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Defense: Tech Generation

Military Spending Will Slow Overall, but There Are Growth Areas

Courtesy Department of Defense
Cybersecurity operations such as the Navy’s Cyber Defense Operations Command are likely to see growth.

One might think defense industrial facilities across the nation would be humming with activity and boardrooms would be filled with smiling faces after a decade in which U.S. defense budgets nearly doubled.

But with two wars winding down, the nation facing prolonged economic uncertainty and a government focused on reducing deficits and debt, defense industry executives face a worrisome retrenchment.

Still, amid the defense industry’s darkest days in a generation, areas of potential growth in business — and, hence, jobs — in several key sectors have forecasters ­brightening.

Frank Kendall, one of the Pentagon’s top acquisition officials, told a Senate panel earlier this year, “It should be clear that while we anticipate significant change from the environment of the last decade or so, the sky will not fall on our defense industry.”

Indeed, despite enormous problems with major defense weapons development — such as the F-35 Joint Strike Fighter, the Littoral Combat Ship, the Ground Combat Vehicle and others — some areas within defense will likely receive a greater share of future military spending, fueling job growth and innovation that reflect the evolving battlefield, say lawmakers, defense experts and lobbyists.

Almost universally they cite three broad areas where more innovation and spending will occur: modernization and sustainment of existing weapon systems; unmanned, robotic systems; and cyberwarfare and information technology.

These growth areas will touch the entire defense industrial base, from the major prime contractors to the lower-tier support firms, and companies will have to put a premium on attracting and retaining the right employees from the science, technology, engineering and math, or STEM, workforce.

North Carolina Democrat Sen. Kay Hagan, a member of the Senate Armed Services Committee, says, “Overall, science and technology is a key foundational basis for our national defense capabilities and the industrial base that produces them.”

Certainly, the United States over the next 10 years will spend far more on national defense than will the rest of the world combined. The Pentagon in fiscal 2012 alone will spend about $645 billion — including base defense spending, war funding and military construction at hundreds of military facilities worldwide — or roughly 4.1 percent of anticipated gross domestic product.

But base defense spending over the next decade could be less, potentially 20 percent less, than the government anticipated even a year ago. As the wars in Iraq and Afghanistan wind down, the U.S. military will roll back hundreds of billions more in war spending.

Tougher on Some Than Others

For a defense industrial base that employs more than 5 million Americans with largely high-quality, highly skilled jobs, losing roughly $1 trillion in base defense spending over 10 years — along with a decline in war spending — will reshape the industry in as yet unknown ways.

This reshaping, however, likely will most greatly affect mid- to lower-tier contractors, Brett Lambert, deputy assistant secretary of Defense for manufacturing and industrial base policy, told a Senate Armed Services subcommittee in May.

Prime contractors, which already underwent consolidation over the past 20 years, will not be immune. As a result of lower defense spending projections, stock prices for most major contractors are not doing so well, despite good earnings and strong dividend increases. But it’s even tougher on mid- to lower-tier companies. In such an environment, access to capital will be tough, and doing business in the defense world requires significant capital investment.

“Part of the problem is the cost of entry into the defense market is high,” says Fred Downey, vice president of national security at the Aerospace Industry Association. “Currently there is intense pressure on cost and profit, which will give people a bit of a pause before they jump.”

To that end, the Pentagon has increased efforts to lower the barriers to mid- and lower-tier companies entering the defense market. The Department of Defense is addressing many of these factors — such as time-consuming paperwork — not just because they impose unnecessary costs, which are ultimately passed on to the taxpayer, but also because the Pentagon must make it easier for innovative companies to do business with the military.

What's Old Is New Again

As lawmakers wrestle at the political intersection of national security and budget deficits and debt, the defense industry already is betting on an outcome that emphasizes the need to improve and extend the life of existing weapons systems.

Industry officials, some lawmakers and lobbyists all seem to expect that existing jobs will be preserved and some new ones found in improving the performance of today’s F/A-18s, F-16s, and F-15s, and M-1 tanks, Bradley fighting vehicles and Amphibious Assault Vehicles, among others.

“We will need systems to last longer because they will have to last longer,” says Michigan Democrat Carl Levin, chairman of the Senate Armed Services Committee.

Levin’s statement is born from the new fiscal austerity being embraced by the government at large, as well as from the Pentagon’s and defense industry’s inability over the past decade to develop and acquire any major weapons systems for prices that are even remotely close to their anticipated costs. Few systems are more representative of the relative dysfunction than the tri-service F-35 Joint Strike Fighter program, which has experienced epic cost growth and development problems.

“My concern about the F-35 is that all the services have limited amounts of money for acquisitions,” says Arizona Sen. John McCain, ranking Republican on the Armed Services Committee. “How do we do this and everything else?”

The answer for Missouri Democratic Sen. Claire McCaskill, for example, is simple, at least in the case of the Navy: rather than fund the F-35, buy more Boeing-built F/A-18s from her home state and make the existing F/A-18s better. “It’s a contrast between one poster child of ‘good’ and one of ‘bad,’ ” she says.

She acknowledges that the F-35 would be more capable, but not so much more to justify its enormous price tag in a time of heightened budget consciousness. “We have to have discipline and place our investments in what is known,” she says.

