Our Insights from The Association of the U.S. Army’s (AUSA) 2023 Annual Meeting
Through attending in-person exhibitions and multiple panel discussions at AUSA’s 2023 Annual Conference, Capstone has selected several key trends that are expected to shape the future of the Aerospace, Defense, Government, & Security (ADGS) industry. Military leaders, U.S. Army administrators, and leading industry voices provided insights on key trends in Capstone’s coverage areas, specifically the Air, Land, Sea, & Space (ALSS) Systems and Command, Control, Communication, Computers, Intelligence, Surveillance, and Reconnaissance (C4ISR) sectors. Several takeaways from our experience at conference are highlighted below.
1. Transformation Over Modernization
As the U.S. military experiences a period of significant disruption in technology, the need for a transition from technology modernization to technology transformation has taken center stage amid growing geopolitical conflicts around the globe. To learn more about this topic, Capstone attended a panel discussion with:
- Firat Gezen, President of General Dynamics’ (NYSE:GD) Ordinance and Tactical Systems Division
- General James E. Rainey, head of the U.S. Army Futures Command (AFC)
- Douglas Bush, the U.S. Assistant Secretary of the Army for Acquisition, Logistics, and Technology ASA(ALT)
The panel’s theme was “Transforming for the Future Fight,” an in-depth look at how AFC and ASA(ALT) have spearheaded the Army’s transition from modernization to transformation alongside its industry partners. Assistant Secretary Bush and General Rainey highlighted long-range fire capabilities, counter-C4ISR, and unmanned robotics as areas of focus in the transformation of land warfare. Specifically, Assistant Secretary Bush hopes to have long-range hypersonic missiles tested by the end of the year, while General Rainey expects counter-C4ISR to become crucial as nearly every modern military supports C4ISR capabilities. Additionally, investments in unmanned robotics are projected to be critical for mortar fire and land munitions, allowing the warfighter to be more versatile.
During the panel, General Rainey and Assistant Secretary Bush expressed the importance of mission alignment between AFC and ASA(ALT) as a key factor in reducing production timelines for advanced land warfare capabilities, citing the accelerated approval of the M1E3 Abrams tank’s development as a joint success. Additionally, General Rainey and Assistant Secretary Bush emphasized clear communication with the Army’s munitions production partners in the private sector, as necessary for turning the concept of modernization into transformation.
“Inside two years, about 18-24 months, we’re in the most disruptive period of time in terms of technology. We have a duty to be able to see what’s happening, learn from that, and rapidly turn those observations into real capabilities,” said General Rainey during the panel.
To help facilitate the production of new capabilities, Defense industry participants have come to expect an uptick in accelerated contracting processes through the increased use of single-source contracts and the inclusion of multi-year contracting. Currently, the Department of Defense (DOD) bears the brunt of production costs during periods of significant munitions ramp-ups. As noted by Mr. Gezen during the Transforming for the Future Fight panel, the private sector feels multi-year contracts will give companies financial security in the long-term, allowing industry participants to commit more capital investment into production.
“I think [multi-year contracting] is one thing we can do to help [the Defense] Industry become stronger with really nothing to lose. The basic rule is that if you get a 10% savings, then you pursue multi-year contracting. That’s extremely short-sided in my mind. Let Industry set up second sources, make investments, then you are going to get the savings on the next contract. Putting savings aside, there are all these other benefits. We can give our workforce stability and security for their jobs. With multi-year contracting we can lock down key scarce resources through long-term agreements. The administrative time from the government, working with Industry and doing these annually is not the best or most efficient way to spend our time. You want industry’s investment? You lose nothing doing these multi-year contracts, you actually get a stronger industrial base,” said Firat Gezen during the panel discussion.
The increased use of accelerated contracting and long-term agreements stand to benefit industry participants, regardless of prime contracting status. The Army’s objectives in technology transformation have the ability to provide business owners with new and recurring revenue opportunities. This additionally provides potential buyers with enhanced visibility into target company financials, positioning businesses with Army procurement relationships to receive elevated M&A interest.
2. DOD Expands Resources for Small Businesses
Small businesses have continued to play a vital role in technology development, bolstering production for prime contractors and driving innovation for new capabilities. As the Defense industry has become increasingly consolidated at the top among primes, the Small Business Administration (SBA) and DOD Office of Small Business Programs (OSBP) have committed significant capital and additional resources to help small businesses compete in the Federal marketplace. The SBA’s Small Business Innovation Research Program (SBIR), a fund to help small businesses with research and development (R&D) costs, has given a combined $300 million in awards since fiscal year (FY) 2022, according to Megan Dake, the Deputy Assistant Secretary of the Army for Procurement, during a talk at AUSA’s Small Business Seminar. Additionally, the SBIR program has spent $100 million in FY 2023 on awards, with new SBA awards prioritizing companies specializing in artificial intelligence (AI), machine learning (ML), and large language model capabilities.
