Military & Aerospace l First Lady of Defense
May 30, 2012 § Leave a comment
As the space shuttle Discovery took its farewell ride over Washington on the back of a Boeing jet in April, Linda Hudson watched from a VIP viewing area at the National Air and Space Museum’s Udvar-Hazy Center near Dulles. The shuttle now rests at the museum-where Hudson is a board member-a relic of the bygone era of manned space flight.
Hudson, president and CEO of the defense contractor BAE Systems Inc., grew up an hour from Cape Canaveral in central Florida. She lived so close to the NASA launch complex that on a clear day she could see the rockets take off. By the time she was 16, she was taking flight lessons and dreaming of becoming a pilot or an astronaut.
Seeing the shuttle make its final lap was a bittersweet moment for Hudson, now 61. But a lot of things are coming to an end these days.
Not a month before Discovery’s retirement, another vehicle significant to Hudson had its swan song: The last US military Mine-Resistant Ambush-Protected Vehicle in Iraq was sent to a museum in Fort Hood, Texas.
The combat vehicles, called MRAPs, became icons of the wars in Iraq and Afghanistan. Troops traveling in outdated trucks and Humvees were vulnerable to improvised explosive devices (IEDs). In 2007, the Army finally ordered the MRAP, designed specifically to withstand IEDs.
BAE produced three of the five MRAP models used in the wars. That program, coupled with another popular BAE product, the Bradley Fighting Vehicle, propelled earnings in BAE’s land-and-armaments sector-the part of the company that manufactures combat vehicles and weapons systems-from $4 billion to nearly $12 billion between 2007 and 2010.
Those products also boosted BAE’s presence in the United States. BAE Systems Inc.-headquartered in Arlington with more than 40,000 employees nationally and 6,500 in the Washington area-is the US subsidiary of the United Kingdom’s BAE Systems. Within the company, the US half is known simply as “Inc.” Because it’s foreign-based, BAE is less well known in the American market than such competitors as Lockheed Martin and General Dynamics, two of the region’s largest employers. But it’s one of the ten largest defense contractors in the US, typically hovering around number six. Its UK-based parent is the second-biggest defense company in the world, reporting $30.7 billion in revenue last year, about $16 billion behind Lockheed, the largest.
London headquarters or not, by the peak of the wars more than half of BAE’s earnings were generated by its American subsidiary. Today, Inc.’s business accounts for about half of total BAE revenue.
Though BAE’s combat-vehicle business remains the world’s largest, the spending boom is over. With the end of the Iraq War and with the war in Afghanistan winding down, revenue in the land-and-armaments sector has slid back to $6 billion. BAE Inc.’s overall revenues in 2011 were $14.4 billion, compared with $17.9 billion in 2010 and $19.4 billion in 2009.
The future of the entire defense industry is uncertain. In January, Defense Secretary Leon Panetta announced $487 billion in defense-budget cuts over the next decade, and there could be $500 billion of additional cuts if so-called sequestration kicks in. That will be triggered if Congress can’t agree on a plan to reduce the federal deficit by next January-and these days it doesn’t seem as if Congress can compromise on anything.
This changing environment puts Hudson at the helm of a contractor-and an industry-at a crossroads. On a spring afternoon, she sits in a conference room adjoining her 21st-floor office in Rosslyn, overlooking the Pentagon and the Potomac River. She has close-cropped blond hair, a pink manicure, and sparkly baubles on her fingers. She’s surprisingly petite, yet her presence is commanding.
On the wall behind her is one of several artworks, which she commissioned, made of recycled combat-vehicle parts. Those vehicles, after all, have been Hudson’s biggest focus for the last several years. But as major weapons and vehicles programs become less affordable for the Department of Defense, Hudson is working to diversify BAE’s offerings further to ride out the downturn.
This isn’t the first time she has found herself in a tight spot. In fact, she has challenged the odds throughout her career.
Before joining BAE in 2007 to lead the land-and-armaments division, Hudson was head of General Dynamics’ armament-and-technical-products division. When she took over that business, it was floundering. Hudson’s mandate from then-company executive vice president Gordon England was either to improve division performance enough to make it attractive to a buyer or to figure out a way to make it a profitable piece of General Dynamics.
