fedgazette

Military build-up: district defense contractors watching, waiting

A look at Ninth District defense contractors in light of recent military activity

Rosie Cataldo - Staff Writer

Published January 1, 2002  |  January 2002 issue

It might not make a good campaign slogan, but the war against terrorism has its upside for Ninth District businesses providing goods and services to the U.S. military, especially in light of the sagging general economy.

Every year, the US military spends tens of billions of dollars purchasing goods from private sector companies. Billions more are spent every year on research. The war on terrorism will bring still more resources into this industry, and some district businesses are likely to benefit.

Caswell International Corp. in Minneapolis, for example, designs equipment found in shooting ranges, or "targetry" in military-speak. Contracts with the Department of Defense (DOD) usually make up between 45 percent and 60 percent of the company's business. But since Sept. 30, military work has increased substantially, according to Don Addy, company president and co-owner.

"Our customers expect more money from an anticipated increase in DOD spending," Addy said. The National Guard and Army have increased orders for training equipment to increase readiness, Addy said, as has the FBI, which is a non-DOD funded agency.

But given the comparatively small scale of military efforts to date, many other defense contractors are still waiting for the orders phone to ring. With nearly $361 million procurement dollars in 2000-about 40 percent of its business—Alliant Techsystems of Edina, which manufactures ammunition, is the largest DOD contractor in Minnesota. Alliant has yet to see a windfall of new projects but is likely to do well if there is continued military action.

"There's less impact on our business than one would imagine," said Rob Bitz, the company's communications director. "We've had a lot of discussions with our customers as they've been planning military actions. If we won a major new contract, that may cause a significant increase in hiring. But even then it's not necessarily a business where you go out and hire a lot of new people because you have the production talent in-house already," Bitz said.

The DOD's budget will increase for 2002, but by how much and for which projects are the million—make that billion—dollar questions. Prior to Sept. 11, the fiscal 2002 Pentagon budget was projected to be $328 billion, an 11 percent increase over this year. After the attacks, Congress gave the go-ahead for an additional $20 billion, and proposals for further hikes are being considered.

Compared to big shots like California, Virginia or Texas, Ninth District states do not have a huge piece of the defense industry pie. But even the district's small share of defense contracts—a little less than 2 percent of total procurement dollars—is large enough to bring business to a wide range of companies. (This percent includes all of Wisconsin and excludes the Upper Peninsula of Michigan. See map for more data.)

For example, ORC Industries in La Crosse, Wis., manufactures rain suits, hats and other items for the military; Gateway, Inc., in Sioux Falls, S.D., provides the latest in information technology equipment to the National Guard; and General Mills, in Minneapolis, makes cereal for military personnel. Many such companies were unable to comment because of a request by the Pentagon last October asking companies to be very discreet about their business as well as their defense projects. But some were able to share how the current military situation was affecting business.

New war, new business opportunities

Due to the nontraditional, small-scale nature of this military action, there has not yet been a general acceleration of defense contracting. The increase is more selective, involving the types of materials necessary to fight terrorism in Afghanistan, such as night vision equipment, shelter for cold weather environments, precision-guided weapons, and surveillance and intelligence systems.

"We're not going to be using tanks probably, so there hasn't been a huge ramp-up of heavy equipment," said Dan McGinty, head of public affairs for the Defense Contract Management Agency (DCMA), which oversees a majority of DOD contracts. Hence, the changes are affecting a select group of defense-related companies.

One big reason that Caswell International saw the recent increase in business was a shift in military training methods from an open battlefield to one on urban terrain—called Military Operations on Urban Terrain (MOUT). Caswell, a private, 75-year-old company with 70 employees, has been selected as initial designer and builder of the prototype MOUT training facility at Fort Polk, La., said Addy. "Our equipment is considered state-of-the-art for MOUT targetry," he said. "We build products that enable those agencies to train their personnel.

"We're seeing more of a shift in doctrines to more tactical training as opposed to strategic training. That means our equipment will have to evolve," Addy said. "When training requirements change, equipment requirements have to support that. We're seeing that sort of evolution beginning to take place, and I think Sept. 11 is just going to accelerate that."

Caswell has added four permanent and some temporary employees since Sept. 11. It's conceivable they'll add more employees in 2002. The company has had a lot of inquiries, Addy said, "but that doesn't pay the bills."

The company has also received inquiries from Customs Service and the Federal Law Enforcement Training Center-the largest federal law enforcement training agency, and includes the airline sky marshals-regarding its Road Range system, which is a mobile firing range contained in a semitrailer.

Come fly with us

Aviation is another industry likely to see some additional defense contracts. Mid-America Aviation Inc., in West Fargo, N.D., currently gets about 95 percent of its business from DOD contract work. It specializes in the overhaul and repair of airplanes and helicopters for military and civilian applications. Customers include the Air Force, Army, NASA, as well as Lockheed Martin Aircraft and Boeing Co.—the nation's number one and two DOD-contracted equipment suppliers in 2000.

