Let’s look at the U.K., which has been urging its defense industry to build products that might appeal to foreign buyers. When Stephen Lovegrove, the Ministry of Defence’s permanent secretary (that is, the MoD’s top civilian), met a small group of journalists at the British Embassy in Washington this week, he didn’t seem very concerned that the change in administration would affect U.K. defense firms’ ability to compete for U.S. military contracts, nor change U.S. firms’ investment in the U.K.
“While indigenous capability is critical for us, easily the best way that companies are going to be able to make sense of the international market is by having the best equipment and the best technology being offered at the right prices to people around the world,” Lovegrove said.
“We are not really spending a huge amount of time trying to moderate our stance in respect to what may or may not be happening over in the States,” he said. “To be honest, I think that there is good evidence that, as long as we in the U.K. can continue to provide best-in-class capability, then people will want to come and invest in the U.K. and buy U.K. kit.”
I posed a similar question to Bill Lynn, who leads Leonardo DRS, the U.S. arm of the Italian defense firm formerly known as Finmeccanica. Like Lovegrove, Lynn didn’t seem very concerned that the Trump administration would change the way the Pentagon does business. “I don’t think it changes very much in terms of competition. The best product at the best price is going to win.”
U.S. defense firms employ lots of people overseas. This helps — and in many cases is critical — to winning contracts from foreign governments looking to boost their own economies and develop a manufacturing base. In the U.K., Lockheed Martin has 3,000 employees, Boeing 2,000, Raytheon 1,400, and General Dynamics 750. Does Lovegrove fear American firms will pull up chocks?
“No,” Lovegrove said bluntly. “We think that people have not invested in the U.K. because of some kind of special sweetheart deal with U.K. We think that people have invested in the U.K. because that’s the most sensible place to invest in and they trust our people and they trust our legal system and they trust all the other things which are not going to go away no matter what happens in Europe and no matter what happens in the States.”
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Lockheed Scouts Tech at SXSW…in a Helicopter
Among the first-time attendees at the music-and-tech South By Southwest festival, which kicks off tomorrow in Austin, Texas: Lockheed Martin. The defense firm’s little-known venture capital arm is looking to invest in new technology and there’s no better place to find small companies exhibiting that tech than SXSW. Here’s a twist: investment seekers will pitch their ideas during a short helicopter ride above the festival, like an airborne version of ABC’s “Shark Tank.”
Aerial pitch meetings are meant to “promote the venture fund a little bit and have some fun with the entrepreneurs,” said Chris Moran, the vice president of Lockheed Martin Ventures. Morin will be joined in the Sikorsky S-76D by reps from ClearSky (a Florida-based investment fund), ARCH Venture Partners, and Lockheed’s chief technology scout. Moran and I recently chatted about Lockheed’s venture fund, and its upcoming SXSW event.
Q. How did the whole helicopter pitch come about?
A. There was a team of folks coming out of the business development organization where we were trying to figure out where we could promote Lockheed Martin, promote the innovation that Lockheed certainly has been doing for decades and decades, and what would be the great venue for that to happen. It looked like SXSW was coming up in the right timeframe. It is a sort of convergence of innovation and a variety of streams —not just technology, but music and everything else. I think the feeling was, “Wow, what a great venue to present that.”
Q. What are you looking for there? Certain types of technologies or firms?
A. The key areas for us are ones that cross over well with the broader VC community, not specifically defense-related, but certainly can be used in defense applications. Some of the big areas are artificial intelligence, virtual reality, autonomous systems, drones, robotics … cyber security and data analytic applications, data fusion. Those seem to dominate what’s getting invested in right now so we felt that we’d have a good chance of seeing those at SXSW.
Q. What kind of reaction do you get when investment seekers meet “the world’s largest defense company”?
A. I spent 30 years in the commercial side of things; I was in the semiconductor business for a long time out here. So I sort of bring that “other world view” that you’re talking about. Honestly, when I’ve gone out and met companies — particularly ones in the target areas that we just mentioned — either they almost fall over themselves saying: “Geez, Lockheed Martin, we’ve been trying to talk to you guys, we’re so glad you have a venture arm. We’ve got some ideas that we think would really play well in the defense space and we’ve just been trying to find the right people to talk to.” So I haven’t seen that type of commentary that is all too common. People have largely been very excited to work with us and very excited to talk to us about the technologies that they’re involved in. Particularly in the autonomy space, they recognize that Lockheed Martin has a huge library of [intellectual property] and capability in that space that we’ve been applying to defense products for a long time. I think partially they want some knowledge and experience from us on implementing these things in fielded systems to help them move their ventures along. It’s a bit of a two-way street, I’d say.
