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US Private Firms Boost Internal R&D Spending

Nov. 18, 2013
 
General Atomics tests a railgun. Many private companies invest higher amounts of revenue in research than do public companies.
General Atomics tests a railgun. Many private companies invest higher amounts of revenue in research than do public companies. (US Navy)

WASHINGTON — Publicly traded US defense companies, citing shareholder pressure and uncertainty about Defense Department plans, have generally kept research and development (R&D) spending low.

Private companies don’t face the same relentless push for quarterly profits, but they still need to understand what technologies DoD wants.

“You tell me you don’t know where the customer is going?” said James Chew, strategic development manager for General Atomics. “How does that make any sense? I don’t know if I could drink enough for that to make sense. How can you not know? It’s better, faster, cheaper.”

General Atomics, like most private companies in the defense sector, doesn’t disclose its company R&D spending, either as a gross number or as percentage of sales. But the company is committed to keeping R&D spending strong, Chew said.

“If it’s something good, believe me, we brief our CEO and it’s supported,” he said. “Public companies should be able to do the same thing, too.”

Other private companies in the sector also voiced a commitment to company-sponsored R&D.

Several executives described spending multiple times the percentage of large public defense companies, which frequently invest only about 1 or 2 percent of sales in R&D.

“It is well worth the money in the sense that it gives you a competitive advantage over those who may not invest,” said Paul Sautter, director of R&D for Alion Science and Technology, which like General Atomics is one of the 100 largest defense contractors in the world.

Alion works with customers to find potential investments, but it also listens to employees for transformative ideas. To that end, the company tries to put aside 20 percent of its R&D expenditures for unusual thinking.

“We’re looking to encourage the wild and crazy ideas that are going to disrupt the world that we live in,” Sautter said. “A lot of the times, the ideas are not as well fleshed out, they’re embryonic. We actually have a kind of incubator process.”

That incubator can yield significant developments, such as an idea one employee had “out of the blue” on how to calculate the amount of noise a submarine’s shape produces when traveling through water. Mechanical noises can be worked out in advance, but there was no way to anticipate, or model, the noise that would be created by the submarine’s shape itself, Sautter said.

Alion tries to leverage those types of ideas across segments. In the case of the noise model-ing, the same principles can be applied to missiles moving through the air and to other fast-moving bodies.

General Atomics focuses on investing in areas with both commercial and defense applications, Chew said. In particular, the company has been spending money on energy technologies, including thermodynamically stable, safe batteries.

“We’ve had real good times over the past 12 years; basically, whatever idea we proposed to the government, they said, ‘We’ll buy it, get it out there as soon as you can,’” Chew said.

“Now what you have to do is say, ‘Who is going to be successful?’ The companies that are going to be successful are going to be those that take the entrepreneurial attitude and say, ‘What do we know about the market, what do we know that people are really looking for, or what can we do to give them something that they didn’t know they needed?’”

While the difference in company structure, private or public, plays a role in the different approach to R&D, according to Peter Singer of the Brookings Institution, there’s another factor: size.

“You’re talking big companies, but you’re not talking the size of the big boys,” Singer said.

It’s true that only a handful of US private companies make the annual Defense News Top 100 contractors list, and none are at the top of the heap.

“Bigger companies tend to take fewer risks,” said Singer, author of the upcoming book, “Cybersecurity and Cyberwar: What Everyone Needs to Know.”

“The bigger contractors are more status quo-oriented,” he said.

Modest R&D investment by top defense contractors can have negative implications, Singer said.

“That’s likely not a good thing for either industry or national security,” he said. “The danger of this is not merely that you don’t get as much competition of prices and systems, but you also don’t get competition of ideas.”

If, as Sautter and Chew suggested, investment in R&D provides a corporate advantage, it would seem logical that some public defense contractors would boost their investment.

And while there may be exceptions, any larger shift is unlikely, given the continued pressure from shareholders, said Byron Callan, an analyst with Capital Alpha Partners.

“I don’t think they have the courage to do it,” Callan said. “It takes a pretty bold management to stand up right now and say to shareholders, ‘You know what, we’re going to take [profit] margins down, put it into research and development. Trust us, in three year’s time, we’re going to be a better company.’ To the contrary, they’re talking about sustaining margins.”

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