Manufacturers target emerging markets to replace military contract losses

As Missouri manufacturers wind down their U.S. Department of Defense project work, a drought of contracts is coming.

In the last 15 years, the value of DOD contract dollars have fluctuated in the Show-Me State, dropping as low as $6.1 billion in 2005 and doubling the next year. Contract totals have trended down from $11.8 billion in 2011, hitting a low last year of $3.78 billion awarded solely to Missouri-based companies, according to Springfield Business Journal research of DOD news releases throughout 2015.

“Initially you think it’s just the aerospace industry, but when you dig into the companies that receive the funding is when you get concerned,” said Kim Inman, CEO of Springfield-based Missouri Association of Manufacturers. “It’s going to decrease, and you will see that effect on the economy.”

According to a study by the Pentagon’s Office of Economic Adjustment, the DOD spent $11 billion in 2014 state contracts, with The Boeing Co.’s Defense, Space & Security division in St. Louis accounting for $6.9 billion, or nearly 63 percent.

John Hixson, St. Louis Economic Development Partnership’s vice president of defense and advanced manufacturing, said the largest losses will occur in aerospace, with Boeing’s production of F-15 and F/A-18 fighter jets due to end in 2017 in anticipation of Lockheed Martin’s F-35 II Lightning.

“The numbers suggest there could be between a $2 billion and $4 billion fluctuation over the course of the next four or five years, and there’s no known defense opportunity on that short of a horizon,” he said.

In the study by Los Angeles-based economic research firm Aecom, Hixson said emerging markets for manufacturers were identified as commercial aviation, drone and autonomous vehicle production – all of which are projected to grow by billions of dollars over the next five years.

The ripple effect
Although six St. Louis companies make up the state’s top 10 contractors and tally nearly two-thirds of DOD dollars, Inman said aftershocks of lost contracts would be felt at companies ranging from toolmakers to print shops.

“What’s troublesome are the multiple levels below the first tier of subcontractors that we can’t track,” Inman said, noting there are roughly 13,000 manufacturers in Missouri. “Imagine the rollout effect that’s having across the state.”

Positronic Industries Inc. President and CEO John Gentry said while most of the company’s work for the DOD supplies out-of-state contractors, he’s noticed unexplained delays in purchase orders.

“It could represent – here in Missouri – about 5 to 10 percent of annual revenue,” Gentry said, noting in-state business accounts for $40 million of Positronic revenues. “We’re quite diversified so hopefully we’re making that up somewhere else. We’re not so heavily reliant on Defense and military that we feel that threat.”

Pulaski County, with more than 26 percent of Missouri’s more than 41,500-strong DOD workforce, has the largest single chunk of department spending outside St. Louis at $828.5 million, primarily funding and staffing Fort Leonard Wood.

Inman said training for a next-generation workforce could be provided through $90 million in federal funding by the U.S. Department of Labor’s Office of Apprenticeship, helping new markets buoy the industry and – if DOD spending cycles back around – support future growth.

“What we’ve done is build a bridge, and if we can fill the gap with opportunities like these, then when those projects start ramping up again we’ll be growing the economy instead of just staying steady,” Inman said.

One possibility is the nuclear supply chain, the opening topic of discussion at MAM’s 2016 conference Feb. 3 at the Ramada Plaza Springfield Hotel and Oasis Convention Center.

American Mergers & Manufacturing International President David Garcia presented on the market’s long-term revenue potential, citing a Nuclear Energy Institution report pegging the global budget for operating some 435 power plants at $375 trillion by 2050. Garcia said the current national spend is between $7 billion and $10 billion annually, and neither budget accounts for nuclear plant research and design, installation, construction, upgrades or decommissions. There are currently 60 reactors under construction worldwide, he said.

Nuclear horizon
Rick Prugh, manager of the Make It In America program at Missouri Enterprise, said while nuclear industry promises expansion, it likely wouldn’t generate enough revenue to be a company’s sole source. At least 85 percent of companies he’s targeted for entering the industry supply chain already have $1 million or more in total sales from their current books of business.

“Nuclear is certainly profitable because companies are willing to pay a premium for the parts,” Prugh said. “But you need to be a substantial and diversified company if you’re going to play in that arena.”

In order to become direct suppliers to nuclear power plants, Prugh said manufacturers require quality management system certification through the American Society of Mechanical Engineers, called NQA-1. Auditing and consultation costs through ASME start in the low-$20,000 range and could take months or even a few years to obtain. The more likely place for businesses to start, Prugh said, is as a second- or third-tier supplier, which requires less stringent certifications and might even be covered by the contractor supplied.

Debra McIntosh, president of Integrated Containment Systems LLC, which makes containment boxes for dismantling plutonium and uranium and handling nuclear medicine, said the company has that advantage. Because ICS has its own quality management system in place and would directly supply Department of Energy national laboratories in Los Alamos, N.M., and Oak Ridge, Tenn., quality directors from those plants would audit ICS and the Springfield company would carry the proper certifications by proxy.

Still, the company has yet to land a successful energy bid, and even the first purchase orders for contracts it won last year providing pharmaceutical equipment to Texas A&M University haven’t materialized. McIntosh said without additional business from the pharmaceutical and food industries, ICS and sister company Customer Powder Systems LLC wouldn’t be able to support operations on nuclear energy supply.

“We see government contracts as good potential, but it’s slipped to third or fourth on our list,” McIntosh said. “If you have the stamina it might be worth it, but it doesn’t pay the bills.”