Michigan auto sector looks to defense industry as sales slow
Troy — Some automotive suppliers in Michigan are trying to diversify by targeting the defense industry ahead of a predicted slowdown in auto sales.
Michigan ranks No. 28 based on volume of defense contracts, an improvement from No. 33 in 2016. But business leaders and government officials say the state can become the defense leader in the Midwest in the next five years and end its status as a "donor state" that provides approximately $1.5 billion more in taxpayer funds to defense than it gets from it.
Some businesses, however, cite the red tape and jargon of the military-industrial complex as obstacles to becoming defense contractors.
"We quickly learned this was the perfect moment to start this conversation with the auto sector now that they're forecasting flat growth," said U.S. Rep. Elissa Slotkin, D-Holly, who recently held a roundtable with companies on the subject at Automation Alley, a manufacturing business association in Troy.
"Many don't know how to start, how to enter into conversation with the Defense Department," she said. "That's a huge barrier of entry. The perception is it's going to take a ton of time, effort, work and even then you still might not get anything from it."
Precision Global Systems, an auto powertrain parts supplier and defense subcontractor in Troy, has sought for about five years to provide its nonhazardous rust-removal chemical solution to the Defense Department. To do so, though, it needs the Pentagon to make the request.
The military annually spends $20 million on rust-corrosion issues, most of which goes to rust-prevention measures, said Richard Najarian, the company's president. He has exhibited PGS's approximately 15-minute "de-rusting" process to the U.S. Army and Navy in places across the country and hosted a dozen visits, including for a four-star general.
"There's huge amounts of interest in our product," Najarian said. "When you go down to the next level, that's where the challenge is. How do I sell something to the military that is new to the market?"
The company found an advocate for its work at an Army depot and is hopeful that talks will open the pathway for business.
“This would provide new opportunities for growth and expansion," he said. "For a small- to mid-sized company like PGS, government contracts are a catalyst for new manufacturing programs.”
'Weakness to a strength'
For the first time in years, Michigan is in a better position to promote itself, officials said. The Michigan Defense Center, an entity of the Michigan Economic Development Corp., produced the first statewide strategy to protect and grow the state's defense sector in 2017. It expects to release in the fall an updated version that aligns with the national defense strategy to explore autonomous systems, missile defense, hypersonics and more.
Michigan rose to the No. 4 state in attractiveness for the aerospace industry from No. 8 a year ago in PricewaterhouseCoopers' aerospace and defense industry report released this week. In the past 18 months, the state has attracted nearly $750 million in aerospace capital investment, according to the report. Plans for a low-orbit satellite launch site also were announced last year.
There could be more to come: Out-of-state military and commercial aerospace companies have inquired about Michigan as a place to keep their manufacturing in the United States, said John Bedz, entrepreneurship and defense manager at Automation Alley.
"The aerospace sector has great needs to make things quickly," he said. "If (Michigan companies) are willing to do a little bit of the leg work, they could open the market for themselves. There is need."
Michigan also is the only state to have representatives in the House Armed Services Committee (Reps. Jack Bergman, Paul Mitchell and Slotkin) and one in the corresponding Senate committee (Sen. Gary Peters). The committees control the purse strings for the Defense Department.
"We went from a weakness to a strength" after Michigan had no representation on the armed services committees after 2014, said Sean Carlson, executive director of the Michigan Defense Center. He is a retired lieutenant-colonel contracting officer for the U.S. Air Force.
In the proposed Defense Department budget, amendments highlight Michigan for its expertise in automotive capabilities and vast amounts of land and airspace for multi-nation, multi-branch military exercises similar to the annual Northern Strike at Camp Grayling and the Alpena Combat Readiness Training Center. The hope is to attract more active-duty missions to the state.
"Business attraction is different in defense," Carlson said. "We have to go to the Pentagon. The attraction happens when you bring new missions here."
The Ground Vehicle Systems Center is a major mission for developing advanced military automotive technology and is located at the Army's Detroit Arsenal in Warren. That attracted in April a small team from an American joint-venture between Massachusetts-based defense contractor Raytheon Co. and German defense manufacturer Rheinmetall AG to Sterling Heights.
The joint venture is bidding to become the prime contractor with the Defense Department on a $617 million request for proposals with its Lynx KF41 next-generation infantry fighting vehicles, of which Rheinmetall funded the development. If in April 2020 the joint venture wins the contract, it intends to open a manufacturing site in Michigan.
It is working with the Michigan Economic Development Corp. and local communities on incentives and location selection. No hiring number has been determined, though it would be in the hundreds, said Brad Barnard, Raytheon program director for Team Lynx.
"Southeast Michigan is kind of the center of gravity for the combat vehicle ecosystem," Barnard said. "The customer is here, the R&D is here, industry, supply base — everything."
About 100 small businesses attended a recent supplier recruiting event for the Lynx project at Automation Alley. But for many small businesses, getting to where they can pursue a defense contract is out of reach. Meeting cybersecurity regulations, obtaining the correct certifications, navigating the hundreds of contracts and writing bids can cost thousands of dollars.
The government, however, funds resources to help businesses navigate the process. The Defense Logistics Agency, Michigan Economic Development Corp. and local partners fund the Procurement Technical Assistance Centers of Michigan to offer consulting services and information to federal contractors at no cost. The nonprofit has nearly 2,700 active clients and helped Michigan businesses win $1.2 billion in contracts in 2018.
"This can be a competitive marketplace," said Beth Cryderman Moss, president of the PTACs of Michigan and the director of the Macomb Regional PTAC. "It can take up to a year, two years of really beating the pavement, making sure you’re hitting all the right marks, networking, making sure you’re positioning yourself with certifications, registrations, and you still may never get an award.
"But it may be worth investigating the opportunity. We can help you determine if there is a place for you and if there's an advantage to commercial auto suppliers to build on for potential revenue streams."
The Michigan Defense Center also provides an online platform to help businesses navigate federal contracts based on a readiness score conveying how prepared they are to work with the government. The center additionally provides funds up to $10,000 toward bid-writing services. Those resources helped secure approximately $220 million in contracts since January 2016.
"If you win a contract, that’s great," Carlson said. "Even if you’re unsuccessful, 60-70% of your template is already done for you. Now you’re in the game. We help them get through that learning curve."
Suburban Bolt & Supply Co. received support from Macomb's Procurement Technical Assistance Center and the Michigan Defense Center. The veteran-owned auto supplier based in Roseville previously received small buys from the U.S. Army and had developed a prototype 10 years ago for the defense industry that never went anywhere. Four years ago, it made a concerted effort to grow that part of its business. Now, it's finally seeing results, said Nikki Gordon, the company's marketing director.
Although its goal was to earn one contract this year, it already has secured two and is looking to grow defense from 2% of its annual revenue to 10% next year.
"A physical government contract is about three times the size of an average order of one of our customers," Gordon said. "It’s definitely helped when things have slowed down in other aspects."