Chief executive Robert Stevens explains why the US aerospace giant is no longer dependent on defence
What a difference a year can make. Early in 2005, Lockheed Martin learned the US Department of Defense leadership had marked several of its programmes for early termination in a bid to cut spending. A year later, and despite continuing budget pressures, the largest US defence contractor believes its key programmes have survived the scrutiny of the DoD’s Quadrennial Defence Review (QDR).
“I think we’re going to be able to sustain our strategy of disciplined growth. I think our programmes that are being reviewed in the QDR and in the budget process will be validated. And I think there will be appropriate and adequate funding in support of those programmes,” says Robert Stevens, president, chief executive and chairman. “That will likely put us on a trajectory of growth in the slightly less than mid-single-digit range for our foreseeable future.”
Speaking to Flight International at Lockheed’s Bethesda, Maryland headquarters – close to its largest customer, the US government – Stevens points out that defence is now only half the company’s business. “Our disciplined growth strategy has been targeted at accelerating growth in the non-defence segments of our business,” he says.
At the same time, Stevens does not subscribe to pessimistic projections on US defence spending now circulating. “The projections we have in the future year defence programme show a deceleration in growth, which some construe as defence coming down,” he says. “But actually, baseline to baseline, the president’s budget request and the supplemental appropriations have shown a fairly significant investment in defence, and one that I would describe as growing.”
A former US Marine, Stevens does not believe the DoD’s near-term focus on operations in Afghanistan and Iraq is affecting the drive to network-enable the US forces, or reducing the need for large-scale system integrators like Lockheed. “Every day we see the incredible muscular value of first having information and then, with the right high quality information, knowing exactly what the options are and how many degrees of freedom we have in preparing a response,” he says.
“And it is a phenomenon that goes far beyond combat power,” Stevens continues. “It can be applied to logistics and sustainment and follow-on support and recovery operations. There really is no limit in how to get highly leveraged responses based on net-enabled situational awareness, whether that response is a strike mission or a humanitarian mission,” he says.
The DoD’s net-centric experience is directly applicable to Lockheed’s other, adjacent markets, Stevens believes. “If you take that and extend it to broad situational awareness, communications, command and control, it applies not only to combat power, it applies to hurricane relief. How do you go into a geographic area that has essentially lost its infrastructure and hope to bring some sense? And in bringing that sense, get greater knowledge so that we can respond appropriately to those in need.”
Since taking over leadership of Lockheed, Stevens has championed the drive within the company towards “horizontal integration” – essentially network-enabling the corporation itself. “Once you orient yourself away from an isolated organisational model and toward a network model, you see real opportunities to bridge across stove pipes,” he says.
“I think we see a convergence in the demands that are placed on policy planners as to exactly what is national security as compared to homeland security. Or what is law enforcement versus what is military? There is a naturally occurring fusion there,” Stevens believes. “The horizontal integration philosophy we’ve applied to ourselves as an organisation principle, and as an adaptation mechanism, we coincidentally find applies to many market opportunities,” he says.
Lockheed’s information technology skills fit this model of convergence, and will enable the company’s non-defence business to grow organically, Stevens says. He cites a contract to develop a search engine and database for the National Archives that will assure documentation is preserved in its authentic state, yet provide citizens with access to the documents in their original form. “There are many applications, we believe, in database management for such skills and techniques to preserve authenticity and improve and ease access to materials,” he says.
Stevens says Lockheed’s contract to operate the Federal Aviation Administration’s automated flight service stations is “important because it calls upon our systems integration and information technology skills and is the first of what we think will be more outsourcing opportunities”. With critical infrastructure protection an increasing high priority, the company is to provide New York with a subway security system. “Subways are but one node, New York is but one city,” he says.
Stevens sees plenty of opportunity for acquisitions in the fragmented federal IT market, where Lockheed is the biggest player, but there are still lots of competitors and no reason to believe the government will intervene to block consolidation. But on the defence side, despite the pressure on the DoD budget, he does not expect further near-term consolidation among the large-scale integrators.
“It depends on where we want to optimise the industrial base,” Stevens says. “I think discussions that say we either want more competition on one hand or we want more consolidation on the other hand occur a little in the abstract.” Those discussions should revolve around “demand and supply and funds flow”, he says. “When that occurs in the abstract, you can get some real imbalances where you have too many sources of supply chasing too few dollars with marginal firms that are not healthy. That simply creates the illusion of a lot of competition.”
