Address to Australian Defence Magazine Congress
Remarks by Raydon Gates, Chief Executive, Lockheed Martin Australia
Wednesday, 13 February 2013
Canberra, Australia
As I mentioned, since Bob Stevens coined the phrase – ‘the
New Reality’ - we have been responding by putting strategies
in place that are designed to better meet the needs of customers,
enhance our competitiveness and thus sustain the Corporation’s
growth.
Distinguished guests, Ladies and Gentlemen.
Today I have been asked to talk to you about ‘The Evolution of
Australian Defence Industry’.
How are we adapting to a new economic outlook, and where do
we go from here? In short, what is the ‘new reality’ of Defence
contracting, and what has Lockheed Martin been doing to
accommodate it?
While we are meeting our corporate responsibilities by
ensuring revenues and returns to shareholders continue to grow;
changing circumstances have necessarily brought with them
adjustments, including the loss of some capabilities nurtured
over many years. The reduction of our global workforce from
over 140,000 employees just a few years ago to 120,000 today,
is indicative of these changes.
Immediately, I would say to you that it is disconcerting to see
that defence expenditures across the Western world are falling,
and as already said, in many areas, quite dramatically.
Driving these outcomes has been a focus on:
• Containing program costs;
• Shortening product development cycle times;
• Driving innovation, affordability and flexibility into our
products; and
• Delivering on our commitments.
As the decade-long activities, first in Iraq and now Afghanistan,
are wound down, we anticipated that military operational
expenditures would decline.
However, as we all know, due to lingering economic and
structural issues resulting from the Global Financial Crisis,
national budgets are under pressure from slow economic
growth. Revised priorities have meant governments are
responding to mounting social needs by deferring or cutting
back on new procurement expenditure as well.
To help meet these goals and further strengthen our business,
we have also made major organisational and executive
management changes.
Factoring in long defence procurement cycles, we see this ‘age
of austerity’ will continue for at least a decade, thus bringing on
a ‘new reality’ in the defence business space, as so eloquently
put in 2011 by our former CEO, Bob Stevens.
As you may know, we started the year with the appointment of
Marillyn Hewson [Slide 1] as Lockheed Martin’s new global
Chief Executive Officer – the first woman from our business to
ever fill this role.
So along with our industry peers, two years down the track we
continue to face significant challenges from these accumulating
effects. The global security environment remains volatile;
thus not surprisingly, our customers are asking us to do more,
and do it more affordably, as they in turn experience greater
budgetary pressures and expanding mission requirements
across the broad civil-military spectrum.
In parallel with Marillyn taking up her new position, from
January 1 we adopted a new business structure [Slide 2].
I know it seems odd - on the one hand, talking about the
impact of budget austerity on our organisation, and then
announcing that we moved to expand the number of our
business units, from four to five. But in this year of our
centennial, Lockheed Martin is demonstrating that it does take
a long-term view!
2013 will be no different from our experiences of constraint in
2012, and as I said previously, we are predicting the situation is
unlikely to improve in the medium term.
Prior to becoming the new CEO, Marillyn had been the Head
of our Electronic Systems business, and thus had a good grasp
of its capabilities and potential for business growth. That
business included our Missiles and Fire Control (MFC), our
Mission Systems and Sensors (MS2) and our Global Training
and Logistics (GTL) elements.
So this is the environment in which we have to continue to
evolve.
So what has Lockheed Martin been doing?
[1]
Address to Australian Defence Magazine Congress
Remarks by Raydon Gates, Chief Executive, Lockheed Martin Australia
Wednesday, 13 February 2013
Canberra, Australia
(Continued from previous page)
Suffice to say, as we absorbed the 2011 and 2012 experience of
a steadily diminishing budgetary outlook - and how we could
identify ways to cut costs, increase efficiency and save money
for our customers - the Corporation resolved we would all be
better focused in 2013 if we adopted a new structure of a larger
number of smaller-sized lines of business.
and distribution, and even education, through innovations in
simulation and training.
I will speak more in a moment about the US Defense Budget
outlook and ‘sequestration’ – which will also be a shaper of our
global agenda moving forwards.
The evolution of our strategy remains positive, and has retained
a bias for growth in uncertain markets. In short, as we say, we
have to be able ‘do difficult’. This is as important in Australia
as it is in the United States.
