As the world’s largest defence contractor – and likely to remain so for some time - Lockheed Martin has a lot of influence and prestige.
5th Jul 2012
As the world’s largest defence contractor – and likely to remain so for some time - Lockheed Martin has a lot of influence and prestige. It is therefore a feather in the cap of the ACT Government that they had a role in persuading the corporation to select Canberra as the location for their new and permanent Australian headquarters. Officiating at a ceremony to open Lockheed Martin Centennial House on July 3, Chief Minister Katy Gallagher welcomed the move, saying it was in line with her Government’s strategy of encouraging knowledge-based industry. The building is so named because in 1912 the founders of Martin and Lockheed – entities that merged in 1995 – established their respective businesses. The rest, as they say, is history. Current Australian CEO Raydon Gates reflected on Canberra’s international reputation as a city with good skill sets and a strong education base. He was also typically generous enough to reflect on the achievements of his predecessor Paul Johnson, one of the true visionary figures of Australian defence industry. The corporate star of the event was Chris Kubasik, the Chief Executive Officer-designate of Lockheed Martin. He will take on that role on 1 January 2013 and in the meantime remains the corporation’s Chief Operating Officer and Vice Chairman. He described the capabilities contained within Centennial House: “Here we are working together in partnership to meet the threats and challenges of cyber security, develop clean energy solutions, provide the next-generation of aircraft and their associated air traffic management systems, and deliver for government services that work better and cost less – all to advance the safety, well being, and progress of the citizens of the ACT, the nation of Australia, and people around the globe.” The building will house 200 full time staff, making Lockheed Martin the 6th largest non-Government employer in the ACT. It already houses a leading edge cyber security facility known as the NextGen Cyber Innovation and Technology Centre. Possessing substantial computing power, it is the company’s third such site, with the other two located in the United States and United Kingdom. After the formalities, Chris Kubasik held a wide-ranging media round-table, with many questions focusing on the Doomsday scenario of the United States implementing what is known as sequestration. Sequestration is the name given to the automatic $600 billion reduction in defence expenditure over ten years that will take place unless Congress can agree on discretionary budget reductions in other areas. If the defence cuts occur they will be from January 3, 2013 – two days after Mr Kubasik takes on the top job; meaning this is possibly one of the greatest corporate hospital passes of all time. He chose to start on a positive note, describing progress on the Joint Strike Fighter program. He said that looking at it from a high level, the development of the F-35 is going very well. One of the key metrics he uses is the flight test program and in particular the number of test points that have been achieved – with up to eight significant criteria looked at to validate performance. According to Mr Kubasik, Lockheed Martin will try and undertake around 1,000 flights during the course of this year and use these to retire another several thousand test points. He added that the company exceeded its target of flight tests in 2010 and did the same thing last year. He and other senior executives receive nightly updates about aircraft test performance – an indicator of how closely progress is being monitored. As of the morning of the briefing – July 3 – the Joint Strike Fighter was about 50 flights ahead of its 2012 schedule and also about 1,000 test points ahead of plan. Production of the jets has been hampered by a ten-week strike at the Fort Worth facility, though this ended on July 2 with machinists and other specialized trades returning to work. According to Mr Kubasik this has caused some minor delays and the company has plans in place to make up for lost time. He reminded the media of recent positive news regarding the aircraft, including its selection by Japan in November last year. He also pointed out that Norway has recently publicly reaffirmed its commitment to a purchase of 52 aircraft and plans to acquire some of them sooner than originally scheduled. The question and answer session started with the possible consequences for the international business of Lockheed Martin if sequestration occurs: “If sequestration is to occur – and I think a lot of people are working hard to make sure that doesn’t happen – the mechanics of how it will be implemented is that it will be an across the board cut at programmatic level. So each and every program will have an equal cut. No single program – as I understand it, remembering that we have never done this before as a nation, so we are learning as we go – will be terminated, but the funding for each will be reduced (by 10%).” He believes that when it comes to international programs, these will be largely unaffected, though there could be some adverse impact on sales volumes. He pointed out that in Australia the company is somewhat insulated from events in the United States because of a number of autonomous contracts with the local subsidiary. These include things such as the contract secured in 2010 to provide the Australian Tax Office with computing hardware and services. Discussing the JSF in particular, the consequences of sequestration on aircraft price is a complex matter if it leads to a slowdown in the rate of production – which would be highly likely under such circumstances. Apparently it is extremely difficult to plan and model for such an outcome based on a 10% cut in funding for the program. At the end of July, Lockheed Martin intends to study and analyse a couple of their programs and calculate how a cut of this magnitude will effect issues such as workforce numbers, trickle-down effects and impacts on supply chains. Mr Kubasik explained that some of his thoughts were speculative because of so many uncertainties associated with sequestration. The company has legally binding signed contracts with the US Government – for example for the JSF – where both sides have made commitments about funding, scope and requirements. How contracts might be modified to reflect the impact of a forced 10% reduction in budget “is going to be interesting” because of potential legal claims not only from Lockheed Martin but also from a very large number of suppliers. It is clearly the hope of the company that sequestration will not occur, with Mr Kubasik believing that over the last couple of months there has been a heightened general level of awareness about the potentially damaging effect this would have on jobs, including those of subcontractors. He also pointed out that the greatest damage of all might be to the safety of the United States: “A lot of analysis and discussion starts with the budget, but it really should start with the strategy for national security”. Lockheed Martin derives 60% of its income from the US Department of Defense and a 10% reduction could lead to an equivalent percentage of job losses. At a time when the US unemployment rate is stuck at above 8% no one wants to see the situation worsen. However, with a Presidential election due in November, both the Democrats and Republicans appear to be playing a dangerous game of Budget Chicken with it being unclear who will be blamed the most if sequestration is triggered. If JSF numbers are cut, or the production schedule slows – or both – Australian suppliers will face further difficulties. A number of companies have already suffered from the slower than anticipated development of the aircraft – which has not been the rivers of gold that several years ago many were led to believe would be the case. Lockheed Martin’s position is clear and perfectly rational – they will not use their own funds to prop up subcontractors, including those in Australia. And nor should they. Note to Lockheed Martin’s Washington DC lobbyists: maybe you should throw into the mix the fact that Australian companies and their employees might be made to suffer if JSF cutbacks take place because of intransigent US domestic politics. Australia has been a staunch and loyal ally of the United States and to be treated this way by a great and powerful friend hardly seems fair. It is one thing for the US to punish itself, but it is quite another to also damage the interests of completely innocent partner nations. Politicians of all persuasions usually respond well to the ‘Guilt’ button being pressed – and Lockheed Martin might want to start pushing this one. Hard.