The Government Contracting space has historically had significant barriers to entry for small businesses and new participants. This includes a variety of complex regulations that determine the viability of a company’s proposal. AUSA’s Small Business Seminar featured a panel discussion on DOD resources for small businesses with Derrick Davis, Director for Industrial Cyber Security for the OSBP, Khalil Mack, Director of the OSBP’s Apex Accelerators program, and Dr. Bryson Reynolds the lead for the OSBP’s foreign ownership, control, and influence (FOCI) mitigation efforts. Mr. Davis leads the OSBP’s Project Spectrum cybersecurity initiative, which provides assistance for small manufacturers in the defense industrial supply chain. The Apex Accelerators program, founded in FY 2023, provides technical contracting assistance to a wide range of businesses that pursue contracts with the DOD, other federal agencies, state and local governments, and government prime contractors. The panel stressed the importance of industry participants utilizing Project Spectrum, Apex Accelerators, and FOCI resources jointly, as all DOD small business services work interconnectedly. Also of note, the Army has built resources to help innovative small businesses navigate the federal marketplace more efficiently.
The Small Business Seminar featured the Army Applications Lab (AAL), formed by ASA(ALT) and the AFC specifically to reduce barriers to entry for smaller companies, operating with streamlined and accelerated contracting processes to bring commercial technology from small businesses to solve specific Army problems. The Army’s Long Range Precision Fires Cross Functional Team (LRPF CFT) sped up the development of the Field Artillery Autonomous Resupply (FAAR) System through the use of AAL’s commercial technology cohort. The FAAR cohort program brought together six different small business technology companies to help create a solutions for the field system’s development. This accelerated process championed by the AAL shows the usefulness and efficiencies unlocked by working directly with small businesses.
The DOD and SBA have introduced these resources to help smaller industry participants compete through R&D financing and accelerated contract processes. Additionally, these resources help companies navigate aspects of working with prime contractors, another segment of the federal marketplace that can provide significant revenue opportunities for small businesses.
From a mergers and acquisitions (M&A) perspective, businesses that can utilize these resources to conserve cash by spending less out of pocket on R&D, coupled with a robust contract waterfall and subcontracting work, are well positioned to attract buyer appetite. This has been most prominent in the ALSS Systems M&A market, in which transaction volume has risen 59.3% year-over-year (YOY) through Q3 2023. Capstone discusses additional trends and drivers of M&A activity in our most recent ALSS Market Update.
3. Strategic Initiatives from the Department of Defense Drives Technology Exhibition
National security directives from the president’s FY 2024 DOD Budget Request have shaped the direction of capital investment across the Defense industry.
“The FY 2024 budget is the most strategy-driven request we’ve ever produced from the Department of Defense. To sustain our military advantage over China, [the budget] makes major investments in integrated air and missile defenses and operational energy efficiency, as well as in our air dominance, our maritime dominance, and in munitions, including hypersonics. This budget includes the largest ever request for the Pacific Deterrence Initiative, which we are using to invest in advanced capabilities, new operational concepts, and more resilient force posture in the Indo-Pacific region,” said Secretary of Defense Lloyd Austin III in his statement on the FY 2024 Defense Budget Request.1 The exhibitions at the 2023 AUSA Annual Meeting characterized these investments and directives highlighted in Secretary Austin’s comments.
Of note, Bell Helicopter highlighted investments in air dominance, showcasing its B-360 Invictus helicopter part of the Army’s Future Attack Reconnaissance Aircraft (FARA) program, and its V-280 Valor tilt-rotor aircraft, which was selected for the Army’s Future Long-Range Assault Aircraft (FLRAA) program. Bell’s V-280 Valor showcase at the conference gave visitors an early look at the successor to the UH-60 Black Hawk, an important sign of development in the Army’s modernization and transformation efforts. Also of note, Moog’s (NYSE:MOG.A) booth exhibited investments in energy efficient systems, including its Hybrid Electric HE350 Recluse unmanned aerial system (UAS) for contested logistics and re-supply, based on the company’s S-250 UAS Electric Multi-rotor Vehicle Testbed. Florida-based Tomahawk Robotics, which was recently acquired by AeroVironment (Nasdaq:AVAV), highlighted the DOD’s investments in new operational concepts, showcasing its wearable products for uncrewed systems specifically its Kinesis command and control system. The company’s AI-enabled system allows users to control uncrewed systems from a tablet connected directly to their combat vest, while also being compatible with Tomahawk’s MxC-Mini wearable datalink device for ISR applications.
The exhibit halls also served as a geographic showcase, as well as a technology and hardware exhibition. In line with the U.S.’ National Defense Strategy, U.S. allies in the Indo-Pacific region had a strong showing at the conference. Notably, Australia had the largest international presence with 57 Australian exhibitors in attendance, while South Korea had healthy industry representation with 13 exhibitors. Individual U.S. states including Virginia and the Oklahoma Department of Commerce provided exhibits at the conference to draw investment from industry participants with large manufacturing capabilities.
To discuss our experience at AUSA Conference 2023 , find out which shows we are attending in the future, or schedule a meeting to learn about Capstone’s wide range of advisory services for middle market companies in the ALSS Systems and C4ISR sector please contact us.
U.S. Department of Defense, “Department of Defense Releases the President’s Fiscal Year 2024 Defense Budget,” https://www.defense.gov/News/Releases/Release/Article/3326875/department-of-defense-releases-the-presidents-fiscal-year-2024-defense-budget/, accessed October 23, 2023.
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