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Easy come, easy go. And as Boeing (NYSE: BA ) learned this week ... sometimes not so easy.
The Pentagon confirmed Tuesday that it is officially putting an end to its "$160 billion" Future Combat Systems program in its current form, heading off taxpayer fears that runaway costs could morph FCS into a $300 billion boondoggle.
Back to the future...
Six years in the making, FCS aimed to transform the way the U.S. Army fights its wars, linking military units through a high-tech maze of computer and satellite networks. Co-managed by Boeing and SAIC (NYSE: SAI ) , the plan aimed to link remote ground sensors, unmanned aircraft, military robots, and ultra-high-tech combat vehicles into a unified fighting force. Every element of a brigade would be able to "see" what every other element saw, creating an unmatched "force multiplier" in combat.
Unfortunately, while the program by definition aimed at preparing for "future combat situations," FCS became rapidly overtaken by events in the present. Combat experience in Iraq and Afghanistan taught the military that thin-skinned vehicles, no matter how technologically superior, were vulnerable to low-tech improvised explosive devices (IEDs). In-process changes ordered for various FCS vehicles, combined with the defense industry's penchant for viewing defense budgets more as a guidelines than mandates, had FCS running at least 40% over budget (and counting.)
Long story short, Defense Secretary Gates decided to first gut the program in last month's Pentagon budget request -- scooping out the $87 billion heart of the program when he eliminated the "Manned Ground Vehicle" element -- then cancel it once the heart had been ripped out.
... and back to the drawing board
So it's so-long and see-ya for FCS. But what will take its place? I mean, after sinking billions into developing new military technologies, you wouldn't want the Army to just junk all it has learned, and start from scratch, right?
Enter "ABCTM," the Pentagon's latest batch of alphabet soup, this time denoting "Army Brigade Combat Team Modernization." While more a concept than a plan at this stage, the broad outlines of ABCTM seem to go like this: Instead of equipping 15 high-tech, super-integrated brigades with space-age technology, the Army will take various bits of tech, developed piecemeal, and spread them over all 73 of its combat brigades.
In some ways, ABCTM may still look a lot like FCS. Two weeks ago -- after Gates outlined his long-range plans for the future -- the Army asked Congress for $2.9 billion in FCS funds. The bulk would go to Boeing and SAIC for network hardware and software and systems engineering work. But that still left more than $300 million for bits and pieces of FCS:
- A Non-Line-of-Sight Launch System being developed by Lockheed Martin (NYSE: LMT ) and Raytheon (NYSE: RTN )
- Unattended Ground Sensors, a technology developed by Textron (NYSE: TXT ) ,
- Unmanned Ground Vehicles from providers like Lockheed, and iRobot (Nasdaq: IRBT )
- And Unmanned Aerial Vehicles from... well, everybody. Name a company -- any of those listed above, plus General Atomics, Honeywell (NYSE: HON ) , and L-3 besides -- and it's probably hawking some type of UAV.
How much of this funding will survive the termination of FCS, however, remains uncertain. Apparently, the Army is only asking for $100 million to help it start up ABCTM, which suggests that the previous requests may be scaled back -- or perhaps just pushed back a bit until the Pentagon firms up just what "ABCTM" stands for.
What's it all mean for investors?
You're going to think I'm crazy for saying this... but if you ask me, the answer is: "It probably doesn't mean a lot. And it's certainly not as bad as you fear."
Oh, sure, if you own shares of Boeing or SAIC, the two lead contractors under FCS, then the program's cancellation probably means fewer revenues for both companies in years to come. It's not a total loss, though. The Pentagon will likely have to pay Boeing and SAIC at least for their development costs up to date, and perhaps a cancellation fee. (DefenseNews quotes an army source who pegs this figure at approximately $350 million.) Importantly, even with FCS kaput, Boeing and SAIC can still bid on the parts of FCS that survive under ABCTM. More to the point, each company should maintain a critical role in the core networking technology that underlies modernization efforts. The same DefenseNews article quotes an Army source saying Boeing-SAIC will remain the lead system integrator for spinout technologies.
More generally, I see Gates' killing of FCS and initiation of ABCTM as an attempt to:
- Rein in costs on a program that had gone "off the reservation" and was galloping its way to the Land of $300 Billion. As a taxpayer and an investor, I cannot fault him for trying to head off the PR fiasco that would entail
- Invest in weapons systems that we will actually need in the future -- not just protect pet projects that appease vested military-industrial complex interests. FCS as a whole may be dead, but Gates' moves this week make me more certain than ever that if you put your money in firms developing unmanned aircraft, robots, and body armor -- that's where the future, and the profits still lie.
Victory through superior defense investing: