A version of this article appears in the June 9 edition of Aviation Week & Space Technology.
It is a truism in business as in private life: Everyone wants to be different, but not too different. When it comes to aerospace and defense (A&D) companies wielding research and development (R&D) dollars, it also may be the only trend they have in common.
R&D spending by A&D companies—sometimes called independent research and development, or IR&D, to distinguish it from government-provided dollars—is taking on renewed focus this year (AW&ST March 31, p. 47). So far, most observations have revolved around whether companies or even the whole sector are spending enough on IR&D, with top companies devoting low-to-mid single-digit percentages as a share of their revenue (AW&ST April 21, p. 18).
But analysts and executives are increasingly looking beyond how much is spent to how it is spent. “We have believed that raw R&D spending measures can’t really capture innovation,” says Capital Alpha Partners analyst Byron Callan, a long-time A&D investor expert. “Microsoft spent $10.4 billion on R&D in its fiscal 2013, compared to $4.5 billion at Apple in its fiscal 2013, and yet we suspect most investors might consider Apple the more innovative of the two companies.”
In recent weeks, chief executive and financial officers of large A&D companies have offered clues to their R&D priorities and approaches as they reported first-quarter financial results and spoke to investor conferences about their outlooks on 2014 and beyond. Many touched on similar themes such as keeping their products and offerings affordable to government customers or providing leading-edge technologies. But as three of the biggest corporations show, there are also important nuances.
For, long-term investment opportunities seem to begin, at least, with unmanned and long-range strike aircraft technology, according to top executives. “We’re on the front end of where unmanned capabilities are really going to go,” CFO Jim Palmer says. A lot of challenges remain, he acknowledges, including technology yet to be developed, “but this is the future.”
Besides the company’s iconicUAV (Northrop is increasingly promoting its maritime-version MQ-4C Triton model to international customers like Australia and South Korea, while Japan appears interested in something closer to the U.S. Air Force type), executives are targeting the U.S. Navy’s Unmanned Carrier-Launched Airborne Surveillance and Strike aircraft, according to recent comments by Palmer and CEO Wes Bush. Other priorities include the Pentagon’s Joint Strike Fighter, the Air Force’s Long-Range Strike Bomber (LRS-B) and T-X trainer aircraft, as well as a “number of radar” systems.
Overall, Northrop is spending 2% of revenue on IR&D “year-in and year-out,” executives say. But rather than relying on the top-line amount when it comes to future investments, one constant in all discussions is how Northrop is researching, developing and designing for customer affordability, and not just technological superiority.
“Customers emphasize cost,” Palmer says. “I make sure I focus my IR&D to those activities that are going to likely give us the biggest bang for the buck, and at the same time think very carefully about your products today and how you can achieve the most affordable cost structure.
“Clearly on new product development, design is very important,” he continues. Once the design is set, “the ability to influence cost is more difficult. So . . . designing for the lowest-cost solution is absolutely critical on the front end.”
A significant example came in May in Melbourne, Fla., where Northrop unveiled a plan for building up its Manned Aircraft Design Center of Excellence. A new 220,000-sq.-ft. building near the Melbourne International Airport, housing an additional 300 employees by the end of 2015 is envisioned. If Northrop lands the LRS-B, for instance, the Space Coast site could eventually encompass 1,500 more jobs.
Arguably less about traditional R&D spending on a particular technology—e.g., stealthy, pilot-optional long-range strike—and more about so-called capital expenditure, the potentially $500 million investment nonetheless reflects the company’s approach when it comes to spending on future A&D products.
The Space Coast was built up during the Mercury-to-shuttle era ofprograms, so the area is home to many skilled engineers who are eager to work. “Northrop Grumman gave the Space Coast the boost it needed in its post-space shuttle economy,” Airport Executive Director Richard Ennis says.
At the same time, the move centralizes engineering for Northrop—in a lower-cost environment than California—and follows CEO Bush and CFO Palmer’s effort to streamline and consolidate a disparate corporation pieced together over decades by mergers and acquisitions.
