Presidential politics and defense electronics

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January 29, 2016

Every month the McHale Report will host an online roundtable with experts from the defense electronics industry ? from major prime contractors to defense component suppliers. Each roundtable will explore topics important to the military embedded electronics market. This month we discuss the how the presidential election will impact the defense electronics market, if sequestration will last, and get our panelists to make some predictions on the election.

This month’s panelists are: Ray Alderman, Chairman of the Board for VITA, non-profit organization focused on real-time, modular embedded computing systems; Robert Day, Vice President of Marketing at Lynx Software Technologies, which provides secure software solutions for military systems, avionics, Internet & phone communications, office automation and medical devices; Eric Sivertson, Founder and CEO of QuantumTrace, which provides commercial technology solutions with unique IP to integrate trust, security, and reliability for the aerospace & defense requirements; Ethan Plotkin, CEO of GDCA, legacy support company, specializing in sustaining old COTS designs for as long as they are needed; and John McHale, Group Editorial Director for Military Embedded Systems magazine and proprietor of the McHale Report.

MCHALE REPORT: The U.S. presidential election is in full swing, with candidates making all kinds of promises and predictions regarding defense budgets and military actions. How much has the uncertainty in U.S. political leadership affected the defense electronics industry? Does it make it difficult to forecast?

ALDERMAN: Yes, politics is why there is a yellow color and an ammonia smell in the defense budget punch bowl. Yes, politics have removed common sense, predictability, and confidence from the procurement process. The trade-off between the political choices we have is between spending money on the defense budget to defend America, or more social benefits for the people. Until that is settled, we cannot forecast with any degree of accuracy.

DAY: The uncertainty in the election results typically has a negative effect on defense electronic spending the year before the election. Major new programs are not typically started, and defense contractors and integrators will often wait until the result of the election before undertaking any major IRAD [internal research and development] initiatives.

PLOTKIN: Most programs have enough information to pretty accurately forecast how many spares and repairs they’ll need throughout the expected life of their program. The main challenge has to do with existing DoD procurement policies constraining multi-year funding, and a lack of clarity around who in the federal government is responsible for making sensible investment decisions to reduce the total cost of ownership for COTS parts that go into long-life programs.

SIVERTSON: I think the answer to that is absolutely, but also the economic conditions of the government budget is a huge part as well. The uncertainty is half budgetary-based and half related to who is leading the effort to fix the budget. How we fix the budget is a fundamental problem and the uncertainty about who is qualified to do that drives the uncertainty in the election. So many in Congress kick the can down the road on defense budget issues, especially the current administration. The next CEO of the country needs to really be serious about tackling the budget issue. That will put more certainty in the DoD budget process so we can have a better idea of what will be funded and what will not.

MCHALE: It makes it especially difficult to forecast for the primes. With all the people I talk to in the industry they can’t effectively predict the market as the DoD does yet know how it’s going to fight the next war, let alone what tech they will specifically require. Regardless who wins or what their war stance will be the U.S. government will still require eyes and ears everywhere, which means continued investment in signal processing solutions and embedded software tools to feed their insatiable demand for data. This is a positive for the COTS industry, but they will also face forecasting inconsistencies as some contracts will be delayed or have their numbers reduced.

MCHALE REPORT: Conventional wisdom suggests that a Republican president would be more favorable to the defense industry than a Democrat, but is that really so? The COTS industry did have its birth during the Clinton administration. Or is a strong relationship between Congress and the Executive branch more important for avoiding deadlocks than party affiliation?

DAY: The current situation is really a perfect storm of both the thoughts above. The Republicans would likely increase defense spending, curtail the defense sequestration, and also have control of congress to get both approved. The Democrats would be more cautious on increasing the defense budget, and in any areas for increase would also be closely watched and discussed with Congress before approval, with potential horse-trading being required to get that approval.

SIVERTSON: I would agree that it is more beneficial to have a strong relationship between Congress and the president. At the end of day the budget process is more efficient when the president and Congress can get along. Throughout history both Republicans and Democrats have been hawkish. For example President Kennedy was very strong on the defense side and had to be with the crises he faced. Historically Republicans lead more in this area. Also when we are involved in a war with another country there will be more consensus between the parties on defense spending. However, whenever the country is involved in a long-term conflict that has a malaise over it like Vietnam or even the Middle Eastern conflicts of today it is difficult for any president.

