PARIS: Interview: L-3 Communications chief executive Michael Strianese

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L-3 Communications built a multi-billion dollar global defence company during a massive acquisition spree near the end of the last cyclical downturn in US investment in weapon systems.

As the industry now enters a new cyclical drop in US defence spending, L-3 chief executive officer Michael Strianese explains how this cycle will be different, and why L-3 has not leaped at opportunities to grow even bigger as even larger defence contractors divest key businesses.

You've said L-3 is well positioned as we head into a possible downturn, albeit not completely isolated from some of its ill-effects. What does that mean, to be well positioned for a downturn ahead?

In a down environment like this no matter how well positioned any of the companies are, you can't avoid some negative effects at places within the company. I don't mean to suggest that we're totally immune from any downdraft in the budget at all. But again, it's relative among companies. Some will do better, some will do not as well. When you look at L-3, first of all we don't make large platforms - planes, ships, tanks, satellites etc. So we have lower risk towards major programme cancellations. Specifically, in about 20 programmes that have been cancelled in 2010, the effect on L-3 has been extremely minimal. We also have the ability as platforms are going to be used for a longer time we have very strong positions in life-cycle extension and upgrade and refurbishment.

michael strianese, l-3 communications
 © L-3 Communications

In the last downturn 15 to 20 years ago, the playbook for a US defence industry executive seemed to be to consolidate at the prime level. As we go into this cycle, perhaps the scale of the downturn isn't comparable, but do you see a standard playbook that you and your peers in the defence industry will use, especially as you look at the size of your business?

It's a different environment now than in the mid-1990s. First of all the DoD [Department of Defense] has come out and said that they are really not in favour of consolidation at the prime level. Now we can debate where they draw that line as to what is the prime level, but notwithstanding what they've said, I'm not sensing there's that appetite. There was a very different structure in the industry 20 years ago than there is today, as there were many, many, many more companies to consolidate. What you are left with are a handful of large primes, very few companies in the mezzanine space that is only about three or four that I can think of, and a large supplier base - third-tier I would call it - which we have been consolidating but cautiously because of valuations.

So what do I see? We've seen some divestments actually. Both Lockheed [Martin] and Northrop [Grumman] sold reasonably good-sized service operations. Those were I think more geared towards potential OCI [organisational conflict of interest] issues, but also Northrop has completed the spin-off of their shipbuiliding business. ITT has announced it is splitting up into three different companies, separating defence from its industrial businesses. So I would expect or anticipate some more rationalisation among companies where operations are less core. I see more streamlining going on.

One interesting point I'll highlight for you is if you look at the divestitures none of these companies have been acquired by defence companies. That should be indicative to you of a different mentality among defence contractors.

It also seems that there is a growing emphasis on international growth, but at the same time the international budgets may be declining faster than the US defence market, so where do you think the potential is for a US supplier to grow further?

Every company obviously is focusing on international. We've been focusing on our international footprint every year. No matter how much you could potentially grow internationally, it's difficult to offset the potential decline in the US defence budget, just because of the timing of things. International sales cycles run much longer. Having said that we are focusing on growing in the Middle East and in India. Those are growth markets As you may have seen last fall, there was a tremendous amount of hardware ordered by the Middle East - planes, helicopters and missile defence systems. A lot of the programmes carry with them a tail for training, logistics, MRO work, so we're trying to secure a position on the tail end of those programmes. Same thing with India.

In the last few years, we've seen L-3 offer the export version of the Project Liberty King Air and the Mobius optionally manned aircraft.

Those seem to take a long time to start gaining momentum and I'm wondering if that speaks to the timelines of trying to complete sales on the international market?

In the US market, we are usually pursuing a programme which is based on a known requirement. In the international [market] the requirement is not yet thought out. Many countries like a system, but they don't really have a requirement defined as to what they want to do. So you usually need to spend [a] significant amount of time working with a potential customer and crafting what a requirement is so you can deliver a system to meet the requirement.

The Liberty-like airplane - the King Air - we will have an airplane at RIAT in July. It's the demo version of an export Project Liberty plane that is equipped with sensors, communications etc. We've built this system on our nickel if you will, so we have much more than a Power Point presentation. We can actually take it to a customer and fly the system and let them see its capabilities. So it's real important to have hardware that's ready to go [so] that a customer can see its performance.

It also sounds like you have to walk some international customers through a requirements-generation process.

The acquisition system in a lot of these countries is not as mature certainly as it is in the US, the UK or in Canada, for example, where the requirement is spec'd and the contract glued to it. It needs to get a little more mature. We help where we can, or we hire more of a consulting company to help them spec it out.