The defense industry appears justifed in its anticipation of bigger Army budgets, improvements in the acquisition process and a shift in Army procurement focus from counterinsurgency to more traditional large scale land warfare.
At this week's Association of US Army (AUSA) land warfare trade show, the largest of its kind in North America, 720 companies/exhibitors were "all in" at "booths" costing $80/sq ft and totalling up to $1M. Reflecting global tensions in North Korea and Europe and the runup in defense stocks, this year's show was the best attended ever with some exhibits absolutely standing room only. We were there with Hedgeye clients who met privately with CEOs and on the floor with technical experts and senior vice presidents.
Some takeaways:
- Everyone believes there will be more money. Eventually.
- Leaders of the primes all bemoaned the uncertainty of the legislative process but, based on their interactions with the Hill, are confident that defense spending will be at or above the level of the President's budget.
- In independent sessions with HASC, SASC and SAC staff members, we have found that there is mostly consensus on the Hill that the Budget Control Act of 2011 will be amended to raise both defense and non-defense caps for two years (FY18-19) just as it was in 2015 for FY16-17.
- There seems to be little appetite for complete removal of the caps as desired by defense hawks. We have been told that the tax reform discussion is "taking the oxygen out of the room" and detailed work on new caps has yet to begin. At least a short (two weeks?) extension of the Continuing Resolution beyond December 8 seems inevitable.
- The DoD's Terrible Acquisition Process is Actually Being Addressed
- In an effort to change the Army's abysmal track record on program management, Acting SecArmy McCarthy and Chief of Staff General Milley announced the biggest changes to the Army bureaucracy in 40 years by moving to a more SOCOM-like, flatter acquisition process. See our note, "Army to Emphasize Modernization over Growth".
- DoD Undersecretary Ellen Lord announced that DoD had begun the process of pushing the decision authorities for all but a very few DoD programs down to the service level, cutting a layer of bureaucracy. DoD will provide "insight rather than oversight."
- Lord rescinded an Obama Adminstration edict that tracked Industrial R&D expenditures and industry found to be onerous.
- Acting Secretary McCarthy said, "Let me be clear. We want industry to be profitable."
- The Army is shifting its equipment focus from counterinsurgency to being able to fight against high tech enemies (read: Russia).
- Precision Fires. Several companies (BAE, RTN and GD) have mature programs that can transform existing US weapons stocks into precision weapons. For example, BAE's Advanced Precision Kill Weapon System screws a guidance kit onto existing "dumb" rockets and mortar rounds. The concept is similar to BA's JDAM, which is a kit added to 1950's-technology Mark 80 series bombs. RTN and LMT are competing head to head in developing the Long Range Precision Fires program which will downselect in 2021 to produce a 250 mile range replacement for the legacy ATACMS produced by LMT.
- Next Generation Combat Vehicles. The Next Gen Combat Vehicle is still conceptual and is likely to replace Bradley's in 2030s. Meanwhile, GD is pushing to expand its M1A2 Abrams V3 upgrade from a 20 year procurement program to one that completes in 5 or 6 years ($). The upgrade includes Rafael's Trophy Active Protection System used by the Israelis. Another GD Land Systems focus is the 30mm gun which is now going on Strykers headed to Europe. BAE displayed the first of the 2900 Armored Multi Purpose Vehicles it is beginning to produce for the Army @ $3.5M. With the M109 Paladin, the Bradley and the AMPV, BAE has the franchise for 80% of the tracked vehicles in the Army's heavy brigades, which now seem to be the Army's focus of attention.
- Future Vertical Lift. Bell CEO Mitch Snyder was showing off a mockup of TXT's V-280 Tilt Rotor entry in the Army's FVL 2018 demo for an H60 sized aircraft. The V-280 is maximizing Bell's lessons on the V-22 and is already conducting ground testing with first flight later this year. The V-280 seems to be ahead of its competitor, the Sikorsky-Boeing "Defiant", which uses two coaxial rotors and a pusher prop to achieve the desired speeds of 240 + Kts. Defiant has not yet been built. A smaller version ("Raider") is doing risk reduction and experienced a hard landing in August.
- Network. The Army is restructuring GD's current $420M/year WIN-T Increment 2 program designed to provide "comms on the move." The Army is concerned about the current program's EW vulnerabilities and transportability. GD Mission Systems President Chris Marzilli exuded confidence in GD's ability to adapt to the still evolving program. GD yielded its portion of the Handheld/Manpack IDIQ radio contract to HRS and Thales. CUB is trying to take LLL market share in the tactical common data link capability area.
- Air and Missile Defense. Of particular note was the plethora of air defense capabilities on display particularly counter UAS. BA has developed a Maneuver Short Range Air Defense (M-SHORAD) weapons mount that packages a high energy laser, 25 mm gun, Hellfire and AIM-9X missiles. Versions of the system were mounted on BAE's Bradley, OSK's JLTV and GD's Stryker at the show. RTN also demonstrated.
- Soldier Lethality. SecDef Mattis speaks often about the need to get ground forces into the 5th Generation just like Aviation. This was one of the areas of greatest innovation at the show. Exoskeletons, robotics, power sources, etc were on hand. Elbit demonstrated a vehicle driver's helmet with "see through" capability found in the F-35 helmet. TXT Systems has designed a machine gun designed around cased telescope ammunition that does not use brass and cuts the soldier's load by 40%. CUB's Live Virtual Constructive and Gaming Training solutions were getting senior USMC attention.
