If you ask Tom Kennedy, CEO of Raytheon, big change is underway in the defense sector. Those in the US have begun to "lift their heads up from wars of insurgency," he says, while around the globe, countries are trying to protect sovereignty.
So what does that mean for the industrial base?
Kennedy spoke to Defense News Executive Editor Jill Aitoro about those shifts, interestingly, the day after the Brexit vote and only a couple of weeks before heading to the UK for the Farnborough International Airshow.
I have to start with the Brexit. Were you surprised?
It was close all along. There were polls where they were predicting it would be close, but that the decision would be to stay. I think folks underestimated the senior end of the population. Data analytics predicted [UK] would stay, but where did they get the data? Tweets, Google. They missed the majority that doesn't use Twitter or Google.
As a company we stay away from politics. But in terms of impact, the majority of our customers are government. We're a business-to-government domain. And if we looked at the different governments we deal with, the UK would be one. But the fact that the dollar is strong – and could possibly become stronger – and we have a landing company, Raytheon Systems Limited, where we pay in pounds, we don't see an issue. [There] was a concern over the low oil prices too, and we didn't see an impact from that either.
If you step back, the reality is that the world has become a more dangerous place. And these folks are trying to protect the sovereignty of the nation and their citizens. They're putting that first. We've seen that across the Middle East, we're seeing that in Asia Pacific. And as part of that, we're seeing significant demand. Our pipeline has never been as strong in the history of the company.
Most of the work we did in the UK was done for the UK [not for the EU]. It could provide enhanced work, because UK may decide to do more, versus being part of the EU, where they were doing consortiums with French and German companies. It may actually be better. We'll see how that plays out.
Raytheon has always focused a lot on international opportunities; it served the company well when US defense budgets dipped. Does that remain the strategy?
We've always been strong on international. It's in our DNA. But when sequestration hit, we along with the defense industry – our main market shrunk. We were concerned about our top line. And it did come down. We got together to figure out how to reverse that trend. The lever we had to pull was the international one – but we had to pull it differently than in the past. That change, at the top level, was to go from a regional model to a country-based model, and then to treat a country as a market with multiple customers. In Saudi Arabia at that time – we had been there 47 or 48 years – we leveraged our partnerships in country, and the work we'd done, to grow beyond those customers we already had. If you've been in a country for many years, there's a lot you learn – culture, how they do business, how they do acquisitions. By looking through that new lens, from a regional to a country focus, we went from 25 or 26 percent of revenue [coming from international] last year, to 31 percent at the end of 2015, and 43 percent of backlog.
For overall business, we grew in 2015 by 2 percent, and that was when sequestration was in full force; this year, we'll grow 3-5 percent.
What can we expect from Raytheon at Farnborough?
It's our key show. We'll be meeting with over 50 countries. There will be a big display of Patriot. Obviously it's been technologically upgraded significantly, so we'll showcase that, including the AESA radar. This will be its first time at Farnborough. We'll also have a whole cybersecurity demonstration. It's not just cybersecurity, the protection of systems. But cyber to protect command and control, cyber to protect and harden systems, whether ground-based, air-based, space-based, surface and undersea.
A model of Raytheon's 360-degree capable Gallium-Nitrite (GaN) based Active Electronic Scanned Array (AESA) air and missile defense radar
Photo Credit: Courtesy of Raytheon
You've opted to invest in cybersecurity for both defense and commercial markets, even as some competitors have exited the latter. Why is that?
The underlying technology is the same. The training we have for our cyber warriors is the same, whether it's in government or commercial. So several years back, as we were doing our strategic review, we looked at the core competencies; we were getting significant business [from cyber]. We had SureView, which can detect an insider threat trying to steal intellectual property, or doing some damage to your system or some other malicious activity. But we didn't have the market channels to take that product into the commercial market place. We looked for a way to create those channels, and we came to the conclusion we needed to buy [one]. It's why we bought Websense. We've been integrating that company together with our Raytheon cyber products group – [generating] $600 million a year in revenue. It's right up there with other big commercial [cyber] companies. [Raytheon rebranded its commercial cybersecurity business Forcepoint in the beginning of 2016].
I wanted to touch on unmanned. Raytheon is doing a lot of interesting work, including with DARPA. How do you see DoD adapting the missions for these systems?
It's going to have multiple missions and uses. You see uses today in ISR, and strike. But as we move forward, there are [new] concepts we're heavily involved in; you can have 20 smaller [unmanned systems] working together and collaborating in a network, using autonomy, artificial intelligence, machine-to-machine interactions to assess and take action as a swarm to overcome the enemy. It's exciting for us, and ties nicely into our whole missile business. [Mid June] we did a test with DoD to fly swarms; we had 30 Coyotes [swarming] at once. They're expendable, they're low-cost, and deploy from a common launch system. It's been well tested. The next step is to take it to the battlefield. At the end of July, we'll do similar tests for the Navy.
We're seeing more and more countries try to build up their domestic manufacturing. What might this mean for foreign sales?
This is something we've been [adapting toward] for 30 years in international pursuits. We have a global supply chain, suppliers in Europe, Middle East, and Asia Pacific that we work with to provide localization. It's part of our international business model to put jobs in the countries where we do business. These are noble jobs. And they're professional. They're supply chain, finance, contracts, engineering, operations, high-level technicians.
And domestically, we're looking at Silicon Valley to partner. Our headquarters is in Boston, and I was just with a group of CEOs at MIT this past week talking about how we'll apply new technologies to business solutions. Running a business you need to be aware of new things coming up that you might not have developed yourself, and have an open business model.
There are debates on the Hill right now about whether a more advanced missile defense system is needed. Thoughts?
What we're doing is providing solutions to the Missile Defense Agency and the rest of DoD to counter the threat, whatever it may be. We're not worried about the words [in a law or policy]. We're worried about the threat. In Yemen, the Patriot shot down a ballistic missile [in June]. Had that gotten in, there would've been hundreds of civilians killed. In the last few years, there's been extensive use of the Patriot to shoot down these tactical ballistic missiles [with] 13 countries using the system. And five or six years back, we did a technology refresh, under a UAE contract. UAE was the first to get that, then Saudi Arabia got engaged, Kuwait, South Korea, Taiwan, and now the rest of the countries have an opportunity to upgrade their Patriots to the latest technologies.
And because of the issues in Eastern Europe and the Middle East and the Asia Pacific region, we're seeing demand for new systems across the board. We're working with Poland to close an opportunity. The government is reviewing their options, and definitely getting ready to make a decision.
Anything else you want to add?
I would just say that there is a change going on. You hear it in the third offset strategy. We're seeing [those in the] US lift their heads up from wars of insurgency. We're seeing a concern that there are peer nation-type threats that have caught up in the technology areas, and have systems that are getting close to the capabilities of our systems. We're trying to figure out what to do better for moving forward; what can we do to make decisions faster to combat the threat, to get inside the decisions-and-effects loop of the adversary. To me that's exciting news to the defense industry. The Department of Defense is realizing we have to get to the next generation of technology to stay ahead of the threat.