Marketplace Today Blog

By Rick Barrett
Milwaukee Journal Sentinel

Oshkosh Corp. has been eliminated from the competition for a $20 billion contract to build a vehicle that would replace the military Humvee.

Wednesday, Pentagon officials said three teams, led by defense contractors Lockheed Martin, General Dynamics and BAE Systems, will move ahead in the next phase of the vehicle-design competition. A team led by Northrop Grumman Corp., which included Oshkosh as the vehicle builder, will not advance to the next round.

Oshkosh officials said they were disappointed with the Pentagon’s decision, which they had waited on for months.

The company remains firm in its belief that it developed the best vehicle (pictured above) to replace the Humvee, said spokeswoman Ann Stawski.

The decision also surprised some Wall Street analysts, who had expected Northrop Grumman and Oshkosh to be among the winners.

The Oshkosh vehicle would have been powered by electric motors and a diesel-driven generator. It could have been used as a mobile generator, providing electricity for remote command posts and airport landing strips, in addition to use as a troop carrier.

“We felt that our design leap-frogged the current capabilities and requirements of the military,” Stawski said.

Oshkosh officials said they’re awaiting a full briefing from the military before deciding whether to protest the decision. Each of the three teams left in the competition will receive contracts worth at least $35.9 million to begin the second phase of the Joint Light Tactical Vehicle program which ultimately could be worth $20 billion or more.

“This is a critical step toward providing our soldiers with ever more capable combat vehicles,” Army Lt. Gen. Ross Thompson, deputy to the service’s assistant secretary for acquisition, logistics and technology, said in a statement.

Besides the Northrop–Oshkosh team, the others not selected to advance to the next round of the competition were Boeing Co., SAIC Inc. and Textron Inc.; Force Protection Inc. and DRS Technologies Inc.; and Blackwater USA and Raytheon Co.

Northrop Grumman will make a decision about pursuing other options after it is briefed by the Army, said Janis Lamar, a spokeswoman for the Los Angeles-based company.

Humvees haven’t fared well against insurgent attacks in Iraq, even when they were equipped with armor. The military is looking at replacements for the vehicles, partly because they can’t do everything needed in modern warfare.

The Army and Marine Corps say prototype vehicles will be tested for 27 months before production awards are made.

The Pentagon will then pick two contractors to go forward. It's unclear whether the government will make a final award to a single company or use multiple vendors.

Wednesday’s announcement was a severe blow for Oshkosh, one of the U.S. military’s largest vehicle manufacturers, said analyst George Reis with George V. Reis Investments, in Two Rivers.

The company’s concrete-mixer business is off 70 percent because of the slowdown in residential construction and less concrete being poured by municipalities and commercial-construction companies. Also, the company’s European business has been dogged by management problems and a slowdown in the European economy.

Now, with the Pentagon announcement, “I wouldn't be surprised if there was a complete restructuring” at the company, Reis said.

Historically, the odds are slim of overturning a Pentagon decision on military contracts. But if there’s a silver lining to Wednesday’s decision, it’s that Oshkosh won’t have to spend millions of more dollars in the next phase of the vehicle-design competition, said analyst Charles Brady with BMO Capital Markets.

If Oshkosh had remained in the competition, it would have had a negative impact on the company’s earnings because of the expenses associated with the JLTV program, according to Brady. It could have cost the company 10 to 12 cents per share in 2009, he said.

“Everything I read sounded like Oshkosh had a pretty good product,” he said. “But there’s always the risk of doing all of this work for two more years, spending millions of dollars, and ultimately not getting the contract.”

Each of the remaining teams in the vehicle-design competition is being asked to build an infantry vehicle, a general purpose vehicle and a utility vehicle to support various Army and Marine Corps missions. The services are expected to order 65,000 vehicles, which will not enter initial production until 2013. Each vehicle is estimated to cost $400,000, according to Merrill Lynch analyst Ronald Epstein.

BAE Systems walked away the big winner in Wednesday’s announcement. It will lead one of the teams that was selected, and its Armor Holdings subsidiary is on another.

The Associated Press contributed to this report.