Budget may steer Army trucks to Navistar, Oshkosh--Lower defense spending is forcing changes in U.S. military truck programs
--Military planners expect to shift more costs to defense contractors
--Truck builders Navistar and Oshkosh could have an edge over competitors
https://www.marketwatch.com/story/budget-may-steer-army-trucks-to-navistar-oshkosh-2011-11-22
Anticipated cuts in U.S. military spending could tip the competition to build a new generation of military trucks in favor of commercial manufacturers willing to withstand the Pentagon's tough new requirements for defense contractors.
The U.S. Army has scaled back plans for replacing its fleet of Humvee utility truck in hopes of sparing a new truck program from congressional cuts. At the same time, the military aims to rebuild thousands of Humvees to improve their performance and protection in combat.
The dual approach is intended to satisfy the Army and Marine Corps' demands for a better utility truck than the aging Humvee, while at the same time demonstrating to Congress the resourcefulness to adapt and modernize some of the 160,000 Humvees already in service.
The strategy exerts pressure on companies vying for production contracts to hold down expenses by giving defense planners a fallback option should the costs of one or the other program veer off course. Under the proposed recapitalization program for the Humvees, the army would cap the cost for a rebuilt Humvee at $180,000. Meanwhile, the army has set a ceiling on the price of the new truck, known as the Joint Light Tactical Vehicle, or JLTV, at $270,000. The military appears determined to pull other cost-reduction levers as well, including ratcheting down reimbursements for contractors' research and development expenses and periodically rebidding production contracts to attract better prices.
"Nobody is too eager to throw their hats in the ring for this," said Dean Lockwood, an analyst for Forecast International Inc., a defense and aerospace consulting firm in Connecticut. "There's some real fear out there that contractors are going to left holding the bag" if the funding is eliminated.
The tight-fisted tactics would appear to favor Oshkosh Corp. OSK -5.61% , Navistar International Corp. NAV -2.97% and other companies that can offset the anticipated thin margins on JLTV or the Humvee program by leveraging existing engineering, supplier agreements and assembly lines for commercial vehicles. Navistar is the third-largest seller of heavy-duty commercial trucks in North America. Oshkosh builds fire trucks, cement mixers, garbage packers and other specialized trucks. Both companies have had success in recent years in capturing military truck contracts under unconventional programs necessitated by the wars in Iraq and Afghanistan.
Long-running production contracts with opportunities for margin-enhancing upgrades to equipment have been the life blood of the U.S. defense industry, providing companies with years of reliable profits and the means to recoup extensive development costs.
The Humvee's incumbent manufacturer, AM General LLC of Indiana, has essentially been a single-product company for 25 years. Defense industry stalwarts such as Lockheed Martin Corp. LMT -0.70% , BAE Systems PLC and General Dynamics Corp. GD -0.02% rely on plump margins to support networks of subcontractors and partnerships assembled for specific defense work, including building vehicles.
Navistar and Oshkosh have gone on the offensive lately to present a can-do image while much of the defense industry is hunkered down waiting for the outcome of federal budget negotiations that could strip about $1 trillion from the projected increase in defense spending over the next decade.
Navistar and Oshkosh unveiled truck prototypes this fall intended to showcase lower-cost designs and technology for the JLTV at a time when support for the new truck in Congress has been slipping because of its high cost. Under the Army's original requirements, each truck would have cost about $400,000.
"We're trying to get in front of the customer with the art of what's possible," Ken Juergens, a vice president for military programs at Oshkosh, said. "We think it's in the government's best interest to let the JLTV competition to prevail."
Oshkosh's new light combat vehicle borrows from its success in developing an all-terrain armored truck on-the-fly in 2009 for U.S. troops in Afghanistan. The Wisconsin company built 8,700 vehicles, known as M-ATVs, in 18 months.
Navistar in October released a truck called the Saratoga that the Illinois company views as a demonstrator model for either JLTV or the Humvee program, which aims to fix the truck's shortcomings as a combat vehicle. As an engine builder, Navistar could supply the remedy for the Humvee's lack of horsepower for the added weight of protective armor.
"I'm not going to be sitting out there flat footed if the Army puts a bullet in the JLTV program," said Archie Massicotte, president of Navistar's defense unit, which has built nearly 9,000 landmine-resistant patrol trucks for the military since 2007. "I'm going to be able to come back with something else" for the Humvee program.
The modest initial volume of just under 6,000 Humvees would likely increase significantly if the JLTV program is canceled. Even if the JLTV is spared, the production volume would be limited to about 50,500 trucks spread over several years beginning in 2015.
Analysts predict the long lead time to award a contract and uncertain funding for the new truck will prompt some defense companies to pass on JLTV, particularly after Oshkosh's recent struggles to earn a profit on a contract for medium-sized military cargo trucks that it won in a cut-throat price competition with BAE Systems two years ago.
"In this environment, do you want to win (the contract) and lose money?" said Josephine Millward, an analyst for brokerage firm Benchmark Co. "I can't imagine that whoever wins JLTV, that's it's going to be very profitable."