October 2, 2013
On October 2nd, the Brent Scowcroft Center on International Security launched the Atlantic Council Captains of Industry series, a forum for leaders of major defense contractors to discuss their plans for navigating the new realities facing their businesses. The first speaker was David Melcher, CEO and president of Excelis, a $5.5 billion global aerospace, defense, and information solutions company. The event was moderated by Steven Grundman, the MA and George Lund Fellow at the Scowcroft Center.


 

Melcher addressed the secular trends in military spending since the end of the Second World War, up through the latest retreat from land-centric wars in Asia, and the presumedly pending shift to a commons-centric force focused on East Asia. To meet the underlying needs for new materiel within shrinking budgets, government buying patterns, he predicted, will shift from new starts to extensions, with continuing use of indefinite delivery and indefinite quantity (IDIQ) contracts, and with more intense competition amongst contractors.

Some industrial restructuring will be required, he expects, and will begin once investors have greater clarity about future spending patterns. Top management will eventually find uses for free cash flow besides dividends and share repurchases, and more differentiated strategies will emerge. But Melcher also expressed some concern for the industry and its relationship with the US government, whose sense of clarity about future requirements has been lacking. Declining funding levels will not sustain all capabilities equally. If the way forward is independent innovation by contractors, government will need to reward them through actual purchases and reasonable rates of return.



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