Hudson didn’t want to sell off the division. She overhauled its business model, laid off a third of its employees, and shut down its internal factory, outsourcing all manufacturing instead. Under her watch, the division quadrupled its revenues and became a driver of General Dynamics’ growth.
“She was financially very astute,” says England, now president of the consulting firm E6 Partners. “Not all executives are really good at making decisions, but she’s very good.”
Her performance caught the attention of BAE, which recruited her in January 2007, a key moment, as it would turn out, for the contractor and the Pentagon.
The same month, President George W. Bush announced the Iraq War surge, in which 30,000 additional troops would be deployed to the country by the following summer. Annual war casualties had consistently hovered around 900; the American public’s support was waning. The Department of Defense needed to curb the death toll-meaning the moment was ripe for a company that made combat machines.
“It’s easy to forget how close we were in Iraq to pulling the plug on the whole thing,” says Michael O’Hanlon, a senior fellow at the Brookings Institution focusing on national-security and defense policy. “The MRAP helped make the wars politically viable.”
When Hudson took over as president of land and armaments, BAE’s MRAP was in its infancy. Hudson pushed full steam ahead-even though the Defense Department had yet to actually place an order for the new vehicles. The company invested nearly $100 million of its own money before the Pentagon put in an order.
“We made a decision that we were going to do everything we could to get systems available to the warfighter as quickly as possible and to move out on our own money in advance of when the customer was ready,” Hudson says.
During the same period, BAE Systems Inc. acquired Armor Holdings, a maker of tactical military vehicles and vehicle armor, for $4.5 billion. That company was folded into Hudson’s land-and-armaments group, and it, too, had a design for an MRAP.
The investment paid off many times over. Because of the advance work Hudson’s group had done, once the Defense Department put out the call, BAE delivered the first vehicles within 43 days-an effort that significantly raised the company’s profile in Washington power corridors.
BAE became one of the Army’s largest suppliers of armored vehicles, building and upgrading 9,686 MRAPs. The contracts brought in more than $5.3 billion for the company.
Though she doesn’t come from a military family, Hudson developed a love of fighter jets in elementary school. She says she can’t really explain it-she simply liked fast airplanes. Her aptitude for numbers garnered special attention from her junior-high math teacher, who first told her about engineering. By the end of high school, when Hudson realized that becoming a pilot or astronaut was a nearly impossible goal for a woman in the 1960s, she had set her sights on engineering.
“I decided if I couldn’t fly airplanes, if I couldn’t participate in the space program, I could design those things,” she says.
Hudson was one of two women in the engineering program at the University of Florida. By the time she graduated in 1972, her exceptional grades had earned her several job offers. She went with the highest bidder, Harris Corporation, where she designed B-1 bombers and classified satellite programs.
Asked to describe the professional environment for women in those days, she answers succinctly: “Very ugly.” She recalls sitting in meetings and feeling invisible.”You went into every situation with people assuming you didn’t deserve to be there.”
When Hudson and her then-husband applied for a mortgage, they were turned down. Hudson made more than he did, but the lender refused to count her salary because he assumed she’d get pregnant and quit her job. Today, Hudson owns three homes-one in Arlington; one in North Carolina, where she plans to retire; and a historic island house an hour outside of Gainesville.
The lender was right about one thing-Hudson did become a mom. She has one daughter, but she never gave up work: “I always had full-time help. I don’t know how I would’ve done it if I hadn’t.” And though she’s now divorced, her husband of 25 years worked for himself, which made him the parent with the more flexible schedule.
Hudson is as candid about her struggles as a parent as she is about her professional successes. “I’m trying to be a better grandmother than I was a mother,” she says. “My daughter will tell you I didn’t always do it really well.”
As adults, the two have grown closer. Hudson shares her passion for travel with her daughter and three grandchildren. They’re taking an Alaskan cruise this summer, followed by a ranch vacation in Montana.
Hudson has come a long way, but she credits those early experiences as a woman in a male-dominated field with making her more determined: “I learned that if I was better than anyone else in the job that I did, people would have to pay attention to me.”
