With the federal spending environment becoming more constrained and possibly heading toward steep cuts if a budget sequestration measure goes into effect early next year, Boeing [BA] will have to be mindful of protecting certain parts of its supply base through acquisitions to assure access to some components and systems, the head of one of the company’s three defense divisions said on Friday.
The threat of sequestration “has said to us [that] we need to think about how we continue to deliver our end product to our customer with a very honest and healthy look at the supply base,” Roger Krone, president of the Network and Space Systems division within Boeing Defense, Space & Security, said at a Defense Daily editorial board meeting. “And, in some cases, we may end up back in businesses that we weren’t in 10 years ago. Not really for competitive reasons but simply to get assurance of supply.”
For the past decade or more, many of the large defense companies in the United States have reshaped their portfolios to move away from being as vertically integrated as they once were in favor of having a breadth of capabilities and enough depth of expertise and technology so that they can excel at being systems integrators, particularly for large-scale, complex projects.
But entering a new period of flat to declining government budgets, including for defense and security systems and technology, and reduced spending could jeopardize the health of the supplier base that large defense companies rely on for key components and systems they either put into their platforms like aircraft and satellites or other technology-based solutions.
Bob Stevens, chairman and CEO of Lockheed Martin [LMT], last week warned that sequestration could lead to large companies having to void some contracts with smaller firms, in some cases putting their survivability into question (Defense Daily, March 15).
Krone, who recently spent time visiting some of his division’s second and third tier suppliers, said that many of them are unique in that they have none or maybe one competitor. Most of these, around 75 percent, aren’t concerned about sequestration because they don’t think it will happen while the others are concerned whether “it’s a good industry to be in,” he said.
Where there are plenty of suppliers of a product or system, Krone isn’t as concerned about having a particular company become part of Boeing. For example, he said, there a “healthy industrial base around” satellite composite structure suppliers with several companies in the United States and as many more outside the country that this is an area that Boeing likely only needs a prototyping capability and enough know-how to be a “smart buyer.”
But when technologies and products are unique and are important to Boeing and its customers, having those capabilities in house may be important, according to Krone.
“We want deep insight into those parts of our value stream that create a difference that matters for our customers,” Krone said. “So our philosophy is not to own the commodity portion but to own that part that creates a performance difference in the end item.”
He mentioned two acquisitions within the last two years that were motivated in part by assuring access to supply. One of the deals was for Argon ST, a supplier of sophisticated defense electronics used in C4ISR systems.
Krone said that Argon, which already was a key supplier to Boeing, had come to a point where two of its three founders had retired and the company was faced with having to change its capital structure. With the acquisition, Boeing helped ensure it had access to key capabilities.
For Boeing, locking in access to certain key technologies was important but so was obtaining access to technologies that would have taken Boeing up to five years to develop organically and embed with customers, Krone said. Argon also provided Boeing with access to new customers so the deal had value on “multiple levels,” he noted.
Last summer Boeing acquired a data solutions company called Solutions Made Simple, Inc. (SMSi), that also has been providing a software that is a key ingredient for a Boeing application used by a classified customer.
SMSi, which also was facing a decision about its liquidity, was also attractive not just to “control more of our own destiny” because their software product was “heavy in our value stream” but because they have a culture of innovation and because it could “provide access to broader markets through our Information Solutions business,” Krone said.
“These are ways to enhance our portfolio, to go broader, to go deeper,” Krone said of Boeing’s thinking about the recent acquisitions.