TrendRaytheon looks to homeland security market for growth

Published 13 October 2010

Raytheon, looking for ways to offset flatter U.S. military demand, has dropped the gold-plating approach once associated with weapons programs in favor of less expensive approaches that save cutting edge equipment for areas where it is truly needed; Raytheon is one of many U.S. defense companies that are betting on foreign sales and growth in adjacent markets like homeland security, an area where analysts expect tens of billions of dollars in new orders in coming years; Brian Seagrave, Raytheon’s vice president for homeland security:”In homeland security, the value proposition is, ‘Good enough, low price’”

Raytheon has embarked on a new low-cost, high-volume strategy to make gains in the homeland security market in the United States and abroad as it looks for ways to offset flatter U.S. military demand.

Eighteen months after losing a $3.5 billion Saudi Arabian border security contract to Europe’s EADS (“EADS wins large Saudi border protection deal,” 21 July 2009 HSNW), Raytheon has dropped the gold-plating approach once associated with weapons programs in favor of less expensive approaches that save cutting edge equipment for areas where it is truly needed.

In homeland security, the value proposition is, ‘Good enough, low price,’” Brian Seagrave, Raytheon’s vice president for homeland security, told Reuters in an interview.

MoneyControl reports that Raytheon is one of many U.S. defense companies that are betting on foreign sales and growth in adjacent markets like homeland security, an area where analysts expect tens of billions of dollars in new orders in coming years.

Raytheon hopes its focus on off-the-shelf, plug and play solutions will set it apart from other companies, allowing it to respond more quickly to a rapidly changing market while giving customers the benefit of its expertise on missiles, intelligence sensors and air traffic control operations.

Seagrave gave no details on Raytheon’s current homeland security revenue, but Raytheon’s homeland security sales are estimated to have reached 41 billion in 2009.

Homeland security is not a separate division for Raytheon, but that could change once the company doubles current revenue, Seagrave said, citing plans to bid for work in a dozen countries in coming years and to grow through acquisitions.

Raytheon aims to boost foreign sales to about 25 percent of its $25 billion in annual revenue from about 20 percent now.

Seagrave said his strategy for the security market was to use local representatives and small contracts to get a foothold in areas like India, the Middle East and eastern Euro

JP Morgan analyst Joseph Nadol wrote in a note last week that Raytheon was one of the companies best positioned to weather current defense budget challenges, and dismissed its loss of a $1 billion U.K. contract this summer (“U.K. removes lead contractor Raytheon from e-Borders program,” 22 July 2010 HSNW) as an isolated event .

Raytheon’s shares took a hit when Britain abruptly canceled its e-Borders security project with a default notice. The two side are in arbitration over the issue.

Raytheon has argued that its work on the program has significantly improved Britain’s security by screening more than 120 million passenger journeys per year, more than half of the traffic entering and leaving the country.

Raytheon shares are trading just above a year low of $42.65 reached in August, and far below highs around $60 this spring.

MoneyControl writes that the company said it would launch a command and control system next week for protecting borders and critical infrastructure that draws on lessons learned from the loss of the Saudi border security order in 2009, and problems with the U.S. Secure Border Initiative program run by Boeing.

The Clear View system is based on off-the-shelf software to keep its cost low, but offers the unique advanced tracking capabilities that Raytheon developed as part of its air traffic control and maritime tracking work for the U.S. government, the company said.

The new modular system just won a small order from an initial military customer and a beta version has been used at airports in a large metropolitan area since July.

Future sales to foreign customers and private infrastructure providers could range from $5 million to $1 billion, said Mark Desmarais, director of security solutions for Raytheon’s Network Centric Systems division. “It’s really focused on reducing the total cost to the customer,” he said.