MCHALE: I think a strong relationship is more crucial to getting things done in the budgetary process, but Republican presidents are viewed more favorably by many in the defense community today and would be perceived as breath of fresh air after the last eight years. When the Supreme Court’s Bush v Gore decision was announced over a loud speaker at the COTSCon show in 2000 cheers went up throughout the show floor, which was filled with COTS suppliers. No doubt about who they wanted to win. That said, other Democratic Presidents have been quite hawkish such as John Kennedy in the 1960s. It is often world events that can ultimately determine the nation’s defense spending – such as the attack on Pearl Harbor or 9-11, but in more unclear times, Republican presidencies are seen as more friendly to the defense market.

ALDERMAN: Clinton told Perry to do the COTS initiative to reduce military spending, so wipe that smirk off your face. While that was good for us, it was a net negative to the prime contractors. We’d be better off with a Republican president than a Democrat in the White House, on the surface. With the Democrats proposing to spend more of the federal budget on social benefits, and the Republicans proposing spending more money on defense, the avoidance of deadlocks is dependent on the outcome of both the White House and the Congressional elections. Deadlocks will prevail unless we have one party controlling both the White House and Congress. Star wars and Obamacare prove what happens when one of the parties controls both.

PLOTKIN: For new programs, it’s certainly better if everyone shares similar priorities and strategic views. For existing programs that are near the end of their initial deployment or already in sustainment phase of their lifecycle; the challenge rests mainly with enabling the DoD’s program and support teams with the guidance and resources to do what’s needed to support these long-life systems for as long as they are needed. This means setting up proactive [Diminished Manufacturing Sources and Material Shortages] DMSMS programs that guarantee predictable price and access to all the parts they need to support workhorse systems.

MCHALE REPORT: Do you see sequestration continuing despite the result?

SIVERTSON: I think it will depend on who wins. There is one candidate who will fix that problem and that is Donald Trump. Whether you like or him or not he is an action-oriented businessperson. Sequestration has created problems for the business industry and he is the only candidate taking a firm stand. However, it may not be a good thing at first for defense firms as he would likely kill programs, but he will remove the malaise of sequestration. Depending on who wins the election and if they get along with Congress, they may likely keep sequestration going as it can be a hidden weapon, or a pocket veto if you will.

PLOTKIN: There are a lot of people on both sides of the aisle, and across all branches, who want to see federal budgets reduced or increased. If we cannot come to an agreement on getting a correct balance of defense vs. non-defense spending, and if the branches of federal government remain broadly divided, then subsequent sequestrations may be a way forward.

ALDERMAN: Congress decides what the defense budget looks like, not the president. If we have a hawk president and a dove congress, defense budgets will continue to suffer from sequestration. The president can veto defense bills, so it’s important to have a pro-defense president and a pro-defense congress of both Democrats and Republicans. Congress’s pro or con military budget position depends on how many prime contractor facilities, component suppliers, and military bases are in their district. A pro-defense congress and a pro-defense president is the best outcome we can hope for. Anything less, and the only situation that would dilute sequestration is another major attack by terrorists on American soil.

MCHALE: It sometimes seems sequestration was put in place so Congressional leaders and the president could avoid making decisions. This will get dangerous if and when sequestration starts degrading operational readiness, leaving us unprepared in the face of a serious threat. We need leaders more concerned with solving problems than passing it down the road. In this sense sequestration is a symptom of procrastination on the part of the government. Some funding has been loosened lately, but agreements need to be made to lift it all together. But that probably won’t happen till at least 2017.

DAY: The Republicans have already stated that they would unilaterally lift the defense sequestration, while the democrats would only lift it if domestic sequestration was also lifted, and that would require a higher level of discussion and approval.

MCHALE REPORT: What military application -- radar, electronic warfare, unmanned systems -- will thrive regardless of which party runs Washington? And why?

PLOTKIN: Innovative platforms that make our forces more informed, agile, and integrated seem to be the trend – all of it underpinned by a focus on cybersecurity.

SIVERTSON: Without a doubt cyber is massive and cannot go away. Advanced persistent threats such as nation states are prevalent now, but there are also levels of terrorist organizations and criminal organizations who are investing in cyber. It is too lucrative for these cybercriminals and nation-states that harbor them and only makes it worse. Cyber will get great funding and continue to be a huge issue for the entire world and I only see the threat growing. Another growth area is unmanned systems. It is still way more economical to put a robot in harms way than a human. It is also cost-effective as one soldier could cost as much as three to four robots — and robots don’t get a pension check. Unmanned systems are a force multiplier.

DAY: We believe that unmanned systems will continue to thrive, either as an alternative to human forces in the battlefront, or as a defense and border control on home soil. We also believe the electronic warfare, surveillance systems, and cybersecurity will continue to see investment, as a cyberdefense against potential cyber enemies, and also seeing cyberwarfare as an alternative to the traditional battlefront.

