Forecasting the Future

An Article on the Dulles Chamber of Commerce’s “What to Expect in 2012” Discussion Panel

Late in January, the Dulles Chamber of Commerce hosted a panel discussion on “What to Expect in 2012”.  Members of the panel included executives from Professional Services Council, Raytheon, Northrop Grumman and Lockheed Martin.

The panelists discussed the expectations that 2012 has compared to 2012.  The main themes covered were the defense budget cuts, continuing resolutions, the current budget cloud of uncertainty, as well as the external events that may play a role in shaping the defense contracting environment.

The Dilemma:

Mr. Chris Bowie, Corporate Director of the Northrop Grumman Analysis Center said that 2012 will exceed the lows of 2011.  He also mentioned that the defense budget for 2013 will be 3% lower than 2012.  A contraction in investment accounts should also be expected. 

Mr. Stan Soloway, the President of the Professional Services Council mentioned Secretary of Defense Leon Panetta’s resolution to reduce America’s defense budget by up to $490 billion over the coming decade.  He briefed the panel that last year was the first time in ten years where the industry did not match the federal budget. 

The points mentioned above also means that the federal “funding stream remains under a cloud of uncertainty”, said Mr. Larry Duncan, Vice President for Federal and State Government Relations and PAC Affairs.  Yet, in spite of this cloud of uncertain, there will not only be challenges, but opportunities that contractors could benefit from.  Panetta’s resolution emphasizes a shift into reconnaissance, cyberspace warfare, special operations, and missile defense systems. 

Mr. Mark Esper, the Vice President of Government Relations for Raytheon, brought up the fact that external events will also play a big part in into feeding into that cloud of uncertainty that hovers around the federal budget for 2012 and beyond.  2012 is an election  year, and the Obama administration had to make a move to show that they are coming up with solutions to address the country’s deficit problem.  Of course, the winner of the elections in November will also dictate how the budgeting will be addressed in the years to come.  Although he still sees a “strong middle ground” out there, Mr. Esper noted that the parties themselves are moving further apart from each other.  He referenced 2010 when the Democrats were decimated.  In Congress, the deficit hawks now outnumber the defense hawks.

How to Thrive During Challenging Times:

In short, defense spending in general will face a difficult time within the coming years.  To meet the coming challenges, Mr. Bowie said that Northrop Grumman is reorganizing its structure so that it can better meet the new needs of the government. 

Mr. Duncan added that the reduction of the pie means that the bar has also been set much higher.  There needs to be a “resetting of expectations in terms of margins”.  Mr. Duncan suggested to the members of the audience that much more effective teaming arrangements be taken into consideration when it comes to resetting these expectations, as “the tightening of the belt flows down to the subcontractors”.

The representatives of the large prime contractors on the panel spoke of expanding their company’s horizons to look more aggressively at international opportunities.  They brought up USA’s NATO allies as potential sources of opportunities, namely: Australia, Japan, and Israel.  Potential external threats like Iran and China should also be taken into consideration when reviewing the international climate.  Mr. Esper added that in these challenging times, it is wise to “follow security threats are” and identify “where our partners and allies are”. 

Conclusion:

The climate for government contractors may be cloudy, but that doesn’t mean that there isn’t any room for sunshine.  The days of outrageous government defense spending may be behind us, but if a company does its homework and is able to leverage itself to respond to the changing environment, and if it is able to increase its efficiency and reevaluate its expected margins, then it should be able to thrive. 

It has been an interesting month of December.  For 2012, GovPartners will be releasing bi-weekly news updates from around the world which may be of interest to current (and potential) government contractors.  Below is a top-ten list of the news-worthy material which have dominated the headlines for the month of December:

10.          NATO vows to continue to carry out nighttime raids that target suspected insurgents.  The partnership with Afghan forces will also continue to increase as well, with Afghan special forces now take part in nearly all night raids.

9.            U.S. increasingly reliant on the three transit routes which snake through Central Asia, Russia and the Caucasus to ship non-military supplies and fuel into Afghanistan as the relationship between Washington and Pakistan continues to deteriorate.

