do to the industry and how it would sort of, you know, really take, you know, the premier provider of lift in the world, really, off the table at a time before, you know, other companies were certified or had the technical capability for the full range of payloads and leave our country with a gap in lifting national security payloads that are already planned and manifested. And so they've been off to try and rework that language to, you know, satisfy the original intent of it without creating that unintended consequence. And I understand the conferees are off, you know, doing government's work right now, and we (anxiously ?) await, you know, how that turns out.


    Question here.

    Q: Mike Malino (ph) with Lydos (ph). You spoke briefly about the perfect launch record you have and then going to – now looking at costs and cutting out costs. Do the two recent accidents cause any pause in that shift and change the way you're going to go about that?

    MR. BRUNO: So, you know, as I said when I was standing up a moment ago, this is difficult work and, you know, tragedies like that are not something that you wish on anyone. It puts stress on the customer. It's hard on the industry. You know, I happened to be friend with Dave Thompson. We've worked together for years. You know, I reached out to him and said, hey, you know, I know what it's like, and it's tough. You know, hang in there.

    No, it really doesn't because, you know, sort of the intellectual pause that you talk about is really built into the way we do business already. You know, you'll never hear us say 89 consecutive launches. We launched 89 one at a time. No one is ever more than one defective part, you know, one loose o-ring away from, you know, what you've seen happen. It just takes incredible attention to detail. You know, anyone on the assembly line at our company, at our factory, anyone at the launch pad can raise their hand and stop the whole operation. You know, if there's anything in question, if you're not certain what's going on, we stop and we make it right before we move on.

    And when I talked about streamlining those processes, you know, I referenced our experience, and so let me give you an example of what I really mean by that. You know, when you do this kind of work and you start a new, you know, rocket or you start a new process, you make very conservative decisions, and so some of our components are tested many, many times as they go through the assembly of the rocket. They're tested at when they're –say it's an electronic part. It might be tested as a card and then it might be tested as a card within a box at the box level. It might be tested as a subsystem and it might go through our simulation integration laboratory. It'll be tested a couple more times as the rocket continues to, you know, get built up. Why are we testing it so many times? Well, we're not always sure when we start which pieces of technology are going to be the least likely to survive to the end, so we test them early so that if they're going to fail or have an issue, we can extract them early in the process before we've invested a lot of money and it's difficult to, you know, remove them from a fully assembled rocket and have to do retesting just because we took it apart. Eighty nine later, we understand that technology much better and we have a very mature record of saying, you know what, that card never fails, and so I'm going to test that card, but I'm not going to test it at the card level. I'm willing to wait further downstream, because the odds of us having to have – you know, pull it out later and spend the money and schedule to do that are pretty low. So it's a pretty good risk. We haven't lessened the reliability. We have not ceased testing the item. We've just made smarter decisions about how efficiently to do it. So there's a whole host of things like that that are really about our product and our experience with it and not, you know, things that have happened with other people.

    MR. RONCKA: OK, we had in the back, and then we'll come forward in the front here.

    Q: (Name inaudible) – with CSIS. Both the Atlas 5 and the Dafor (ph) are the same – (inaudible) – engine. Do you have any thinking about upgrading this engine as well?

    MR. BRUNO: I'm sorry, could you repeat your question.

    Q: I'm talking about the Arrow 10 engine, which is a common engine on both (launcher ?), which is very old but very reliable.

    MR. BRUNO: The Arrow 10.

    Q: Do you have any plans to upgrade it?

    MR. BRUNO: Oh, OK. So for everyone else in the room, so, you know, the RL-10 is the engine on our upper stage of both vehicles – another great engine and another engine whose technology is from a few years ago. And the question was, do I have any plans to upgrade that engine. I'll just say that we have a complete vision of where this launch vehicle ends up, starting with, you know, the American engine replacing (under ?) the first stage and then a whole set of trays just now finishing on what that new launch system will look like. And we are absolutely studying that upper stage, but I'm not ready to tell you what it all looks like yet. But I will soon.

