As the federal government plays catch-up on defense spending, defense contractors like Scottsdale-based General Dynamics Decision Systems are reaping the rewards with billions of dollars worth of ongoing and new contracts.
About two years ago, a cash-strapped Motorola was looking to shed its Integrated Information Systems Group in Scottsdale. The group was performing financially, but Motorola needed to raise some cash fast.
In early September 2001, the Integrated Information Systems Group was purchased by General Dynamics and became General Dynamics Decision Systems, a wholly owned subsidiary of the Falls Church, Va.-based defense contractor.
The subsidiary has thrived since the acquisition, with new and ongoing government contracts, and is forecasting continued growth.
“No question it’s a good time to be a defense contractor,” said Paul Nisbet, an aerospace analyst at Newport, R.I.-based JSA Research. “All the defense contractors are showing growing. We’ve had the defense budget grow from under $300 billion with the last Clinton budget, to probably over $400 billion for next year, and well over $400 billion if you include the cost of the war.”
General Dynamics reported net sales of nearly $14 billion in 2002, up from $12 billion in 2001. General Dynamics Decision Systems expects a 15 percent increase in sales this year over last year. Most of General Dynamics Decision Systems’ equipment development and production take place at the Scottsdale complex. The subsidiary has a few, smaller facilities in other states.
THEN AND NOW
Mark Fried, president and general manager, talked with the Tribune about his subsidiary before and after the acquisition.
Fried headed up the Motorola group, and it was the group’s leadership that decided it wanted to be purchased by General Dynamics. The group already had initiated an aggressive growth strategy, but Motorola’s financial vulnerability acted as a barrier, he said.
“We were sort of artificially constrained on things like capital and investment, so to that amount, I think we might have grown more than we had with Motorola,” Fried said.
In general, General Dynamics is a better fit because the “heart of the company is defense,” not cell phones, he said.
Unlike Motorola, General Dynamics is a decentralized company in that it allowed the subsidiary to operate under its own leadership from day one, Fried said.
“The chairman said ‘we bought your company and we bought your managers, you know more about managing the company than I do, my job is to redeploy capital, and if you do well financially, then you're mostly left to manage your own company,’ ” he said.
The 144-acre complex, on McDowell Road just west of Hayden Road, had about 2,800 employees, mostly engineers, back in September 2001. That work force has since grown to 3,400 people, Fried said.
“This year we’ve hired about 250 people and we have about 150 openings,” he said. “So we've been growing by all accounts, our strategy has been working. If you know any software systems engineers, we're looking for them.”
The subsidiary has deployed equipment and about 35 people to assist U.S. forces in Iraq. Several of its employees are still there, Fried said.
“We’re receiving very good feedback about our equipment and the lives that it has saved,” he said.
The subsidiary’s three areas of development are: Command and control systems, information assurance and space and terrestrial communications. Some of its projects include:
• The Common Ground Station, which is housed in the back of a Humvee and provides an Army commander a real-time big picture of the battlefield to enable more timely and accurate decision making.
• The Unit Operations Center, a mobile command and control operations center that provides Marine commanders with standardized, portable workstations supporting data systems and other software.
• Sectera cellular telephone systems capable of encrypting both voice and data.
• The HOOK2 combat search and rescue radio, which already has saved lives in Iraq, as well as other communications systems.
Also, Iridium Satellite, the global satellite telephone system developed in the East Valley, is proving to be quite a lucrative and successful venture for General Dynamics Decision Systems, Fried said.
“We do the government business for Iridium, which is the major part of the Iridium business right now,” he said. “We operate a gateway for the government business in Hawaii. We encrypt the phones and we sell the phones to the government. This has been a big user in Iraq. In places where they couldn't get any communications, they use the Iridium phone. Millions of minutes a month are used with our phone.”
In today's military conflicts, information is just as important as weapons systems, Fried said. Because of that, General Dynamics Decision Systems’ information systems are in high demand, he said.
Also growing in importance is the need for interface, or shared information among the various branches of the military during combat operations, he said.
“A very big initiative is the Army doesn’t fight separately from the Marines and the Marines don’t fight separately from the Army,” Fried said. “It requires more interface, more information and more communications, which just emphasizes the theme of this market space being a very good one.”
The subsidiary isn’t gaining more contracts because the U.S. Department of Defense’s budget is growing, but because it is beating out other defense contractors in contract competitions, he said.
“We've been competitively winning market share from all of the big players, the Boeings, the Lockheeds, the Raytheons, all of them,” Fried said.
If military spending dropped to zero, General Dynamics Decision Systems would “be in trouble,” he said.
“Unfortunately I don’t see peace worldwide breaking out real soon,” Fried said. “We see more hot spots where some action is necessary, more than some people seem to think the military can handle right now.”
The Pentagon is projecting increased spending on defense at least through 2009, “and those plans exclude any war on terrorism costs and any homeland security costs,” Nisbet said.
“The only thing that could derail it is if public opinion changed sufficiently to knock the current administration out of the White House, in which case in all likelihood you'd get another president who would want to cut back on defense spending,” he said.
As technology steadily advances, the need to upgrade existing systems and equipment keeps General Dynamics Decision Systems busy, Fried said.
“You see state-of-the-art workstations deployed in these things,” Fried said. “In 18 months you need to retrofit them so that they're next generation.”
In the meantime, the subsidiary’s work force has been growing about 10 percent annually, and this is expected to continue, he said. It has been successful in finding software engineers locally who have been laid off from other high-tech companies, he said.
“Motorola has let go of a whole bunch of people and we've snapped them up,” Fried said. “We are recruiting nationally, but we've been fortunate with our local hiring. In fact, We’ve coordinated several times with Motorola closing businesses that we could smoothly transition and pick up those people.”