The Reagan National Defense Forum in Simi Valley is a great place to take the temperature of the national defense community; it’s the best place to get easy access to top defense officials, CEO, lawmakers, congressional staff, lobbyists, equity analysts, consultants, and think tankers. Last year, much of the talk was optimistic, just weeks after Donald Trump’s surprise election, with predictions of a cash influx into the Pentagon. This year, not so much. The government could shut down on Saturday for the second time in four years, although top lawmakers will head to the White House this afternoon to try to reach at least a short-term compromise.
And yet, many investors at this year’s #RNDF predicted that defense will continue to grow. “The budgets have turned. The degree to how much they have turned is still in question, but we’re headed up from here,” said Michael Leskinen, executive director or aerospace and defense at J.P. Morgan.
Leskinen noted the sector’s historical high performance of late. “To see the multiple expand from here is tough,” he said. “But to see it contract is unlikely as well, because the cash profile of the business is strong.”
But the shutdown clock is ticking, even as advocacy groups lobby to repeal federal spending caps that have been in place since 2013 and military commanders warn of the consequences of continuing resolutions.
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Heard at #RNDF
Gen. David Goldfein, the Air Force chief of staff: “I find myself at times in what I would call 20th-century discussions that are characterized by platform-vs.-platform discussions: ‘How does the F-35 do against the J-20?’ I say, it’s almost an irrelevant discussion, because I can’t think of a scenario where I’m going to put a single F-35 against a [plane]. When you face the United States of America, you’re going to face an F-35, plus low-earth orbiting satellites, plus an Aegis [warship], plus a brigade combat team, plus a Marine expeditionary force, plus, plus. The key is: How do you connect it? How do you connect in ways that allow the commander in chief and commanders that are trying to produce options to be able to create options at a pace that the adversary can’t keep up with. The only way you do that is through connecting and make sure that they’re sharing.”
Ellen Lord, the former Textron Systems CEO-turned-defense acquisition undersecretary: “We need to make the foreign military sales process easier, faster, much simpler and less costly for our partners and allies. A lot of work we can do there.”
Wes Bush, chairman, CEO and president of Northrop Grumman: “As I think about all of the discussions that we’re having across our country, I am a bit concerned that I too often hear almost an acceptance that the pace of technological change, the globalization of technology will inevitably result in the U.S. not having absolute technological superiority. I don’t accept that. And I don’t think that we as a defense community should accept it.”
Spotted in Simi Valley: Mattis aide Sally Donnelly, Pat Shanahan aide Justin Johnson. Former Obama-era Pentagon appointees and top aides: Leon Panetta, Deborah Lee James, Frank Kendall, Mike McCord, Jamie Morin, Alan Estevez, Bill LaPlante, Jeremy Bash, Zach Mears, James Swartout. Hill staffers: Ben FitzGerald, John Noonan, Doug Bush. Retired brass: Dave Deptula, Frank Gorenc, Dave Buss.
The Third Offset Lives On. Sort Of.
Lord, the acquisition chief, said Pentagon is continuing former Deputy Defense Secretary Robert Work’s push for technologies that allow weapons and aircraft to penetrate defended airspace. “Although a lot of the work is classified, that is being done; there is a significant amount of work being done,” Lord said. She said the Pentagon and defense industry are investing heavily in hypersonics, which just happens to be a technology that the Defense Department will single out for investment. “[W]e are generating new weapons that fly differently, fly very fast, that I think are going to be significant in our ability to really have an advantage over adversaries. If the prior administration hadn’t had that foresight and laid out the vision, I don’t think we’d be where we are today.”
Be Frank About Technology Threats
It’s not always easy, because the information often arrives through classified means, but it’s necessary, said Wes Bush, Northrop Grumman chairman, CEO and president. “I think it’s important for our defense community to be clear. We don’t want to be seen as being overly alarmist; that’s never helpful. But I think we need to be as factual as we can about the challenges that we see coming right at us because of this determination on the part of other nations who may be our competitors or they may turn out to be out adversaries. We need to have that clarity and use that clarity to help motivate our actions.”
