By ANNA PRIOR
Historians will long debate whether the wars in Iraq and Afghanistan helped or hurt the U.S. There's no question, however, that the two conflicts improved the business of General Dynamics (GD),
The firm's future is clouded not only by the end of the wars but also by a political version of the fog of war, analysts say. The failure of last summer's deficit talks triggered an automatic budget-cutting process -- which, if not altered, will result in a 10-year, $500 billion defense cut starting in January. That mandatory cut, says David Rowlett, a T. Rowe Price aerospace and defense analyst, would be "the worst-case scenario" for General Dynamics.
For his part, Johnson, a Vietnam War-era fighter pilot who served on the Joint Chiefs of Staff, says his company has been planning for cuts in military spending for "quite some time." One component of his strategy involves focusing the firm more on ships and submarines, a business General Dynamics (and its predecessor) has been in for more than a century. The company is also getting a boost from its thriving Gulfstream private-jet business, says Richard Tortoriello, aerospace and defense analyst at S&P Capital IQ. Another factor in the company's favor: U.S. law. Statutes on the books since the late 1920s require the government to keep the military at a certain level of readiness, a rule analysts say essentially guarantees that the Pentagon isn't going to cut spending entirely.
Nevertheless, General Dynamics' 65-year-old boss will be spending much of his time this year preparing his company in case those big cuts come to pass. At the firm's headquarters in Falls Church, Va., Johnson talked about submarines, dealing with China, and how this budget battle might be his last.
Do you think these automatic spending cuts will happen?
No one on earth, as of this moment, can declare with certainty how it's all going to turn out. I'm not going to solve the problem today, but we're agile enough, so we'll deal with it. It helps that we are very efficient at every level from elemental things like how you negotiate contracts to how complete a design is when we actually start bending metal.
What about replacing the revenue lost as a result of the end of the Iraq and Afghanistan wars?
We're very disciplined about things like cost control, continuous improvements, efficiencies and the agility of our business. And this is a threat-based military, so it always has to be ready to respond. Fundamentally, we are relevant to the fighting force, and that will remain so even in a declining defense budget.
Will international sales help offset some of that decline?
Yes, international sales in our combat-systems group was 34 percent of that group's sales last year, and it's probably going to be close to 40 percent in the next three or four years. We sell through the U.S. government to foreign countries; there are rules and regulations that we comply with in all of those spaces.
Are you putting more focus on the shipbuilding business, too?
I believe shipbuilding will be a very steady business for General Dynamics. Submarines and surface combatants, like destroyers, are our stock and trade. There's a lot of water out there, especially in Asia Pacific, and a huge part of global commerce moves by sea. So freedom of the seas and unimpeded trade are hugely important to the global economy, and the U.S. Navy has been a part of that for a long time. That will not change.
In Asia, is the main issue China?
Yes, but I don't view China today as a threat, if you will. But you have to be very cognizant of what other navies are doing, what other militaries are doing, and respect both their scale and capabilities and make sure you always keep yourself at the leading edge of that competition curve.
Private jets have been a growing business. Who are the primary buyers of Gulfstreams?
They are primarily private companies and individuals, and last year, 70 percent of orders came from outside North America. We are also starting to see a return of large U.S. publicly traded companies, which I think is very healthy.
Corporate executives were vilified for using your jets a few years ago.
They've taken a lot of abuse, mostly politically inspired, but I would tell you that we're very gratified to see the North American market starting to return.
General Dynamics recently appointed Phebe Novakovic as its president and chief operating officer. Is she being groomed to take your place one day?
It's an affirmation of how serious we are about planning and the depth of our bench. And whether Phebe will end up as the CEO, you'll have to ask the board of directors; but it certainly doesn't take much to figure out that if she's coming in as the president and COO, she's probably in a strong position.