Spinning off Oshkosh Defense would be bad for the Department of Defense.
Last summer, as Sandra Erwin of National Defense reported, the US Army consciously warned American truck manufacturers of an impending slowdown in its purchasing. The industry is now so deep in that slowdown that speculation about restructuring has become old hat. But today’s Wall Street Journal brings a new rub, as Maureen Farrell asks “Is Oshkosh Weighing a Spin-off of its Defense Unit?” That rumor, from financial analyst Jeff Wichmann of CreditSights, is unusual in that Oshkosh is more often described as a potential acquirer of struggling military truck lines. More so, the company just two years ago fought off a demand for just such a spinoff from veteran activist investor Carl Icahn. I cannot speak to what the management team in Wisconsin will do this time, but I can address the interests of Oshkosh Defense’s home customers, the US Army and Marine Corps. Such speculation is not shocking, but a spinoff is to be discouraged.
Spinoffs and other market exits have been underway for decades in defense. That’s because the US Defense Department has long been known as not just a demanding customer, but a difficult one, with a myriad of regulations that impose useless administrative costs. In response to the gradually accumulating piles of paper and armies of accountants, most large American firms with interests in defense sold those operations after the end of the Cold War to defense specialists. Such self-imposed costs are thus unhelpful restrictions for defense ministries anywhere, as they restrict who will do business with them. Accordingly, the latest release of Better Buying Power, one of the Pentagon’s two current sourcing strategies, says that the department must
Remove barriers to commercial technology utilization. Some commercial technologies with military utility are advancing at a faster pace by far than comparable military unique technologies. However, for a variety of reasons many firms that are active in commercial markets choose not to pursue business with the Department, or with our prime contractors. The Department needs to understand the barriers that exist and find ways to reduce or remove them. This initiative is new, and it will require close consultation with industry and other stakeholders to identify areas in which we can improve our performance. (p. 5)
At least the leadership is self-aware. There is a similar line of thinking behind the Defense Innovation Initiative, the Pentagon’s other sourcing strategy. Its initial memorandum doesn’t address commercial technology directly, but the strategy is clearly driven by Deputy Secretary Work, and he has been touting the importance of commercial technologies in almost every interview on the subject. If Wichmann’s speculation is shown to be grounded, Oshkosh’s interest in a spinoff would be signaling the Pentagon that its latest pronouncements of pending reform are just not credible.
For defense, that would be a tragic loss. Granted, there is clearly great scope for defense specialists in the defense industry. Fighters and airliners both use turbine engines, but engineering the serpentine air flows required for stealthy intakes has no commercial analog. There are few commercial uses for tracked infantry fighting vehicles. But if a company can benefit from learnings in multiple markets, military and commercial, then the benefits bring great value to Defense. Consider supply chain management for spares and repairs: as one executive at Oshkosh once asserted to me, “the depots think they know lean, but they don’t know lean.” Defense specialists and government agencies can learn those skills, but the discipline of a broader commercial marketplace speeds that learning by necessity.
Finally, maintaining interests in defense and commercial markets makes the enterprise a stronger whole, and in the long run, a more reliable supplier. Oshkosh is a tough company that can fight like a cornered badger when it must. But it’s a tougher company with the financial stability of multiple product lines. Only a few years ago, the Defense unit saved the rest of the operation from what could have been a bankruptcy filing (there were, after all, a few of those in the automotive business). At a certain level, truck-building is truck-building, so an integrated Oshkosh can move staff and resources from one side of town to the other, between its commercially and militarily-focused factories. Undoing that flexibility would be a step backwards for the industrial base.
If Under Secretary Kendall and Deputy Secretary Work are really serious about commercial technologies, as their twin defense-industrial strategies say they are, then they should telephone Oshkosh CEO Charlie Szews and Oshkosh Defense EVP John Urias, and ask what in the wide wide world of sports is going on up there. Then they should ask what they can do to help.
James Hasík is a senior fellow at the Brent Scowcroft Center on International Security. He has advised management at Oshkosh Defense in the past, but has no commercial relationship at present.