And that is another aspect of answering the question – What
have we been doing at Lockheed Martin to address the ‘New
Reality’?
To conclude on the organisational changes, Marillyn’s former
Electronic Systems business has been de-constructed, with
Missiles and Fire Control (MFC) and Mission Systems and
Sensors (MS2) stood up as their own operating businesses.
Doing difficult things is increasingly a discriminator and driver
for addressing growth paths in the current economic climate,
where accelerating structural change sees traditional business
models constantly under attack from new comers emerging
from all quarters of the globe.
In turn, the former Global Training and Logistics (GTL)
business has been substantially incorporated into the former
MS2, and now combined, trades as Mission Systems and
Training (MST).
Further, we have to take action to protect and expand core
programs and products, while also re-assessing their relevance
in terms of ensuring they remain essential to the customers’
mission, and therefore, deserving of ongoing investment and
support.
So we are now organised into five prime business areas. Apart
from Aeronautics which is $15B, each of these business areas
is about an $8B annual turnover:
Strategic actions to bolster position also need to be taken.
Our investment in the Next Generation Cyber Innovation and
Technology Centre here in Canberra to expand international
sales through active local partnering and investment activities
is a case in point.
In this reorganisation, you would not be too far off the mark in
perceiving the new organizational structure is purposely more
customized to reflect our ongoing efforts for core customers …
Aeronautics … AIR COMBAT SYSTEMS;
Missiles and Fire Control … LAND COMBAT AND STRIKE
SYSTEMS;
Mission Systems and Training … MARITIME COMBAT AND
PATROL SYSTEMS;
IS&GS … COMMAND & CONTROL, INFORMATION
SYSTEMS AND CYBER; and
Space … COMMUNICATIONS & SURVEILLANCE.
So what has been the result?
While the reorganization is new, the actions Lockheed Martin
earlier put in place to evolve in this new reality has since been
rewarded with a record year of turnover in 2012 and a healthy
backlog, very much reflecting an expanded product portfolio
stretching across both civil and military domains.
As required within the evolution of defence industry, embedded
in all of these activities are a large number of civil programs.
These civil activities seek to grow revenue streams by
leveraging a broader economic benefit from Lockheed Martin
investments in military technologies where development cost
has already been retired.
However, we are an American company, and as mentioned
yesterday ‘evolution’ in its most worrying form could be
severely forced upon us very shortly. This evolution is
called sequestration. That is on top of the usual experience
of Congress not yet approving the FY2013 defense budget at
a level consistent with President Obama’s proposed defense
budget.
They also look to harness the accumulated expertise of
our 70,000 scientists and engineers to address new issues
confronting human kind, including ‘alternatives’ – in transport
management from space, multiple-source energy generation
This will not be without consequence for our 120,000 strong
work force, with up to 10,000 positions in the US having
previously been identified by our senior management as
potentially coming under threat.
[2]
Address to Australian Defence Magazine Congress
Remarks by Raydon Gates, Chief Executive, Lockheed Martin Australia
Wednesday, 13 February 2013
Canberra, Australia
(Continued from previous page)
Clearly, Defence cutbacks do not come without flow-on effects.
Obviously as military procurement is affected, so will be the
rate of military innovation. In time, that will have a direct
effect on the flow of products and services potentially available
to our customers.
So continuing the focusing on Australia’s National Security
Requirements
I have already spoken about Defence cutbacks in the United
States and the Western world as a whole. There is, of course, as
we all know, a similar atmosphere of defence budget restraint
in Australia.
It is interesting that in some instances innovation has been
the answer to this dilemma – the ability to take the giant
technological step. The JSF is an example of this.
In Australia, our broadly-termed ‘national security’ operations
also face the impact of flattening government expenditures,
including the roughly A$5 billion of defence expenditure
adjustments announced last May in the 2012/13 Defence
Budget proposals, along with their flow-on effect into the
Forward Estimates. No doubt, ASPI’s Mark Thomson will have
something more to say about that.
The Joint Strike Fighter Program [Slide 3]
Despite the uncertainty of the US Defence budget outcome, the
Joint Strike Fighter program continues to be funded to the tune
of US$10 billion per annum.
With its re-baselined development schedule, the F-35 program
is now achieving, and in many areas exceeding the planned
flight testing schedule.
