The boss of the UK company's North America arm is leading its assault on the world's biggest defence market
Although it rents just two storeys, the visible-for-miles red sign on its new Arlington office block symbolises BAE Systems' towering ambitions in the US defence market. From his fourteenth floor window, BAE Systems North America chief executive Mark Ronald can look out over the National Cemetery upon what has become – since last week's swoop for United Defense Industries (UDI) – the UK company's number one customer, the US Department of Defense.
The $4.1 billion acquisition of the maker of Bradley armoured vehicles will make BAE's North American arm the Pentagon's sixth biggest supplier. The move, once completed, will propel BAE into the major league of US primes with expected sales in 2005 of almost $8 billion – more than 25% of BAE's overall revenues and almost 40% of its defence business.
Since being appointed in 1999 – the year BAE Systems North America was created – Ronald has seen the US arm blossom from a $500 million business. Much of it is due to the 12 acquisitions – five of them last year – it has made, including DigitalNet and Alphatech. These latest acquisitions brought combined revenues of $700 million and boosted BAE's presence in the information technology and electronic systems sectors. But Ronald, who also sits on BAE's main board as chief operating officer, is quick to point out that existing businesses have flourished too. "We have delivered annual double-digit organic growth for the past three years," he says.
BAE's success in the US defence market contrasts with some of its European rivals, which have yet to achieve a breakthrough in terms of major contract wins. Part of that has been thanks to strong ties between Washington and London, which allows some easing of sensitivities about technology transfer. "We start from a strong government-to-government relationship. Some of these companies have got an element of government ownership, which means they are viewed somewhat differently," says Ronald, a 63-year-old New Yorker with a background in electrical engineering. But ultimately it comes down to performance. "We have been excellent stewards of the business," he says. "There's only one reason your customers come back and that's the quality of your products and your service."
In addition, BAE has made great efforts to be seen as a domestic US player. The North American arm has its own board, comprising US citizens, employs more than 27,000 Americans (before UDI is added), and you have to dig deep into its promotional material to find any reference to its British heritage. "Last year we created 2,000 additional jobs in the USA. We invested heavily in the infrastructure. BAE has put more into the USA than we've ever taken out," says Ronald. "Forty per cent of our shareholders are here in North America. We're as American as any other publicly traded company that does business here."
The UDI acquisition swings BAE's North American business significantly towards land systems, an area it sees as likely to deliver growth as the US military gears up for extensive urban-warfare deployments. But it also adds another weapon to BAE's arsenal of integrated defence solutions. Although Ronald admits BAE is not as vertically integrated as competitors such as Boeing, Lockheed Martin, Northrop Grumman or Raytheon, its spread of businesses and technologies mean it is more able to bid as a prime contractor for a growing number of Pentagon deals. "Our aspirations reflect the fact that our government has decided to buy essentially in larger elements, with fewer contracts, allowing us to integrate our horizontal capabilities," he says.
Even with BAE's almost exclusively US workforce, the Department of Defense's rules on technology transfer remain an issue as little transatlantic cross-fertilisation is allowed. "A more updated regime would be appreciated across the board," says Ronald, although he is upbeat about prospects for more sharing of technologies between allies. "Since our men and women are fighting side by side, we believe that anything that will facilitate the process of the warfighter having interoperable equipment is to the positive," he says.
The company is "very well positioned" to bid for research dollars from the likes of the Defense Advanced Research Projects Agency, he says. "We've been one of the most successful companies with DARPA. We've got a good track record of taking research projects all the way through to actual products that find their way on to things." Although last year's acquisition of Boeing Commercial Electronics for $66 million boosted BAE North America's fledgling civil avionics business, the company is less well placed to pitch for commercial research funds, says Ronald.
He sees some signs of the USA relaxing its resistance to buying from overseas suppliers, following a number of contracts going to teams using non-US platforms, such as the US101 presidential helicopter (ironically, BAE Systems was part of the rival consortium, backing the Sikorsky S-92) and Airborne Common Sensor. "Ultimately, it's about who provides the best equipment – the best capability for the lowest price," he says. "Jobs are important, but it's a generally open market. When we're putting men's and women's lives at risk, are we going to give them inferior products just because the alternative means buying from Spain or whatever? [The USA does not] have a monopoly on brilliant people and if there was a way of protecting against – for instance – improvised exploding devices, we wouldn't hesitate to buy from whoever had that product."
MURDO MORRISON / WASHINGTON DC
Source: Flight International
