It is unrealistic to expect defense contractors to invest more of their own money to offset declining government funding of cutting-edge research, especially without guarantees that governments will buy the technologies, says the top executive at avionics supplier .
Instead, says CEO Clay Jones, governments need to accelerate efforts to incorporate commercial products and technologies into their systems to lower costs.
“There is no argument to be made in this environment for pure company-funded R&D to sell into military markets,” Jones tells Aviation Week in an interview at the Paris air show. “The risk profile is far too high. I’m going to invest millions of dollars hoping that the Pentagon will buy it and Congress will fund it? I don’t know how you do that.”
Jones also believes that all of the hand-wringing in the defense industry about constrained military budgets in the U.S. and Europe is overblown. By his calculation, an anticipated decline in U.S. military budgets during the next few years will be offset by growing sales in emerging markets, leading to a flat but still massive market.
“In general the mood is somewhere between awful and terrible, and I think that’s overstated,” Jones says. “A bad day is the two recessions we’ve had in the last decade where I lost 25% of my commercial business within two years. I had to lay off 8-10% of my workforce, zero out all incentive compensation and close down facilities. What we’re seeing in defense is not a bad day.”
Rockwell Collins derives 59% of its sales from defense. The company’s internal forecast sees the U.S. market – which accounts for half of global sales – going from 5-7% annual growth to anywhere from flat sales to a 2% decline. But Jones expects that to be offset by 3% growth in defense spending outside of the U.S. in Europe, in nations such as Brazil, India, Turkey and Saudi Arabia.
“When you look at net worldwide defense budgets over the next 3-4 years we believe they’re going to be flat,” he says. “Flat is a heck of a lot better than the experiences we’ve had in our commercial business.”