Foreign sales, offsets, and Trump; Missile defense pondered for Hawaii; Q&A with Lockheed’s top lobbyist; and more.
For defense industry watchers, the closest thing to a State of the Union address — at least for pomp and ceremony — might be the speech given by Lockheed Martin’s CEO at the firm’s annual media day. On Tuesday, Marillyn Hewson took the podium at the firm’s building in Arlington, Va., between crisply folded flags and two glass teleprompters.
This year, her speech was essentially a greatest-hits recap of carefully worded comments made and accomplishments touted in recent earnings calls. The world’s largest defense contractor — a firm that had $47.2 billion in revenue last year — wants to grow international sales 3 percent in coming years. Last year, foreign sales were $12.7 billion, or 27 percent of total sales.
“[M]ore than 40 percent of our new business came from international customers,” Hewson said March 21.
But the big question facing defense firms, two months into the new Trump administration, is how the president’s stance against offshoring jobs might affect U.S. companies’ foreign sales. Arms-buying governments want more than weapons for their money; they want investment in their own country, through co-production and technology transfer — offsets, in industry parlance. This is particularly true in the India and the Middle East.
Building weapons overseas is nothing new for American firms. The ubiquitous F-16 fighter jet has been built in several countries. Right now, F-35s are being assembled in Italy and Japan. But will future moves — like the proposal to build F-16s in India — come under scrutiny from the Trump administration?
“The first thing that we’re doing — given that we’re working with President Trump’s administration — is helping them understand and appreciate what co-production means in the programs that we have today,” Orlando Carvalho, executive vice president of Lockheed Martin's Aeronautics business area, told me in an interview.
“I think right now the administration is taking the time to understand, taking the time to learn, taking the time to get an appreciation of all of this to ultimately arrive at a policy decision,” Carvalho said.
Even when co-production is set up overseas, there’s usually an impact on jobs in the States from suppliers and even manufacturing.
I asked Robert Rangel, Lockheed’s senior vice president for Government Affairs, how his company might approach overseas co-production.
“I think the challenge for us is to be able to have that deeper conversation on any one of these transactions,” Rangel said. “That it’s not just sort of the first blush assessment [that] a foreign-sourcing agreement, etc., is somehow contrary to the declared position of the administration. It really has to be understood through a net impact, where the alternative is it goes to a foreign competition and then the net benefit to the United States is zero.”
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Protecting Hawaii From North Korean Missiles
The Trump administration has pledged to “develop a state-of-the-art missile defense system to protect against missile-based attacks from states like Iran and North Korea.” The $30 billion budget amendment proposed by Trump on March 16 calls for money for Patriot, PAC-3, THAAD, and SM-3 interceptors — and that just might be the tip of the iceberg.
I chatted with Dale Bennett, executive vice president of Lockheed Martin’s Rotary and Mission Systems business, about the expected uptick in missile defense spending. Lockheed builds PAC-3 and the THADD missile defense system. Bennett also noted the massive missile defense radar Lockheed is building in Alaska. But he also mentioned another area where a radar might end up.
“There’s opportunity for protection of Hawaii and then further uses of that technology to expand as you think to the future,” Bennett said.
The Missile Defense Agency tested a land-based version of the Navy Aegis ship radar (which Lockheed builds) in Hawaii in 2015. A version of it has been installed in Romania, part of the shield to defend against Iranian missiles.
“We put Aegis Ashore there [in Hawaii] initially to prove out the prototype and then as the threat axis continues to emerge, we’ve deployed THAAD to Guam, and I think there are discussions around future procurement for increasing the radar capability in the islands,” Bennett said. “It’s kind of notional at this point.”
Q&A with Lockheed's Robert Rangel
I first heard of Rangel when he was chief of staff to Defense Secretary Donald Rumsfeld, when he was described as a powerful man behind-the-scenes. He still works behind the scenes, now as Lockheed's senior vice president for government affairs, but emerged for a rare one-on-one chat at the company’s annual media day. Here are some excerpts from our conversation.
