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tv   Reagan National Defense Forum - Panel on Defense Technologies  CSPAN  January 30, 2018 8:42am-10:00am EST

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congressman joe kennedy. we will hear your reaction and comments from members of congress. president trump's state of the union address tonight live on c-span. listen live on the free c-span radio app and available live or on-demand on your desktop, phone or tablet at c-span.org. >> next on c-span2, navy secretary richard spencer is joined by technology a financial industry leaders to talk about the fence innovation. from the reagan library in simi valley, california, this is about an hour and 15 minutes. [applause]
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>> hello, everyone. good morning. it's great to see a beautiful day and such a beautiful place in a very important time for many, many reasons. but we here today to talk about the challenges that the defense industry and our government faces as a result of the pressure from wall street. how does that quarterly earnings report affect the ability of our government to innovate and protect us? if the big question, it's an important question with lots of ramifications for years to come. here to discuss this and attack this problem, we have mr. michael leskinen, executive director, aerospace and defense, jpmorgan. he is the wall street guy that's basically demanding all these things so you have some good insight for us. we have mr. raj shah, managing
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director, diux. he's part of the entity, $200 million from the government had out in silicon valley to go out and acquire new technologies and find the need is, coolest things on the horizon that can really help us. we had the secretary of the navy, honorable richard spencer right here next to me. and we have mr. michael strianese, chairman and ceo of l-3 technology is also looking for a lot of this technology that he can then present to the secretary to see what it is that can best protect us. i'm going to take it off, we'll have a conversation and what remind you all to jump into the conversation, you can do that online through the rndf mobile app anyone watching at home if you have any questions just submit them to us on twitter, and will be watching for all of those, twitter at hashtag rndf
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for anybody who's watching online or on fox business now. so let's kick it off. first michael, tell us about what it is that you want from an investors standpoint from these companies, like michaels, what is it that you want, what is its unique and what do your investors since expect. >> was for some of what he thank you for being here. it's a real privilege to be with this distinctive so thank you for that. the topic of putting more money into the business is something that the are doing more of come you're seeing more i read. as an investor, there are trade-offs. i can take a dip in. i can for a buyback with the companies can invest, invest in the business. for me to want to allocate my
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shareholders money to companies that are investing, i need to see three things. i need to see stable budgets. that's not necessarily ten or 20% higher budgets but stable budgets that can be planned on. china has a five-year plan. you can plan for five years. i need to see that. i need to see companies be disproportionately rewarded for taking risk versus for taking a low risk in production programs. that should be a lower fee versus programs that you may innovate, spend irad and then you don't when the production phase. that does not instant investment and i would rather see dividend buyback if that's the case. thirdly, i think important from the department standpoint is you want to see companies rewarded for past performance and vice versa. so if your are on a tanker or an aircraft program and you do not deliver on time and on budget, that should have an impact on
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how likely are to win the next program. when i i look at how programs e awarded that doesn't happen today. so those are the three pieces i would focus on. >> mr. secretary, when you hear this and you know there's this pressure from investors like michael and all of wall street they want the most out of these companies, how do you think about in terms of making sure you're getting the most in terms of the most innovative technology that is out there? >> it fascinating having come from wall street, everyone is saying old friends are calling up and sing what's it like to work inside the pentagon? and if you look at the job of the secretary of the navy man, equip, training deliver, a title x hat ad-aware is running a business. i have a budget, i deploy funds. i get the equipment. i delivered to the combatant commanders. it is imperative for me to be a
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responsible consumer, a responsible client. the word that we are putting out right now, and this starts from the top on down through, we want to erase the whiteboard and get away from transactional relationships in the general sense and really welcome partnership with the industrial base. what do i mean by partnership? what i mean is shared risk, should benefit. we want to make sure that we are taking risks and at risk are being shared. the government shouldn't take 90% of the risk and leave 10%. has to be distributed. it's incumbent on us to send that signal out to the industrial base. norm augustine told the ones stop writing about industrial base what is doing to the
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pentagon. they are simply mirroring the system that you have. and it's human nature. it's true. we have to change that and we're looking forward to opening the doors for this relationship concepts. we have a relationship now but to strengthen it because i don't have enough the funds that a need for the requirements that are being heaped on me. i need to increase my capabilities, and every single aspect why do business and the only way i can do that is by working in partnership with the industrial base, and in that line that sends a trickle down to michael is going to make the investment appropriate because capital is the universal lubricant for my business, in order for my suppliers and my supply chain to function correctly. >> you are caught in the middle because you have michael who is demanding those quarterly earnings. you have a client that wants the best technology for the future so how are you fixing that? >> there is the dilemma. we are a public company subject
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to the competitive pressures of capital markets. we have our customers which we care about that new technology and need investment. we have our shareholders that would like the market return. we're not the only industry you can invest in. there are other industries that i'm sure raj sees everyday on the west coast that produce returns way greater than the defense industry, but we are an industry known for being predictable over the long-term generating reasonably good returns. however i think as return of the past decade of shrieking flat budgets it's been difficult for many of the companies in the industry to make investment decisions that work for the long term because of the lack of certainty whether there would be a program, how long it will take, whether not to get the money back, whether it will be terminated. you run into problems and you get a nasty call from that guy, or even worse 11 activist show