    MR. RONCKA: OK. Maybe in the front?

    Q: Hi, Jacob Markish (ph), Renaissance Strategic Advisors. Just to follow that thread a little bit about looking out to the future, the next generation of systems, if you look a little bit farther out, 10, 20 years out, going back to the technology theme as well, could you tell us how you think about the potential and the value of investing and in developing reusable launch systems – you know, a concept that's been tried a number of times – (inaudible) – different things. How do you – how do you view that area?

    MR. BRUNO: Sure. So you're asking the expendable launch vehicle guy what he thinks about reusables. OK. (Laughter.) Well, their time will come. I'm absolutely convinced of that. It's not here yet. And, you know, again, I'll give you an overly simplistic answer just to kind of, you know, wrap that in sort of some foundational physics. You know, depending on what the return to Earth approach is – and let's say it's powered flight to Earth, not necessarily re-entry flight – a whole bunch of fuel goes up that you don't use to get, you know, the job done, which is to put a payload at a specific orbit. And when you build a rocket, if you're doing a good job, 90-plus percent of what is sitting on the paid before you light that monster is propellant. And if it isn't something that burns, it's not payload. It's waste. And that's how rocket engineers see the world. So if you're carrying a bunch of propellant so that you can fly yourself back to the Earth, that's all energy you could have used to put a bigger payload, you know, in the same orbit or, you know, the same payload further up.

    So that means, you know, really you're going to have to fundamentally change the technology so that that math changes if it's powered back to Earth. If it's re-entered to Earth, there are a whole, you know, set of technical challenges on large bodies that have to be overcome. That will be the technology we see first.

    And I have some insight there. In my prior life I did an awful lot of hypersonics. So I sort of understand that. And we see people moving in the direction now, and it's very exciting. That's what we'll see first. Then we'll see the other technology later. But for the near term expendable is going to be the most practical and cost-effective access to space.

    MR. RONCKA: So we have a question from our Twitter crowd, so technology in action, although I would note that of course it had to be handed to me on a piece of paper. (Laughter.) So technology does have limits.

    The question is, with the BE-4 boosters – so this is the Blue Origin proposed engine – be human rated from the start, or will the Atlas V with the RD-180s on it remain for a potential man-rated space applications?

    MR. BRUNO: Sure.

    MR. RONCKA: So it's an astronaut fan out there or something.

    MR. BRUNO: Yeah. What a great question. And the answer is I don't know. It depends on, you know, when we get there – and we're going to be ready to work on certification flights in about 2019 – you know, what are the first demands upon us. And if it is a, you know – you know, crew mission to the International Space Station, then we would certify for that. If it's not, then we would certify for nonhuman flight first and then later do that.

    MR. RONCKA: Right. OK.

    So we're coming up towards the end of the Q-and-A session, but I would say that the left side has asked far more questions than the right, so is there anyone who would like to get in a last question or two? Yeah, Judy.

    Q: (Just ?) trying to hold up the right side. (Laughter.)

    Hi. I'm Judy Miller. I'm on the Executive Committee of the Atlantic Council. I'm curious about how you perceive the rocket science base, actually, the people who are working in this area. I mean, it's been a constant refrain for a number of years more broadly in the defense sector that we're losing the human talent we need.

    MR. BRUNO: Sure.

    Q: But I sounds like a lot is happening, so I'm just curious what your take on that is.

    MR. BRUNO: Well, there is a lot happening, but the character of, you know, the rocket scientist base, the human talent, is different now than it was in past years. And it's really important in our industry to understand that this business really is all about our people. We're not one of those industries where, you know, the thing that differentiates you from your competitor is some gigantic, you know, capital investment you made first. You know, we're not like that at all. It's all about the rocket scientists and the technicians and the planners and all those people who have, you know, all that experience and that dedication and the skill and the knowledge. And so today is different than the early '90s and eras before in that the industry's smaller.

