Deep thoughts with Nick Chabraja

Wall Street thinks Nick Chabraja, CEO of General Dynamics, is one of the shrewdest — if least talkative — executives in the aerospace and defense business.

If you’re looking for someone to read political-industrial-strategic tea leaves for you, Chabraja’s your man. And he’s expected to retire in the near future, so savor his words now.

Chabraja certainly didn’t disappoint during a 50-minute chat with analysts yesterday at the Morgan Stanley Industrials CEOs Unplugged Conference, which I tuned into via webcast. Here’s what he said.

On why defense industry CEOs like himself don’t fear an about-face for US security policy after the Bush term expires in 2008:

It seems to me that the market is unduly preoccupied with the Iraqi situation. These companies do not depend on that particular deployment. And when that one’s done there’s going to be another one. We will not be out of Afghanistan under any circumstances. So I don’t – I don’t know how to tell you what the industry could do to make it better. In many respects this is a wonderful market to be in. The credit of your customer is very good. They are mature in terms of systems. Very predictable in a lot of ways.
In its early days, this industry was highly cyclical, had long shoulders, long cycles, but severely cyclical. And, I would say, in the first 40 years of its existence the aerospace and defense industry didn’t make any money for anybody. A 3% return on sales was probably the [total of the] first 40 years, with a lot of bust years. I think the investment community didn’t very much like the industry because they don’t do very well with it.
I would say that this is an industry that has done very well since the end of the Cold War. You would think it would be just the opposite. [However], the cold war ended and the industry started to perform. Since early 1990 probably the returns from this industry have been as good as anybody else’s. But normally we have not been accorded very healthy multiples.

On how defense acquisition reform really works:

Change is constant in the defense side of our business. Why is that? Because acquisition is run by civilians many of them political appointees, and many of them — at least against the sands of time — are in office for a short period of time. Each [are] anxious to imprint some lasting improvement and legacy for their tour of duty. So the industry is faced with new initiatives from service secretaries, assistant secretaries for acquisition, technology. So this is not new. But there are only so many contract vehicles known to man, and we are going to have to deal with a handful and new initiatives. And I think it’s incumbent upon industry to be disciplined and flexible to meet our customers needs and at the same time to be able to calculate and measure the risk that we face for the benefit of our shareholders and not engage in foolish contracting practices. But I don’t think it’s political-party sensitive. But it comes with change in administration.


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