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With war and turmoil on so many fronts around the globe, U.S. defense contractors—and their metals suppliers—are busy keeping the military in a state of readiness.
By Dan Markham,
Senior Editor
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With war and unrest the sad rule around the world, service centers that supply metals to the defense industry are in the middle of a growth period with no end in sight. U.S. government defense spending is expected to continue increasing for at least the next two years, and possibly longer, though perhaps at a slower rate.
“The actual federal government [budget] projections call for an increase through 2011, which is calendar year 2012-13,” says Robert Aboulafia, vice president of analysis at Teal Group Corp., a Fairfax, Va.-based firm specializing in aviation and defense issues. “It just isn’t going to be at the same double-digit pace it’s been the last several years.”
Where the new spending will go is a question, but one with an answer that seems favorable to metals distributors. Aboulafia anticipates some of the money earmarked for procurement of fighters, missiles and other new purchases may be shifted to maintenance and overhaul. While government contractors acquire much of their metal mill-direct, service centers are actively involved in supplying providers of maintenance material and spare parts.
“Rather than replacing, they tend to repair and enhance their existing platforms with new avionics,” says Bob Mraz, vice president of sales and marketing for TW Metals. “As a result, the maintenance and repair elements are that much greater. And it will continue as long as there’s a need to maintain an effective fighting force, which appears to be forever.”
TW Metals has a sizable presence in the defense market, providing a variety of metals to federal agencies across the country and throughout the world. The company even created a separate division, the Government Business Unit, to handle all of its work with the government. Headquartered in Chicago-suburban Carol Stream, Ill., the unit does not report through TW Metals’ traditional structure, instead reporting to Mraz’s department at the corporate office in Exton, Pa.
One reason for the separation was the hard-to-kill belief that it’s difficult to do business with the government—and if you do, you must wait to get paid. Neither is remotely true anymore, yet this persistent myth proved to be a hindrance within the company, Mraz says.
“There’s a tremendous amount of red tape—if you choose to wrap yourself up in it,” he says. “If you understand how to do business with the government and the conditions they set forth, there isn’t a better or easier customer in the world.”
Though the rules and regulations may be strict, they are also easy to understand and access. Information on Federal Acquisition Regulations is available on numerous web sites. “They are a road map, a connect-the-dot process, on doing business with the government,” Mraz says.
Once a shipment has been made, securing payment is not as vexing as the myths suggest. Service centers report getting paid in a similar, or even better, timeframe than when dealing with some private customers.
“They do have the machine that makes the money,” jokes Chuck Contes, president and owner of Aviation Metals, Charlotte, N.C. “If you have your ducks in a row, your payment process is not nearly the nightmare people pretend that it is. We’re getting paid within reasonable limits.”
Whereas TW Metals is a large supplier of a variety of metals to the government, Aviation Metals specializes in smaller quantities of hard-to-find alloys. There is a place for both kinds of companies in the defense market.
“When you’re a smaller company, [government] is one of the first areas you should approach as a business. It’s the safest place to go when you are a newcomer,” Contes says. “You’re not risking anything. You don’t have to entertain the customer to get the bid.”
Still, for many companies both inside and outside the metals business, entering the world of government contracts can be daunting.
“Barriers to entry in defense work are still high. The volume of paperwork is a huge issue,” says Aboulafia. “It’s not just that there may be mandates to purchase from a U.S. source, but documentation to back it up as well.”
Even Mraz, who raves about his experience with the government, recognizes that the decision to enter the market cannot be made lightly. Newcomers face a steep learning curve.
What some commonly refer to as unnecessary red tape, others see as commonsense precautions. Among them is Jack Middlebrooks, executive vice president of sales and operations at Transtar Metals, Torrance, Calif.
“Defense-related programs have requirements that have to be filled and specific steps that have to be taken,” says Middlebrooks, whose company supplies heat-treat aluminum exclusively to the aerospace and defense markets. “It’s probably more driven by safety than it is by bureaucracy.
“It’s not so much a different set of rules. It’s a set of rules you have to follow exactly. A lot of people don’t find it worth the effort, so they don’t do a lot of government business,” he adds.