Those of you who picked up the ADM yesterday and looked at
the ‘Top 40’ will know Lockheed Martin continues to steadily
build its local business profile, and this year we climbed a little
closer towards the Top 10 of Australian defence companies
- moving up a notch from 12th to 11th. While the roughly
A$200m of turnover we reported in the ‘Top 40’ continued
the steady growth in revenue and employment over previous
years since 2008, the curve on the charts is flattening out. It is
getting tougher, therefore, we will need to roll up our sleeves to
make sure our business remains on the upwards path.
Aircraft production commitments are being met; 30 aircraft
were delivered in 2012, and 36 are planned for delivery 2013.
Last month, we began assembly of the 100th aircraft on the
production line.
Australia’s first two F-35A ‘Lightning II’ jets are being built
as I speak, and will be delivered late next year with the
capabilities required for Initial Operating Capability.
Given that Lockheed Martin is celebrating its 18th consecutive
year as the largest supplier of Information Technology (IT)
services to the US Government, it is not just a coincidence
that nearly 25 per cent of our Australian workforce is occupied
in supporting critical continuity of government Australian
Government civil agencies, in particular the Australian
Taxation Office.
Australia is a lead participant in a very attractive global
Industrial Participation package that will bring next generation
manufacturing technologies and highly skilled jobs to local
industry. We are tied into the production run of over 3,000 jets,
not just the 100 Australia will buy.
Over A$300 million of work has been contracted to local
firms to date, and we expect several billion dollars’ worth of
production contracts to be won by Australian companies as
orders for up to 100 aircraft are fully progressed. Sustainment
will further add to this figure.
The extension of our IT expertise, including in Cyber security,
more widely across the Australian economy - and at all levels of
Australian Government (both Federal and State) - is a big element
of the strategy we have adopted to span the coming years.
Hence the consistent theme in this address today. Moving
forward, we will need to evolve to be more innovative ... more
responsive to the needs of our customers ... and ultimately,
more cost efficient in the products and services that we provide.
It was refreshing to hear the comments yesterday about the
quantum increase in capabilities the F-35A will bring to
Australia over legacy aircraft. Minister Kelly’s remarks were
right on the ball. The ‘Lightning II’ is more than just an air
combat platform. As the Minister pointed out the aircraft is a
completely integrated air combat system. It’s the first of it’s
kind, and will deliver a huge increment in network centric war
fighting capability to the Australian Defence Force. It really
is evolution.
So what does this all mean for the defence business?
I have tried to cover a lot of ground today. So you may be
asking, what does it all mean to ‘The Evolution of Australian
Defence Industry’?
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Address to Australian Defence Magazine Congress
Remarks by Raydon Gates, Chief Executive, Lockheed Martin Australia
Wednesday, 13 February 2013
Canberra, Australia
(Continued from previous page)
If, as I predicted earlier, there is likely to be a decade-long
effect from the ‘new reality’ of budget austerity in the defence
business space, then we are going to see some changes.
simulation), eHealth or even opportunities within the natural
resources industries.
I spoke earlier of this when I referred to our new corporate
strategy. As well as continued growth in international markets
– in particular – the Middle East and the Asia-Pacific region,
we are looking to expand our business into new areas - what we
call adjacencies.
Those continuing to inhabit the defence business space will
understand enterprise growth will no longer be able to be
attained simply on the back of overall growth of the market.
Instead, individual enterprise growth will become more reliant
on attaining incremental market share. That is, from other
competitors. For a short time, customers will no doubt find it
a good time for buying. But there will also be greater risks,
including the sustainability of entities with which they are
currently dealing with.
Some of this landscape is already with us. Lockheed Martin
Australia is indeed a prime example of this ‘new reality’. Over
25% of our employment base is currently focused on critical
‘continuity of government’ agencies.
Our work with the Australian Taxation Office is now moving
into consolidation mode, and it is important to our growth plan
that the skills and workforce accumulated into that effort is
sequenced into other business opportunities.
For industry, this environment will require more upfront
investment in market intelligence. The ability to fully
understand the priority needs of customers - and accurately
translate these into finely tuned proposals - will be paramount.
As a result, our people are currently hard at work looking for
new opportunities in broader Federal Government agencies,
as well as State Government information technology and
administrative authorities to absorb this new resource.