    And so in those days you didn't – there – you know, there was so much activity everywhere. You didn't have to manage knowledge. You know, the – every department in every company was a big institution unto itself. And so today we actually manage it. And that has been a passion of mine for a number of years in various positions I've had, where we have refined over the time really at least knowledge management programs that provide great opportunity for people entering into the industry to sort of accelerate the development of their careers and to, you know, take on responsibility much earlier than they would have in years past or in the absence of that.

    And so, you know, what we do is we come in and we look at our business and what's asked of us, and we figure out sort of the core capabilities that a company like ours has to have. And then, you know, I'm always embarrassed when I have human resource professionals around, because we see everything as a systems engineering problem, even people. (Chuckles.) And so we break those things down into specific skills, and we find out who experts are, and then we pair them as a – as a mentor with a protégé, and we boil their knowledge down to sort of a checklist of education – and by the way, mostly experience – and then that person's manager and that mentor come together, and they over time create opportunities and assignments for those people to work down that checklist. And at the end of that journey and where I've done this in the past, it – we can accelerate a person to becoming an expert two to three years. They get certified and recognized and anointed. You are now the expert of high-speed turbo machinery.

    MR. RONCKA: Clearly not me, but – (laughter) –

    MR. BRUNO: And so that's how we approach it. It's absolutely a doable do. You just have to put the energy in.

    MR. RONCKA: So I have one final question and maybe ask if you had any closing remarks. But this last question really comes from an Atlantic Council perspective, a global perspective. I'll call it the oceanic council, given the global source of supply and talent.

    You mentioned that the industry is smaller than it used to be. Perhaps here, but I think about the global technology base, and I look at some of the space launch or also spacecraft activities that people are doing in countries like Nigeria with active space capabilities and developments and everywhere else. There's a massive pool of talent and energy and money to take advantage of, and the question is, how does a company or the U.S. government do that? So I'm going to ask you to for the moment take off your CEO hat –

    MR. BRUNO: OK.

    MR. RONCKA: – and think more broadly from a policy perspective. What should the United States government be doing or stakeholders like yourselves to really improve the ability to cooperate across that and really leverage that?

    MR. BRUNO: Sure. You know, what – you got to start with first principles, which are that, you know, this nation has a vast network of friends and allies. It's one of the things that has contributed to global security in the – in the by and large pervasive state of peace that exists, you know, across the planet today.

    And bearing that in mind, it's important for friends and allies to be more capable and more prosperous. If you'll just, you know, excuse me for being patriotic for a moment, I mean, I will tell you that this country has done more to advance the state of human dignity than any other institution in the history of mankind. I believe that firmly. And if you don't think that's true, you don't understand history very well.

    And so when we look about technology overseas, sometimes there's a knee-jerk reaction around regulations, about export control, for fear of providing technological advantage to nations who are not a member of this community, who are bad actors. And that's an absolutely important concern, and I support it wholeheartedly, and you know I do, based on what I used to do before I came here. But everybody else – let's take an active interest in building their capability.

    And most of those countries, in my experience, because I have done business overseas in my prior role with our allies, around primarily defensive systems and others, what they're really looking for is to partner with American industry and to build over time, you know, domestic capability, to improve their economy and to, you know, bring prosperity to their people. And if we – you know, if the government will take that posture and make intelligent choices about export control and expedite the process – there are times when it can be very, very slow, because it's simply not a priority for the specific agency that's been tasked to go be the front person for that, and those – you know, and they can be so slow that those opportunities –

    MR. RONCKA: Go away.

    MR. BRUNO: – go away. And the country in question either goes to another solution, maybe one we wouldn't like, or they perhaps give up and they try and do something else that would not be as impactful and as beneficial for their people.


    Last call for any questions. Tory, any last remarks?

    MR. BRUNO: Boy, I think we've covered anything, you know, or – and everything. You know, I think that I just want to thank you all for coming out and asking such great questions and giving me a chance to talk to you. Thank you.

    MR. RONCKA: Thank you for coming. (Applause.)


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