8.            General John Allen reiterated that “the continued work beyond ’14 in terms of development of economic capability and governance will continue.  We will also see, probably, a U.S. military capability beyond ’14.”

7.            The U.S. military may have withdrawn from Iraq, but international companies continue to pour into the oil-rich country.  Earlier this month, Royal Dutch Shell PLC and Mitsubishi Corp. signed a final $17.2 billion, 25-year contract with the country.  Some $12.8 billion would be spent on infrastructure and $4.4 billon on construction of a liquefied natural gas facility.

6.            Iraq cabinet okays 2012 budget at $100 billion.  The new budget forecasts total government expenditures at $68 billion, including $31.6 billion set for investment spending in 2012.

5.            U.S. Defense Secretary Leon Panetta and General Carter Ham, commander of the U.S. Africa Command, paid a visit to the country in mid-December and expressed their confidence and support in Libya’s transition to democracy.

4.            Afghanistan's government signed a deal with China's state-owned National Petroleum Corporation, allowing it to become the first foreign company to exploit the country's oil and natural gas reserves.  The deal, initially valued at $700 million, could end up being more than ten times this amount if more reserves are discovered and developed.

3.            The Department of Defense’s $662 billion budget for 2012 was approved by the U.S. Congress.  The lawmakers agreed on $518 billion for Pentagon operations and about $115 billion to cover the wars in Afghanistan and Iraq.

2.            Kim Jong-Il passes away, names his 27-28 (depending on source) year old son, Kim Jong-un as his successor.

1.            Iran threatens to close the Strait of Hormuz, a vital route in the Gulf where more than 1/3^rd of the world’s ship-borne oil passes. 

Unified Combatant Command Spotlight: EUCOM | September 7, 2011

WHO?

The United States European Command (EUCOM) is one of ten Unified Combatant Commands of the United States military, headquartered in Stuttgart, Germany. Its area of focus covers 21,000,000 square miles (54,000,000 km2) and 51 countries and territories, including Europe, Russia, Iceland, Greenland, and Israel. The Commander of EUCOM simultaneously serves as the Supreme Allied Commander, Europe (SACEUR) within NATO.  The current Commander of EUCOM is Admiral James G. Stavridis.

WHAT?

With national and international partners, U.S. European Command’s primary purpose to conduct military operations, international military partnering, and interagency partnering to enhance transatlantic security and defend the United States forward.

WHERE?

In early 1951, NATO established Allied Command Europe and the Supreme Headquarters Allied Powers Europe (SHAPE). General Dwight D. Eisenhower was called from retirement to become the first Supreme Allied Commander Europe (SACEUR). The United States sent massive reinforcements to Europe designed to deter the Soviet Union.  The EUCOM was formed shortly in 1952.

During the Cold War and the Kosovo War, EUCOM was the lead command for potential operations. During the Gulf War and Operation Northern Watch, EUCOM controlled the forces flying from Incirlik Air Base.

WHEN?

EUCOM was established on 1 August 1952, to provide "unified command and authority" over all United States forces in Europe.

WHY?

America's rapid post-war demobilization, followed by the end of the occupation of Germany in 1949, led many to question the United States' commitment to defend Western Europe against the spread of communism. Western nations questioned how they could provide for the common defense and simultaneously questioned America's role in such defense. In 1948–1949, the Berlin Blockade motivated Western Europe and the United States to create a military alliance. In 1949, the allies established the North Atlantic Treaty Organization (NATO).

From 1950 to 1953 United States military personnel in Europe grew from 120,000 to over 400,000. 

EUCOM and its components continued to provide military assistance throughout Europe, as well as humanitarian assistance, disaster relief, noncombatant evacuation, support to peacekeeping operations, and other non-traditional missions in Europe, Africa and the Middle East. For example, after the Congo became independent in 1960, EUCOM joined in several multinational operations in that country, including peacekeeping, humanitarian assistance, and noncombatant evacuation in 1960, 1964, 1967 and again in 1978. In the Middle East, EUCOM provided military assistance to Israel as well as noncombatant evacuation of American citizens in 1967, 1973, and 1982–1984.