Edited transcript of interview with Ronald Sugar, president, chief executive officer and chairman of Northrop Grumman, with Craig Hoyle, Flight International defence editor. The original interview appeared in the 14-20 February 2006 edition.
London, UK. Wednesday 1 February 2006
Q: You’re opening Northrop’s London office today. Why haven’t you had one prior to this and do you think that has affected your ability to do business in the UK on past programmes such as the Watchkeeper unmanned air vehicle?
A: We actually have had a London office. It was right here, but we never brought together all of our different operating elements into a single space. We never had the appropriate senior leadership or the corporate wide view that we now have. The company has $31 billion in sales and 125,000 people worldwide. Here in the UK we have over 500 people already and we have been here for decades through our current company and our predecessors. We have about $300 million in business here. What are we doing here? We are doing the overhaul of surveillance aircraft – the [Boeing E-3D] Sentry AWACS. We are doing command and control systems development for the British forces. We’re doing robots that dismantle bombs, air traffic control systems and work with the police information technology office, a fingerprint recognition system and a biometric system. One of the things that struck us is that we might as well create a much better visibility and more focus, because we’re already here and we can do more.
Q: You are not currently a top 10 supplier to the UK Ministry of Defence. Do you think the UK Defence Industrial Strategy (DIS) white paper is encouraging for your business and is it an aspiration to build your military business in the UK?
A: Having taken this step and then having the DIS come out subsequently, it certainly validates our thoughts that this is a good place to do business and that this is a place where we want to increase our business.
Q: The US Quadrennial Defence Review (QDR) is coming out on Monday [6 February]. What are your early indications on how Northrop is going to stand from that and is it going to have any impact on any of your major programmes in the USA?
A: There are not a lot of secrets in Washington, so we’ve had some indication of what we’re going to see. I don’t think we’re going to see a lot of surprising things. I think we’re going to see a continued emphasis on transformation, intelligence, precision strike and information as future enablers for warfare. Because of the way we’re positioned as a company we’re pretty well convinced that it’s going to validate the portfolio that we have. I think the emphasis is going to be on increasing information content in all these things.
Q: From an air side, there’s no reason to suspect that things like the Global Hawk unmanned air vehicle are going to reduce in importance?
A: In fact quite the contrary. We’re getting tremendous feedback from the government on the use of Global Hawk. We’re also in the process of test flying an unmanned helicopter called Firescout. We’ve conducted nine successful landings aboard a ship at sea. It’s pretty exciting – it’s a surveillance platform that can also carry weapons and fire missiles. I think the whole world of unmanned surveillance and frankly the future of unmanned strike aircraft is going to be increasingly important.
Q: One of the elements of the QDR will be to talk about a global reach strike capability. Do you see that as something like the X-47 coming forward or a B-3 development? Manned or unmanned, is Northrop in a position to meet the requirements?
A: This is right in the centre of what we do really well. We are the company that built the B-2 bomber, which is the most capable long-range strike asset in the world. We’re also building long-range long-endurance unmanned air vehicles and are also the prime contractor to modernise the [US Air Force’s] entire ICBM [intercontinental ballistic missile] force, so we are certainly in this game. Whether it will be manned or unmanned? I doubt the QDR will make that decision, but the need for a long-range strike system long-term is clear and undeniable. It will take many years to get it, but we will be there looking at it. Manned or unmanned? I don’t know, but technology makes it increasingly likely that an unmanned system could be an answer. It could also be optionally manned, or manned and maybe set up so that it can be flown without a man in it in a case where you have a pilot in dangerous circumstances.
Q: Do you think the general increase in US defence spending is going to continue over the coming years, or is it going to stabilise, or tail off even?
A: If you read the press casually you would come to the conclusion that there are massive cuts in defence spending, but that is not true. What you are seeing is slower rates of increase in defence spending in the US defence budget. I think in the UK you have exactly the same thing; single digit growth rates, but the sign is positive. Why is that? I think because the nations realise that even though affordability is an issue, the threats and the challenges in the world are not diminishing, so we have got to deal with that. I cannot tell you with assurity what the actual [fiscal year] 2007 budget will be – that will be proposed by the [US] President, discussed and then appropriated by Congress in the USA. For ’08 or ’09 and ’10 all I can tell you is that whenever we’ve seen five year projections in the past the out-year projections have always been wrong. Why? Because circumstances change.
