COTS Journal

Best Year Ever?…Maybe for Some

By: Pete Yeatman, Publisher

Sometimes we can get caught up in trying to view things on too large a scale. We tend to see the Military Budget as a forest, and the forest has been hit by the sequestration blight. What we need to do is take a closer look at our industry under that forest canopy. For the last six weeks I’ve been calling dozens of companies and users of our industry’s products, trying to get an actual feel of what is going on.

The Administration sent Congress a proposed 2014 Defense Budget of $526.6 billion before a $52 billion deduction for sequestration, leaving a net of $474.6 billion. Secretary of Defense Hagel acknowledged that there will be significant adverse effects on 2014 military programs such as: energy conservation, civilian employees, training, equipment and facility maintenance, contract efficiencies, deployments, training and so on. And now the politics start on how to deal with the forest. And—to extend the tree metaphor—do you cut F-35s? Plant more M1s? Trim the branches off other platforms?

Down here under the forest canopy, in the military industrial electronics market, things are far from gloomy. In fact, there are many quietly doing very well. Getting someone to talk to you, even off the record, in a company under $100 million is easier than with the larger companies with tight control over media contact. With that in mind, it’s necessary to extrapolate what’s happening higher up the food chain from the people that will talk to you.

Things are different from the ’90s, when primes bought and sold one another or traded divisions from different military technology segments with each other. Today there really aren’t many opportunities to repeat that process in this downturn. However, they are taking a page from history and consolidating their internal focus on their strengths, and slowly allowing areas to dissipate if they are cost heavy and return limited. Primes are focusing instead on the unique talent and expertise they provide to existing programs and their target military market segment. Expanding on entrenched programs has a greater probability of success than new, large “blue sky” programs that have a limited probability of receiving funding. Also evaporating is the primes’ funding of the internal teams and organizations necessary to develop the smaller electronic elements. More on that later. Control of the deliverable and platform integration are now at the center of every prime’s focus.

The black cloud of sequestration has restricted military program managers to focusing on smaller purchases for existing programs or funding-limited but essential improvements. Even taking into account seasonal movement for orders and RFPs, many suppliers are noting a significant increase in both. And some companies are even stating that this will be a record year. You only need to look at the stock markets to see that sequestration has not had a major effect on large prime’s stock value. That tells you that they prepared early on for sequestration and mil budget reductions. Whether large or small, officially everyone seems to be keeping their mouths shut about how well the industry is or isn’t doing. Those that are not doing as well as they would like don’t want to scare off potential opportunities, and those that are doing really well don’t want to let their competition know.

Recently there has been moaning coming out of the DoD that the technology gap between our military and those that would do us harm has been rapidly narrowing. They would like to see private industry become more involved in developing technology and products to keep our military in a leadership position. The catch to all of this is that the government doesn’t really want to tell anyone what if any brass ring will be at the end of any involvement. The government will only go so far as to make vague “road maps” that have no guaranteed funding or direction that companies can base their corporate future on. It’s also not in the position to offer much if any IR&D funding as well as saying that overall funding for all new programs will decline. It’s hard to believe that private companies are not falling all over themselves to privately fund research programs that they can give the government for consideration if it eventually chooses to go in that direction and fund a program. 

 

Our industry needs to keep doing what it has been doing for over 20 years. That is to take standard commercial technology and modify it to suit either a range of military programs or specific programs that have a reasonable prospect of success. At almost every level companies are expected to put “skin in the game.” The key here is how much and with whom. Pick your programs and partners carefully; and remember, like with the stock market, going for something that may have the potential of a high return will be high risk. After cutting through all the hype that people provide when talking about their company, almost two-thirds of the companies I spoke with are doing better than they expected or very well during the current downturn. Not a single one of those companies stated that they went “all in” on high risk programs.  

© 2009 RTC Group, Inc., 905 Calle Amanecer, Suite 150, San Clemente, CA 92673