Companies such as General Electric Military Engines, for example, are focused on improving the performance of the engines already in service, including the F/A-18’s F404 engine. Rick Kennedy, spokesman for GE, says the company is looking at ways to improve the engines’ fans through the use of new coatings and materials.

“Just look at the fleets,” he said. “These F/A-18s will need to go for years. The F-15 fleet just grew another 10 years older. In all the meetings we have with the leadership of the armed services, we are trying to understand the life cycle of the air fleets. If those airplanes are in the force structure longer than anticipated, turbine blades, and compressor blades become a focus. As exotic materials come along, you offer materials that expand the life of these engines. That is job growth.”

Unmanned, but Personnel Still Count

The president’s fiscal 2012 defense budget submission earlier this year largely became moot when he signed the Budget Control Act into law over the summer. Nonetheless, some of the guiding principles in the budget submission still apply, and they serve as clues to industry about future growth potential.

Part of the submission, for example, was a 30-year aircraft procurement plan in which the military indicated it expected a near doubling of the number of unmanned systems. These aircraft primarily perform intelligence, surveillance, and reconnaissance (ISR) missions, but some also destroy ground targets. Currently, the military has about 340 aircraft from these classes of systems, which it plans to increase to 650 by 2021. But that encapsulates only a portion of the Pentagon’s overall desires. The report excludes the Army’s and Marine Corps’ plans to buy hundreds of smaller unmanned aircraft and the ground forces’ plans for developing unmanned ground systems.

It also does not quantify the possibility that the mission of long-range attack will be met by a combination of current and future bombers and weapons systems, some of which would be unmanned.

“There will be even more shifting into [unmanned] systems because they are cheaper to build and maintain than manned” systems, says Arkansas Democratic Sen. Mark Pryor.

But Gordon Adams, an expert on budgeting for foreign affairs and defense at the nonpartisan Stimson Center in Washington, says he doesn’t believe there will be significant manpower savings from unmanned systems. He points out that while you lose the person in the cockpit, there still will be crews of people needed to support the activities of unmanned systems.

“There is a lot of personnel support on the flying end, mechanics on the flight end, and data review,” he says. “You go and look at places that are flying them. There are people in uniform piloting and reviewing data streams from UAVs. It’s a different kind of support, but not a manpower savings. But I think we’ll buy more of them.”

Philip Finnegan, director of corporate analysis at the Teal Group, an independent team of aerospace and defense industry market analysts, also notes that the United States is years ahead of the rest of the world in the use of unmanned systems. As a result, companies that build these systems will find a wide-open market internationally for their wares.

“I do see continued growth,” says Finnegan. “Part of that is there is potential for exports. A lot of countries have lagged the U.S. in the use of [unmanned systems], so there are going to be foreign acquisitions. “On top of that there will be new unmanned missions, and maritime has a lot of potential for growth.”

Furthermore, industry will find growth in improving the survivability of unmanned aircraft systems by improving their stealth characteristics and jet propulsion, which will allow unmanned systems to penetrate heavily defended airspace. Today’s unmanned systems function well, but primarily in permissive environments.

There likely also will be growth in demand for unmanned cargo aircraft.

“There are going to be a lot of jobs in the UAV area in the broadest sense,” says McCain. “You’re going to see a lot less manpower-oriented expenditures and much more going into technology.”

Growth Through Cyberwarfare

When Marine Corps Gen. James E. Cartwright, former vice chairman of the Joint Chiefs of Staff, says the Defense Department spends too much time defending against cyberattacks and not enough time attacking the attackers, he was tipping off the information technology/cyberwarfare community as to where it could expect growth.

Cartwright says attackers faced virtually no consequences for their actions.

“How do you build something that convinces a hacker that in doing these things there will be consequences?” he asks.

Strategies in the physical world apply in cyberspace as well.

“The increase in cyberattacks show that as in physical battle you can’t prevail if all you are doing is defending,” he says. “That is being seen as a growth area. The heavy betting is on cybersecurity and probably more offensive capability in the cyber world will be a major growth area. So far everything has been largely focused on cyber-defense, and some feel that must change.”

The House-passed fiscal 2012 defense authorization bill weighs in on the capabilities of the department to go on cyber-offense. It would allow the Pentagon to conduct clandestine cyberwarfare to support conventional military campaigns and defend U.S. forces anywhere in the world. The provision affirms the secretary of Defense’s authority to conduct military activities in cyberspace, including secret ones to protect Defense Department assets or to support military campaigns conducted under the 2001 authorization for the use of force in response to the Sept. 11 attacks.

In July, the Pentagon released its cyber strategy and also revealed that a defense industry computer network had recently suffered a massive intrusion, leading to the theft by a foreign source of 24,000 files. The Pentagon set goals for upgrading the department’s defenses of its own networks, collaborating with other federal departments and agencies, businesses and other countries, and developing a workforce with expertise in cybersecurity and making technological advances.

Read between the lines and what you see are jobs.

“There will be a lot of money in cyber, from Defense, Homeland Security and the FBI,” says Adams. “You will see a lot of procurement money going into cyber, fixing existing systems. It will be hard to know where it is, but it will be in every service budget.”

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