Lockheed Martin’s wide open future


On June 9th 2014, Marillyn Hewson, the CEO of Lockheed Martin, made an interesting and rather unusual speech during a Corporate Media Tour. In that speech she outlined the future three-stage strategy of the company which is expecting flat revenues for 2014 and 2015.

The first stage of this strategy would be to keep delivering “next generation products”, the second to reduce dependencies on Pentagon contracts and the third to invest more in Research & Development.

For Hewson, the next generation products in question are the Joint Light Tactical Vehicle, the Long Range Anti-Ship Missile, some cyber solutions or the Orion and MAVEM space program. But the most iconic programme is of course the F-35 Lightning II fighter jet. Concerning this aircraft, the CEO announced some updates. First, the Navy version will start tests at sea in October on a US Navy aircraft carrier. The 2B software version started trials three weeks ago. Lockheed Martin lowered the cost of this aircraft, by 4 or 5% according to Chief Financial Officer Bruce Tanner, while “improving efficiency”… Finally, the F-35 will soon be presented abroad at the Royal International Air Tattoo and the Farnborough International Air Show, a major and unprecedented marketing move.

The decision by Lockheed Martin to return to International Airshows is part of the second stage of Hewson’s grand strategy. Indeed, she made this revolutionary statement: they are “the perfect place to meet with foreign potential customers”… This marks a turning point of the company which is now trying to develop its presence abroad as the 80% of its $45 billion revenue derived from the DoD is now threatened by budget cuts. Today, Lockheed Martin plans to keep creating subsidiaries abroad as it did in Canada, the UK or recently in Israel and to increase the number of foreign customers.

Earlier this month at Eurosatory, Steve Williams, Regional VP Europe Americas and Israel confirmed to The Bulletin a renewed interest on Europe, either through new partnerships, joint R&T, outright acquisitions, or increased sales. More broadly, the company targets an increase of its foreign sales from 17% to 20% in the next year. But, there is no long term target of 50-50, even if CFO Bruce Tanner admits there is “a possibility that it could drop there”. For instance, in the missile sector, the company plans to increase its sales abroad from 33% to 40% by 2016. Big sellers such as PAC-3 interceptor missiles and the terminal high altitude area defence (THAAD) theatre air and missile defence system will play a great role there as said Thomas J. Oles, vice president of strategy and business development at Lockheed Martin Missiles and Fire Control.

Finally, the third stage of Hewson’s strategy is to increase the R&D budget to keep being the “world leader”, and work through “adjacencies”. Today, Lockheed Martin’s Research and Development is involved in projects on natural resources, renewable energies and civil drones. In the defence sector, the company is developing the SR-72 hypersonic aircraft capable of flying at Mach 6 that could reportedly be operational by 2020. Also, it is developing a programme for High Speed Strike and Laser weapons. Lockheed Martin plans to add this year $30 million to its R&D budget representing a 5% increase. This budget was already increased by 13% in 2013, reaching $700 million. Still, this budget remains $122 million inferior to the 1999 R&D level and it represents just 1.5% of sales last year, according to Aviation Week data.

Today, Lockheed Martin is at a turning point. The implementation of the new strategy could give to the company a new growth of revenue or dig its graveyard. As Tanner puts it “I’m not a big race car driver, but I’ve always heard that races are won in the corners. Downturns are sort of the analogous ‘corners’ in this industry. That’s when you do make some differentiation that hopefully sets you up for the straightaways”. Through several major programmes such as the Patriot, F-16, MEADS, C-130, F-35 and others, the group does have a solid international footprint, but will it be enough to win this race?

Republished with permission from ADIT – The Bulletin.