Q. Is there a big rift between Silicon Valley and the government, or is that overblown?
A. I’m going to invest in things that are clearly important and strategic to Lockheed Martin. The best way for me to do that is to invest in things that have commercial application as well. I’m kind of looking at it the other way: “What commercial things have application to the defense space?” As opposed to “what defense things have application to the commercial space.” The bottom line is: in order for a venture to work in a corporate environment, you’re trying to share the cost and share the risk with other investors. You’re trying to use other people’s money, as they are trying to use yours, to further the technology. The best way to do that is in a viable commercial enterprise that has interest in tapping into some of the defense applications and markets.
Q. Do you have a goal for how much you want to invest each year?
A. The way we’ve set up the fund to specifically give us the flexibility to invest what we need to to access the technology, but not put so much money at risk that it becomes a problem for Lockheed Martin. What we’ve created is a $100-million fund carved out of the balance sheet with the ability to invest a maximum of $25 million a year of that $100 million. Realize that over the course of time, some of that money will be returned, that money will refresh the fund. We’re keeping the money moving with the idea of getting the return on investment and investing in new technologies for the company.
B-21 Bomber Updated
I didn’t expect Gen. Robin Rand, the head of Air Force Global Strike Command, to answer my question about the status of the B-21 Raider, but he did, sort of. “It’s progressing really well” though it won’t arrive until the mid-2020s, he said at the Air Force Association’s Air Warfare Symposium in Orlando last week. He also went beyond other service officials’ 80-to-100-aircraft goal: “I believe we have to have a minimum of 100…I’m not going to set the max,” he said. “That will still be determined.” I also asked about Northrop Grumman’s performance on the secretive project. “Great relationship so far with Northrop Grumman. Again it’s early. We’re going to work really closely with them through this. This is a team. This isn’t us against them. This is critical.” Noted: There is now a B-21 office at the Pentagon staffed with a team from Global Strike Command, and Northrop has a “full-time senior leader” at the command’s headquarters at Barksdale Air Force Base in Louisiana.
Missile Defense Doings
Lots of missile defense news this week. Most notably: U.S. THAAD interceptors began arriving in South Korea just hours after North Korea launched four missiles into the Sea of Japan. The deployment has annoyed China, which doesn’t want THAAD’s powerful radar looking into its territory. While we’re on the subject, the Trump administration must conduct a missile-defeat review — aka a comprehensive review of missile defense — by January. A handful of missile defense experts, led by the Center for Strategic and International Studies’ Tom Karako have put together a list of options in a 96-page report of their own.
One-on-One with Bill Lynn
It’s been a big year thus far for Leonardo DRS. First they broke up with Raytheon, with whom they had teamed for to pitch the T-100 pilot training jet to the U.S. Air Force. Then they said they would enter the competition alone. Now this week they announced they would acquire Daylight Solutions, a company that makes quantum cascade laser products and tech, which are used to protect aircraft from missiles (they’re also used in the medical field).
“We’ve been working on it for a while,” Bill Lynn, CEO of Leonardo DRS said in an interview this week. “This is sort of a long-term plan to shape our portfolio around our core business. We’ve been growing the last couple of years … and we wanted to strengthen that with some targeted acquisitions in strategic areas, none more strategic for us than the electro-optical infrared area. This really builds our portfolio in that area.”
Q. If the defense budget gets a boost, where could Leonardo DRS could benefit?
A. As the Army moves down a path of upgrading its existing vehicles, we’re well positioned because of the install base that we already have in terms of the sensor suits and the comms gear and the network computing. We’re well-positioned to be part of those upgrades. I think what you’re going to see as the Army modernizes is more emphasis on upgrades than on new platforms. In the naval [nuclear] power area, we have important positions on the Ohio Replacement program. That program has to go forward. In the naval electronics business, we’ve been able to win some key upgrade position on naval ships. We feel like we’ve got a nice, diverse portfolio.
Q. What do you make of the current Pentagon budget situation?
A. I think the big deal is not the number…it’s “can you get rid of the Budget Control Act?” That’s what will bring greater stability.
Q. How do you judge the health of the industrial base?
A. Obviously, stocks are taking off. In general it’s pretty good. I think we hit a trough in the budget and it’s on it’s way back up. How much remains to be seen. Most of the base is reasonably healthy. The biggest mid-to-long-term challenge is as more and more of the technology is sourced outside the pure industrial base, how do you pull that technology in and integrate it into weapon systems. We’re moving away from a world where we used to invent it ourselves and then even export it to the commercial side where you now really need to import information technology, autonomous operations, the kinds of things that are likely to drive military technology in the future. The challenge for defense industry is: how do you develop a model that lets you do that?
CORRECTION: Due to an editing error, an earlier version of this article misattributed a quote in the lead section to Bill Lynn. The quote should have been attributed to Stephen Lovegrove.