Defense contractors

[no_free_lunch]

On 4/11/2025 at 9:06 AM, Hektor said:

https://www.yahoo.com/news/pentagon-just-killed-5-1-015956256.html

 

The Pentagon says it's ending $5.1 billion worth of IT and consulting contracts with firms including Accenture and Deloitte

 

The US's defense secretary, Pete Hegseth, on Thursday ordered the termination of IT and consulting contracts with companies including Accenture and Deloitte, calling it "wasteful spending."

 

In a Department of Defense memo, Hegseth said he would cut a Defense Health Agency contract "for consulting services from Accenture, Deloitte, Booz Allen, and other firms that can be performed by our civilian workforce."

 

Also on the chopping block is the Air Force's contract with Accenture to "re-sell third-party Enterprise Cloud IT Services," which Hegseth said the government could "already fulfill directly with existing procurement resources."

 

In the memo, Hegseth also said he was terminating 11 other contracts for consulting services supporting what he called "non-essential" activities, including diversity, equity and inclusion, climate matters, and the Pentagon's COVID-19 response.

 

He said the savings would be reallocated to serve "critical priorities to Revive the Warrior Ethos, Rebuild the Military, and Reestablish Deterrence."

This is great to see.  I would like to see them review these $400 hammers the pentagon make too. Kind of joke but its true, the savings from doge could get into the hundreds of billions once they get going.  Americans wont see the savings, they will get redirected but you should end up with a stronger MIC.  All we need to do is look at what Russia is paying and instead of multiplying the russian price times 10 maybe we can find a way to produce at just 5x the cost?  That is not a dig against Russia, its a challenge to the west.  We have to remember that if we ever have to truly fight the enemy is not going to  care about the sticker price on the jet or tank, they will just try to destroy it.

Edited April 20, 2025 by no_free_lunch

[lnofeisone]

11 hours ago, no_free_lunch said:

This is great to see.  I would like to see them review these $400 hammers the pentagon make too. Kind of joke but its true, the savings from doge could get into the hundreds of billions once they get going.  Americans wont see the savings, they will get redirected but you should end up with a stronger MIC.  All we need to do is look at what Russia is paying and instead of multiplying the russian price times 10 maybe we can find a way to produce at just 5x the cost?  That is not a dig against Russia, its a challenge to the west.  We have to remember that if we ever have to truly fight the enemy is not going to  care about the sticker price on the jet or tank, they will just try to destroy it.

These are big headlines numbers but they are meaningless. They are cutting the ceiling space on contracts. Meaning, the Gov't can spend up to $X dollars. Most contracts rarely hit the $X that's contracted out. Even with all these top numbers, they are cutting $5B out of $1T. That's not even 1% and it's not even actual spending. 

 

Regarding buying directly from providers like AWS, etc., ACN and others put a tiny markup (~3%) on procurements. So if the contract is $100M, roughly $97M of it would go to AWS. So that cost isn't going away. Just gets redirected. This mark

[Hektor]

https://www.wsj.com/business/consulting-firms-offer-up-to-a-combined-20-billion-in-savings-to-federal-contracts-50dd325b

 

Consulting Firms Offer to Cut Up to $20 Billion From Federal Contracts

Consulting Firms are negotiating with General Services Administration as part of broad review of government contractors

 

Some of the biggest U.S. consulting firms have offered billions in additional cuts to their contracts after the Trump administration told firms that they needed to pony up deeper price concessions—or face consequences.

 

Seven of the 10 largest consulting firms to the government have now offered up to $20 billion in savings by proposing to either terminate existing contracts or reduce the scope of their work within federal agencies, according to a person familiar with the negotiations. Some firms are now proposing to offer credits toward their work or artificial-intelligence services free of charge.

 

While companies met a deadline last month to identify potential cuts to existing projects, administration officials later told firms that they were unimpressed with the size and scope of the reductions proposed.

 

If firms didn’t offer more meaningful cost savings, Josh Gruenbaum, the GSA’s procurement chief's letter noted, contracts could be terminated and put up for new bids to competitors. Gruenbaum, a former director at private-equity firm KKR, added that the cuts are necessary to “get the nation’s fiscal house in order.”

 

The GSA’s discussions with consulting firms are continuing, according to a person familiar with the discussions, with more meetings with firms scheduled later this week. Gruenbaum, in his statement to the Journal, said the firms provide value to federal agencies, but that the government must change how it does business and “we will do it in partnership with the private sector.”

[Spekulatius]

South Korea is going to be large weapons supplier going forward, because they still know how to make stuff in volume:

 

[Saluki]

These tariffs will wreak havoc on US defense contractors for 2 reasons. One is the bad feeling towards US firms because of the current administration, which should help firms like Rhinemetal get contracts. The other is obviously the tariffs will increase costs for tech heavy defense companies.  I had a starter position in a tiny company called Optex that is the sole supplier for some optics in Howitzers and Bradley fighting vehicles. It was cheap, no debt, and had big inside ownership, but if they have to pay 150% more their stuff they are buying from China to make their optics work, then it's not going to be able to fulfill military contracts at an agreed price if their inputs are going up massively, but their revenue is going to stay the same. 

[Spekulatius]

Yes, the aerospace supply chains are screwed up. RTX announced a ~$850M hit to earnings for 2025 from tariffs and that is after significant mitigations. Thats ~9% of operating earnings. Raytheon had otherwise stellar earnings and strong outlook, but that’s a lot of money. 
 

[Dalal.Holdings]

You just had the first real engagement between western (French Rafale) aircraft and Chinese J-10s with India losing at least one Rafale to a J-10 using Chinese Air to Air missiles. Chinese defense stocks rallied as a result:

 

https://www.bloomberg.com/news/articles/2025-05-07/china-s-defense-stocks-are-big-winners-in-india-pakistan-clash

 

Looks like the Indian Air Force botched yet another engagement with Pakistan (like in 2019 when its ancient Mig-21 pilot was captured) and I’m sure the French & Dassault are not thrilled with the PR…

 

There should be heads rolling in the IAF, but given Indian Media just spreads Indian propaganda, few people will probably demand reform and accountability in the Indian Air Force. Already, many people are in denial about the embarrassing loss.

 

Not even sure the French stuff can make it versus China’s J-10 which is built on stolen F-16 schematics with more advanced technology built on top

[Dalal.Holdings]

 

Found this video from a former French Fighter pilot very valuable…it seems western defense firms (esp Europeans) have massively underestimated the progression of Chinese capabilities. The loss of the Indian Rafale very close to its base raises a lot of questions, but it’s an embarrassment for IAF nonetheless.

 

Western military R&D needs to immediately refocus on building equipment that can counter increasingly sophisticated Chinese equipment that will soon find its way into the arsenals of Pakistan, Russia, Iran, North Korea, etc…

 

[Dalal.Holdings]

https://www.ft.com/content/ff46ca13-a64d-4ba1-833e-1bb348880aec

 

Quote

“There’s no better advertisement than a real combat situation,” said Yun Sun, a specialist in Chinese military affairs at the Stimson Center in Washington DC. “This came as a pleasant surprise for China . . . the result is quite striking.”

 

Quote

“This is the most important global aspect here — this is the first time Chinese military equipment has been tested against top notch western equipment,” said Sushant Singh, lecturer at South Asian Studies at Yale University. 

 

Quote

Defence attachés from China’s western rivals were waiting “impatiently”, said one in New Delhi, for India to share the radar and electronic signatures of the J-10C while in combat mode so that their own aerial defences could be trained on it. 

 

Military analysts around the world will be studying what took place that day. Did IAF totally mismanage the operation? Did the Rafale run out of fuel? IAF doesn't have a lot of refueling capability. Did they not have enough radar coverage of the battlefield? They've had a chronic shortage of AWACs which they have not solved thanks to crushing Indian bureaucracy...

 

Or, was the J-10 armed with PL-15s absolutely superior to the Rafale ? Sure to make a lot of people nervous.

 

Except, of course the IAF and Indian media who are patting themselves on the back and seem to be content to be mired in a state of dysfunction:

 

Quote

The two incidents underscored that India lacked sufficient airborne early warning and control systems — planes that fly at high altitudes carrying sophisticated radars and sensors that can detect enemy aircraft, missiles and drones at range. But India’s bureaucratic challenges made learning from each skirmish difficult, and inefficient, as compared to a simpler procurement system for Pakistan, which has one main supplier — China — and a military that dominates the country.

 

Quote

Only in March this year did India issue an “acceptance of necessity” notice to triple India’s fleet of such early warning aircraft to 18. Their deployment is years away.

 

Edited May 11, 2025 by Dalal.Holdings

[Spekulatius]

Indian media are all government propaganda. It takes 5 min surfing the YouTube channels to see this. I think the IAF has mismanaged this engagement and the Chinese J10 used by Pakistan is better than thought and a threat that needs to be taken seriously.

 

The US has the stealth advantage but remember that long wave radar can detect stealth airplanes. Ironically the first radar employed during the WW2 (Battle of Britain etc)  were long wave radar and might have detected an incoming F-35. It would be foolish to assume the Chinese don’t have these to their disposal.

Edited May 12, 2025 by Spekulatius

[Dalal.Holdings]

I agree. Indian news shows look like trash and it’s a shame they have no one questioning the government. At least in the U.S. whenever there is a President, there is a well established opposition media ready to critique their every move (from conservative Fox News to liberal CNN/NY Times/etc). In India, they are all parroting what the government says and even Indians on social media are spreading some seriously false & biased information about the conflict..

 

If the Chinese tech has advanced enough to challenge the most sophisticated western gear, it’s only a matter of time until Russia, Iran, and North Korea also procure them (not just Pakistan). That should make military planners around the world: Europe, S Korea, Israel, S Arabia, etc all nervous in addition to Japan, USA, Australia, Philippines, etc

[sleepydragon]

Seems good news for LMT?

