Prospering in Tough Times
Thirteen years into its development, ’s crown jewel—the tri-service, stealthy Joint Strike Fighter—is finally set to make its international debut. The single-engine fighter is flying at the Royal International Air Tattoo and Farnborough air shows outside London. Before heading across the Atlantic, Lockheed Martin Chairman, President and CEO Marillyn Hewson sat down outside Washington with AW&ST Editor-in-Chief Joseph C. Anselmo and Senior Editor Amy Butler to talk about the issues facing the company and its programs.
AW&ST: What are some of the most profound lessons for Lockheed Martin emerging from the F-35 experience?
Hewson: This is a brand-new program that brings with it a lot of complexity—uniqueness in development, the program itself and the capability, coupled with three joint services and eight international partners. It is different from any program we’ve ever had. So the lessons learned are to make sure we have strong communication, fully understand requirements and are working through the process. Another important lesson is that it is about performance. We have got to get through a complex development program, ramp up production, get through the sustainment phase and then perform throughout.
How is Lockheed Martin infusing those lessons into future campaigns?
Program managers undergo very structured training. Our focus is on our customer. I’ve stepped up the discussion to answer the questions: “Are we listening and are we responding? Are we really understanding the objectives of our customer as well as we should be?” But that is something that’s part of our business anyway. Have I put an additional priority on it? Yes. I think it’s critical to have open, transparent communications with our customer and that we are listening so we can meet their requirements and truly adjust to their needs.
Years before you were CEO, former Pentagon acquisition chief Ashton Carter said the perception in the government was that Lockheed Martin’s JSF program manager would be fired if the company’s award fee went below a certain threshold. How do you benchmark the success of your program managers, and was that kind of mentality in that era a lesson going forward for the F-35 and other programs?
I can’t really speak to the experience you described. We rebased the program in 2010 and have done very well since then. We expect our program managers to really understand the requirements, stay close to the customer in terms of changes that might be occurring and perform on cost, schedule quality and technical. And that goes all the way through the supply base. If it results in some return—whether it’s an award fee, incentives, or similar things—that’s just secondary to meeting the objectives.
Since you’ve become CEO, Lockheed Martin’s stock has risen more than 85 percent—triple the performance of the Dow Jones Industrial Average. How do you explain those results when the defense market is in a downturn?
It’s due to the performance of our team. Our sales are down, although not as much as we anticipated. Our earnings per share and margins have increased, primarily because we are performing on programs. We have something like 6,000 programs that we’re managing on a day-to-day basis, and I’ve never seen us performing better. Our portfolio is very strong, and we are continuing to invest to keep it relevant. Our leadership team has been through ups and downs, they know how to manage through a down cycle and take advantage of an up cycle. That is what we’re doing—addressing affordability and making sure we have the right business structure in place.
Would you characterize this as a cyclical downturn in defense, or are we in a structural downturn because of all the pressure on costs?
This downturn is different. If you look back to the late 1980s-early 1990s downturn, we were coming off the [President Ronald] Reagan buildup, where we had made significant investments in defense. So when we had the “peace dividend,” we didn’t have to recapitalize as much, nor did we have the structural issues of the global financial meltdown we experienced in late 2008 and beyond. Now we are coming off of two wars and seeing a decline in need. But what hasn’t gone away is the intensity of global tensions, which keep spiking. That, coupled with budget pressures, makes this a different environment.
Arati Prabhakar, director of the(Darpa), laments the cost and time it takes to procure major weapons systems, and the inability to infuse commercial technologies into them during development. Do you agree that this is a threat to national security?
I believe that if we don’t invest now we will create a gap from which you can’t recover. So as a nation, you have to stay on top of maintaining technological superiority and investing in new capabilities. You can’t just take a pause and think you can catch up. You’ve got to keep investing [in R&D], just like we are doing in our business. That’s the lifeblood of our company. Technological development and innovation are what customers come to us for. We can’t stagnate. The same thing applies to national security.
Prabhakar was going beyond investment. She is saying the system is too slow, too inflexible and too costly in terms of development of systems.
