WASHINGTON – The defense industry must be willing to spend more of its funds on research and development of new technologies if it hopes to stay ahead of rising challengers from the commercial sector, the chief executive for Norwegian defense firm Nammo warns.
Morten Brandtzæg, who took over as CEO of Nammo in March 2015, told Defense News that "the defense industry, going forward, must be willing to risk more of their dollars into technology development…if the industry does not take this task seriously, we will be outnumbered by the disruptive technology startup companies."
Brandtzæg's warning is not a wholly original one, as top voices both inside the Pentagon and in the defense industry have argued that the commercial sector is now the true source of innovation, a change from the last 50 years, when the government or defense sector drove new technologies
But the CEO's comments, made in an April 6 interview, are interesting in the context of how his company has managed to set record growth in 2016.
Nammo is a fairly small but growing company based out of Norway that has managed to find success by prioritizing niche technologies. 2016 saw the company set record revenue of around $480 million. That growth has largely come from new technological developments, and Nammo plans to funnel more than $117 million back to internal investments over the next five years.
"In Nammo, in Europe, we invest more in R&D than the U.S. defense industry. Typically, three to four percent of our own revenue is spent on R&D in Nammo," Brandtzæg said. "We see that as a competitive advantage for us, compared to U.S. where a major part of the R&D spending comes directly from the government into the labs, and then it goes into a ready-made developed product and the industry produces it."
A recent report from the Center for Strategic and International Studies warned that the U.S. pipeline for new defense programs is very thin, something Brandtzæg indicated could create openings for Nammo. The company has already found success in providing tactical solid rocket motors for the Pentagon, including an agreement signed in January to co-locate a new facility with the U.S. Navy.
"We cannot continue with this long acquisition time," he said. "I think it’s the industry’s role to put together some of the technologies, develop it, and offering it to the government, as opposed to sitting and waiting for the long acquisition time to run [as long], because of faster and faster technology development in society, you will end up with selling obsolete equipment to the U.S. soldier. And that is very costly and very bad."
In the near term, Nammo is focusing on growing its core businesses, a strategy that includes both organic growth and new acquisitions.
Organic growth will come, in part, from expanded defense budgets in the United States and Europe, although Brandtzæg downplayed the idea that budget changes will result in a spigot of new funds flowing to his company.
"There are many different areas of the defense system that will fight for the increase in the defense budget. It’s not guaranteed it will go the ammo or rocket motor way," he said. "I think the way to get to it is to have advanced technology because they will prioritize technology more than pure volume, meaning artillery rounds with guided ammunition, so you are sure to hit your target as opposed to mass production of old type of artillery ammunition which lands everywhere."
Brandtzæg also said the company is "actively pursuing other acquisition within the core business of Nammo." While the company has made some moves into the commercial ammunition sector, the vast majority of the company’s profits remain in the military sector, and any M&A activity will be focused there, he added.
Aaron Mehta was deputy editor and senior Pentagon correspondent for Defense News, covering policy, strategy and acquisition at the highest levels of the Defense Department and its international partners.