Red Herring February 20, 2006
Adventure Capital: Predator
General Atomics Aeronautical Systems used startup savvy to build its unmanned planes.
Last November, Ken Mitchell was flying reconnaissance for U.S. troops raiding an insurgent safe house in Iraq. It was night, and Mr. Mitchell watched the scene in grainy black and white via an infrared camera fixed to the belly of the plane. As the soldiers crept toward the front door, Mr. Mitchell saw the enemy sneak out the back in an attempted ambush. Mr. Mitchell radioed in and thwarted the attack. When the action ended with no U.S. casualties, Mr. Mitchell stepped into the glaring sunshine of a Nevada afternoon and drove to a nearby 7-Eleven. “It’s surreal to be in combat and then go buy a Slurpee,” he says.
If it’s surreal for Mr. Mitchell to be a so-called image exploiter for a Predator squadron based at Nellis Air Force Base outside Las Vegas, think what it must feel like to America’s enemies in Iraq and Afghanistan who find themselves the targets of the unmanned planes’ cameras and missiles. Imagine how self-described Islamic holy warriors suffering the deprivations of a desert guerilla war would regard a weapon operated thousands of miles away in an ersatz oasis founded by a Jewish gangster that calls itself Sin City. You can’t get more infidel than that.
There is much more to the Predator story that ought to give America’s foes pause. The Predator is made by General Atomics Aeronautical Systems (GAAS) in San Diego, a sister company of General Atomics, a highly secretive, privately held, 51-year-old conglomerate also based in San Diego. But unlike most other large weapon systems in the Pentagon’s arsenal, the Predator is built on a risky venture model that would be more familiar to a Silicon Valley entrepreneur than an insider of the military-industrial complex that one U.S. Navy admiral says is caked in “rust and crust.”
Think of the Predator as the iPod in the global war on terrorism. It’s a highly successful, easy-to-use, relatively cheap weapon that the U.S. Department of Defense can’t get enough of. And like the iPod, it’s a money maker. The Chief of Air Force told Congress in 2005 that he planned to buy as many Predators as GAAS could build. At around $10 million a pop for a fully loaded plane, that will translate into a tidy profit for GAAS.
Frost & Sullivan pegs the global military unmanned aerial vehicle (UAV) market at $50 billion by 2015. The company has already delivered 130 Predators to the Air Force, and is now building the Predator B, a new plane that can fly higher for longer and carry more weapons. GAAS prides itself on knowing what the customer wants before the customer does. “General Atomics has recognized that it’s a rapidly evolving field, and the race is to the swift,” says John Pike, president of Globalsecurity.org, a clearinghouse for industry information and analysis.
Lethal Weapons
Moving fast has resulted in the Predator, the Predator B, and the Warrior. While the Predator and the Warrior have wingspans of around 55 feet, fly at altitudes of 25,000 feet and 29,000 feet, respectively, and can carry payloads of around 400 pounds, the Predator B is the super weapon. With a wingspan of 66 feet and a length of 36 feet it can fly for more than 30 hours at 50,000 feet. Moreover, it can pack a 3,000-pound payload.
And somewhere inside GAAS are the closely held plans for the Predator C, a new unmanned plane with a jet engine, instead of the standard prop. “I’m not talking about Predator C,” says GAAS President Tom Cassidy.
A former Navy fighter pilot who flew combat missions over Vietnam, Mr. Cassidy is a 72-year-old Bronx-born bulldog, who delivers only a middling performance when he pretends the Pentagon’s procurement process doesn’t frustrate him. “The system exists and we find a way to get in,” says Mr. Cassidy, who has been with the company since 1985.
GAAS got in by putting up a lot of its own money to develop the Predator and its various iterations before Pentagon contracts were signed. That’s not the typical way of doing business in the defense industry. Usually, defense contractors build new weapons with money in hand from the Pentagon. As the customer asks for new requirements, the contractor asks for more money. General Atomics built eight Predators with its own money before it had a customer.
