Defense spending in Virginia: How deep will cuts be?

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Not everyone is so optimistic, especially with the budget-cutting ax already falling in Hampton Roads.

“These are not easy decisions,” said Charles A. Schue III, president and CEO of UrsaNav Inc. in Chesapeake. “No matter what they decide, somebody in the United States is going to get hurt.”

Among other tasks, UrsaNav helps maintain and service the workhorse navigational radar systems used on most ships in the Navy and Coast Guard.

Schue and another Coast Guard vet established Ursa­Nav about seven years ago when they bought the East Coast operations of a California company.

Now with about 100 employees and annual revenues in the $20 million to $30 million range, UrsaNav has positioned itself in the defense sector as a product and service provider focused on maintaining and modernizing existing systems, sometimes referred to as “legacy systems,” Schue said. Its employees travel to vessels around the world to do repairs, make adjustments and train crew members.

Losing any contract would have a dramatic effect on Ursa­Nav.

“Large defense contractors have the ability to recover from losing 500, 1,000 or 1,500 people; as public corporations, they’re big enough to absorb that,” Schue said. “Small, typically privately held businesses don’t have that big a footprint; there’s much more of a drastic effect. The impact on small businesses is significant.”

Service-contracting companies that provide engineering, maintenance and information-technology services are likely to be more vulnerable to defense cutbacks, said Cindy M. Walters, director of Old Dominion University’s Government Sponsored-Industry Assistance Programs.

The Pentagon already is working to bring back under its roof work that it “outsourced” to businesses over the past 15 years, so “you don’t have as many contracts,” said Walters, who helps local firms get federal contracting work.

“My biggest concern is that we have this somewhat of a perfect storm going on,” she said. “For me, the foregone conclusion would be a cut in defense spending that would impact dollars for programs and contracts, across the board, that would affect our area.”

The impending closure of the Joint Forces Command, which provides research and development, modeling and simulation, and training to the military, will slow one flow of defense contracts for firms large and small in the region.

“Everybody’s kind of breathing a sigh of relief,” said Tom Mastaglio, CEO of Mymic LLC, of news that roughly half of JFCOM’s functions will continue in Hampton Roads.

Yet Mastaglio – a West Point grad, 22-year Army veteran and founding director of the Virginia Modeling, Analysis and Simulation Center in Suffolk in the late 1990s – said he’s not sure how much to buy in to what he terms “spin.”

“We’re on the slippery slope here,” he said. “If we’re not careful, there are going to be some significant issues for small businesses.”

The Portsmouth-based company employs about 80 people and has about $20 million worth of defense contract work, about 90 percent of its portfolio. It’s now on a mission to diversify its product line, creating computer programs to help train emergency medical response teams, provide therapy for people with brain injuries, and improve security at U.S. ports. It’s already won a contract with the Virginia Port Authority.

“As a region, we’ve got to look beyond defense,” Mastaglio said. “If you don’t want to end up like Detroit, we better figure out what we have, what our organic capabilities are and how we can use them to meet other needs, rather than being largely dependent on a single customer .”

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Others, however, believe that the region has such a well-established defense infrastructure, with facilities and a talent pool few other places can match, that it will continue to hold its own, at the very least, and even may see some growth.

“There’s a huge customer base there, and there’s a lot of talent,” said Dave Herr, president of BAE Systems’ Rockville, Md.-based Support Solutions sector. “It’s a good place to do business; it’s fairly diversified; I’d say it’s fairly well-positioned.”

BAE’s Support Solutions sector includes the Chesapeake communications facility, an office in Hampton and, most recognizable, its shipyard at the mouth of the Elizabeth River’s Southern Branch.

“The Hampton Roads area is actually fairly central to the BAE strategy,” Herr said.

Last summer, anticipating some of the shifts in the defense environment now under way, BAE reconfigured its businesses, shoring up the unit Herr heads, servicing and sustaining existing systems.

“We think there’s going to be rising demand to maintain and upgrade some of those older platforms,” Herr said.

The local shipbuilding and ship-repair industry, in which BAE is a player, contributes significantly to the region’s economy. Nearly one of every 11 jobs in Hampton Roads is directly or indirectly dependent upon the private-sector shipbuilding and repair industry, according to a 2007 study by Old Dominion University’s Economic Forecasting Project.

“Knock on wood, it’s not going to affect us very much,” said Malcolm Branch, president and CEO of the Norfolk-based trade group, of any defense-spending adjustments.

The port’s ship-repair facilities are virtually unparalleled, Branch said, and local firms have adapted to changes by the Navy that concentrate more work in one shipyard through “multi-ship, multi-option” contracts. The Navy’s 30-year plan calls for a minimum fleet of 313 ships. As long as they continue to be built and go to sea, Navy ships will require maintenance and periodic overhaul .

It’s that ongoing pace of operations that may secure continued defense contracting for businesses in Hampton Roads.

“When is that going to end?” asked Al White, an executive at BAE’s Chesapeake facility, pointing to a slide-show image of two camouflaged snipers in an Afghan-like setting, near a portable satellite dish. “When is the war on terror going to be over?”

Until that happens, he said, he’s not too worried.

Robert McCabe, (757) 446-2327, robert.mccabe@pilotonline.com

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