BAE Systems Loses Out on U.S. Defense Deal
The loss of the contract to its Wisconsin-based rival Oshkosh Defense is the first major setback since BAE Systems launched its US expansion strategy two years ago.
Under the existing contract, BAE Systems will carry on producing FMTV vehicles for the US Department of Defence (DoD) until the fourth quarter of next year. The programme is still expected to generate $2bn for the company both this year and next. Not only will there be no direct hit on revenues from the loss of the follow-on contract, but the company was already anticipating revenue from the programme to drop to less than $1bn from 2011, BAE Systems said yesterday. But the news of its failure to win the new deal nonetheless left the shares as the FTSE 100's biggest fallers yesterday, dropping 18p, or 5.6 per cent, to 306p.
"The full implications of this decision cannot be assessed until consultations with the DoD have been completed regarding their intentions to transition the programme to the new arrangements," BAE Systems's statement to the Stock Exchange said.
The company, which is the world's second largest defence contractor after Lockheed Martin, has held the contract to supply the US military's Family of Medium Tactical Vehicles (FMTV) programme since 1991, through its 1997 purchase of Armor Holdings. In total, more than 50,000 vehicles have been supplied so far, including trucks to transport troops to the combat zone and trucks to haul cargo, artillery and air defence systems.
Sources close to BAE Systems were yesterday downplaying the loss, claiming it was the result of a strategic decision rather than being beaten in a straight fight because Oshkosh won the deal by offering a price lower than BAE Systems thought was realistic. BAE Systems faced serious financial problems in 2002 after unwisely low bids for two UK programmes—the Nimrod helicopter and Astute submarine—led to massive overruns, contretemps with the UK government and a string of profits warnings. "BAE has learned its lessons from Nimrod and Astute and being burned on a cost basis," one source said.
BAE Systems has pursued a rapid US expansion programme over the last two years. Prior to the acquisition of Armor Holdings for £2.3bn in May 2007, the company had only nominal interests on the other side of the Atlantic, through its subsidiary BAE Systems Inc. But the Armor purchase not only brought significant contracts with it—including the FMTV programme—but also offered a springboard for other deals. BAE Systems is now the fourth-biggest defence contractor in the US market, and the division accounts for more than half of the company's £18.5bn annual sales.
The massive deal covered its purchase price within just two months, winning a $500m deal to build Mine Resistant Ambush Protected (MRAP) vehicles and also a $3.5bn re-tender of the FMTV programme which included an order to build 10,000 armoured lorries.
The US is not BAE Systems' only big growth market. It is also focusing on expansion in India and Saudi Arabia, where defence spending is expected to rise, as well as growing niche markets such as cyber security.
At the company's first-half results in July, Ian King, the chief executive, said he expected combat aircraft to take over from land vehicles as the main driver of growth.
The new phase of FMTV is initially for production of more than 2,500 trucks, Oshkosh said yesterday, with a possible total of up to 23,000 over five years. The company has already beaten BAE Systems once this summer. In June, it won the $3.3bn deal to build for the US military all-terrain vehicles to protect troops against roadside bombs in Afghanistan.