Stevens says the launch vehicle market – where Boeing and Lockheed have proposed combining their government satellite launch businesses – is a good illustration of the competition versus consolidation argument. “The financial stress associated with that business is because there has not been enough demand that can take such a high-quality source of supply and make a high-performance financial model,” he says.
The two companies are seeking approval to form 50-50 joint venture United Launch Alliance, but the government has requested more information, pushing a decision into 2006. “We think that the underlying conditions that caused us and Boeing to move forward to our government customers, and the fundamental value, have not diminished one bit. We think that the benefit will be to lower the recurring cost without having to step back from the assured access of having redundancy in the launch vehicle,” Stevens says.
“We continually assess the environment around which we’ve made this proposal. And every time we look at the environment, we think the fundamental underlying conditions that led to our judgement of value to our customers and our companies is sustained in every data request,” says Stevens. “I’ve not seen any change in the environment that would tell me that this is anything other than a balanced, wise, appropriate response to meet assured access, affordability and good quality.”
Lockheed is not pursuing consolidation opportunities internationally, meanwhile, preferring partnerships. “We have 300 such partnerships. It has been a good model for us. I believe it has been good for our partners,” Stevens says. Successes have included the Lockheed-led US101 team winning the US Presidential helicopter competition with the AgustaWestland EH101. “We’ve gotten very effective systems at affordable prices that are good for our US customers. Equivalently, we expect to have the opportunities to take those same offerings into other markets.”
Access to European markets is essential if European companies want to do business with the DoD, Stevens says. “If the response in Europe tends with some consistency to be a closing of the markets, or the inaccessibility of the markets, then I think many companies in Europe will have to re-evaluate what are clearly and publicly stated objectives in coming to the US market,” he says. “I don’t think it’s reasonable to envision open access to one segment of the market and closed and prohibited access to another segment of the market.”
He also voices concerns about the threat to transatlantic co-operation posed by any move to lift Europe’s arms embargo on China. “We’ve respectfully asked our European partners and representatives of European governments to evaluate these judgements with real care,” he says.
Efforts to involve international industry in the JSF programme have come in for criticism as the Lockheed and the US government work to get the nine partner nations to sign a single agreement for the production, sustainment and follow-on development phase. “The discussions are robust, and they should be,” Stevens says. “We are moving toward discussions of production and sustainment over the life of the programme, which means countries are going to be firming the number and types of aircraft they intend to buy, how we’ll do final assembly, how we’ll do sustainment, and how the global supply chain and logistics management system will work.”
US export controls have been a constant hurdle, “but we have no circumstance where we have been unable to meet our commitments to date because of the lack of access to technology”, says Stevens. “When we have individuals who express legitimate concerns about where technology release lines are being drawn, we should address those. And we feel confident that we will be able to do that.”
Keeping the JSF an international programme is key to Lockheed’s plans, and may have helped ensure cuts in US procurement will be less than expected. “It will be a high-performance aircraft because we’ve aggregated demand and got the best of the global supply chain,” Stevens says. “We’re looking at a global supply chain and sustainment model to make sure that the most economical approach to cost of ownership is embedded.”
Lockheed’s JSF, F/A-22 and C-130J programmes look more secure than a year ago, but the company is awaiting a delayed US Army decision on the troubled Aerial Common Sensor (ACS) programme. After Lockheed won the competition, the mission system was found to be too large for the Embraer ERJ-145 platform selected. The army issued a stop-work order and directed the company to propose alternatives.
“The outcomes range from doing something to simply not proceeding with the programme,” says Stevens, who is clearly displeased with his company’s performance. “There are many objectively verifiable measures of merit that would suggest we are a high-performance, well-qualified systems integrator in demanding markets and demanding technical applications. In the final analysis, I’m not satisfied with the range of outcomes here.”
But ACS could yet prove to be an isolated misstep in Lockheed’s evolution from aircraft manufacturer to systems integrator. Once the company’s biggest business, aircraft manufacture accounted for only a third of the company $35.5 billion revenues in 2004, and that proportion is reducing. “In the last five years, we doubled our aeronautics business,” says Stevens. “I would like to tell you we’re going to double it again in the next five years. But that does not look at all likely. We expect, however, to continue to have a healthy aeronautics business,” he says. “What I also expect in the implementation of our disciplined growth strategy is to continue to grow other parts of this business.”