Q: On the [Lockheed Martin F-35] Joint Strike Fighter [JSF] are you comfortable that the numbers are not going to fall significantly and that the international partners you have at the moment will stay onboard the programme?
A: I think the programme has made enormous progress in the last year and we are a major partner with Lockheed Martin and BAE Systems. This is a remarkable airplane in all three of its variants. We had some weight issues over the last year so we have worked assiduously to eliminate those. We have already delivered portions of the airplane. In terms of actual numbers, who knows? But I think these are out-year issues. The real question is: ‘Will the programme continue?’ and the answer is: ‘Yes it will’. This is the way forward, and my hope and my belief is that the alliance of international partners will continue.
Q: Have you had sight of the tanker Analysis of Alternatives yet?
A: It will offer a range of thoughts in terms of what alternatives exist to satisfy the [US Air Force’s] tanking needs. It will not be the decision document by which the air force decides how it wants to proceed. It will provide an input, it will influence the decision, but the air force will make the decision. I do believe that there is an urgent need to move on to get these tankers in process, because there is a long process before they can be delivered to the fleet. If you talk to the people in the air force who are responsible for operating the tankers and maintaining air mobility they will tell you: let’s get on with it. We believe it is increasingly likely that it will be a capable tanker which will also have transport capability. As a result of that we are increasingly excited by our offering based on an [Airbus] A330 airframe and that the Northrop/EADS approach is very, very competitive. It is entirely likely that it could be a split buy, for a lot of reasons, one of which is that there may be different levels of requirement and also because there may be some political imperative to do this for industrial base purposes. This is going to be well watched – it’s going to be probably the most heavily scrutinised procurement in history, probably more so than the Joint Strike Fighter procurement. We are excited about having a fair and open competition, and we want one in which the warfighter and the taxpayer will get the best deal.
Q: What is your opinion on whether it will be a split buy, or whether contracts will be competed annually?
A: Most likely it will be a block buy of a certain number of aircraft initially, either of one type or maybe two buys of two different types to get the development and the initial engineering done and then go to low-rate initial production. We are going to offer a tanker which has close to 60% US content and assembled in the USA in Mobile, Alabama. We have an agreement with our partner EADS to make a strong capital investment to establish the aircraft assembly and modification facilities there, and it’s going to be sourced with an enormous number of US parts and components. The US content of this airplane is going to be very competitive with the other offering, which itself has considerable international content.
Q: A programme that has hit trouble recently is the Aerial Common Sensor [ACS] acquisition. Is that something that you’re interested in going into again? If so, would you offer something larger than the Gulfstream G450 this time?
A: The Aerial Common Sensor competition was a direct competition between ourselves and Lockheed. Subsequent to the selection of Lockheed the ACS aircraft was terminated. The budget line will continue though. The army still needs urgently to have a capability near-term. They have approached us about that as we are the incumbent for the existing system. We expect to continue to support the army on that in the near term, and in the next several years maybe the reformulation of another competition or a follow-on opportunity. In the meantime we’re going to step in and help the army with the [Beech RC-12] Guardrail.
Q: How are you addressing issues at the moment about exportability of the Global Hawk, as it comes under the Missile Technology Control Regime? How are you going to get around that situation and meet interest in places like Australia and Japan?
A: Australia, Japan and also Europe, with the Eurohawk. This is one where we’re going to follow the lead of our government. I think there is a view on the part of our government that it would be good for our close allies to have this kind of capability and we’re certainly pleased to do that. If modifications have to be made to the regime relative to missile characteristics then I think that will be worked government-to-government. I think it’s doable, but it’s a question of if the nation wants to do this with its allies then it will find a way to do it.
Q: How do you see the process in Europe with Eurohawk and NATO’s Alliance Ground Surveillance project? How do you feel things are moving along on that programme?
A: They are moving slowly. We certainly hope to see the opportunity to actually build something for our European allies sooner rather than later. Sooner is better.
Q: Business-wise, your 2005 is looking like a turnover of about $31 billion?
A: In ’05 we did $30.7 billion and in ’06 we’ve targeted about $31 billion. We have $11 billion for information and services, $9 billion for aerospace – which includes our aircraft and spacecraft systems – $7 billion for electronics and $5 billion for ships. So you can see ships is our smallest segment, even though many people think we’re basically all shipbuilding. We have 30,000 programmes and no one is worth more than about 3% of our revenue. Our largest programme is for the Minuteman intercontinental ballistic missile.