But that attitude may be changing as the military markets remain hot. In September, A.M. Castle and Co., Franklin Park, Ill., effectively doubled its aerospace and defense business with the acquisition of Transtar.
After shedding its marine unit several years ago, Transtar now works entirely in the aerospace and defense sectors. Most of its business goes through major government subcontractors such as Lockheed Martin and Northop Grumman. Transtar supplies all of the aluminum plate for the joint strike fighter, though it passes through Lockheed.
Vendors, such as service centers, can make direct sales to the federal government through direct vendor deliveries, for example, of alloys that meet certain precise specifications. In other cases, the government awards metals contracts based on suppliers who can serve specific locations around the globe.
One challenge for distributors is the government’s commitment to include small, disadvantaged companies in the supply chain. Service centers are encouraged to build a socio-economic plan that includes working with other companies owned by women, disabled veterans, the handicapped and other minority groups.
“When you compete for government business, it’s your supply chain partners against other supply chains,” says Mraz of TW Metals, which is now a subsidiary of O’Neal Steel. “It’s a way to infuse the economy with dollars and activity, and a way to make sure that everyone can do business with the government.”
Despite this, government infrastructure isn’t nearly as bloated and wasteful as in years past. Like the rest of the metals industry, the federal government has embraced “lean,” Mraz says, to service centers’ benefit.
“They’re leaning their operations like everyone else,” Mraz says. “They want to add value, and stocking a commodity that’s readily available from multiple distributors is just a redundancy.
“I’ve seen them evolve,” he adds. “They are now a lean organization that’s focused on supporting the war effort through supply chain management.”
This new approach to doing business is evident in other ways. Steve Buzash, president of Standard Metals Inc., a copper and brass distributor in Hartford, Conn., says though business is good overall, his company has seen less federal government work in recent months.
“In terms of seeing a bunch of RFQs coming in from Uncle Sam, I really haven’t. I’m wondering if it’s because commodity prices are so high.” For government depots to cut back on high-cost inventory, like many service centers, is only prudent thinking, he says. “We’re very careful on how and when we buy. I can understand everybody being that way.”
Experts agree that global instability, which shows no signs of abating, ensures defense spending will not take any major hits for the foreseeable future.
“Even if there’s a change in administration with a softer policy,” Contes says, “there’s still going to be business out there because of the world situation. If we’re not on the offensive, we at least better be ready on the defensive.”
Narrow Niche Opens Broad Opportunity for Apex
When the U.S. Navy commissions construction of a new ship, they call Apex Steel, Englewood, N.J.
Apex Steel is one of the few sellers of bulb flats—rolled steel sections that are used as stiffeners in ocean-going vessels. The profile of the section impedes corrosion, adding to a ship’s life and durability, explains Apex President Norm Cantor.
“They’ve been employed in ocean-going ship designs for over 50 years, but they were predominantly in commercial ship construction. There’s been a transition in the Department of Defense, which has become increasingly concerned about cost overruns, plus an emphasis on lifecycle. They don’t want ships rusting out in 10 or 20 years,” Cantor says.
Because of its ultra-narrow niche, Apex’s relationship with the federal government differs greatly from that of most service centers.
“We’re so specialized, they tend to come to us for certain technical information,” Cantor says.
Since the dimension on each shape varies depending on the particular ship, the design and specification process takes much longer than typical steel orders. “You have to meet with naval architects and design engineers as much as three, five, even seven years in advance of any possibility of making the sale,” he says.
Due to the earlier exodus of the U.S. shipbuilding industry overseas (a trend that’s been somewhat reversed in recent years), the sections are not produced domestically. Apex Steel purchases all of its sections from Norway’s Ruukki Steel Group.
Buying metals from outside the United States for use in defense projects is often a sticky issue, though Cantor believes the federal government realizes tradeoffs must be made in certain situations.
“It’s important to take a posture of ‘Buy American’ where it’s practical. But there comes a point where it’s more critical to maintain U.S. jobs in certain key industries, and I think the U.S. shipbuilding industry is one,” Cantor says.
Though there are few distributors like Apex, Cantor believes other companies can uncover niches like the one his company discovered. “There are many specialized areas people can go into. The idea is to try to find something every Tom, Dick and Harry isn’t capable of offering.”
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