This weekend's annual invitation-only Reagan National Defense Forum At the Ronald Reagan Presidential Library just north of LA was the see and be seen event for America's national security cognoscenti and the businesses that earn a living from the Pentagon. Receptions, dinners and panel discussions were held under the wings of Air Force One and just above an Irish pub imported from the Great Communicator's ancestral village. Current Pentagon and White House leaders discussed the macro aspects of US Defense and listened to critiques and commentary from past office holders, current CEOs and think tank experts. Here are ten things we saw and heard during the event:
- Everyone believes that the Pentagon budget will see a significant (6-9% y/y) bump in FY18 compared to FY17 when we finally get past this current series of continuing resolutions. The Pentagon is counting on 3-5% of real growth over the long term but everyone is resigned to only really knowing the topline two years at a time. There were a lot head nods when one CEO said he'd be happy with a less than optimal Pentagon topline if it came in exchange for more certainty in the budget process.
- Everyone whined about the Defense Acquisition process. Acquisition officials say they want to speed it up and say they are willing to take more risk. The real change observed so far is a willingness to push decision authorities down to lower levels.
- Defense companies are big taxpayers and if the tax bill passes will be even more flush with cash than they already are. One company COO told me that current taxes have a 37% impact on his company's current profits.
- Defense companies will be using their tax windfall for mergers/acquisitions, dividends, and share repurchases. They will not be hiring new workers. In fact, consolidation may result in less hiring.
- A big shake out and consolidation among the mid-tier (~$5B) service companies is coming within six months. CSRA, SAIC, BOOZ, CACI and MANT all want to get bigger through acquisition. NOC, RTN and GD may sell off their IT and tech services sectors as LMT last year (Leidos).
- The Pentagon's four-star buyer of satellites wants to get away from huge, multi-billion dollar satellite busses with critical functionality on board like GPS and SBIRS and move to an architecture of smaller and cheaper satellites that are put up commercially. This comes just as those LMT programs have stabilized and are beginning to deliver.
- No one thinks North Korea will give up their nascent nuclear capability without a lot more pressure than they're feeling now, if then. The path to a solution is through China and we'll know by this spring if they're really doing what our mercurial President thinks he has heard from Xi. My note, "War Probability in Korea Assessed as 7 on a 10 Scale" is still on target.
- The Russians are doing well at US expense. They are turning Turkey and controlling events in Syria. There was even some speculation that North Korea's remarkable progress in rocketry may have some Russian roots.
- Tools for a war in the Pacific theater will have to be dramatically different that what we have been using in the Central Command theater since 1991. The Pacific will be a "stressed" operating environment totally unlike the permissive environment in Iraq and AFG. Our unclassified UAVs, large command and control aircraft, e.g., JSTARS etc will be vulnerable. China is catching up technologically and the US is at risk of losing its traditional qualitative edge.
- Secretary of Navy Richard Spencer offered this concept for dealing with China: "Let's take the Federal Acquisition Regulation tome, mark it Top Secret, put it on the Chinese Embassy steps and let them adopt it. We win."