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up. i've had the personal pleasure of dealing with that. for truly we are here and they are not. i'm not happy to say that, but it's a dicey environment. we want to keep our customers and our war fighters the best fighting force the world has ever seen. the u.s. military has always had a substantial technology advantage, and i think with a bit of a deficit that is occurred over the past decade that needs to be brought back. we need to be again competitive within the capital markets so we are viewed as an attractive place to invest. it's a balancing act. >> for sure. i want to circle back to that because i think activist investors are very march -- very much a new phenomena in the last ten years, lease the extent to which their operating. that makes it challenging for any business that ads on a whole other lit when talking about the defense industry because it's so
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relevant to you, mr. secretary, and to all of us in keeping us safe. before i do that i want to go to raj for a moment because you're part of what the government is trying to do to discover these new technologies before l-3 does or before wall street does. tell about your process and what you're doing. >> thank you for the invitation to be here as the department of defense's representative out in the valley. it's great to be on the wall street panel. you know, the nature of warfare is changing and it's being driven by technologies whose development being led in the commercial sector. there are sloughs of the startups, tech companies that are building technology for the own commercial market that are going to play a major role in the defense of our nation and on the battlefield. the pentagon used to be a monopoly buyer, buying the stuff
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ourselves. that world is changing and has a lot of implications for us. one, these companies are going to build this technology whether or not we participate or not. i think about artificial intelligence and autonomy, how it is disrupting the financial markets, disrupting technology companies. it's embedded in all the phones that you and your pockets right now. you have real-time translation of any language. that didn't exist five years ago. the world of self driving cars on the way. all these things have military implications. because, two things, one is, tech is moving so fast, and two, it is accessible to our adversaries but we don't have exclusive rights to them. what's most important is it's not necessarily just the protection of that technology, it's how fast we can ingest and incorporate that into the hands of our men and women on the battlefield. i think we're seeing a slew of
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different things that are really interesting. we are seeing the use of drones, commercial low cost of drones by our adversaries, some noted cases of isis and others taking a hobbyist drone and putting a grenade onto it and impacting our troops are we have to think about our approach. i think the last time there was a discussion about how much dating we collect of overhead imagery, we do. we can have humans looking at the screens. so that's another piece of critical technology and we can talk more about it but the good news is that the capital markets, even in early-stage capital markets, are beginning to look to department problems as one they want to solve and invest in. >> mr. secretary, how has investment in technology changed over the last several decades? when you think about the military it feels like there was
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a time in history where we report all kinds of resources into defense, and we backed off that and i think defense has had a change of many ways, including military because much of this now is outsourced. that may be far more efficient but walk us through that change and the current state of things now. >> it's very interesting, trish, if you look back to the days when darpa was new and you really had the department of defense leaving innovation, literally between nasa and dod. they were probably the biggest innovators back in the 50s, 60s and 70s. commercial world hot up. the last ten, 15 years you look at what's happened to us on a budgeting cycle for the dod specifically, and the requirements, the tasks we have received to do our job. we no longer had the money to
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make those investments. it naturally trickled away. if i was to look back over the last ten years, and i just talked about the responsibilitt i have of being a good client to my suppliers and my supply chain, we have obviously, i won't say we have set a failed signal. we sent the signal we are not investing because you have the primes in the largest stock buyback and dividends, and that's because they don't find any opportunities that we're giving them to invest in on a business case basis. so bad on us for not crafting a good enough message, more importantly bad on us for not having a sustainable source of resources to signal to the marketplace that we're in this for the long run so they can afford to invest the dollars to make the returns so michael invest in their companies. it's a true relationship. it's symbiotic, and i don't know
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if it was truly understood inside the building. the responsible of being a good client, to be very frank with you. >> michael, at l-3 you want the best most cutting edge technology to show to your client but how do you do that in an environment that is so driven by a bottom line? how critical is knowing that your client is going to be there in support of the projects that you are investing in in terms of your overall portfolio? >> we are very confident our client will still be there. the question is, will the congress fund our client? we like all companies have invested. we went into the public is an urgent requirement because of a deployment or whatever the case may be, a new thread is identified and you need to move
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forward as they say and invest it a new technology or a new system that can counter, you know, keep our men and women in uniform safe. making those decisions have become a little more challenging when the funding is not as clear. so unlike our adversaries, whether it's russia or china who have state run industries that can they can do anything they want without, they can act a lot faster if we don't make anything in the pentagon as you know. there are not tanks and ships going out the back door. it comes of in industry and toe from us. we need a tighter relationship in terms of the budget certainties, and things that give us the confidence going forward a little more, not run into problems with our investors. >> i can put a point on that which i don't know how many of you in the room have really paid attention to this, but the budget control act, sequestration and the caps, i
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was asked isamu board of directors all-male to ask what that has cost the navy. the last nine crs have cost the navy, in the neighborhood of $4 billion. that's not opportunity lost. that's putting $4 billion in a trashcan, putting lighter fluid on it and burning it. that's exactly, this is the symbiotic relationship we have to have with the industrial base. that's a tough environment to work in when we think we can turn a switch on and off to build a ship or to fund a project. the whipsaw effect let alone what happened to the pentagon delivery schedule and cost of dollars, it trickles down to our supply chain and our suppliers. in a magnified manner. >> if i might expand on that. the returns of the defense industry very good. this is a great business. it's not a question of not investing in a because of their current returns. it's a question of if i invested
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it is a going to drive more revenue in the future and with sequestration you don't get there. with oco funding requirement you don't get there. that's the hesitancy to invest. you said mike is in the middle between customer and investor and that's not exactly true because we are outlined. the business is good. if i see revenue growth driven by irad i'm going to support investment all day long. and the second point i would make is on development, on new programs. ..