So-called centers of excellence are not unique to Northrop, of course. Whenexecutives are asked about IR&D and priorities, they similarly point to their newly renamed and corporate-infused Space Technology Advanced Research and Development Laboratories, principally located in Palo Alto, Calif. In May they said the site has received a “major reinvestment” with the opening of an 82,000-sq.-ft. lab and that the organization—including facilities in Sunnyvale, Calif., Louisville, Colo., Billerica, Miss., and Manassas, Va.—will spearhead Lockheed projects ranging from solar studies and nanotechnology applications to additive 3-D printing and communications research.
Lockheed CFO Bruce Tanner says the company’s annual IR&D spending—1.5%, according to Aviation Week data (AW&ST May 5, p. 48)—has risen $100 million in the past two years. CEO Marillyn Hewson says the top Pentagon provider has invested more than $3 billion in R&D in the last five years, on combined efforts such as advanced materials and manufacturing, autonomy and robotics. Other areas of focus include unmanned space, quantum computing and cyber and energy.
But like others, Lockheed is heeding the Pentagon’s calls for paring program costs in light of this era of more restrained budgets. As much as new technology is important, so is maintaining competitiveness on existing product families. “So [that means] making sure we’re listening to our customers, extending the range, for example, on the” missile, according to Hewson. She also cites the Terminal High-Altitude Area Defense and Joint Air-to-Surface Standoff Missile. Other prioritized R&D includes the Long-Range Anti-Ship Missile developed for the Navy, and variants of the Littoral Combat Ship for the international marketplace—both are programs Lockheed has had to defend in Washington’s heightened austerity climate.
Yet Hewson says the company is looking ahead, too. “You saw probably the SR-72 that we rolled out, which was a capability we have been working on for a number of years and we’ve got a ways to go yet to demonstrate it. But having an intelligent surveillance-reconnaissance capability with the potential for strike platform is very interesting,” she says. “That’s just one example, but one that I think makes the point that if we’re going to continue to do what we do as a corporation we must be focused on being a technology leader, because that is the value we create for our customers.”
For its part,—which spends 3.5% on IR&D, according to Aviation Week data—is unlikely to say otherwise. Still, according to CEO Jim McNerney, there is a limit. Pursuing game-changing projects every 25 years or so is not viable. Instead, the company is focusing on maturing existing technologies and incrementally introducing them to the marketplace, like Apple iPhones and iPads now.
“It’s the market’s will: The more-for-less world will not let you pursue Moon-shots,” McNerney says. “We still need a very robust exploration of new technologies to mature so we can spiral them in, but to take less risk in the integration of these technologies as opposed to taking the risk of trying to integrate them all at once in some brand-new platform.”
McNerney points to the decision to go with the 737 MAX instead of a clean-sheet aircraft, as well as the way the A&D giant is approaching its, as examples of its path to the future. “There was a lot more we could have done to that airplane,” he says of the latter. “There was a big debate between an all-new airplane versus what we’re doing. I think the way we’re building the -10, that would have been a more unique airplane in a prior Boeing life,” McNerney continues. In contrast, “[we are] leveraging through reuse and common design the for a totally different mission.”
Boeing would try to do the same regarding any 757 successor, the CEO hints, if and when one is pursued. “We do not see a need for it immediately as compared to some other opportunities we have,” he says. “We’ve got a whole plate of opportunities that are going to drive this company very successfully and profitably over the next 15 years. But at some point we’re going to have to address that, and there will be some options there . . . to take the current 37 platform and figure out a way to expand it. There is an option with the 787-8.”
But again, expect evolutionary, not revolutionary. “We’re looking at all of these things,” McNerney says, “but our [mind-set is] to avoid the Moon-shot.”
In other words, whether it is Triton, the “son of Blackbird” SR-72, or a new mid-range airliner, industry looks set to deliver more of the same for some time.