Now that she’s head of Inc., a role she assumed in October 2009, more than 40,000 employees pay close attention to her every move.
when she became CEO, Hudson began a drastic restructuring of the business. “We saw the downturn in defense spending coming,” she says. “So we made the decision some time ago that we had to reposition ourselves before the cuts hit.”
She started by stripping out an entire layer of senior managers between her and the lower-level heads of the various parts of BAE’s business.
John Gannon, president of BAE’s intelligence-and-security sector, says the extra layer of management blunted communication: “I call Linda and she will respond. I never had anything approaching that kind of contact with her predecessor.”
BAE’s British parent company had built up the American side of the business through acquisitions, and those formerly separate companies had never been truly integrated. As a result, Inc. had 40-some payroll systems and dozens of benefit plans. “Imagine the cost of running all these different systems,” Hudson says.
She integrated Inc.’s payroll and benefits and set up a single facility in Charlotte to handle all human-resources and finance functions, all part of creating more than $100 million in savings.
But it will take more than that to stay competitive. Hudson knows firsthand that the competition for vehicle contracts has gotten stiffer. In 2010, BAE lost a contract it had held for 17 years to build military-transport trucks when a smaller company, Oshkosh Defense, significantly underbid BAE. Hudson says that to beat Oshkosh’s price, BAE would have lost money making the trucks. Oshkosh also beat out BAE for a $3-billion-plus contract to make a lighter, off-road version of the MRAP.
As her land-and-armaments business declines, Hudson is focusing resources elsewhere. In keeping with the trend across the industry, an increasing amount of BAE’s business comes from providing services to customers in addition to building new products for them.
For instance, to give BAE the facilities to service and repair ships at the Navy’s main home ports, Hudson bought Atlantic Marine in 2010. The services side of Inc. now accounts for 32 percent of revenue, up from 22 percent when Hudson became CEO in 2009.
She’s working to expand BAE’s electronics offerings, too. Since 2010, Hudson has bought Fairchild Imaging and Oasys Technology, firms that specialize in night-vision products, thermal-imaging systems, and other electronic gear used in defense and aerospace. As the military balks at buying new vehicles, the idea is to offer a cheaper alternative: services and smaller-scale products that can enhance or expand the lives of their existing vehicles.
Hudson is also focused on strengthening BAE’s relationships within the intelligence community. As areas such as cybersecurity continue to grow, she has been meeting with top-level officials including the heads of the National Security Agency and the Office of the Director of National Intelligence.
Gannon, head of BAE’s intelligence-and-security business, has been making the introductions. The former deputy director for intelligence at the CIA has valuable connections in that world, but he’s set to retire from BAE this summer, making it even more urgent for Hudson to build her own inroads.
Loren Thompson, a defense-industry consultant at the Lexington Institute who counts BAE and some of its biggest competitors as clients, says Hudson has positioned the company favorably: “What’s striking about BAE is how it is no longer just about military hardware. That change happened most decisively under Linda.”
That’s not to say BAE doesn’t want to build big trucks anymore. It’s currently competing for two major contracts.
The first, the Joint Light Tactical Vehicle (JLTV), is intended to replace the iconic Humvee. The contract could be worth more than $15 billion.
The second, the Ground Combat Vehicle, will replace BAE’s Bradley fighter in the next 20 years or so. The Army plans to buy 1,800 GCVs, yielding as much as $30 billion. It’s also possible the Army will seek a cheaper alternative, such as an upgrade to the old Bradleys.
The contract could reshape the defense industry, particularly for the two biggest armored-vehicle builders-BAE and General Dynamics. “The question is if BAE or General Dynamics doesn’t win the next tank contract, do they stay in the tank business?” says Eric Lindsey, a defense analyst at the Center for Strategic and Budgetary Assessments.
Hudson says she feels good about BAE’s odds in both competitions. Despite its more diverse mix of businesses, BAE is, at its core, a builder of trucks and tanks.
But as Hudson witnessed just a few weeks ago as the shuttle circled overhead, nothing lasts forever. As a little girl, she says, those rockets she could see from her house captured her heart and mind, starting her on the path that led to this perch 20 floors above the Potomac. That’s all over now.
“It is what it is,” she says with a shrug.
May 29, 2012
By Marisa M. Kashino