Agility in Acquisition
Ellen Lord said the Pentagon needs new flexibility to shift funding, and abandon or start new projects, based on emerging threats. “We need to continue the dialog with Congress because the world’s shifting around us, and sometimes we need to redirect some of our investments,” she said during a panel focused on the industrial base. “That’s a tough thing to do sometimes when we have to say: ‘What I decided two or three years ago that was in the best interest of our nation perhaps isn’t now.’ It’s always hard to stop something. We having very difficult conversations about we need to stop some things and start some others.”
What Wall Street Wants from the Pentagon & Defense Firms
Michael Leskinen, executive director or aerospace and defense at J.P. Morgan, has a three-item list: Stable budgets that can be planned upon, that “companies be disproportionately rewarded for taking risk,” and that “companies [be] rewarded for past performance,” he said. “If you’re on a tanker or an aircraft program and you did not deliver on time and on budget— well, then that should have an impact on how likely you are to win the next program,” Leskinen said, a clear reference to Boeing’s costly, months-late effort to build a new tanker for the Air Force. “When I look at how programs are awarded, that doesn’t happen today to enough of an extent.” Speaking of that tanker, Tuesday saw the first flight of the first plane that will get delivered to the Air Force next year.
F-35 Upgrade Decision Looms
Lord, the acquisition chief, said she’s spent “a lot of time” on the F-35 program over the past two weeks, particularly a $4 billion effort to update the hundreds of jets that have already been built. “We are going through the details of production, modernization and sustainment. We have not formalized what we’re doing on modernization,” she said. “We are absolutely committed to partnering closely with industry in getting a very, very good value in the program. We will modernize, but we will have specific targets and we will have a plan to get there with a timeline and a cost schedule.”
Update on the Pentagon Acquisition Overhaul
The Pentagon preparing for the Feb. 1 split of the office of the undersecretary for acquisition, technology and logistics into two new undersecretary offices. Lord will become the undersecretary for acquisition and sustainment. The Trump administration announced this week that it would nominate Michael Griffin, a former NASA administrator, to become undersecretary for research and engineering.
“What I’ve done is really studied the body of work that AT&L does,” Lord said. “I don’t think this is as much about moving boxes and lines as it is understanding how we do work now, and how we could effectively do it moving forward, because the world’s changed around us and we need to change around it.”
Lord raised the possibility of making it easier to bring experts in and out of government, akin to a construct used by DARPA, the Pentagon’s long-range research arm. ”I think we can do a whole lot more with bringing people in from industry and academia and coming in for a certain number of years and moving on to keep things fresh.”
Pentagon officials are setting up “some bridging positions” people in the acquisition workforce that will report to both undersecretaries “to be able to make sure we have continuity.”
One Year Later, Boeing Happy With DC Move
Leanne Caret, the CEO of Boeing Defense, Space and Security says moving the firm’s defense business from St. Louis to Washington has been the “the right decision for us.” She also said the company’s July decision to reorganize its defense business has been well received. “We’ve continued…to see that the way we’ve aligned the organization and the customer’s response to that has been very positive,” she said. “My focus is on making sure we are rapidly responding to them, we’re affordable and they see us being proactive and working for them.”
General Dynamics Scores Saudi Deal
Reuters reports that GD outbid Raytheon, Rheinmetall, and Leonardo’s Selex to win the contract to increase security at Saudi offshore oil facilities.
Hondo Takes the Helm
James “Hondo” Geurts — the high-energy, straight-talking U.S. Special Operations Command weapons buyer — has been sworn in as the Navy’s top acquisition official. The Tampa Bay Times’ Howard Altman sat down with Geurts last Saturday about how he will approach his new job. Read it, here.
AIA Announces 2018 Board
The group appointed Thomas Kennedy, chairman and CEO of Raytheon, as chairman of its board of governors. William Brown, chairman, president and CEO of Harris, will serve as vice chairman. And ICYMI: former Army Secretary Eric Fanning is taking over as President and CEO at the beginning of the year.