Kent Sherwood used to make windsurfing sailboards. Now, the president of Inglewood (Calif.)-based Foam Matrix Inc. is using his patented manufacturing technique to make molded aircraft wings for Lockheed Martin Corp. (LMT
) and Boeing Co. (BA
) And he's shaving customers' costs by as much as 50%. Before the 61-year-old surfer began talking up the cost-saving nature of his process, the military had little interest. But with defense budgets cratering in the mid-1990s, "it allowed me a way in," Sherwood says.
In the Pentagon's view, this erstwhile windsurfing business may be the wave of the future. In a new position paper posted in February on the Pentagon's Web site, Defense Dept. officials have tried to map out which companies and technologies are likely to transform the military two decades hence. Some giants are on the list, including Walt Disney, which could be tapped to contribute high-tech training and simulation software.
But the majority of the 400 companies mentioned are small fry such as Vanu Inc. of Cambridge, Mass., which has developed software-radio technology that makes handheld communications gear more versatile. The military expects innovative startups to sop up more and more Defense Dept. spending over the next 20 years. They might even grow into rivals of giant defense contractors such as General Dynamics (GD
) and Northrop Grumman (NOC
), both on this year's BW50 list.
Recruiting a fresh gang of startups poses some challenges. New players grumble that the defense market is too small and the procurement process too arduous. Also, they say, the accounting requirements are burdensome, the funding is uncertain, and profits slim.
But the Pentagon is convinced that startups are the future. It is determined to woo them -- and with at least some of the most promising candidates, it is likely to succeed. The Defense Dept. recognizes that the larger contractors share a mind-set that was defined by Cold War battles, making it hard to dream up defense and security strategies for this century. "Monumental leaps were infrequently developed by the top firms of their time," says Suzanne D. Patrick, deputy under secretary of defense for industrial policy. It was Patrick's office that was responsible for producing the new blueprint, "Transforming the Defense Industrial Base: A Roadmap."
To grasp the Pentagon's recruitment challenges, consider the obstacles that drove tiny Amptek out of the defense business. When it was founded, in 1977, the Bedford (Mass.) outfit raked in 70% of its revenues from selling high-performance instruments and satellite parts to the feds. After a drop in military funding for its technology, which measures radiation in space, sales to Uncle Sam plunged to 5% of the company's $7 million in annual sales. The Pentagon wants Amptek to return to the fold, but for now, its executives prefer to concentrate on commercial products such as portable x-ray fluorescence-analysis gear, which identifies alloys for oil and salvage companies. "We're pretty committed to the commercial market," says Alan C. Huber, Amptek's vice-president of engineering.
Other small companies that were nurtured by defense contracts are just waiting to break into commercial markets. EluSys Therapeutics, a 5-year-old biotech venture, gets all of its $2 million in sales from the feds. But that's because only the military will fund its anthrax drug. Since there is no population on earth routinely afflicted with anthrax, the Food & Drug Administration has allowed the company to conduct efficacy trials on animals before doing safety trials on humans. The military isn't put off by the lack of human clinical data -- and its contract allows EluSys to generate quick cash flow.
EluSys also wants to develop a family of drugs that works in a similar fashion -- binding certain types of pathogens in the bloodstream and flushing them through the liver. Its techniques might prove effective against common scourges such as drug-resistant infections. If so, the Pine Brook (N.J.) company could cut its DOD ties. "On the revenue side, [defense] is not a big market, and on the earnings side, you can depend on the government to suppress profits," complains EluSys CEO Stephen G. Sudovar.
Small companies with attractive technology also tend to be mavericks, and they balk when the brass barks its orders. The 20 employees of the Insitu Group, for example, make small, unmanned aerial vehicles (UAVS) for the military and commercial markets, with prices starting at about $60,000. The Bingen (Wash.) company has also developed a breakthrough 1.2-lb., $20,000 stabilized video-imaging system that can keep pointing at the target while the plane flies onward. Clearly, Insitu's ScanEagle UAV, created with Boeing, could give the better-known $4.5 million Predator a run for the money. "We deliver 60% of the mission for 1% of the price," boasts Steven M. Sliwa, president and CEO.
Sliwa, however, says the military wants to add more capabilities to the aircraft, which could boost its cost and cut its three-day maximum time aloft. Sliwa is resisting, declaring that if the U.S. Navy wants a small UAV with, say, two sensors, it should just buy two ScanEagles. That's not the way to please admirals and win more contracts.
For many startups, the idea of ballooning into the next Boeing, as the Pentagon envisions, has little appeal. "Our value is in the innovation process," says Foam Matrix' Sherwood.
Sherwood thinks Defense should foster a vibrant cadre of small suppliers who could provide price competition and innovation. And indeed, the Pentagon is mulling ways to overhaul its hidebound procurement process to make that happen. If it can carry out these reforms, its 20/20 wish list may just have a fighting chance.
MARCH 24, 2003 |
Copyright 2003, by The McGraw-Hill Companies Inc. All rights reserved.
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