Two were sold to the U.S. Department of Homeland Security, NASA bought one, the U.S. Navy bought two, and then the Air Force asked for six more. In 2005, GAAS beat out Northrop Grumman to win a multimillion-dollar U.S. Army contract for 17 Warriors, a souped-up version of the Predator B. Even the taciturn Mr. Cassidy allows that the Army contract was a “really big” coup for the company.
While the rest of the defense industry braces itself for a Pentagon spending downturn, GAAS is trying to figure out how it will keep pace with demand. The company nearly doubled its payroll in 2005 from 900 employees to 1,600. Toward the end of last year, GAAS was hiring 50 engineers a month. It plans to bring on another 70 in 2006. That’s not exactly Google speed, but in January, Boeing laid off nearly 100 employees at a plant in Kansas.
California Roots
Mr. Cassidy grouses that he could sell even more Predators if the U.S. government would allow him to sell the planes to interested international customers, which he says include Pakistan and the United Arab Emirates. But the government classifies UAVs in the same category it places intercontinental ballistic missiles. “That is dumb, it’s really dumb,” says Mr. Cassidy. That means it is difficult to sell Predators beyond the Pentagon and NATO. In addition to the United States, Italy, Turkey, and a country GAAS won’t name fly Predators.
There are other customers the company declines to mention, but everyone knows the Central Intelligence Agency has at least one Predator. It was a CIA-piloted Predator equipped with Hellfire missiles that blew up a car in Yemen believed to be carrying al-Qaeda operatives. It was probably a Predator used in a mid-January air strike in Pakistan that killed a number of civilians and missed its al-Qaeda target. Given the plane’s prominent role in America’s wars, one would think that GAAS’ San Diego factory would resemble something out of James Bond. It doesn’t.
The company’s California roots and startup ethos are evident on the factory floor. A three-man team polishing the tip of a wing could be building surfboards. More than one motorcycle helmet rests atop a row of lockers. There are no girlie posters on the wall, but neither are there any admonitions of the “Safety First” variety that festoon most factory walls. In one room the size of a large drug store, men in sunglasses and goatees, some even wearing shorts, move around parts of a machine that before year’s end will likely be patrolling the skies over a war zone. It doesn’t seem that they particularly mind the paint and epoxy vapors wafting in the fluorescent bulb-lighted room. They might even like it.
General Atomics Aeronautical Systems is unusual in another way. Around 70 percent of the Predator is actually manufactured at the company’s two plants in San Diego. Metal parts are machined in-house; puffs of smoke rise from soldering irons where Filipino women bind microchips to motherboards. The place looks like pictures of Apple Computer in the days of the IIE. The company uses tools from industries that have either long since left the U.S., or are in the process of packing. A laser-guided cutter comes from a garment factory, another machine from a cabinet-making plant. The Predator is painted battleship grey in a machine bought from a Lexus dealership.
Part of the clever repurposing may be attributed to parsimoniousness on the part of the sister company, General Atomics. Owned by Neal Blue, also a former fighter pilot, General Atomics doesn’t talk much. Of course, with no shareholders to answer to, it doesn’t have to. Founded in 1955 as a General Dynamics division devoted to finding peaceful uses for nuclear energy, Mr. Blue bought the company in 1986. Today the conglomerate builds everything from maglev trains to nuclear reactors in Romania.
But the company’s web site lists its UAVs first on its list of technological innovation. Like so much of the U.S. weapons industry, much of GAAS’ innovation happens out in the desert. On a clear January afternoon, Mr. Cassidy tips the nose of the company’s twin-prop Air King 200 over the San Bernadino Mountains toward the floor of the Mojave Desert. From 15,000 feet, the ground looks like George W. Bush’s vision of Iraq 2020: a rough and arid landscape tamed with curling subdivisions, baseball diamonds, and kidney-shaped swimming pools. Soon the exurbs give way to empty desert. There are more runways than roads out here. This is where Chuck Yaeger broke the sound barrier. It’s where bombs are tested. In the Middle East you go out to the desert to talk to a burning bush. In America you go out to the desert to blow the bush up.