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>> and for a company like l-3, if the acquisitions rules. are you out there in competition finding these new technologies. and you would have to acquire them because i would think it's cheaper to acquire them than to put capital expense into something and know know whether it's going to pan out or not. >> true, and i think that either there's interest or more expensive. but, you know, i would say just for discussion, follow the money the past several years, this industry has plowed tens of billions of dollars into purchases. why? because we had a certain return. it's risk free and that has the
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defensive earnings. it wasn't in technology, it wasn't in future production, very simple, that was the only place to go during a number of years when the budget was contracting and shrinking, you know, and looking forward to a smaller pie for the next year and there's not a lot to think about that if you wanted to sustain your company and operate in the capital market. that's what we've seen with this coming at the end of this cycle because we've shifted back from, you know, predominantly repurchases to acquisitions and r & d and bought a couple of companies the last couple of years and invested in areas that are not quite funded yet like undersea vehicles. but we have enough confidence our clients are going to get there. >> michael hits the nail on the head. one of the things, we've been nibbling around the edge for reform for acquisition policy. the funny store when i was spooling up for confirmation, i
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got a briefing on the acquisition instruction, instruction 5000 and had two generals and two admirals briefing me and at the end of the table was, you know, marine corps captain and a navy lieutenant marine corps captain and i loved speaking to the junior officers and they're through. and what do you two think about the acquisition program, instruction 5000 and the navy lieutenant chins it over to the marine and the marine kind of looks down and says, well, sir, if it was up to me i'd stamp top secret on instruction 5000 and leave it on the chinese embassy steps and they adopt it and we win. [laughter] >> very good. >> that kind of sums it up. so we actually have to get after this. we're doing great things like wciux and we have cells, fast
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buy cells, we have to make sure it inpregnantnates the whole organization because we are our own worst enemies in some cases. we sit here and from my point of view, we say we need this, need this top line, need, need, need. we do, but we also need to do work inside the building and make sure we spend your treasures the best way we can and we have to have the tools to do that. industry is ready. as i referenced earlier with norm augustine's statement, if we change the process, industry will adapt to that process and we have to go back to where we both share risk and share returns. >> and i'd like to actually address that and hit on the last comment about the partnership between the commercial sector and industry, you know? commercial technology and businesses, underpins both the hard and soft power of this nation. i don't think there's any daylight, shouldn't be any daylight between the innovation and economy that we've seen crop up over the last decade or
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two, and our important partners in the industrial base. to be more specific, you have young companies that take high levels of risk, high technology risks that are backed by venture capitalists that understand that risk, but when they find something that works, a particular type of technology and then we want to bring it to scale. and the department 3 million people, the largest organization in the world, if you want to bring it to scale, this is where our industrial partners are absolutely vital. they understand the process and they have the relationships and they know how to work in austere classified locations and so, you know, what we've seen from our vantage point is the most successful efforts are taking our best young companies, emerging technologies and fusing them with our industrial partners to say, you know, let's bring the strength of both together and we can do it in a timeline
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that's much, much faster. >> michael, in terms of where the companies are trading, i think that, you know, in part the surprise over the election caused a lot of upside in defense companies that wasn't necessarily built in. so, the sector, as you've pointed out is doing extremely well. where do you see it heading over the next six to 12 months, the p.e. ratio sort of overall for the sector, what the valuation is where it goes or where it can go? >> i'd like everyone in the room to buy j.p. morgan's funds-- no, look, the sector is valued at top 5 percentile of where it has been historically on a relative basis and so to see the multiple expand from here is tough. but to see contract, i think is unlikely as well because the cash profile with business is strong. the budgets have turned, the
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degree to how much they have turned is still in question, but we're headed up from here. and the returns are stable. and so that's a very nice setup in a relatively slow growth world in a very attractive industry so i think that's-- i think that that's stable and that you see earnings growth drive, stock performance from here. i'd like to see the players that are investing irad, as an american, i'd like to see the customers that are investing in irad get a disproportionate part of the topline growth. and that would be from the topline growth and that's what the department would like to see. an opportunity, talking about partnering, it's a commercial analog. when you think about partnering for success, some in the industry says that boeing has gone too far with that, but the dod could adopt it and that is,
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on key programs, legacy programs like the 737 and the triple 7, there are contracts in place for boeing to deal with flyers, spirit air systems, ut or honeymowell. they've been trying to drive costs out and so what boeing has come up with, partnering for success, okay, we know contractually you can charge us x for this piece of landing gear and we can't outsource it to someone else, so this is a monopoly like what we see with the primes in many cases in dod. but if you work with us on this program and when we come out with the next airplane and do the next middle market aircraft or do a-- next variance of the 787 you'll get business with us because you're working with us, partnering with us and that
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requires program managers to work across programs at a higher level and that's something that i think is low hanging fruit for the department to do, and here is where we're going to have to change our acquisition parameters. one of the most fascinating things that i've had to do so far is the pa program which is new navy, anti-sub. it's a 737. and if you look at what goes on with the 737 on the commercial side, and now we're a military buyer, you almost think we're built commercial off the shelf, it's not quite there, but it's pretty close, and you look at exactly what michael is talking about, and boeing has a service, boeing commercial services where 24 hours the plane doesn't remain on the ground more than 24 hours. they dispatch the parts, et cetera. and i was saying, why didn't we sign up, why can't we take the mindset that we're buying readiness. i don't care-- i don't want to actually own
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parts in the bin. i want to buy readiness so i'm buying 99% up. how the supply chain gets it there and dos it, that's the value they provide me and that's what i compensate them for. we couldn't use that system because there was no way for us to validate what a true price was. because of the way that boeing handled it which was not their fault. that's the way the commercial world looks at it. so, to adopt some of these programs, which are low hanging fruit, we're going to have to really change the way that we do business. >> michael, what do you think some of the most exciting technologies are that you have in your pipeline in terms of what's on the horizon and how does that get presented to the secretary? >> well, we have regular dialog with the secretary and the staff, but we've invested this year in undersea vehicles, including much-needed propulsion that does not rely
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on lithium ion batteries. we don't want lithium ion batteries on our ships and subs and come up with something else, and we have. we'd love to demo it shortly. in fact, i think the navy has witnessed a couple of demonstrations and is encouraged by the progress that we've made. that's one example. another example, where we saw a problem that needed solving is the congestion in the airport, going through the check points, something everybody loves to hate. >> indeed. >> and when people don't recognize who l-3 is, they have to do this and they know who we are when we go through the airport. and we've invested in a number of companies that have technology or we've developed it on our own where the traveler does not have to divest liquid from their commuter because the machine will identify an energy material or not. and and the hope is that we'll
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get the lines moving faster and the public will be safer and we'll get some enjoyment back in our vacation travel, but-- >> that's a tall order. but we'd all appreciate it for sure. so walk me through the process. are you, mr. secretary, saying, this is our problem. michael, can you solve it? or are you, michael, saying, hey, i'm seeing this and that and this and this and this on the horizon, maybe makes more sense for the navy. >> more of the former than the latter. we have to shift that. our primary job as defined is provide the requirements to the industrial base of what our problems is, what the problem set is and say, okay, you guys go back, spitball, do your r ann -- r & d and come back with a solution. we have to be out there with a
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periscope looking around, going, here are atypical or nonstandard developments that are out there in the marketplace that we wouldn't see normally through our traditional supply base or suppliers. we have to be doing both and we have to be doing the latter now more and i think that raj is an example of how we're approaching that. it's a communication give and take. >> raj's group is pretty recent, 18 months ago? >> it's a 18-month organization. when we're talking about capital, one of the challenges is, how do we adequately fund and invest in commercial technology that, you know, may not meet that quarterly earnings impact? and resident real challenge and driver here is that our adversaries are not waiting. they recognize this. so i'll share a couple of stats that we've looked at.