Hopefully she is in a position to work with everybody else to streamline that. Darpa does a really good job of helping to spur incubator-type hard problems, or quick-turn-type problems. So that is a good model for streamlining. We look at the Skunk Works as another model. Many companies and organizations have asked, ‘How are you able to innovate so quickly?’
You say Lockheed Martin’s investment in IRAD (independent research and development) is going up, but as a percentage of revenues isn’t it below historical norms? It was just 1.5 percent of your revenues last year.
I don’t think it is below historical norms. You’ve got to look at R&D dollars much more holistically than just IRAD. We have a lot invested on the front end of development programs where we share the development cost. I don’t think we are down.
What are some near-term opportunities where you can use IRAD in campaigns, or even to help make unsolicited proposals to the government?
We are focused on some specific things I cannot tell you about now—which we see as near-term opportunities to help grow the business. As for the longer-term, we are putting an effort into hypersonics, directed energy, autonomy and robotics, and advanced materials like nanotechnology, 3-D printing and advanced manufacturing. Those are areas we see as potential game changers.
The U.S. Navy’s Uclass (Unmanned Carrier-Launched Airborne Surveillance and Strike) requirements seem to de-emphasize stealth. If they remain as they are, is it possible that Lockheed Martin would decide not to bid?
We’ll have to see how it all comes out in terms of the requirements. Our Skunk Works team has done a superb job working on the preliminary design efforts. We hope that it will line up with what the U.S. government wants. We’ve been engaged in it for some time now. We will have to assess it very closely and determine what we will do. We go through a very disciplined approach [to decide] a bid or no-bid. Of course, we are going to pursue opportunities we think we can win.
Russia says it will stop selling the RD-180 rocket engine to the U.S. If a new engine doesn’t materialize in the next couple of years—and the Atlas V launcher is at a stand-down—does it make sense for Lockheed Martin to stay in the United Launch Alliance (ULA) joint venture with?
There is about two years’ worth of Atlas inventory, plus you have the Delta IV and the ability to adjust your launch manifest. So I think that is the near-term answer to your question. No one knows if [launch services are] going to stop after that—it’s early days yet. Will there be an opportunity for another engine? Potentially, and we would support whatever the U.S. government wants to pursue in investing in another engine.
Has Lockheed started to think about life after Delta IV, given thatis aiming to disrupt the market? It is changing the pricing structure, and perhaps customer expectations as well.
If SpaceX gets qualified and makes it through the certification process, we certainly are prepared to compete with them. We have a great track record—83 successful launches out of ULA, 115 or so on Atlas itself—going back to when it was a Lockheed Martin-only product. We are constantly assessing what the competition will look like in the future. I think our price is pretty competitive. They have to achieve certification and be reliable—we’ll see how their pricing comes out. In the meantime, our job is to continue to provide affordable launch capability, which is what we’re doing with ULA.
Your predecessor, Bob Stevens, used to liken cyber to the “Wild West.” How far along is Lockheed Martin in developing a significant revenue stream in that area?
Cyber is an approximately $1 billion business for us today, and we expect to continue to grow our cybersecurity capability, both domestically and internationally. We are helping a lot of governments in that area, as well as large commercial companies. It is small relative to our size as a $45 billion company, but you have to recognize that cybersecurity is embedded in a lot of the programs that we have as well.
Are [Russian President] Vladimir Putin’s actions in Ukraine making Eastern Europe a more attractive market to Lockheed Martin?
There is certainly a big interest in that region for missile defense and additional capabilities. We are pursuing the Poland shield, where they are going to spend $5 billion on an air defense system. We have MEADS [Medium Extended Air-Defense System] as our offering. I’ve had discussions in the region with Germany, Italy and Poland, who are very interested in MEADS as a modern, very capable, 360-degree capability that I think gives them the ability to meet their needs. It is NATO-interoperable so it potentially could even be a NATO system. There continues to be interest in other of our products as well. Everywhere in the world, where there’s a demand for our products, we’re there to share the capabilities we can provide.
Education: Bachelor of Business Administration and Master of Arts degrees from the University of Alabama.
Career: Joined the Lockheed Corp. in 1983 as a senior industrial engineer, and rose through 19 management positions before taking the top job on Jan. 1, 2013.