October 2, 2013
Melcher Discusses the Business of Defense in an Age of Austerity
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.