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if you look at all venture deals in the united states in 2016, 12% have an investor from china. that's up from 6% in 2010. if you look at certain technologies, such as robotics, in particular, 17% of the funding was from china. and so, you know, you can make determinations or observations of, you know, why they're doing it, but if we think these things are going to be military relevant in the future, them getting a seat at the table early, prior to our regulatory sifius type of activities take place, that's a big deal. and so, you know, it's quite-- they're quite open about it. so they set up two venture funds this past year, there's a billion dollar fund focused on taking technologies from our universities and commercializing it, entirely chinese funded. there's a $500 million fund
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started in san francisco that is focused on these technologies, artificial intelligence, autonomy and it's the sovereign wealth fund. so, you know, it's the challenge for us, i think, is, you know, we look at our economic arm and our national security arm quite separately. and if our adversaries don't and take a partnership. >> it's alarming, 200 million and they've got a billion, and 500 million-- the chinese, i mean, look, let me ask you this. are they spending the money from what you've seen wisely or are they just throwing money at the problem? i guess if you're throwing off, you're likely to get lucky on a few, but is it money well-spent or are they just gobbling up everything they can think of? >> and that's a venture, and you don't know if it's a good
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bet until five years down the road. maybe it's a foolhardy enterprise, but if we know these things are important, it's incumbent on us to play a role in that. it doesn't necessarily have to be investors. we're not an investment fund, we are writing contracts quickly to bring that in. but how the secretary says, how do we do this faster, how do woo he prototype and experiment and that's the model that needs to change and the good news is that we're seeing that in the department. one of the critical inhibitors for a young company to work with the department, particularly if it's a software business, is you know, if you go into any leading technology company or start-up and wherever and you walk into their office and show me your server room and you open the door, there's one comcast box. that's their server room.
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no one has racks and racks of processing memory, they use the clouds. and you say to the company, come to the department and build these, and there's a rack and do something they haven't done since the '80s, it doesn't work. and the department launched an effort and the secretary has put a directive out to help the entire department embrace cloud computing and such as processing and memory, that is how do you build applications in the cloud. and across multiple classification levels. i think we're starting to make those right steps to be agile. >> and let me put an example out here just so you don't think that the dod is the complete trogladyte. we might have calluses on our knuckles, but-- >> and going out and seeing the sailors and marines, i was out
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on the west coast and had a chance to stop by an amtrak repa repair facility, which is an armored track vehicle. and there was a white connex box and it was additive manufacturing being done in the field. and they had a couple of simple plastic parts, health visor, adapter, had a four-week wait and it was a $400 part that they were making right there for, you know, $14. but i got to the end of the table and here was this amazingly elegant turbine that looked like if you'd cut a sea shell in half it had curved blades and it was part of an ejector for a abrams tank and without getting too technical
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and spins dirt out of the again begin. and 19-week delay from order to delivery, $23 part. a corporal in the marine corps took the measurement tool, the development tool home with her on the weekend and put together an algorithm to cad this thing, comes to work on monday, we have someone who works there, a civilian, here is the algorithm, can we get this produced? this is outside of san diego. they find someone to cad it, ap put this thing on, first one failed, second one got it. they're doing this in one week. if you take rand's equation for what a corporal cost in the marine corps, times 14 hours, plus the aluminum, plus the milling charge, it was $2300 to deliver that part. this is the speed of relevancy that we need to get to.
