JUST IN: Pentagon eyes more export reforms; Defense spending outlook; L3Harris’ big win; and more...
The Pentagon’s top weapons buyer is making changes that would allow more allies to buy more technologically advanced U.S. arms.
“In the next six months, I very much hope to open the envelope, particularly on some of the weapons technology that we can export,” Ellen Lord, defense undersecretary for acquisition and sustainment, said during a taped Reagan Foundation event that aired Thursday afternoon.
Lord said she wanted to “beef up what we’re doing with” the U.K., Canada and Australia, countries that with the United States make up the National Technology and Industrial Base.
“There are many others out there that we can work more closely with,” she said. “We have not really visited what technology we export, I think, in a significant way recently. I am concerned that sometimes we are losing international competitions because…as we have increased our capability, we have not increased the capability that we export in a commensurate fashion.”
Lord said India and U.S. allies in the Middle East are buying arms from Russia and China because they cannot obtain export licenses for American-made weapons. This argument is frequently used by U.S. defense executives looking to sell more weapons in the Middle East and elsewhere.
“We are having a very focused discussion on, ‘Let’s rethink this from a strategic point of view’,” she said. “We might in fact be hurting ourselves when we think we’re helping ourselves. A lot of this technology, frankly the magic sauce, is in the manufacturing of it. The technical data package doesn’t always give it to you.”
Still, she said, “Obviously we have to make sure we’re very careful not to have things that could be disassembled and understood and so forth.”
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Global Defense Spending Outlook
A lot has changed since December, when Deloitte published its defense and aerospace outlook for 2020. Now at the midway point of a year upended by coronavirus, the consulting firm has updated its predictions. The commercial aerospace outlook is varying degrees of bad, depending on who you listen to, but Deloitte predicts it could “take up to three years for passenger traffic to return to pre-COVID-19 levels.”
A June survey conducted by the company found “73 percent of consumers said they did not feel safe flying right now. Of the U.S. consumers surveyed, 77 percent were unlikely to take a domestic flight for leisure in the next three months, and 86 percent responded they are unlikely to fly internationally in that period.”
While the defense sector is much more stable, Pentagon acquisition officials and defense executives have been open about supply chain disruptions leading to delays in weapon deliveries. Wrote Deloitte, “the pandemic may lead to a temporary disruption in the defense sector supply chains, which are global and diversified in nature. As a consequence, minor near-term cost overruns and schedule delays could be expected.”
“From 2020–21, US defense spending is likely to flatten out after experiencing five straight years of growth, and the result of U.S. presidential elections in November 2020 are unlikely to have a major impact on defense budgets prior to 2022,” the report states. “Although the rate of growth may decrease or flatten in 2020, the United States’ emphasis on firming up its military capabilities is expected to result in relative stability in the defense sector.” (I recently wrote about what defense spending might look like in a Biden administration.)
Aside from spending, mergers and acquisitions are expected to decline after a flurry of activity involving top-tier defense firms. “As liquidity becomes a key priority, most [aerospace and defense] companies are likely to become cautious about any M&A activity, at least in the second half of 2020,” the report states. Of note, Boeing axed its deal to acquire Embraer’s commercial aerospace division and Woorward and Hexcel terminated their merger plans. “After the effect of the pandemic subsides, the industry may see smaller deals in the extended supply chain, especially the acquisition of distressed and mid-to-lower-tier suppliers by financially sound companies.”
Pentagon-Industry Relations Warm Amid COVID
Earlier this month, Tom Arseneault, the CEO of BAE Systems, Inc. — the U.S. subsidiary of BAE Systems — talked about how the coronavirus pandemic has led to a more regular, if virtual dialog between defense CEOs and Pentagon leaders. This week, Will Roper, the head of Air Force acquisition, said there have been “better relationships with the primes than I've seen in many years because we all share a passion for keeping suppliers solvent, avoiding cashflow issues that can pop up with COVID impacts.”
Why Northrop Is the Odd Giant Out
Over the past two weeks, CEOs from across the defense industry have been lobbying the White House, Pentagon and Congress to approve billions of dollars that would pay for companies’ coronavirus-related expenses. The CARES act allows the companies to get reimbursed, however, Congress has only authorized, not appropriated the funding. A top Pentagon acquisition official said this week that the Pentagon needs “around $10 billion” in the next coronavirus stimulus package, which is expected soon.