In turn, customers themselves will need to become more
disciplined in the specification of their requirements, as the
acceptance of more finely tuned proposals from industry to
meet constrained budgets means that very large costs will
accrue should customer requirements be changed subsequent to
contract.
This is the ‘new reality’ of Lockheed Martin and, dare I say,
where I perceive the path is now being mapped for the ‘The
Evolution of Australian Defence Industry’.
If you are an optimist, these changes will end up delivering
more value for money for the taxpayer, as both industry and the
customer will be more sharply focused.
The concept is one of ‘ready mobility’. It is one of taking our
current skills and expertise, and re-packaging them within
more dynamic structures for broader engagement across the
Australian economy as a whole.
If you are a pessimist, these changes will substantially increase
the challenges associated with sustaining a viable commercial
business.
As an example, I would cite the Prime Minister’s recent
‘Strategy for Australia’s National Security’ – entitled ‘Strong
and Secure’. This document spoke of the overall security of the
nation being inextricably linked to economic stability, resource
sufficiency, good governance and social cohesion.
In short, we see the ‘new reality’ bringing with it large changes
to the structure of Australian defence industry, including
the loss of certain traditional capabilities, and a further
consolidation of the local specialist defence industry base.
Across our broad spectrum of business activities, Lockheed
Martin, like many of our fellow companies, has many products,
processes and solutions that have potential to address these core
national security priorities.
This may be a new and uncomfortable phenomenon for some in
Australia.
So let me conclude with some example of Lockheed Martin’s
evolution in Australia.
The Prime Minister also spoke of the generic ‘national security’
sector absorbing some 8% of Federal Government expenditures
– some A$34 billion in 2011/12 (excluding the aid program).
Being both an optimist and a realist, Lockheed Martin
is focusing on its core military customers, while also
progressively broadening the spread of its business activities
into the civil sector, be it education (via training and
That is a 35% increment over the $26.3 billion allocated purely
for Defence.
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Address to Australian Defence Magazine Congress
Remarks by Raydon Gates, Chief Executive, Lockheed Martin Australia
Wednesday, 13 February 2013
Canberra, Australia
(Continued from previous page)
Further, the combined $34 billion palls into insignificance
when considered against broader national and international
market cross-sector opportunities for the progressive diffusion
of military-derived technologies and hybrid systems into the
civil sector.
Glenn Martin that make up the legacy and current value of
what we are celebrating this year – 100 Years of ‘Accelerating
Tomorrow’.
It is also at the heart of what we collectively bring to our
customers in 2013, as we jointly address the continuing
challenges of the ‘new reality’ of defence procurement.
As always, we will need to be sharply focused on the objectives
that we set ourselves. Big numbers also bring with them big
challenges. Generally, and for very good reasons, military
specifications are set well above those of the civil sector.
They accordingly bring with them costs that are not readily
acceptable or transferrable into the civil sector.
Thank You.
So moving forward, and for all of our customers, we will have
to bolster our efforts in the identification of ways to cut costs,
increase efficiency and save money. This is the specialisation of
the private sector that all Government’s rely upon to improve
outcomes for the community.
That is the ‘new reality’ Lockheed Martin has been successfully
facing now for a number of years, and I believe forms a logical
pathway for ‘The Evolution of Australian Defence Industry’.
Thank you OR
Just before I close, I would like to mention the 2012/13
financial year marks 100 years since the Lockheed enterprise
was founded by two brothers (Allan and Malcolm) on 19
December 1912 [Slide 4].
The company you know today – Lockheed Martin – emerged
from a 1995 merger with Martin Marietta. That company was
founded on 16 August 1912 by Glenn L Martin. So it is a very
special time for us.
Both companies were founded at the dawn of manned flight –
with even the Wright brothers latterly teaming up with Glenn
Martin for a time.
Both the Lockheed’s and Glenn Martin went on to significantly
expand the envelope of flight - from miles per hour to beyond
the speed of sound. Ultimately, both companies contributed to
accelerating man’s conquest of space.
As you will see when you visit us at the Avalon Air Show, as
well as the superb F-35A ‘Lightning II’ 5th generation fighter,
we are also starting to roll out examples of our competencies in
unmanned flight.
It’s the commitment of visionaries like the Lockheed’s and
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