[Dalal.Holdings]

https://www.bloomberg.com/news/articles/2025-05-13/success-of-chinese-jets-against-india-raises-alarm-in-asia

 

Quote

Chinese Weapons Gain Credibility After Pakistan-India Conflict

 

Quote

“We may need to reassess the PLA’s air combat capabilities, which may be approaching — or even surpassing — the level of US air power deployments in East Asia,” Shu said, adding Washington might want to consider selling more advanced systems to Taiwan.

Quote

“There is a good chance the weapons systems China is able to offer will be even more appealing to potential buyers” especially in the Global South, said James Char, assistant professor of the China Program at the S. Rajaratnam School of International Studies, noting the J-10C is not even China’s most advanced jet.

Quote

 

M. Taylor Fravel, director of the Security Studies Program at the Massachusetts Institute of Technology, cautioned that the Chinese jet was primarily for aerial combat, while the Rafale was designed to conduct many kinds of missions, meaning the J-10 may have held an advantage. 

 

 

 

[Spekulatius]

Another deep seek moment, just like with the Huawei phone a year ago, Deep Seek LLM, semiconductors, EV’s, space program, passenger planes now fighter planes. The list gets longer…

 

The Chinese are way past copying western products.

[Saluki]

On their conference call, OPTEX said that they expect no impact from China tariffs because defense companies are exempted from paying tariffs. If that's true, why is it affecting Raytheon, but not them?  Anyone know about this issue?  

[Xerxes]

11 minutes ago, Saluki said:

On their conference call, OPTEX said that they expect no impact from China tariffs because defense companies are exempted from paying tariffs. If that's true, why is it affecting Raytheon, but not them?  Anyone know about this issue?  

Who says it is affecting Raytheon 

 

It is affecting RTX, mostly due to its Collin Aerospace and Pratt Whitney subsidiaries … but probably not Raytheon

[Saluki]

10 minutes ago, Xerxes said:

Who says it is affecting Raytheon 

 

It is affecting RTX, mostly due to its Collin Aerospace and Pratt Whitney subsidiaries … but probably not Raytheon

 

Ah I see.  I was thinking of it as RTX = Raytheon. Since Collin and Pratt do both commercial and military stuff, do they pay tariffs on all of it, or just the non-military portion? 

[Xerxes]

4 minutes ago, Saluki said:

 

Ah I see.  I was thinking of it as RTX = Raytheon. Since Collin and Pratt do both commercial and military stuff, do they pay tariffs on all of it, or just the non-military portion? 

I think broadly speaking is the commercial side that is impacted. 
 

On the military side F-35 specifically has a global footprint and has F-135 P&W engine. It is not clear the details around that one. 
 

But then again it is structure and systems from BAE. 

[Saluki]

 

Interesting piece about Anduril's fighter drones. Shame it's not a public company. 

[formthirteen]

1 hour ago, Saluki said:

Interesting piece about Anduril's fighter drones. Shame it's not a public company. 

 

Palmer Luckey has excellent taste in shirts. I would definitely invest in the company if it was public. Someone on the board has shares, if I remember correctly.

[lnofeisone]

33 minutes ago, formthirteen said:

 

Palmer Luckey has excellent taste in shirts. I would definitely invest in the company if it was public. Someone on the board has shares, if I remember correctly.

I got some shares in Anduril. Wish I put more in. 

[formthirteen]

1 hour ago, lnofeisone said:

I got some shares in Anduril. Wish I put more in. 

 

Nice! I hope they IPO so I can buy some shares.

[Spekulatius]

21 minutes ago, formthirteen said:

 

Nice! I hope they IPO so I can buy some shares.

My guess is you won’t if you see their numbers. Defense is a low margin business and I think they won’t look that different than those of the large defense contractors.

 

There is only so much premium I pay for a CEO having a good taste with shirts and wearing flip flops.

[formthirteen]

19 minutes ago, Spekulatius said:

My guess is you won’t if you see their numbers. Defense is a low margin business and I think they won’t look that different than those of the large defense contractors.

 

There is only so much premium I pay for a CEO having a good taste with shirts and wearing flip flops.

 

I wouldn't look at Anduril's numbers before investing. I make an exception for companies that have a CEO who wears nice shirts and flip flops. It's a sign of corporate excellence.

[lnofeisone]

21 minutes ago, Spekulatius said:

My guess is you won’t if you see their numbers. Defense is a low margin business and I think they won’t look that different than those of the large defense contractors.

 

There is only so much premium I pay for a CEO having a good taste with shirts and wearing flip flops.

I suspect their margins will be a bit higher than those of traditional large defense contractors but there is more risk. In short, large contractors often have a fair amount of time and materials contracts where the margin is predetermined and tends to be lower because the customer assumes the execution risk. These contractors sprinkle in some firm fixed price contracts, which are higher margin but shift execution risk to the contractor. Anduril is primarily involved in firm fixed-price contracts (which they paint as products).