Of all of the major prime contractors, Northrop Grumman CEO Kathy Warden is the only one not to sign any of those letters. Why? We looked to the company’s April 29 first-quarter earnings call for some answers. First, there are savings from Northrop’s acquisition of Orbital ATK. “[A]s we look at this year, we have some increased COVID-19 related cost, as any company does as we do more of the safety protocols, cleaning, social distancing,” Warden said. “And we fully expect...that we can offset those through other cost reduction measures that we anticipate taking this year.” (H/t to POGO’s Mark Thompson for pointing this out in his newsletter this week.)
Large Companies Still Speeding Money to Suppliers
Some new data points illustrate the Pentagon and defense industry’s effort to get money to small suppliers faster than usual:
L3Harris Technologies has sent more than $230 million to small-business suppliers in 47 states, Jim Burke, a company spokesman, said in a June 15 email. That’s more than double the $100 million it said it would accelerate to suppliers in April. “The accelerated payments are part of L3Harris’ overall efforts to support its employees, customers, suppliers and communities combatting COVID-19,” Burke wrote.
Lockheed Martin has sent more than $1.7 billion to its suppliers, the latest $600 million being passed along between June 26 and July 10. In April, the company pledged to accelerate $450 million in payments to suppliers.
Navy Awards L3Harris Unmanned Ship Deal
It’s a huge win for L3Harris Technologies, which has been pushing to become a major player in the unmanned surface and underwater market. The $35 million contract calls for the “detail design and fabrication of a prototype Medium Unmanned Surface Vehicle (MUSV). This contract includes options for up to eight additional MUSVs, logistics packages, engineering support, technical data, and other direct costs, which, if exercised, will bring the cumulative value of this contract” to $281 million.
House Oversight Committee to Probe F-35
The House Oversight and Reform Committee has scheduled a June 22 hearing titled “F-35 Joint Strike Fighter: Ensuring Safety and Accountability in the Government’s Trillion Dollar Investment',” Bloomberg reports.
Air Force Awards Boeing F-15EX Contract
The Air Force placed a $1.2 billion order with Boeing for eight of the new jets on Monday. The Pentagon contract announcement lists the total program cost as $22.9 billion. That figure, Capt. Jake Bailey, an Air Force spokesman, wrote in a July 14 email, “has a 10-year ordering period and 15-year period of performance to accommodate a maximum of 200 aircraft, nonrecurring engineering (NRE), and product support elements.” The Air Force plans to buy 76 F-15EX fighter jets over the next five years. “The total number of aircraft to be procured is yet to be determined, but 144 is the projected minimum,” Bailey wrote. The Air Force considered the “flyaway unit cost estimate” as $87.7 million.
International Arms Sales Approvals Skyrocket
The subject line in Cowne & Company analyst Roman Schweizer summed it up pretty well: “Well, That Escalated Quickly.” In a span of five days, the State Department approved 11 deals worth up to $31.5 billion, bringing the total value of armes deals approved this year to $65 billion, Schweizer wrote in a Monday note to investors. On July 9, State approved a $23.1 billion deal for Japan to acquire 105 F-35 Joint Strike Fighters. It’s the second largest foreign military sale ever behind a $29.4 billion Saudi Arabia F-15 fighter deal announced in 2010.
Japan Receives First Osprey
The first V-22 for the Japan Ground Self-Defense Force arrived in Japan on July 10, according to Boeing, which jointly makes the Osprey with Bell. Japan becomes the only country other than the United States to operate the V-22.
First KC-10 Tanker Heads to Boneyard
The Air Force retired the first of its 59 KC-10 Extender aerial refueling tankers on Monday. The KC-10, a modified version of the McDonnell Douglas DC-10 three-engine airliner, has been flying in the Air Force since the early 1980s. All of the Extenders will eventually be replaced by Boeing KC-46 tankers.
- Rear Adm. Thomas Henderschedt has been named the defense attache at the U.S. embassy in Beijing. He was previously the Naval attache at the U.S. embassy in China.
- Michael Kratsios, the U.S. chief technology officer, had been named acting defense undersecretary for research and engineering.
- Mark Lewis, director of defense research and engineering for modernization, has been named acting deputy defense undersecretary for research and engineering. Lewis will also remain director of defense research and engineering for modernization.