Wharton Aerospace & Defense Report

The aerospace and defense industry generates some $150 billion in sales each year in the U.S., driven in part by the booming market for cutting-edge homeland defense products and services. Currently, the industry is at a crossroads as factors like the slowing economy, strategic mergers and acquisitions, and an aging workforce present both challenges as well as opportunities.

Ken Krieg runs Samford Global Strategies, a consulting practice that helps clients manage and lead through periods of strategic change. Krieg previously served as the Under Secretary of Defense for Acquisition, Technology and Logistics from June 2005 to July 2007. During that time, he advised the Secretary and Deputy Secretary of Defense on such matters as research and development, military construction and advanced technologies. At the 2008 Wharton Aerospace Conference, Krieg spoke with Knowledge@Wharton about the challenges the industry is facing today and the future of Aerospace and Defense in America.

Transcript: Knowledge@Wharton Podcast with Ken Krieg

Knowledge@Wharton: Can you talk a little bit about your current role in the aerospace and defense industry?

Krieg: Well, as I like to joke, I’m a former bureaucrat who is semi‑employed. Recently, last July, I left as the undersecretary of defense for acquisition, technology and logistics. And so I am in a period of transition where I am doing a little consulting to the industry, spending a little time as a senior fellow to the Center for Naval Analysis, doing some writing, and spending a little more time with my family than I did over the last six years.

Knowledge@Wharton: So what are some of the industry challenges and trends right now?

Krieg: There are several. The first one, and it is probably not one you would look at first, is talent, it is intellectual property, it is human capital. Both the industry and the United States government went through a period in the ’90s where we didn’t attract a lot of new talent, where we were going through downsizing. And if you look at the average age of the workforce, both inside the government and in much of the industry, it is starting to age. Just the part of the world I looked at, we had 135,000 people in the acquisition workforce in the Department of Defense. Their average age was 49. We hired almost no one in the ’90s. So the 30‑somethings in the pool weren’t there.

I think it is incumbent upon the industry and the national security establishment to go out and attract and recruit the next generation. We do fabulous things. Getting the next generation of talent into the system is something we need to do.

The second challenge the industry has, obviously, is managing the changing set of markets. On the commercial side, recessions are tough in the aerospace industry. On the government side, political changes, cycles in investment move around. Managing through those periods of change is a challenge. I think on the technology side, the challenge the industry faces is how to balance between the desire for advanced technology on the one hand, and the need to rapidly innovate in field products on the other. And so managing that balance, particularly in the government environment, is one of the toughest things to this industry.

Knowledge@Wharton: Going back for a minute to the issue of the aging workforce: is there anything specific being done as far as trying to recruit young talent?

Krieg: I think that it is [a priority for] the leadership in industry and increasingly the leadership in government. It is on their radar screen. They understand it. Our challenge now, after not having been in the market for a while, is, given all the great things that a young engineer or a young scientist or a young professional could do, how do you make aerospace and defense/national security attractive. We work on fabulous programs and fabulous problems in this space. How do you go out and convince the 22-year-old or the 27-year-old, "Come over here and do this," because it is not at the forefront of news and issues in the front page of the Wall Street Journal. I think that’s the challenge. I think the leadership in both industry and government get it. Now how to do you translate that into programs, and how do you go out and do the recruiting?

Knowledge@Wharton: So you mentioned recession and the impact on the industry. How has the slowing economy affected the industry? Are there some specific ways?

Krieg: I don’t know. I don’t watch it closely enough to know. Did I say “recession?” I should have said slowing economy.

Knowledge@Wharton: Or potential recession.

Krieg: Potential. I am not the economist and I am not going to try to figure out exactly where we are. I think that the industry, from everything I can read, is holding up pretty well so far. So it is a matter of how customers feel and how long they feel uncomfortable and how much risk. They’re buying large capital goods. So I don’t think there has been a huge effect so far, but I think it is something that the industry has to keep in mind and understand.

Knowledge@Wharton: How about globalization? It seems to have brought about quite a change in the industry and I think you’d be great to speak to this. Have you seen how it has changed the industry in, say, the last 10 years?

Krieg: Fascinating difference between the commercial side of the industry and the military, government-military side of the industry. The commercial side is working through a process of globalizing actually pretty aggressively and you look at the new programs in development and there are hiccups and struggles as they go through it. But in general they’re taking advantage of global opportunities both in manufacturing and supply chain and obviously markets.

On the military side, it is a very different model for a lot of reasons. One is that all legislators, whether they are parliamentarians or congressmen or what, if it’s their tax dollars that are being spent to buy the governmental system, they’d like those tax dollars to be used on jobs in their districts. And that’s a difference between the challenges.

There’s also a set of regulations that are very different on the governmental side from the commercial side. The governmental side is much slower to pick up that opportunity than the commercial side. But I’d have the sense that that is an opportunity, maybe not as free and open globalization as the commercial side, but there is an opportunity ahead for more multinational cooperation in the aerospace industry on the government side. Look at a program like the Joint Strike Fighter, a consortium of nine countries working together globally to figure out how to provide capability.

Knowledge@Wharton: So the U.S. presidential elections are fast approaching. And do you anticipate any changes to the industry as a result of that, the outcome of it?

Krieg: The least safe thing for anybody formerly in politics to do is opine on elections.

Knowledge@Wharton: Yes, I am sure.

Krieg: So I won’t opine on the elections. On the governmental side, on the military side, sure go read it and understand it. I won’t actually opine on it. But the defense industry is historically a cyclical industry and so we have been in a period of fairly strong upward growth, both politically and then obviously driven by the cost of war and the challenges of wars.

Will politics and changes in elections affect that? Yes, certainly. Will they affect it as radically or as rapidly as any side might say in a campaign? I doubt it. But it will provide, as all changes in presidential elections and particularly ones that are as competitive and contentious as this one is, it provides the room for challenge for any industry that finds that a large portion of its revenue is associated with governmental programs. So how’s that for not answering your question?

Knowledge@Wharton: Very good! So what other potential changes or developments might impact the defense industry going forward? I guess I am looking for a little future spin.

Krieg: A couple of things, and I won’t do the global defense business because I don’t know it as well to answer your question as I do the American, the U.S. market. If you look at the U.S. military capital stock, in almost every class of systems, whether it’s helicopters, airplanes, trucks, ships — ships are the one notable exception — the average age of the capital stock is approaching, is at or past, its half life.

So on average, we’ve now owned the systems more than half the length those systems were going to be in place, bought a lot of things in the ’80s, didn’t buy a lot of the things in the ’90s, only starting to ramp up production in the 21st century now. That provides an interesting set of problems. But at the same time we are using them fairly aggressively.

So the challenge for the government will be: How do you manage among, how do you decide among investing in repairing what you have used; in buying the next set of weapons that are in production; and in developing the set beyond that. And that, I think, will be the challenge for the government and the industry in the years ahead.

Can you have all of all three? The answer is no. So, how do you mix and match in the various capital production procurement environments between recent modernization and the farther-out transformation effects of investment? I think the good companies will understand that and figure out how to play in those three environments, but it is going to be challenging.

Knowledge@Wharton: Okay Ken, thank you very much. It has been a pleasure speaking with you.

Krieg: Thanks for having me.