Top Defense Contractor Lockheed Martin Opts for Commercial Diversification

Of all the big contractors in the U.S. defense industry, Lockheed Martin seemingly has the least need to diversify into commercial businesses. It is the Pentagon’s dominant supplier of tactical aircraft, space systems, missile defenses, naval electronics and information services. Having leveraged core defense lines into lucrative relationships with civil agencies and overseas governments, it looks well positioned even if Pentagon demand continues to soften.

So it was surprising to learn last week that a subsidiary of the company in the United Kingdom has won an exploration license from the International Seabed Authority to mine metal-rich undersea nodules between Hawaii and Mexico. The nodules contain high concentrations of copper, nickel, manganese and cobalt, all of which have seen prices spike in the global commodity boom. In addition, they contain strategically-important “rare earths” — exotic compounds in which China currently has a near-monopoly that are used to make everything from smart phones to missile seekers.

It isn’t hard to see why big mining companies would want to be involved in such an enterprise. But Lockheed Martin? Didn’t its most famous former CEO once comment that defense-industry diversification moves were “unblemished by success?” Judging from the numerous commercial ventures the Maryland-based company has launched over the last few years, current management sees things differently. It prefers to segue into areas adjacent to the defense markets it knows so well, but the array of commercial initiatives the company is pursuing suggests that management will entertain any proposal where the numbers make sense.

For example, the Lockheed Martin facility in Louisiana that manufactured external fuel tanks for the Space Shuttle has adapted its tooling and technology to make cryogenic tanks for the rapidly expanding natural-gas industry. The tanks will be used to store and transport the gas in concentrated form, and the company has already received its first orders from commercial customers. Many experts believe that newly accessible domestic reserves of natural gas will transform the U.S. from a net energy importer to an exporter, and Louisiana has emerged as a center of this energy revolution.

Meanwhile, Sim-Industries, a commercial flight training and simulation business acquired while current CEO Marillyn Hewson was running Lockheed’s electronics unit, has just opened its first South American center to train airline pilots on the 737 jetliner. Sim is a market leader in the manufacture of civil-aviation flight simulators that supports training of pilots for the Boeing 737, 767, 777, and 787, plus the Airbus A320 and A330. Lockheed Martin also announced earlier this year that it would acquire a commercial-aircraft engine maintenance, repair and overhaul business in Montreal to support Embraer and Canadian regional jets, expanding the commercial-engine maintenance work the company already performs at its Kelly Aviation Center in Texas.

The company is also pursuing a wide array of commercial diversification initiatives in its Information Systems and Global Solutions business, which is the biggest provider of information services to the federal government. In the course of doing business with the Department of Defense, Department of Energy and various intelligence agencies, Lockheed’s IT unit has developed literally hundreds of applications and innovations with commercial potential. For instance, it is providing health-related information services in all 50 states and has begun to offer cybersecurity solutions such as its Palisade cyber intelligence management system to customers in financial services, electric power and other industries.

And that’s just the beginning. Last year, Time magazine recognized a revolutionary approach to aquaculture that Lockheed Martin has devised as one of the top 25 inventions of the year. Developed in partnership with Kampachi Farms of Hawaii and the Illinois Soybean Association, the system uses satellite communications, remote sensing and robotics to operate mobile fish pens in which millions of fish can be raised for food without causing environmental degradation or competing for recreational areas. The pens function autonomously in deep-sea areas, drifting in well-defined patterns with automated equipment for feeding the fish and monitoring their health.

Lockheed Martin’s profits still depend heavily on supplying weapon systems like the F-35 fighter and Aegis combat system to military customers at home and abroad. However, the closer you look at the company’s business strategy and competencies, the clearer it becomes that management has a very diverse range of options for the future. This doesn’t yet look like a swords-into-plowshares story, but if Pentagon demand keeps slowing, Lockheed Martin is poises to become much, much more than a military contractor.