Northrop CEO: Government policies should support strong industrial base

Northrop Grumman CEO Wes Bush struck an optimistic tone Friday morning as he spoke to a crowd of northern Virginia business people about the state of the defense industry.

Bush focused his comments during a Northern Virginia Technology Council breakfast on the challenges facing the defense industrial base in light of the economy, budget cuts and national security challenges.

The national security challenges continue to grow for the United States along with the demands placed on the U.S. military, he said. Bush referenced a quote by a Marine Corps colonel who in the 1990s said that since the end of the Cold War, the military is expected to fight conventional wars, respond to violent insurgencies and mount humanitarian operations.

That view is still correct “but we have to prepare for more than that today,” Bush said. The nuclear threat is growing, as are threats from chemical and biological weapons. “And we constantly face the threat of a cyberattack.”

There also are emerging risks centered around energy, food and water, he said.
 
“The defense industrial base must supply the tools to deal with these threats,” Bush said. “And we have to find the solutions at a time when it is the most difficult for the government to make the investments necessary.”

Many companies such as Northrop Grumman are reducing overhead, streamlining operations and increasing productivity in order to lower costs for the government and provide an attractive return to investors, he said.

A successful defense industry relies on three things, Bush said: a solid relationship with its customer, a constant influx of talent and receptive capital markets.

But the current economic conditions threat all three, he said. There is pressure to reduce defense spending, which impacts the relationship and customer commitment. As the spending goes down, there are fewer new projects so it is harder to attract talent. The capital markets watch all of these factors in determining where to invest.

Bush acknowledged that the government has tough choices ahead, but he said that by working with industry, government can continue to drive innovation.

While the Defense Department may not launch new programs for weapons platforms, Bush said there needs to be spending on what he called “technology readiness” so that industry can continue to develop new products and respond quickly when the need arrives.

He also said the government should rework export controls to open more international opportunities for defense companies.

The government should remember the lesson it learned with satellites when it had strict limits on U.S. companies selling satellite technologies abroad because of national security concerns. The thought had been that the United States was so far ahead that other countries could not catch up, but the restrictions encouraged other counties to develop their own satellite industry.

“The U.S. lost valuable export opportunities and we are no safer today,” Bush said.

But Bush said he sees reasons to be optimistic. Defense Secretary Robert Gates said that there should be tougher export controls on fewer products so that the United States can better support its allies. DOD also is clarifying its stance on mergers and acquisitions in the defense industry.

The department is unlikely to support consolidation among the large defense prime contractors, but M&A activity will continue, he said.

In the 1990s, the consolidation trend that led to the creation of the current crop of large defense firms was driven more by companies looking for cost synergies, but today the drive is innovation, Bush said.

The government needs to think strategically about the defense industrial base. "When we do that, it makes the U.S. stronger in the long run," he said.

Northrop Grumman is ranked No. 2 on Washington Technology's 2010 Top 100 list of the largest government contracts.