AD: The aerospace industry appears to be growing and doing quite well in spite of the recent recession. What is the driving force behind the success of Lockheed Martin and the industry in general?
Troan: The modern aerospace industry is considered by many to have been born in John F. Kennedy’s famous 1962 Rice University speech. In it, he noted that as more engineers and scientists work over longer and longer life spans, it would be inevitable that technology would begin progressing at exponentially increasing levels. We are experiencing that phenomenon today as we see product lifecycles becoming shorter as pace of technology increases. So we are inventing new technologies with desired applications at an exponential rate of growth, and that’s only going to increase in the future. As the pace of engineering quickens, well managed technology companies like Lockheed Martin benefit greatly.
AD: Can you comment on growth activity? Are there more greenfield plants being sited or is M&A activity a factor in growth?
Troan: The major mergers and acquisitions phase of the aerospace sector occurred in the 1990s, and — in fact — generated Lockheed Martin as the result of the merger of Martin Marietta, General Electric Aerospace, Loral Aerospace, parts of General Dynamics, and Lockheed. There were also a number of smaller entities pulled into that vortex. Recent M&A activity in this industry has been geared toward obtaining key technologies needed to advance corporations’ technical capabilities and intellectual property. Those are noble goals and the process works very well.
Today [Lockheed Martin] is in a physical plant consolidation mode, while maintaining our sales and expanding our technical base. While we are open to greenfield sites related to federal government customer preference, mission requirements, or cost necessity, we are less than sold on some of our competitors’ current trends of abandoning heritage communities and large physical plants for greenfield sites. There are practical difficulties with greenfield sites of replicating workforce skills, handling new depreciation expense, and meeting long-term commitments.
AD: Is the company active in economic development?
Troan: Yes. We have a very active practice, but are currently concentrating on working with the states and communities where we have a large physical plant and worker population. The goal is to utilize the existing infrastructure and workforce, and negotiate economic development agreements based on worker retention, which is a lot less expensive for the community than bringing in a new employer. The best blend of workforce skills, overhead efficiency, and underlying business climate usually wins; and not just for us, but for our military customers and the community.
AD: States vie very aggressively for large facilities to boost their economies. What are the top three things that Lockheed Martin looks for that would sway their decision?
Troan: We use a Matrixed Probability Analysis (MPA) when looking at a site for a new program. We put all of the possible locations across a horizontal axis of the matrix, and all of the decision criteria down the vertical axis, and rate each site on a scale of 1 to 10. Generally there are three factors that rise to the top, but not in any particular order — workforce quality, available infrastructure, and taxation. Economic developers play a key role in defining the final cost of all three of these factors.
AD: Can you explain these factors further?
Troan: The best business climate in the world won’t help you perform to the customer’s specifications if they don’t have an adequate workforce. Workforce development without a doubt is going to be one of the country’s major challenges over the next few decades. And it’s not just a domestic problem — it’s a worldwide problem.
Nothing kills a product’s lifecycle financial performance like a big capital investment on the front end that has to be recovered over 20 years. So, whether we’re looking at siting at one of our existing facilities, or at a greenfield or a brownfield, we are always hunting for existing infrastructure that can be converted to our needs at a lower cost.
Finally, in order for the corporation to maintain a sustainable production model, the underlying business climate has to have a competitive tax structure and cost of living. But you have to be careful. Some low tax jurisdictions have all their tax revenue set in the property tax category. That inherently precludes any industry that has a lot of capital.
AD: Economic incentives, i.e. tax breaks, commitments to job creation levels, etc., are put forth to attract companies. How much do these mean to a company like Lockheed Martin?
Troan: Economic development is best viewed as an emerging discipline within microeconomics, aimed at artificially modifying the business climate of a region so that targeted business sectors can operate there with a sustainable production model. So these are balanced partnerships between the corporation, the community, the university system, and the workforce to drive down the cost of a particular product so that industry can produce it in a community with a sustainable business model. This is a targeted model that would not exist otherwise.
The customer gets a lower price for higher quality goods and services, the company gets sales at a reasonable margin for its stockholders, the community gets jobs and a windfall of indirect and induced taxation from the economic activity, the university system gets jobs for its graduates promoting enrollment, and the workforce gets jobs and new skill sets. In a good economic development partnership, everyone wins in the long run.
AD: How sustainable is this model with many states/cities being in the red?
Troan: We try and work with the communities in which we do business to achieve a win-win solution wherever possible. The only sustainable way I see for a public sector organization to get out of a deficit is to grow private sector economic activity. Is the economic development model sustainable? I believe so.