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this is the application of technology. we're actually doing it. the reason i wanted to bring this up to you all, to let you know this is happening out in the field, but this is the speed of relevance we have to move at. ironically, capital is not the issue, capital moves quicker than lightning. we have to start moving in the speed of relevance. >> indeed. what do you say to that, michael? has it been challenging for you guys, particularly-- >> well, these printers that can generate spare parts in the field have been something of great interest. from a logistic standpoint chain that takes 30 days to get a part to a remote base. for not a lot of cost you could have one of these printers generate the part on site and especially when we're taking care of aviation, you know,
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aircraft, helicopters, vehicles, there's a steady stream of part requirements and, you know, that's an application of technology to a real problem that is existing today. i mean, given the number of basings around the world for the u.s. military, the logistics chain is quite complex and looking at the 24-hour turn around on equipment is kind of the goal. >> raj, who do you consider the biggest threat in terms of having the most cutting edge technology for their military right now. >> the biggest threat, i guess candidly ourselves the department of defense in that y you-- it change a part and i think we're fortunate, we have a senior leadership team that is very focused on modernization
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and ensurge that we never have a fair fight. the operators that we have on the ground, you go out and see them. they're the most innovative people in the world. we don't have an innovation problem. you find the young corporal, we need a part and doesn't want to wait to get it built. what we have is an incentive problem, right? we have built a set of structures and rules that does not encourage speed, right? you have processes where no one gets-- you don't get fired for going slow, but you might get fired for making a small mistake. how do we begin to make those cultural changes so that, you know, speed in and of it's he have is is something that's rewarded. appropriate risk. we take risks all the time on the battlefield flying an
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airplane, it's a calculated risk. we need to do the same in our administrative processes and i think i look internally to the dod and the d.c. at large, but the good news is we're starting to see change. things are happening. >> michael, forgive me-- >> can i do a punctuation on that. i can't stress that enough. over the past maybe it's 15 years or so, the organization has-- i, in my opinion, has drifted away from risk management to risk amelioration. we're trying to get risk out of the equation. i can get you to zero risk, i can't afford it. we have to become true and get back to the game of managing risk. it's not going to be perfect. and i don't mean to talk cavalierly when it comes to life, that's what i'm talking about, directly, we have to be able to quantify the risk and
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manage the risk to get the best effectiveness and management out of what we're doing. i think we've strayed away from that as an enterprise and we need to get back there. >> any ideas how to do that given your perspective on things as an investor, you're constantly managing risk in your portfolio. how is it that this industry grows quickly enough to meet the needs that we have while, you know, simultaneously being careful enough? >> look, if there's budget, there will be plenty of investment in this industry. it's a question of budget certainty. it's a good-- . some more money? >> it's a good return in this business. we need to see a clear path to budget and that's a political question and that's the biggest cause of hesitation. i would make a point though on unno evaluation and manufacturing, so we're talking 3-d printing and additive manufacturers. there's a growing number of products that can be produced
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that way cheaply and ten years from now there will be a lot more, but i would say that the nature of our contracting as a government disincents that in many ways, if a cost costs $2300 and 10% on sales, i make $230 in dollars. if i can figure out how to make that for $50 and there's no flexibility within the accounting that says, well, we should still be able to make a $200 profit or a lesser profit, you're actually cannibalizing your own business and that's backwards, that's not a partnership. and so, i think more innovative thinking around that could go a long way in pushing towards, you know, we should be focused on bringing the cost to the taxpayer down for the best product for the war fighter and that's not always the case. >> michael strianese, how do you think about investing in
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different technologies when competitors, both the u.s. and overseas are investing in similar technologies, and how do you get there first to make money on it? >> we're no stranger to acquiring companies, probably been one of the more active players over the last 20 years, so, you know, it's always a make versus buy. we can invest in r & d and get there on our own or buy the company. and talking about the underseas, and power plant, and battery-- it's not really a battery, there's current. it was a start-up, i believe came out of mit. and you know, it's a bit of a premium from what we're use today paying and we had a lot of confidence in it and we just bought it. and we have it today. not two years from now. and you know, we've had the confidence in our decisions when we make skwigs acquisitions like that.
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and same with airport security and buying technology that is going to complement what we're going to do and buy the company. >> are they-- where are you seeing the most innovation, here? i know that israel has had a lot of tremendous innovation as well. where are you acquiring it from? >> well, generally privately-owned individual startups that are-- they're not all garage shops, but they're generally small companies that have found a technology and have a number of customers they sell to and we could take that technology and apply it to a broader problem that we see or fills a niche that we have or will short and development cycle that we're undertaking. it's, you know, a great model and served us well over the past 20 years. >> mr. secretary, what is the technology that you really want right now? >> there's no one specific, trish. what we're looking at, i think a fourth multiplier for us,
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when i'm wearing my navy title 10 hat, which is navy and marine corps is the unmanned sector, both in the air, on the sea and under the sea. i think that neural networks, artificial intelligence, whatever you want to call it, i think you heard the general saying the other day that we need to have equipment that thinks quicker, smarter, shares and learns, and that's the punctuation mark, to learn. and that's going to be a fourth multiplier, also. >> and i was interested in this, asking how much time you spend in a given week, how much if you were to divvy up and say percentage-wise, how much do you focus on this new technology and what's next? and the number was quite high, but i'll let you share it. >> it's 25% and that is, and a footnote for that, that's problem solving with a technological bent to, yes. i mean, it's front and center. >> and what about you, michael?
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as ceo of l-3, how much are you focused on what's next, what is the technology that will drive you guys forward? >> you know, in connection with our business units and we put our heads together quite often, it probably runs about a third of the time, reviewing where we are, where we need to be. >> and that's like 100% of what you do, raj. you're always looking at the next thing. how do you guys think about the things. and they're publicly traded, but some of them might come out on the ipo and are you looking forward that next big thing as well? >> sure, well, certainly at j.p. morgan, on my team, we're dealing with large cap stocks and so when i think about the next big thing, we're looking at the big program, b-21,
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virginia, columbia class. the confidence we have in those programs being funded, and the confidence we have in the prime's executing on those programs, and so we will-- i will differentiate where we're shifting our investment based on that forward look, and i think we're different in that we are looking at five years, despite all of the uncertainty, that's my job is to think about what this company's going to look five years from today, not what they're going to earn the next quarter. that's a luxury that we have that a lot of investors don't. >> i don't always here that and it may indeed be a luxury, because i think, you know, a lot of shareholders, they check their portfolio every single day, the market closes, look, how did i do? a lot of investors, mom and pop investors. the markets did well, we can go out on friday night. and you transfer that right to a bigger scale to very large funds. i mean, carl icahn, great example, talk about an
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activist. he knows exactly what his portfolio did on any given day. he knows if he's up or he's down and so, whether it's, you know, mom and pop saying, yeah, hey, we're going to go out this weekend because the market did well, or a billionaire investor like carl, people care whether they're up or down and when you say, okay, it's going to be five years. how does that get received? >> well, we do, too, make no mace tmistake, i know exactly how my portfolio has done every day. and the long-term is made up of success of short-term. if there's a piece of short-term news that, say, a program, there's a mistake on a program and indicates maybe this management team is more likely to screw up the next program, well, that will impact my investment. if they decide in any given quarter to make a thoughtful investment that will drive revenue growth in the future, well, that's an opportunity.
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the stock might trade off on that and that's for the long-term investor and that's where we try to differentiate ourselves. that's different from not knowing what portfolios-- >> it's hard, too, because i think a lot of fund managers, they want to beat the s&p and you've got people that look at their 401(k)'s daily or weekly or quarterly. they doesn't want to be down. nobody wants to lose money and in an environment we're in right now, the stock market hit record levels, fortunately, nobody's losing money and gets back to reality. how do you balance risk and success, michael? because you've got to deal with these angry investors if you're not doing what they want. if they see red on the screen, they're not happy. >> no, they're not. [laughte [laughter]. i can't say that they necessarily have the right
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solutions either though. >> are they not always thinking about it, right? >> i'm sorry? >> are they not always thinking about it right? are they too short-term oriented? >> in my experience, offensively short-term, sell a portion of the business or go borrow a billion dollars and pay a special dividend. it was actually said, you know, do anything you need to do to give us a short-term increase in the price so we can sell off. >> you've had that said to you? >> i'm sorry? >> you've had that said to you? >> absolutely. that's exactly what was said. >> do anything you can do to give us a short-term increase in the stock price. >> we don't care whether it's a buyback, a special dividend, sell a piece of the business, but you're going to do something that's going to give us a gain and, well, we're going to do what's best for the condition and shown the door and they ended up selling their position and haven't heard from them again. and it was offensive. >> offensive, yeah, i'd say. but, you know, look, that's not
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the only one that's happened to. there's a lot of companies under this pressure right now and activist investors are certainly playing a role. so, i guess as we think about it in terms of national security, as we think about it in terms of advancing what we need as a nation. mr. secretary, i mean, if you've got michael dealing with, you know, the pressure of we need something now, as opposed to we need something for the future, how do we balance this? i mean, as a nation, how do we think about this? and when china is out there putting a billion dollars into a company and raj is against them and-- >> this is america, please pay attention. if you look at-- under this banner of being responsible, a responsible clie client, this is something that doesn't keep me up at night, but it certainly is a worrisome issue because capital does move
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at light speed. and you do have a free market and i am an unapologetic capitalist and free marketeer. >> good, because are' here at the reagan library. >> it's interesting what does transpire in this case because one of the things that we have to be responsible about is the health of the industrial base and people go, actually, that's not your job. well, you know what? if in fact we have limited resources to produce something that we must have, yes, i am now responsible. and it is-- it's a dance that has to be done that you're dancing on a bit of a knife edge because you're out there with a fiduciary responsibility to buy the best piece of gear for the most efficient and effective way you can. now, you add in, i won't use the word subsidizing, but you add in going, okay, i have to help an industry in a certain
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area or i have to make the capital investments myself to have this manufacturer produce. it flies in the face of pure and open competition, but we have to live with that because we need to get the gear. and i'm not saying that in a defeatist manner, it's the way to do business, but the movement of capital is something you have to pay attention to. >> it's tricky because i, too, am a red-blooded american capitalist who believes that the capital markets usually are the very best, most efficient ability in which to divide up resources and see growth, but sometimes, you know, you get to a point where if michael has to sell a division of his company that is very promising for five or ten years down the road, but that technology gets squashed because the investing public is so demanding of his quarterly
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earnings, you know, you start to wonder at what point -- how do we help manage this, right? what should you guys be doing, maybe it needs to be more than $200 million that you're investing for new technologies, and maybe you're bringing some of those new technologies to the likes of michael and to l-3 and other corporations. >> there's a multitude of asset classes that have importance in national security and defense. you know, i think that the point i would highlight is as we think about these new emerging technologies, there's ample capital going into them today so let's take, for example, artificial intelligence, everyone likes to talk about that. last year there was 40 billion invested r & d in ai by large tech companies and others in venture capitalist and young start-up companies.
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if i look at the number that the defense department itself put in, you know, it's well under $100 million. and so, these funds are going. there's great technologies being built. our best and brightest engineers and pc graduates are going to the companies and so it's happening. and that's a good thing. so, i think now the next step is, okay, how do we get that tech and bring it in to solve our problems, right? my experience that i've seen in going into the valley and boston, is these smart engineers, they want to work on important problems. and photo sharing apps are only so much fun compared to-- right? how do we make our sailors more lethal, how do we make our ships more survivable. but we have to provide them a mechanism to work on that and so, that's what long-term capital does. it's okay and there's a partnership that will be built,
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but we have to accept that some of the sources of this technology will require us to operate in ways that we haven't before. >> and i want to follow along with that just so everyone has a full appreciation of the span of effort that we're talking about. if i look at my budget just in the navy alone, which is quite a big chunk of the overall budget when you look at columbia cash, virginia payload, f-45, aircraft carrier family. a am-phib's down the line. we're building long-term ships, five-year builds, four-year builds, we have to nurture that work force. there are various organizations out there that are contributing to these efforts that have to actually and now going back to
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something that we haven't talked about in 20 years, which is vocational schools, working with states to teach people how to bead a weld and get a great job working in a ship yard. it's not just technology. we have to manage the whole span of work force. >> it's a great point and i think this is an issue that increasingly is coming up as our economy goes through this pretty significant shift. and as we move increasingly to technology, it's not just the technology. there's lots of other jobs and lots of other jobs that people can make good living at that we've gotten away from, right? as a nation for a variety of reasons, but we just haven't been as focused on those opportunities, so, i think you make a great point, mr. secretary and the reality is we've got a lot of people that can do a lot of different things, and how do we best put them to work. we have some questions in from the audience and i want to encourage everybody again, if you have questions you can