MCHALE: As I mentioned above demand for actionable intelligence will drive the demand for better radar, electronic warfare, signals intelligence, and cyberdefense regardless of who is in the Oval Office. We’ve seen in the last decade as these market areas have seen steady growth and are forecasted by multiple market research firms to continue in that manner.

ALDERMAN: Both parties will support more intelligence-gathering systems, especially imaging systems. That says radar, signals intelligence (SIGINT), image intelligence (IMINT), possibly electronic warfare, and their associated platforms will get the money, especially unmanned aerial vehicles (UAVs). These are defensive systems that each party can agree on. If the democrats prevail, then strategic platform funding will suffer, especially the B3, DDG-1000, F-22/35, and the Littoral Combat System (LCS) programs. If the republicans prevail, then the big expensive strategic platforms will get more funding. If you look at our primary enemies (Russia, China, Iran, and North Korea), none of them have a significant naval force they can send more than a few hundred miles from their shores. None of them have an air force capable of flying across oceans and delivering bombs reliably. All these enemies are stuck in 3rd generation warfare, so they will confine their malfeasance to their own region (as they are doing now). There will be no major sea battles between massive ships like in World War II in the Pacific. Ships are just large floating targets for anti-ship missiles and smart torpedoes. And there will not be any major aerial battles like the Battle of Britain. Aircraft are just large flying targets for anti-aircraft missiles. None of our major enemies have an economy to support a war of more than a few months or weeks, except maybe China, and they are caught-up in their own economic quandary right now.

The platforms and weapons we have are 5th generation warfare tools, and they are three to five times better than anything our enemies have. So worst case under the Democrats, we will upgrade existing platforms and keep our advantage. Best case under the Republicans, we will do the upgrades and build new weapons and new platforms too. As for GWOT (Global War On Terror), we have the weapons. What we need are targets! We need to find and fix terrorists faster, and we need to put ordinance on them faster (finish them). We need to tighten the find-fix-finish loop. That’s mostly upgrades, and possibly a few new platforms, like the X-47 and the Phantom Ray.

MCHALE REPORT: Prediction time. Who will win and will he/she be good for the defense electronics industry?

ALDERMAN: Even if Hillary avoids the perp-walk for disclosing classified information, and avoids blame for the Benghazi incident, she might be forced to drop out for the sake of the party, and that leaves Comrade Bernie [Bernie Sanders] (or possibly a run by Michael Bloomberg). On the Republican side, Trump is still in the lead with only 10 months to go. If it’s Trump vs Hillary, it will be a tight race, but I think much of America is tired of the Clinton-Bush dynasties, and Trump will win. If it’s Trump vs 75 year-old Comrade Bernie, then Trump wins. If you remove Trump and toss in [Ted] Cruz, I think the Democrats have some advantage. Nobody else in the Republican stable seems to have the horsepower to prevail against Hillary. But I think even Carly [Fiorina] could beat Comrade Bernie. Trump would be the best outcome for the defense electronics industry, by far.

SIVERTSON: My prediction is Donald Trump. He has a great shot at winning the presidency, but is probably not the best choice for the aerospace and defense industry in the short term. I know that’s a shocker, but the reason is the defense industry has spent too much. A president with Trump’s business background will see it as over bloated with many inefficiencies and he will want to fix it. In long run I think it will be excellent for the defense industry, but in the near term a Trump presidency will create even more pain, more than Clinton or Sanders would. Trump is all about the art of the deal he will make deals and some will be painful, but it will probably be the right pill the DoD needs to take to clean it up and make it more economically efficient. I like the guy. He has potential to do good.

MCHALE: A journalism school professor told me a long time ago to follow the British odds makers when it comes presidential elections. So I checked out Ladbrokes and their latest odds have Donald Trump even to win the election with Marco Rubio second at 9/4. On the Democratic side Hillary Clinton is almost a lock at 1/5 and Sanders is second at 4/1. For the overall they have Clinton at 5/6 beating Trump at 10/3.

While I think these two are likely to win, I disagree with Ladbrokes as I think Trump would beat her. He is more of a populist candidate and has many supporters among independents and Democrats as well as Republicans. I also think many voting citizens want someone other than a Bush or a Clinton.

DAY: At present the prediction is for another Clinton administration, with a great deal of uncertainty of how much (if any) this would increase the defense electronics spending.

PLOTKIN: If I can’t talk about it at Thanksgiving dinner, there’s no way I’m putting it out there for the world to see! However, I do think that whatever happens, the increased certainty of knowing who will be in charge over the next few years will be a good thing.