Boeing Defense Shake-Up Signals Broader Shifts in Industry
These are odd times in the defense industry.
Pentagon budgets are on the rise. And the sector’s top firms have been darlings of Wall Street. But defense contractors are in no celebratory mood.
A major announcement Tuesday that Boeing is shedding senior executives and reorganizing its defense business speaks volumes about the dilemmas facing the industry. At a time when the defense market is poised for growth, established military contractors like Boeing are nonetheless coming under extraordinary pressure to stay competitive.
Cleaning out corporate overhead is one obvious option, but that is not enough these days for defense contractors to stay on top of their game. They also need new and creative ways to satisfy their most important customers across the military services. This issue is now coming to a head as the Pentagon seeks cheaper and faster options to modernize its weapons and information systems.
The business is as “competitive and as fierce as it’s ever been,” said Leanne Caret, president and CEO of Boeing Defense, Space & Security. The defense portion of Boeing accounts for one-third of the $95 billion aviation giant.
“We need to be an agile organization that is more responsive to customers' needs,” she said in a statement. "We are fundamentally addressing how we compete, win and grow."
The defense sector in the United States has been downsizing and shrinking for some time. Widespread layoffs and closings followed deep cuts in U.S. defense spending after the withdrawal of U.S. forces from Iraq in 2011 and the budget sequester starting in 2013. Today, only a handful of Pentagon contractors crack the Fortune 100 list. Tom Davis, a senior fellow at the National Defense Industrial Association, estimated that the combined annual revenue of the top five defense firms — Boeing, Lockheed Martin, General Dynamics, Northrop Grumman and Raytheon — add up to about 40 percent of Walmart sales, or less than 30 percent if one does not count the commercial aerospace revenue of the five defense firms.
Boeing’s latest reshuffle follows a major move by the company last year to consolidate aviation services into a single division. It recognizes that there may be bigger opportunities in aircraft maintenance and logistics support than in sales of new hardware to the Pentagon.
Boeing’s steps to flatten its organization by wiping out an entire layer of management is about reducing costs, but also about increasing the company’s ability to react more quickly to military needs, says defense industry consultant Loren Thompson. He notes Boeing wants to “shorten the chain of command” between Caret and key product lines: unmanned systems and electronic equipment; space and missile defense; strike, surveillance and mobility; and military helicopters.
The realignment shows the real pressure that defense companies face in adapting to changes in the national security landscape, says Charles Mahoney, a political science professor at California State University, Long Beach, who has researched trends in the defense industry.
“A company like Boeing is in a difficult spot,” Mahoney says. Its defense business is heavily reliant on traditional military hardware like fighter jets and satellites. It now has to figure out how to position itself for a future when wars are fought with vastly different tools, Mahoney observes. “We are changing from the old model of large-scale invasions and occupations to virtual war waged constantly.”
Companies like CACI and SAIC — which have aggressively moved into intelligence and cybersecurity work — are adapting more quickly to these changes. In the military space business, surging competitors like SpaceX are challenging incumbents Boeing and Lockheed Martin by offering cheaper and more flexible launch services.
D.C. politics are another factor forcing defense contractors to shift gears. Partisan warfare and permanent budget gridlock have proven to be damaging to the defense sector, and there is no sign of that changing, says Mahoney. The industry’s stocks will continue to perform well, at least until there is more clarity on how the budget stalemate will be resolved. The Pentagon for years has been funded by continuing resolutions, and even with Republicans in control of all branches of government, it remains difficult to see how defense spending will come out in the end. “Investors are betting that the big increase is going to happen, but we don’t know,” Mahoney says of President Trump’s promise to boost the military budget.
That uncertainty likely played into Boeing’s decision to eliminate about 50 executive positions and realign defense product lines. Looming questions remain concerning defense spending. Trump called for a 10 percent increase but the Pentagon is projecting a 3 to 5 percent increase over the next several years. So it could take the better part of a decade for the money to flow down to contractors.
The buildup pledged by Trump may have given Wall Street investors a false sense of security when it comes to defense industry stocks, Mahoney says: “His rhetoric about huge growth in the military says a lot about the president’s lack of understanding of how war has changed. The number of troops doesn’t necessarily translate into an advantage in this new era of warfare. It’s about technology, capabilities, intelligence, information.”
Sandra Erwin is a national security and defense reporter for RealClearDefense. She can be reached at serwin@realcleardefense.com. Follow Sandra on Twitter @Sandra_I_Erwin.