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tweet them at us. everyone at home watching on fox business and the audience and anyone on-line. this is one of the questions that came through, just a reminder to put them in, if you're here at the premises, rndf mobile app and if you're watching on fox business, you can tweet them to us at rndf, that's the hash tag for twitter. here is one of the questions right now, it has to do with stem. does wall street factor the risk of the current and future critical work force shortages in stem, and defense, related fields and its impact on productivity, quality, and output? michael, i'll start with you on that. >> well, you know, through our industry organization, the aerospace industry group, we have made that one of our top priorities, so, we are getting the word out in the stem programs as we can. and i've personally done it with my high school and get the word out. the lack of students coming
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through the science areas is going to rise to a national security level. if it's not remediated. if you think about the demographics here, we have bo boomers like myself a big wave of them, and hopefully we'll find a ways to do that. >> do you find opportunities that are channllenging to fill. >> it seems we always have several thousand engineering jobs open across the country, but we have established partnerships with several colleges and universities where we sponsor research and we get access to the student body so we can be first in terms of attracting solve the students, the better students to these jobs, but it is an area that we
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should be concerned about. >> michael, when you're looking at five-year time horizons in investments, are you looking at this as well? >> i like to say this is long-term when we're five years out, some of this is longer term. i'll use northrop grumman as an example, they're building centers of excellence for programs. and consolidated to the point where there are hundreds of programs material to that company and they have programs they're delivering today that are needed to hit their quarterly earnings, but if they've done that well and communicated expectations well to me and my peers, they have the ability to plant seeds for the future and so, we've been a little bit defeatist on this panel today and i think there's reasons to be optimistic now with stable budgets you're seeing more and more examples of like northrop grumman investing in centers of
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excellence that should-- >> and with construction and m and a in d.c. and a lot of that happening in 2017 and this may be directed absolutely at you, michael, because they're asking, do you think you could bring in some more tier one and two suppliers in-house? >> well, the door is always open. i mean, we love technology and we have been a good partner for the entrepreneurial company where the founder would like to cash out, but still work. we've done this over and over and over again. we've done it at least a hundred times, probably 200 times. >> and does it typically work on one of the challenges was acquiring the technology, is you're acquiring a company that may have sort of a different cultural feel and they're come in to l-3 and you've got to incorporate them and their people and their personalities. and kind of teach them your
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ways. >> that's one of the keys to doing it right and making sure that the cultures work. and you know, if you think about it, we talk about developments and plenty of capital for developments. but what they're-- there's an art to doing it right. so, i don't think it would be very popular for any established defense company to undertake a project that's going to run $50 million a year losses for the next ten years until they get this. it's the wrong place to do it. you need to do it on a separate company basis and buy it at the end of the day or find a company-- many of the companies that we've acquired in the spaces have run losses for a decade or more, they're invested all of this money and which kind of gets redeemed when we buy it. i mean, they get-- in other words, they've taken the risk as opposed to you. >> exactly, they take the risk and you know, again, it works in very specific areas, but that's-- >> so much m & a in the coming year, not just 17, but 18, what
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do you think, much more. >> yes, 17 has seen returns of some of the big deals, m and a deals in the defense space and there has been a number of them. we get targeting where we buy tuck in, as you call it acquisitions that fit well with what we do and there's no shortage of companies in that space. >> go ahead. >> this is an interesting topic being unapologetic capitalist that i am. it's going to happen in the marketplace, the capital's going to move to the appropriate winner. i need to see an additive benefit for me in the acquisition field. and i have to do what michael's been talking about, which is reward risk because the best model that i should do is say, l-3, here is my problem, go figure it out. michael goes and buys a company that helps him solve that and
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figures it into the price to me, but i get a value plus from that. if somebody is just buying a company for cash flow and all of a sudden now i'm a legacy buyer from that and i'm getting no uplift and getting one more layer of management, i know i don't have a big vote in this thing, but i've got to figure out how to send a better signal that i need to see how is this going to help me as a client? because at the end of the day, i do have a vote and this is a discussion that we have to have as a partnership that i opened with originally and this is what we look forward to. >> the senate has approved, or voted for a tax reform plan and expectations are, they may just actually do this thing. they're in the house and that it won't be repeal and replace all over again, but they may actually get this done. what is that going to mean, and i want to ask both michaels
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here, you specifically, michael, in terms of your company and your earnings and your ability to do things with that capital, and michael, what does it mean for your portfolio, if in fact tax reform goes through? >> well, since you asked me first, i would rather vote on an increased defense budget than had a tax cut. and so, they gave that answer on this morning's show with neil cavuto and i guess they just called the president's baby ugly, but i guess i'll be tweeted tomorrow. the reality is if we're in a budget environment with low to no growth, any cash would not help in terms of dividends and share repurchasinrepurchasing, are we going to invest it that's why i would add vo -- advocate for a certain level of growth in the first place.
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>> michael. >> critically does the r & d tax credit stay. if it does stay the benefit will accrue to all the primes. i know one for one ratio, i would expect. does that accrue to the customer? i think if the customer tries to negotiate some of the ways we've discussed here on stage today maybe you get pieces of it, but i think most of that would accrue to shareholders. >> you think it's going to go to shareholders. >> would accrue. and you're not seeing enough demand for your goods, because budgets are restricted. >> it's all about the stability of the budget. we've talked about budgets growing 14% in some of the proposals on the hill right now. that's probably not good in the long-term. i'd like to see a nice channel of 3 to 5% growth for five years. >> we're on the way, right.
