Two weeks ago, Wisconsin-based truckmaker Oshkosh (NYSE:OSK) won a great victory. After eight years of debating a replacement for its venerable Humvee all-purpose jeep, the U.S. Army finally awarded a contract to build the darn thing -- and Oshkosh won that contract.
Over the next eight years, Oshkosh will churn out a total of 17,000 Joint Light Tactical Vehicles for the U.S. Army and Marine Corps. If all goes well, the contract will then expand threefold. Oshkosh will ramp up and ultimately build a total of 55,000 of these JLTV armored trucks, earning an estimated $21.7 billion in total on the contract.
It would build these trucks, and earn this money, unless that is, Lockheed Martin (NYSE:LMT) has something to say about it.
Over our dead body
Unfortunately, Lockheed Martin does have something to say about it. And what Lockheed said last week was the equivalent of: "Your Honor, I object!"
On Sept. 8, Lockheed Martin filed an official protest against the Pentagon awarding Oshkosh the JLTV contract. Insisting that its own version of the JLTV is "the most capable and affordable solution for the program," Lockheed is demanding that the U.S. Government Accountability Office (GAO) "address our concerns regarding the evaluation of Lockheed Martin's offer."
Curiously, the other loser in the Pentagon's JLTV decision -- AM General, which builds the Humvee that JLTV is meant to improve upon -- chose not to file a protest.
Definition of an honest defense contractor: Once bought, they stay bought?
Why not? Well, here's one possible explanation: Since the Pentagon tapped Oshkosh to build the JLTV, it has awarded AM General not one, not two, but three separate Humvee contracts! Together, the three awards to build Humvees for the Iraqi and Tunisian armies, and for the U.S. Army, Reserve, and National Guard units, are worth just shy of $450 million to AM General.
Sure, $450 million is not $21 billion. But it's a whole lot more than nothing. It is also, apparently, enough to convince AM General not to rock the boat. The more so because, as AM General pointed out recently, there are still 230,000 Humvees in operation worldwide, 160,000 of which are with U.S. armed forces. Even if 55,000 of these ultimately get replaced by JLTVs, that's still anywhere from 105,000 to 175,000 Humvees left for AM General to maintain, service, and sell spare parts for. It's a big chunk of business, and not one AM General wants to endanger by irking the Army with a challenge to the JLTV.
When you've got nothing, you've got nothing to lose
Lockheed Martin, in contrast, has no such installed base of Humvee business at risk -- and Lockheed got no JLTV consolation prizes from the Army. As one colorful commentator recently put it: "If they piss off the Army it just doesn't matter" to Lockheed.
That would seem to give Lockheed Martin every incentive to rock the boat, and try to shake loose some JLTV dollars for itself. But Lockheed Martin may be taking a risk in doing so.
Enemies in high places
You see, GAO protests of defense contract losses really took off in the face of defense budget cutbacks back in 2009. The Pentagon wasn't pleased with how this slowed down the process of getting vital equipment to troops in the field, however. Then-Pentagon acquisitions chief Ashton Carter even issued contractors a stern warning: They should only file protests of Pentagon contract decisions on "rare" occasions, and never "frivolously."
Contractors who ignored this mandate risked incurring the Pentagon's wrath.
Today, Carter is no longer just acquisitions chief: He's been promoted to Secretary of Defense. And as such, he runs the whole (literal) shooting match. He's in a position to, for example, punish a recalcitrant Lockheed Martin not just by denying it Army contracts, but by cutting funds for Lockheed's all-important Air Force F-35 contract as well.
What happens next
Be that as it may, Lockheed's die is now cast. GAO now has 100 days from the date of the protest (so until Dec. 17) to rule on Lockheed's protest. If it decides the Army made a bad call, GAO will likely order it to reconsider Lockheed's bid (and potentially AM General's as well). Such reconsideration will add even more time to the process, and delay delivery of vital war matériel to the troops for additional months.
For its part, Oshkosh must now cool its heels and await the outcome of the protest. The Army has instructed it to stop work on the new trucks until the protest process plays out.
How will it play out? According to The Wall Street Journal, the GAO received more than 2,500 protests last year, most involving defense contracts. Fewer than a fifth of them succeeded. So statistically speaking, the odds favor Oshkosh, and disfavor Lockheed Martin. Meanwhile, with Oshkosh on the ropes financially, but essential to the Army as the company that maintains its MRAPs and builds its "family of medium tactical vehicles" and heavy trucks, the Pentagon has a strong incentive to stick to its guns and insist on giving Oshkosh this contract -- and these revenues -- as a financial lifeline.
By my count, that's two arguments in favor of Oshkosh winning. Unless Lockheed Martin has the merits of this case clearly on its side, I suspect they're bound to lose this battle.