Why Lockheed Martin and General Dynamics Just Declared War on Rocket Engines?

In the increasingly complex landscape of global defense, technology is both a weapon and a shield. The modern battlefield is no longer confined to physical geography but extends into technological supremacy, where innovation dictates power. Today, some of the most pressing threats to global security are not only posed by advanced weaponry from adversaries like Iran, Russia, and China but also by the limitations within the U.S. defense industry’s supply chain.

The Threats on the Horizon

Iranian drones, Russian hypersonic missiles, and China’s DF-21D “aircraft carrier killer” rockets are among the cutting-edge technologies that pose significant risks to U.S. forces and their allies. These threats necessitate the development of advanced air defense systems capable of intercepting and neutralizing these dangers. Defense giants like Lockheed Martin (NYSE: LMT) and RTX Corporation have been at the forefront of creating such systems, including the highly regarded PATRIOT missile defense system and the HIMARS rocket launchers currently being utilized in conflict zones such as Ukraine.

However, the production of these advanced defense systems comes with its challenges. The intricate supply chains involved in manufacturing these products are similar to those of other high-tech industries, such as automotive manufacturing, where component shortages can cause significant bottlenecks.

The Engine Shortage Dilemma

A critical issue now confronting the U.S. defense industry is a shortage of rocket engines, a vital component in missile production. This shortage has become a significant bottleneck, impeding the production of missiles and, by extension, the ability of the U.S. and its allies to maintain a robust defense posture.

The Wall Street Journal has highlighted that two companies, Northrop Grumman and L3Harris, currently dominate the production of missile engines. Their inability to meet the surging demand has sparked concerns among defense contractors, including Lockheed Martin and RTX Corporation. To address this growing problem, Lockheed Martin has taken an unprecedented step by announcing its intention to enter the rocket engine manufacturing business.

A Strategic Alliance

Realizing the enormity of the task, Lockheed Martin and General Dynamics have forged a strategic alliance to research and develop a new generation of military missile engines. The formation of this joint venture, which unites two of the biggest defense contractors in the United States to address a crucial supply chain problem, signifies a dramatic change in the dynamics of the defense sector.

In this partnership, Lockheed Martin will primarily play the role of a strategic partner and exclusive customer, contributing to the design and testing phases of the engines. Meanwhile, General Dynamics will take on the manufacturing responsibilities at its Camden, Arkansas, munitions factory. The engines will then be delivered to Lockheed Martin’s Guided Multiple Launch Rocket System (GMLRS) assembly plant, which is crucial for producing the missiles launched by HIMARS.

By addressing Lockheed Martin’s engine requirements for this specific missile system, the joint venture aims to alleviate the broader engine shortage and help streamline the supply chain across the defense industry.

Implications for the Market

The formation of this joint venture could have far-reaching implications for the defense industry. By entering the rocket engine market, Lockheed Martin and General Dynamics are positioning themselves as formidable competitors to Northrop Grumman and L3Harris. While L3Harris’s Aerojet Rocketdyne subsidiary only contributes 5.4% to the company’s total revenue, making the impact of this competition relatively minor, the situation is more complex for Northrop Grumman. Rocket motors are part of Northrop’s space systems division, which accounts for a substantial 35% of the company’s annual revenue.

For Lockheed Martin and General Dynamics, this joint venture presents a significant growth opportunity. Northrop Grumman’s space division operates with an 8.7% profit margin, while L3Harris’s Aerojet Rocketdyne subsidiary enjoys even higher margins of 11.6%. If the Lockheed-GD joint venture can replicate these profit margins, it could lead to a substantial boost in earnings for both companies.

Moreover, Lockheed Martin’s missile and fire control division, which could see increased sales as a result of this new engine production, operates with an average profit margin of 12.9%. For General Dynamics, whose combat systems division will handle the bulk of the production, the potential benefits are even more pronounced. With an operating profit margin of 13.9%, this division is already the most profitable segment of General Dynamics’ business. The potential to scale production and meet the increasing demand for missile engines could make General Dynamics the biggest beneficiary of this collaboration.

Conclusion

In the defense sector, the new joint venture between Lockheed Martin and General Dynamics represents a major advancement. These two behemoths are not only guaranteeing the continuous production of essential defense systems but also setting themselves up to profit from an expanding market by tackling the dire scarcity of rocket engines. The ability to develop and adapt will be essential as global threats continue to change, and our alliance is a big step in that direction. The decision might significantly alter the defense industry’s competitive environment by positioning General Dynamics as a major player in the development of the upcoming generation of military missile engines.