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>> better than 3 growth. >> what we're going to get for next year, there's going to be a cr. so it's hard to make longer term-- it's hard to think long-term when the budgets are schizophrenic. >> do you want to add to that at all? [laughter] >> you've said your piece. i don't know if you can be so anti-tax cuts when you're at reagan library, but we'll save that for another time. and another question, how are defense companies, priority ides and maintain priority on defense needs and have a focus from wall street about quarterly and financial statements. this is what we're trying to get at, right? this is the essence of the conversation and what we need to reconcile in a world, mr. secretary, where other nations have a lot of money to deploy and throw at this. we have, historically, now had for many decades the most powerful military and we all hope we have that many, many,
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many decades more, but it's going to require some investment and we've got competition. what do we do? >> that's a great question. if we look at -- if we look at china, they've weaponized capital. if you look at what they're doing with both the investing side and the one belt, one road efforts that they've had. you know, it's the old joke we've run out of money, we have to think smarter. we really -- i say we're there now. we have to become much more innovative to increase capabilities. we are going to have to increase capacity and that's going to come over a period of time. we have to address our capability and this is why i talked about a force multiplier when you talked about unmanned, et cetera. we have to find the technologies, the processes that would give us that log
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rhythmic leap. and that's my immediate reaction to that. the capital markets are the capital markets, they're going to do what they do. one more reason i come back to this, why we have to be in partnership in a strategy partnership with our industrial base. >> okay. >> i would add, you know, to that, winter is not coming. we have strength that we can play to here in the u.s. we-- despite our actions of our adversaries have the greatest movement of capital both human as well as financial and we need to nurture that and one of the things i am seeing from our industry partners is, you know, a move of both, both types of capital to those centers of innovation and are trying to
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actively, through, you know, venture capital units and innovation units of their own, to try to get access to that and help bring them their products. so i think, you know, the opportunity for us is to, again, recognize these changes that are occurring, and then have the wherewithal to move fast enough and know that by moving fast, some things aren't going to work, and change the status quo. >> do you think we've ever had as much competition, say within the last 50 years, as we have right now from china? and i know you didn't want to name sort of the other big buyer of the technology and that, you know, who is our biggest competition. and i know you say we need to be, you know, in competition with ourselves, but if you think about who is out there trying to grow themselves economically, militarily, it just seems that china, china is the one that we need to be
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focused on and we need to be doing everything we can to make sure that we're five steps ahead. >> i think we have to recognize the facts, we have to recognize the behavior and be appropriately, you know, actionable here. >> mr. secretary, how do you think about it in terms of, you know, if you compare this with the past times? you said we were at that sort of moment where we have to get smarter because we're out of money, but is it nearing some kind of point where you worry that if we're not more focused on this, if we're not more vigilant and supportive of the industry, we run the risk of not being as successful militarily in the future? >> yeah, and i think i'll-- i referenced the joke we're out of money, we have to be thinking. we are getting funds, but to answer your question directly, trish, i think the analogy is october much 1954 was sputnik. all of a sudden, you know, we used to own this space and now all of a sudden we're seeing
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and hearing the pitter-patter of feet coming up behind us. our overmatch is not as great as it used to be. we are at that, i believe we are at that inflection point and if you speak to secretary mattis and you listen to his language and signals, his statement let us move at the speed of relevance, that underscores it. >> all right. final thoughts from you, michael? >> well, you know, to sleep at night i take great, great pride in the products that this industry has turned out. i don't think anybody, whether it's china or russia, is close. we command on our aircraft, ships, land vehicles, and doo you to the men and women that work in this industry and commitment to it and technology investments and we're committed to continue on and make sure that the united states enjoys the technological advantages it has over forever, looking backwards. we've always had the best and i
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think we will still continue to have the best, because we have the will to do that. >> michael, raj, congress needs to get out of its own way then? >> i mean, look, from my vantage point, i appreciate the reception that organizations and department are inclined to do things differently and faster within the department and have received from our industry partners, have received, and we have all the right elements, we just have to have conviction to get it done. >> exactly, how about for you, michael. >> stability budgets, more partnership, and paying for risk taking, and, frankly, our interests on this stage are more aligned than not. >> so as we look forward to the next several years, do you feel we've reached a turning point at all? i know you say it's a critical point, mr. secretary, but are things changing? is there a bigger, broader commitment that you feel in washington right now to defense, to our military?
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>> looking back on the last ten years of kind of being around washington, in my eyes, i've never seen the stars aligned better for what we're facing right now. it doesn't matter if i'm in front of the house arms services committee, the senator arms services committee, hack, sack d, everyone is leaning in and want to go help. there's no partisanship, it's all about the national defense issues and so, not to leave everybody depressed at all, i'm actually really, actually, very, very excited about what can come out of this. i want to make sure we use the sobriety of what we're facing right now to make the move to go forward and grasp hold of this opportunity to really make hay with it. >> that's a good way to end this panel. thank you very much to all of you, mr. secretary, to michael, to raj, to michael, really
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outstanding conversation. thank you. and i just want to say for all of our viewers on fox business, stay with us. i will be with you shortly. adam shapiro is going to take it from here. thank you so much to the panelists and all of you. >> thank you. [inaudible conversations] c-span's the series, history cases with a look at new supreme court cases. experts join us to discuss the constitutional issues and personal stories behind these significant supreme court decisions beginning monday, february 26th, live at 9 p.m. eastern. and to help you better understand each case, we have a companion guide written by journalist tony morrow. it costsed 8.95 plus shipping and handling. go to c-span.org/landmarkcases.
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>> the president of the united states. [applause] >> tonight, president donald trump gives his first state of the union address to congress and nation, join us on c-span for a preview of the evening starting at 8 p.m. eastern. then the state of the union speech, live at 9 p.m. following this speech, the democratic response from congressman joe kennedy. we'll also hear your reaction and comments from members of congress. president trump's state of the union address tonight, live on c-span. listen live on the free c-span radio app and available live or on demand on your desk top, phone or tablet at c-span.org. >> and here on c-span2 the senate about to gavel in. working on the nomination to the 8th circuit court. a confirmation vote scheduled tore 2:15 eastern time after party lunches. tonight, senator

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