Remember the Comanche
Frank Pace, executive vice president of GAAS, is on the 45-minute flight from San Diego to Grey Butte, one of the company’s three airfields and proving grounds in the Mojave. Over six feet tall, he barely fits in the King Air’s cabin. He is visiting the hangar where the Warrior, the Army’s new unmanned plane, is under development. When he lands at Grey Butte he learns that there are now 70 U.S. Air Force personnel at the remote airfield. “That’s too many,” he says as his tie flies in the wind. Let the government stay in Washington is the attitude on the landing strip at Grey Butte.
In another hangar at Grey Butte sits the AF 006, the sixth Predator B destined for the Air Force. The plane is a counterpoint to those who claim that the U.S. military is a bloated and lumbering force. It was scheduled to drop a load of weapons new to the Predator payload at the China Lake ordnance range 25 miles north of Grey Butte. Before long, the unmanned plane would be armed and flying over Iraq and Afghanistan. It is part of a plan to get weapons into the field fast, and cut through the typical Pentagon procurement process that too often leaves the forces stuck with out-of-date weapons.
Remember the Comanche, says Gary Bender, the man who oversees operations at Grey Butte. He remembers the Comanche only too well. As a civilian employee of the Army, he tested flying machines at nearby Edwards Air Force Base, one being the Comanche. In 2004, the Pentagon killed the program for the attack helicopter after investing almost 20 years and $8 billion. An ever-growing list of requirements drove up the weight and the cost of the $60-million helicopter jointly designed by Boeing and United Technologies. Before the program was killed, the U.S. Army cut its order from 5,000 helicopters to 650. “If the Predator went through a normal Pentagon acquisition process, it would be useless by now,” says Mr. Bender.
Like the veteran fighter pilot that he is, Mr. Cassidy is always looking for the one opening that leads to the big kill. The high-profile flameouts of other Pentagon weapon programs are just such apertures for General Atomics, he says. Mr. Cassidy points to the Pentagon’s recent decision to cancel the Aerial Common Sensor program, a nearly $900-million Lockheed Martin project to develop a business-class jet stocked with sensors: It’s an opportunity ripe for General Atomics to exploit, he says.
Apples and Oranges
There’s a lot of bravado in the desert. The Predator is not the perfect weapon. It has its critics, as well as its competitors. And as Mr. Cassidy homes in on the wreckage of the Aerial Common Sensor program, it is wise to remember that in 2004, Lockheed Martin received $20 billion from the Pentagon to General Atomics’ $350 million.
Of course, General Atomics Aeronautical Systems doesn’t mind the David and Goliath comparisons. Not two miles from the cluster of San Diego buildings where much of the Predator is made is the Northrop Grumman facility that is home to the Global Hawk, the unmanned plane most frequently matched against the Predator. GAAS did beat out Northrop Grumman in an Army competition to deliver unmanned planes in 2005, but the two planes serve different purposes, says Kathy Ellwood, a senior analyst specializing in unmanned aerial systems for Frost & Sullivan. “It’s an apple and oranges type of debate,” she says.
For its part, Northrop Grumman declines to talk about the upstart across the street, except to say that there will always be competition among defense contractors. Especially now, says Cynthia Curiel, a Northrop Grumman spokesperson, as the Pentagon ends a five-year spending spree.
Mr. Cassidy allows that GAAS was preparing to slow production of the Predator before 9/11 changed things. But even as defense contractors prepare for fewer Pentagon dollars, Mr. Cassidy has his eye on the Department of Homeland Security. He reckons the whole sprawling agency, which includes border patrol and the Coast Guard, could be good for another 150 planes.
He might not wait for the orders to come in.
© Copyright 2006, Red Herring, Inc.
