With budget cuts and troop drawdowns, Minnesota's contractors will have to be more nimble to survive.
With products ranging from a 1.2-pound robot that can survive a three-story fall to penile implants for injured soldiers, Minnesota companies with defense contracts are bracing for a new business battlefield.
Combat has ended in Iraq, and the drawdown continues in Afghanistan. Fewer troops means fewer supplies are needed. Bases could close, and defense contractors anticipate at least a 5 percent cut in the Pentagon budget.
Once pioneers in the defense industry, Minnesota's contractors play a less prominent role now but still do defense work worth an estimated $10 billion a year.
But supporters of the industry say high taxes, poor support for start-up technologies, limited venture capital and even a shortage of Ph.D-holding U.S. citizens -- a requirement for military contracts -- all contribute to retard growth.
And there's the perception problem.
"If you're a supplier, and you are trying to sell at Fort Bragg or at the Pentagon ... then God help you if your company has the word Minnesota in it," said Chip Laingen, executive director of the Defense Alliance of Minnesota, which promotes the industry.
"They get that look on their face, like, 'Really? Minnesota? You guys do things with defense?'''
Minnesota was the birthplace of the "K" ration, served to GIs in World War II. During the Cold War, Minnesota incubated Control Data, Honeywell and supercomputer maker Cray Inc.
But Control Data is gone, Honeywell has largely moved on, and Cray left for Seattle. In the last 20 years, the state lost ground to such defense powerhouses as California, Texas and Virginia.
In 2002, Minnesota was 22nd in the nation for prime military contracts. By 2005, it was 35th. Its $1.6 billion in prime defense contracts in 2011 is down from a recent peak of $1.9 billion in 2008. Wisconsin had $5.98 billion in such contracts in 2011, due largely to production of mine-resistant vehicles.
One Minnesota food company already appears to be paying for the military pullback. Edina-based Nash Finch, supplier of groceries to more than 475 commissaries and exchanges globally, reported a 1.1 percent decline in sales and an 11 percent drop in operating profits from its military segment during the first quarter.
The Defense Alliance's Laingen said that in the leaner environment, the military likely will invest more in Special Operations Forces, unmanned systems and cyber capabilities, and likely need more spare parts for older equipment. Minnesota companies remaining in the sector will have to be more nimble, particularly as subcontractors.
A division of Plymouth-based Alliant Tech's Armament Systems, a Honeywell remnant, exemplifies that trend. The business improves the accuracy of ammunition by making GPS guidance and navigation fit existing 155mm artillery shells. Alliant can accomplish that for about $10,000, compared to Raytheon's Excalibur units, which may be more accurate but cost as much as $100,000.
"The time of open budgets are long gone, where cost was never an issue," said Adam Cherrill, director of Precision Mortar Systems at Alliant. "Nowadays, that has flipped 180 degrees." Last year, Alliant moved its headquarters from Eden Prairie to Arlington, Va., to be closer to Washington.
ATVs and sandpaper
Two-thirds of Alliant's sales are to the U.S. government, but the new realities favor companies with more than one customer. The Marines recently awarded a $1.7 million contract to a 53-person Edina company that's a leader in manufacturing small, throwable robots that transmit video.
In its conference room, ReconRobotics has a large wall mural of Army Rangers tossing its product through a window, but it defines itself as a regular manufacturer that happens to sell to the military. The robots, which sell for $5,000 to $13,000, can even inspect crawl spaces. A model being developed with magnetic wheels can scale a water tower.
If the U.S. military loses interest or funding, others in a security-conscious world will fill the void, said President and CEO Alan Bignall.
Medina-based Polaris started a military division in 2005 that leads the market in providing equipment to Special Forces in Afghanistan and to National Guard units. It's working with other companies to develop what the military calls Unmanned Ground Vehicles to carry gear, detect mines or collect unexploded ordinance.
With annual sales of more than $150 million, the unit has become integral for Polaris.
"We leverage the fact that we're a U.S. company that started in northern Minnesota, and we're from the heartland," said Mark McCormick, managing director of Polaris Defense. "We're not some big defense contractor that maybe they've grown to have some stereotypical issueswith."
Maplewood-based 3M also sees opportunity in the new order. After a decade in war zones, weapons and vehicles are being brought home and repurposed. Although it does not release numbers, 3M has increased sales to the military of its Cubitron II abrasives, a next-generation sandpaper designed for refurbishing battle-worn equipment.
One of the state's largest defense contractors is Golden Valley-based General Mills, with $198 million in defense business in 2011, about 1 percent of its total revenue. Asked whether the company will be hurt by peace, a company executive suggested that General Mills is not concerned.
"Whatever impact troop withdrawals may have on our business is not really a consideration. We view our troops coming home as a positive," said Thomas Forsythe, the cereal maker's vice president for communications.
Army of one less
Military recruiting and marketing strategies also are likely to change. Bloomington-based public relations firm Weber Shandwick is part of an integrated group of marketing and communications firms that support Army recruiting. It was part of a group awarded an Army recruitment and retention contract last year that Advertising Age, a leading marketing industry publication, estimated to be worth nearly $200 million a year in billings and as much as $15 billion in revenue.
The firm declined to talk about its relationship with the Army, which intends to reduce troop strength from 560,000 to 490,000 by 2017. Lt. Col. Timothy Beninato, a public affairs adviser who helps determine troop levels, said the Army still will have to market itself and recruit new soldiers.
Advancements in treating wounds have increased survivability rates and are expected to increase Department of Defense orders for products supplied by a company with Minnesota ties.
Denmark-based Coloplast's Minneapolis plant has defense contracts to make a variety of items for treating battlefield-related wounds, including colostomy pouches, catheters and even penile implants.
Minnesota, with no active-duty military bases and diminishing manufacturing, actually may benefit from the changes, said Ann Markusen, a Fulbright Scholar and economist at the University of Minnesota Humphrey School of Public Affairs who has written on the defense industry.
Large defense cuts in the early 1990s helped start an economic boom as defense workers were freed to innovate, fostering advancements in medical devices and other technology, she said. And, with today's landscape, the companies that thrive will have "dual use" products, she said.
"There was a peace dividend, and hopefully we'll have another one," she said.
Mark Brunswick • 612-673-4434