Q. How are Lockheed and the rest of the industry approaching their budget and threat challenges as we look to the next four years?
A. Those basics are still with us, which is there’s no political consensus on how to proceed in terms of national priorities or the tension between government spending and deficit spending and whether or not you go somehow address entitlements and so forth. We have to continue to stay engaged. We have to continue to be a voice that articulates the impact, the consequences and wherever possible is helpful or supportive of openings.
There is net optimism, notwithstanding all those challenges that there seems to be settling in of more of a broad consensus, I would even say a bipartisan consensus, that the broader dynamic is complicated and hard, but one of the net outcomes that you see out of whatever happens here is an increase in defense. The debate is going to be over how much and what’s the corresponding action taken on the other side of the ledger in terms of if you’re on the Democrats side on the non-defense side or any other component. But net-net, there is reason to be optimistic in terms of the general direction even though the path ahead is very unclear.
One of the questions I get all the time is: Give me that crisp, precise answer of how you’re going to operate in the Trump administration? Well, I don’t have one. It’s very much a work in progress.
Q. What are one or two big items for Lockheed in the next year?
A. Is there going to be a shift in policy direction in terms of U.S.-vs.-foreign content and what’s the ripple effect or impact that has on existing arrangements or existing programs. On the positive side is, hopefully, the ability to get the new team to embrace the opportunity to really to streamline the process, take a fresh look at technology controls, [and] understand that it’s always going to be a fine balance in terms of U.S. government interest and also promoting U.S. products overseas in weapon sales. We’re not selling washing machines. This stuff requires careful thought and rigorous process, but at what point is it counterproductive, and at what point is it more of an impediment that you’re really making it difficult to succeed. We believe that we are much in that territory, have been for some time. Is there an opportunity here to bring that back?
What Does DoD’s Top Negotiator Think of the Negotiator-in-Chief?
“This is kind of like dying and going to heaven,” Shay Assad, the Pentagon’s director of defense pricing — aka the military’s chief negotiator — said of President Trump.
Politico has called Assad “the most hated man in the Pentagon” since defense executives loathe having to negotiate with him.
“When you get somebody who is the president of the United States who understands precisely what you do for a living and understands how it’s actually done, it becomes a pretty rewarding thing to do, especially when someone at the top is world-class himself in terms of negotiating,” Assad said March 22 at the Defense Programs conference sponsored by McAleese and Associates and Credit Suisse. “From my point of view, this is terrific.”
Assad wouldn’t talk about how the F-35 Joint Strike Fighter negotiations with Lockheed have changed, but he did say he expects to remain in his job in the coming years.
“I’m looking forward to the next four years and what that’s going to bring,” he said.
Dynetics on the Rise
Back in August, we got a glimpse inside of Dynetics, a Huntsville, Alabama-based firm with a diverse portfolio that runs from bombs to spacecraft. Let’s look at some recent developments.
In February, Dynetics became one of seven firms that will share a $3 billion missile defense research-and-development contract from the U.S. Army Space and Missile Defense Command.
Then last week, DARPA awarded Dynetics a contract for the second phase of the Gremlins program, “an innovative technology program that seeks to enable aircraft to launch volleys of low-cost reusable unmanned aerial systems and safely and reliably retrieve them in mid-air.” The company says the drones are “designed to enable other technologies such as advanced payloads and autonomous battle management for swarming systems.” (Side note, the Gremlins movies still creep me out.)
Next month, U.S. Special Operations Command plans to award Dynetics a contract for 100 Small-Glide Munitions (they’re the bombs with technology copied from Soviet ICBMs that I told you about last year). That’s according to a notice posted in the Federal Register.
A bit further out, the company is planning to build a $14.2 million aeronautic test facility near Decatur, Alabama. From the Decatur Daily: “[T]he proposed 100-foot-tall building is designed to test launch vehicles and large aerospace structures.”