Contractors taking diversification seriously as defense spending shrinks


The American Phoenix, built by BAE Systems for Mid Ocean Tanker Co., and now operating in the Gulf of Mexico.
March 31, 2013

Bethesda-based contracting giant Lockheed Martin earlier this year received a patent for Perforene, a material used to make water potable by removing sodium, chlorine and other ions.

It was a personal victory for John B. Stetson Jr., a Lockheed senior technical fellow who came up with the idea more than three years ago, but it was also a significant step for a defense contractor that has been primarily focused on the government market.

As contractors encounter shrinking federal budgets, they are increasingly seeking to bolster their presences in the international and commercial markets. Companies have long been promising this diversification, but there are now more signs this effort is fully underway.

“The bottom line is if their government customer continues to have less money for purchasing goods and services, then the companies really don’t have a choice but to diversify,” said Loren Thompson, a defense industry consultant.

Stetson came up with the idea for Perforene while at a conference in Houston. He was intrigued by the material graphene, which is composed of pure carbon.

“This stuff is so thin and so strong,” he recalled thinking. “If we could just poke holes in it that are the right size, we could filter the salt out of water.”

Essentially, that’s how Perforene works — but on a scale that’s almost difficult to imagine. The holes are the size of a nanometer, which Stetson said is just a fraction of the width of a human hair.

The technology is in its early stages; Stetson said Lockheed is still working on how to scale production and the company said it is seeking commercialization partners.

Lockheed is hardly alone in scouting commercial opportunities. Even Falls Church-based General Dynamics, which has long had a robust commercial business, is pursuing expansion. The company earlier this year announced a strategic partnership with Samsung to incorporate GD technology into Samsung Galaxy devices.

BAE Systems’ Arlington-based U.S. unit, too, is seeking sources of revenue to help make up for shortfalls in the U.S. defense business.

Today, commercial business represents just under 10 percent of BAE’s work, but the company is seeking growth in commercial avionics and shipbuilding work, among other areas, said Thomas A. Arseneault, executive vice president of BAE's product sectors.

The company has long been translating its experience providing flight and engine controls for military aircraft into the same kind of work for commercial airplane manufacturers. But Arseneault said BAE is expanding beyond its traditional customers such as General Electric and Boeing to now work with Embraer and Bombardier.

In 2010, BAE bought Atlantic Marine, which has helped it expand from its experience in naval ship repair to commercial shipbuilding. Last year, it completed construction of the American Phoenix, a chemical tanker that BAE said is operating in the Gulf of Mexico.

BAE is under contract to build nine more vessels for the oil and petroleum industry.

“We took something we were good at … and translated that,” Arseneault said.

Still, there remains skepticism about defense contractors’ ability to move into commercial work. Many companies have struggled to handle the pace of the market.

Thompson said the difficulty typically isn’t about technology or skills, but simply about culture.

In BAE’s case, Arseneault said some of its focus industries aren’t so different than the government market. For instance, in the aerospace and the shipbuilding sectors, there are a limited number of customers and high barriers to entry.

“It’s hard to take that [government contracting] business model and just flip it on its head,” he said of this shift into more traditional consumer markets. “But there are places in between.”

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