Defense Industry Daily reported on Monday that a team led by Boeing’s Phantom Works has received a first-phase contract from the US Air Force Research Laboratory to demonstrate a miniature precision weapon for use on unmanned aircraft. [See “Boeing Team Gets USAF Contract for UAV Miniature Weapon Development,“ DID, 16 November 2009.] As prime contractor during the initial nine-month program, Boeing will develop an all-up weapon, including seeker, avionics, guidance, control, and mission planning systems. As designer and builder of both the Joint Direct Attack Munition (JDAM) and the Small Diameter Bomb (SDB), Boeing was a natural choice for this effort, so this story was almost not news.
Almost, because there is an important underlying message here. Boeing will not be going it alone. As in the JDAM and SDB programs, Boeing will be relying heavily on subcontractors to develop and build large parts of the weapon. In addition to Boeing, according to DID’s story, the team includes five companies. Albeit a small sample set, the distribution of the nature of the companies is pretty wide:
- KaZaK Composites will build the airframe. Kazak is a forty-person company that focuses on composites in aerospace, marine, and military applications. As the website puts it, Kazak “is an active participant in the Small Business Innovation Research (SBIR) program and is always looking for partnering opportunities.” It just found one.
- Ensign Bickford Aerospace & Defense Co. will design and build the warhead. Ensign Bickford is actually three companies: the other two in the portfolio work in commercial realty and pet food ingredients. If that seems strange, doubtless someone in the private equity business has had the same thought. The aerospace and defense group was founded by William Bickford, who invented the safety fuze way back in 1830, and even today basically does energetics and explosives.
- Systima Technologies will provide integration and testing services for the launcher. Employee-owned Systima also has fewer than fifty staff, and concentrates on aircraft and spacecraft launching and separation systems.
- Science Applications International Corp. will provide systems engineering for the seeker and seeker algorithms. SAIC is, of course, a diverse and huge company, with 45,000 staff worldwide. Contrary to its one-time image, however, this program shows how it isn’t just a consultancy. As I highlighted in the last chapter of my recent book, SAIC actually writes software and does rather a bit more. [See James Hasik, Arms and Innovation: Entrepreneurship and Alliances in the Twenty-First-Century Defense Industry (University of Chicago Press, 2008)]
- Mustang Technology Group will provide height-of-burst and radar options. Mustang, like Kazak and Systima, is a roughly forty-person outfit. According to the website, it’s mostly largely former senior engineers at Raytheon and Texas Instruments who decided that they could do it better-and-cheaper.
Rather, we should expect to see more of this structure in new programs, and for two reasons. First, as it was put by Carl Avila, the director for advanced weapons at Boeing’s Phantom Works, the interest lies not just in the weapon’s low carriage weight for these rather smaller aircraft, but in its prospect for low collateral damage in a “suburban“ environment. In some ways, low weight—low collateral damage is the new tastes great—less filling of military aerospace. Second, the military procurement budget in the United States will contract in the near term, and new programs will need to show how they can meaningful breakthrough old cost-performance curves if they are to capture funding. Hiring the guys who used to work at Raytheon, but now think they can offer more-for-less than Raytheon (or anyone else), will recurrently be appealing.
There’s an important message here for private equity investors, merchant suppliers of engineering products, and systems integrators alike. It’s obvious that the arms industry’s structure is as heterogeneous as its products. What’s not obvious is that all the myriad organizational forms are equally efficient. A few operations (like Boeing’s 787 line) could benefit from a little more selected integration, or from the acquisition of deep functional skills and assets in a few strategic areas. Broadly, though, the biggest firms just can’t cost-effectively manage the down-in-the-weeds details of military design and production efforts. Consider the story from Tuesday morning: J. F. Lehman & Co.'s sale of Atlantic Inertial Systems (AIS) to Goodrich. BAE Systems sold this outfit to Lehman in 2007 for $140 million in cash; Lehman is now selling it on for $375 million. After pulling it out of its parent company, Lehman more than doubled AIS’s value in two years, and in deteriorating military-economic conditions.
That’s such a healthy return that it may lead one to ask why BAE Systems itself couldn’t realize this value from the property. Even so, heaping criticism on BAE would be a bit unfair here. The company makes nuclear submarines, armored fighting vehicles, and perhaps half of every Eurofighter. The span of control needed to administratively control all those activities is just too great. BAE Systems is a 100,000-person company; AIS is an 800-person company. That necessarily puts the embedded operation well below the fold of top managerial attention. Thus, there may be more underperforming assets in the portfolios of big companies in the industry that either need to be turned around to face the opportunities of the twenty-first-century arms industry, or sold off to someone who can take them there.