Q: With aerospace worth round about $9 billion, is that a percentage of the business that you are comfortable with, or do you think that’s an area that needs to grow or that there’s too much reliance on it?
A: We’ve seen a significant growth in the last couple of years. We’re going to be reasonably stable ’06 to ’05 in that line item because of the business adjusting to a whole bunch of new wins that are basically competing with the development portion. And then we would expect over time to see that grow again. A large portion of the electronics wedge of $7 billion is actually supporting flight – we do all the radars on the [Lockheed] F-22, the F-35, the advanced MP-RTIP radar for the E-10 and a lot of airborne electronic warfare systems are also to do with flight also.
Q: In terms of the company growing US and UK-wise, do you think you are going to have organic growth, are you looking to make acquisitions anywhere, and what sort of money do you have in the pot to do that?
A: We have a very solid balance sheet. In fact our balance sheet is so strong and our cash generation is so strong that we’ve been able to have several share repurchases going on. We completed a $1 billion share repurchase last year and we announced a $1.5 billion share repurchase later in the year and we’re already $500 million into that. We have a triple B+ credit rating – the highest in the history of the company – and so we have the financial muscle to do a variety of things. What we’ve said is that we want to provide a balanced deployment of our cash to our shareholders between share buy-backs, dividend increases, reinvestment in our core business, and if appropriate, acquisitions. We’ve also had a few divestitures along the way. We are constantly interested in pruning our portfolio to make it as valuable as possible. We’re not just interested in being big for big’s sake. The appropriate acquisitions at the right time we will consider, but we’re not going to pay too much for them. However, our principle growth plan is organic growth, both in the US and the UK. When we have an opportunity to acquire something and it makes sense we’ll go for it.
Q: You hold the chairmanship of the US Aerospace Industries Association [AIA]. How influential is the organisation going to be in encouraging Washington to change export regulations where they need changing?
A: The Aerospace Industries Association is an influential advocacy group. It consists of over 100 of our largest aerospace and defence companies, and we increasingly recognise that commerce and aerospace is global. We also recognise the critical importance of working with the companies of our friends and allies on critical national security matters. The days of totally vertically-integrated national aerospace companies is long past. Our view is quite similar to that of those in the Department of Defense, which is that we need to streamline and modernise the mechanics. The idea of having a blanket [International Traffic in Arms Regulations – ITAR] waiver from Congress apparently is not going to happen, but I think there is room within the existing legislation to make it a lot better than it has been, particularly when working with our British colleagues.
Q: For JSF, are you confident that it can be resolved before the international partners need to sign on the dotted line later in the year?
A: I sure hope so. I think it’s in everybody’s interests to find a way to resolve this.
Q: Is the AIA speaking with a unified voice – does everyone feel that this is a good way to go, following the ‘Buy America’ attempts of the last two years. Is there still a big ‘Buy America’ lobby that is trying to prevent any weakening in the ITAR situation?
A: You’ll find that the Aerospace Industries Association member companies are generally of a similar mind, which is: modernise export control and do not put in place restrictive ‘Buy America’ legislation. Why would that be? One reason is that this is a global supply base, and in order for us to be competitive we need to rely on global access. There are certain things that we can’t get and don’t want to duplicate in country. Secondly, an increasing number of the members of our AIA are in fact foreign companies that do business in the USA – for example BAE Systems and Rolls-Royce – and they are part of the American aerospace scene. While there are those in Congress who might want to continue ‘Buy America’, it is not the general view of our industry; not in today’s world.
Q: You’re teamed with Boeing on NASA’s Crew Exploration Vehicle contest. Is it looking on track for a decision around August time?
A: We are prime contractor and Boeing is our partner. The request for proposals is out and we are going through the process of now proposing a manned capsule which will be a replacement for the Shuttle. We are very excited about the programme and the offering that we are going to have will be the only offering that combines all the manned spaceflight experience – Boeing was of course involved in the Shuttle, we were involved in Apollo through our Grumman days. We’ll submit our proposal in time by the end of March. The issue will be for the next several years: how much of the NASA budget per year will be dedicated to this, given the enormous cost of maintaining the existing Shuttle? How soon can NASA move from Shuttle to fully funding this system? How do you get to the future while still have to fund the present? That will be a challenge for the administrator and Congress to work through next year. But I think there’s no doubt it’s coming.
Source: Flight International
