During 2023 first-quarter earnings calls, defense technology executives focused on positioning their companies to meet anticipated macro shifts in the market and continued growing international demand. Defense technology companies want to invest in future development, but only if the risk is balanced between the customer and contractor.
Three themes emerged from the earnings calls, transcripts of which were provided by Bloomberg:
Anticipating macro shifts in defense technology
Executives saw opportunity in the anticipated macro shifts in the defense technology market due to geopolitical events and technological advancement.
As countries look to reduce their environmental footprint and seek sustainable practices, many are turning to nuclear power for a clean source of energy. Robb LeMasters, chief financial officer of BWX Technologies, said Canada is an early investor in small modular reactors (SMR). BMX Technologies expects SMR to be part of a growing trend as countries look to diversify sustainable energy sources for defense applications.
Executives also spoke about the use of open architecture in defense applications. In simple terms, open architecture is a system built to be modular, flexible and collaborative. Lockheed Martin CEO Jim Taiclet spoke on the importance of advancing the F-35 jet’s capabilities using open architecture and advocating for this approach in defense applications. However, a major challenge to expanding this market approach will be determining how proprietary standards and protocols will be handled.
Geopolitical risks spur international investments
International governments continue to invest heavily in satellite communication, missiles, clean energy sourcing and high-performance aircraft. Kathy Warden, CEO of Northrop Grumman Corp. said that “outside the U.S., the geopolitical landscape remains dynamic, (and) global defense budgets are increasing as many modernize and expand their defense capabilities.”
Multiple executives commented on the increase in Canadian and Australian investment in defense platforms. Lockheed Martin’s Taiclet said, “The near-peer threats posed by China and the Russian invasion of Ukraine (are) driving the national defense strategy.” Many companies are investing in enhancing technical and manufacturing capabilities based on international demand signals.
Contractors seek balanced risk in development contracts
The federal government has increased its use of fixed-priced development contracts, and defense technology companies are taking a stand. Chris Kubasik, chief executive officer of L3Harris Technologies, Inc., said his company did not bid on two opportunities because the contract type was fixed price for development work. Development contracts by nature carry a level of uncertainty, complexity and incomplete requirements. This makes it hard for the contractor to estimate the expected costs. A fixed-price agreement places the maximum risk of cost on the contractor.
Mark Aslett, CEO of Mercury Systems, mirrored the same sentiment, indicating that only 10% of their total contracts are cost plus fixed fee. Mercury Systems is strategically seeking the same for future development programs. With the continuing effect of economic factors such as inflationary pressures, increased supplier bargaining power and a recovering labor market, companies are hesitant to enter contracts that lack flexibility or carry imbalanced risk.
The takeaway
Industry executives are looking to expand the defense technology market by capitalizing on opportunities driven by technological advancements and geopolitical events. While economic disruptions still exist, many defense technology companies are refusing to bid on fixed-priced development contracts. Strategically, they are looking for a balanced-risk approach between the contractor and customer.