Mid-America is adding 50 employees to its existing 12 due to new DOD contracts with Raytheon, the third largest defense contractor. The company may also have the opportunity to work as a subcontractor for Lockheed Martin on the new joint strike fighter, said Tom Kenville, company president. Lockheed Martin secured the $200 billion DOD contract, the largest single contract ever, to supply the supersonic fighter to the US Air Force, Navy and Marine Corps as well as the U.K. Royal Air Force and Royal Navy.

Mid-America takes in about $5 million a year, which Kenville said is fresh money coming into West Fargo, a town of approximately 15,000. "It's kind of like farmers selling their crops to Europe-that's new money. We have about a $25 million impact in West Fargo. We also have a half-dozen vendors in town who do subcontract work for us."

In order to form a more perfect union

With tens of billions of dollars involved, even the supervision of defense contracting—done mostly by the DCMA—is an industry sector unto itself. The DCMA is a freestanding defense agency that specializes in managing billions worth of contracts, led primarily by the military services. The DCMA employs 12,000 internationally whose job is to make certain the products are of the highest quality, delivered on time and appropriately priced.

"One-third of our employees are quality [control] guys, about 10 percent are engineers, 20 percent are business specialists ... there's just a wide range of stuff we cover. We have a billion dollar budget," said McGinty. "We administer billions of dollars in contracts a year; there are 23,000 different contractors that we work with and 80 different kinds of things we do for these people." Certain contract work needs more observance than others. "You don't need a government guy overseeing the Jockey Co. in Racine, Wis., making underwear [for the military]. But on the other side of town there's a company which makes steering components for military ships. So in a case like that, we'll put a quality assurance guy there making sure they yield a good product," McGinty said.

As of November 2001, the DCMA managed 315,921 total contracts, 3.2 percent of which were in the Ninth District (excluding the Upper Peninsula of Michigan and including all of Wisconsin). The total dollar amount of district contracts handled by the DCMA was $15 billion, or a small fraction of the $227 billion contracted nationwide.

After Sept. 11 the DCMA had not seen a huge increase in defense contracting, McGinty said, because much of the needed materials were already in manufacturing pipelines to be delivered to the military. But there will eventually be increased defense contracting to support the current efforts, and many are being developed right now.

"The military has come to us on certain items to ask companies to prioritize what they're working on to get the items to the military sooner than normal, or possibly a greater amount. Some contracts have been renegotiated," McGinty said. "My sense of the thing is that we should start seeing the impact of these increases in the next 30 to 60 days [mid-December to mid-January]," he said.

Ready and willing

Not all DOD contractors have increased business. Sioux Manufacturing Corp., Fort Totten, ND, gets almost all its work from the DOD, employing 85 people in armor production for Humvees and the Bradley Fighting Vehicle, and an anti-erosion tile that is used to align the canisters for tomahawk cruise missiles. Carl McKay, company president and CEO, said the company has had no increase in orders. "I don't know if we'll need to hire more. If it happens, fine, we'll be happy about it," he said.

Companies in charge of military construction are also seeing little change in business. Strata Corp., a construction company headquartered in Grand Forks, ND, with facilities throughout the state, also reports no change in business. "Change would strictly be based on what the military does. If they add facilities or upgrade existing facilities, some of that would trickle down, I presume. The percent of DOD work changes depending on the year," said Division Manager Dan Syrup.

Academic researchers also hope to tap additional funds for research, which often accompanies a war effort. The University of Minnesota plays an active role in DOD research and holds the seventh spot in the state as a recipient of DOD procurement dollars, totaling $31.3 million in 2000, according to the Federal Procurement Data System.

Georgios Giannakis, a professor of electrical and computer engineering at the University of Minnesota, said he receives about 30 percent of his research funds from the DOD, with the remainder coming from the National Science Foundation and private entities. DOD projects come from the Army Research Lab and the Defense Advanced Research Project Agency, the central research and development organization for the DOD. Giannakis is currently working on wireless communication features to ensure low probability of interception and to make sure they are not susceptible to jamming. He's also researching eavesdropping projects—trying to find out what type of code the other person uses to communicate in order to decode messages.

About 30 percent of Giannakis' research funding comes from the DOD, 50 percent comes from the National Science Foundation and the remaining 20 percent comes from the private sector. "My work spans the spectrum. Students help with research projects, so I don't accept projects that are classified. I want everyone to have a share in my research," Giannakis said. He collaborates with other companies—such as General Dynamics Information Systems in Bloomington, Minn., and Rockwell International in Cedar Rapids, Iowa—on research outside the university for about 10 percent of projects, he said.

Giannakis has not had to hire more people but plans to do so in 2002, though it may not be solely for defense projects. "I have noticed that there is an increase in demand for more research. I believe there will be more emphasis on anti-terrorism research projects. Already people are coming up with request for proposals in that direction," Giannakis said.

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