Raytheon Victory In Competition For Revolutionary Round Looks Unlikely To Generate Robust Returns

It’s a good thing that Raytheon’s overseas sales are growing fast, because business conditions in its home market look less than rosy. A case in point is the company’s recent victory in its competition with Alliant Techsystems to build the most accurate artillery shell in the world. Raytheon won the competition in August, but a week later Tony Capaccio of Bloomberg Business News reported that the Army planned to slash the production goal for the munition — called Excaliber — from 30,000 rounds to 6,000. Having already assembled about 3,000 Excalibers, Raytheon now realizes the program isn’t likely to be much of a franchise for the future.

Stories like this will become more common in the munitions business as the U.S. withdraws from Iraq and then begins scaling down its presence in Afghanistan. Demand will soften as fewer rounds are expended in war zones and the frequency of training activity declines. But Excaliber is a unique case, because it is the only artillery round the Army has that can compete with the accuracy of a smart bomb like Boeing’s Joint Direct Attack Munition. Specifically, precision guidance capability built into the Excaliber munition enables it to hit within ten yards of intended targets after being fired from over 20 miles away. That means a sure kill almost every time the round is fired, which is something new in the annals of field artillery. It also means fewer unintended casualties among noncombatants, which should have been a major selling point in hearts-and-minds campaigns where one of the biggest fears U.S. planners have is that innocent locals will be killed by errant bombs.

So what went wrong? Well, the first problem was that Excaliber was introduced relatively late in overseas conflicts, and troops had little experience with its use. A second problem was that production rates never accelerated to a point where Raytheon could achieve the economies of scale necessary to slash the high unit cost. A third problem was that bureaucratic proponents of other solutions had more influence when the time came to streamline the Army’s approach to precision fires. One thing that did not go wrong, though, was the actual performance of the munition: by most accounts, Excaliber is a remarkably accurate, even revolutionary munition. So it’s too bad the Army has decided to make it a “silver bullet,” rather than buying enough to adequately equip the whole force.

Excaliber isn’t the only Army weapons program to encounter hard times recently. The Armed Reconnaissance Helicopter was killed in 2008. The Future Combat System, supposedly the centerpiece of Army modernization, was terminated in 2009. The Non-Line-Of-Sight Launch System was canceled this year. And some observers think next year could see major delays in the Joint Light Tactical Vehicle conceived to replace the Army’s thousands of Humvee light trucks. But Excaliber is a special case because even at a high unit cost the program doesn’t cost much, and it really has the potential to revolutionize how artillery is used on the battlefield. Maybe the Army has something better waiting in the wings, but it’s just as likely the decision to slash Excaliber wasn’t thought through as carefully as it should have been.