Venetian blind-like screens flutter down the huge picture window at the conference hall, quickly concealing the commanding view of the wide James River. It's as if television secret agent Maxwell Smart had ordered the "cone of silence" because that's exactly what the screen does.Top-secret conferences about the future design of Navy ships are held at the newly completed Virginia Advanced Shipbuilding and Carrier Integration Center in downtown Newport News. "The blinds vibrate to thwart any electronic eavesdropping," says Bob Klosterman, VASCIC director.

The $58 million center shows just how deeply Virginia is wedded to the defense industry. VASCIC is designed to develop the next generation of submarines and aircraft carriers that will defend the U.S. well into the 21st century. Northrop Grumman Newport News, which owns the giant shipyard next door and is a part owner of VASCIC, is the nation's sole builder of nuclear-powered aircraft carriers.

These giant vessels launched the first U.S. airstrikes avenging last year's terrorist attacks in New York and Arlington that killed more than 3,000 Americans. Future aircraft carriers, however, may have unusual twists, such as new reactors that can power Buck Rogers-style laser weapons. Tomorrow's submarines dreamed up at VASCIC could have bullet-like pods around their hulls to house missiles, unmanned underwater drones or mini-subs for Navy SEALS.

VASCIC's projects may be for the future, but there's plenty going on right now. Blessed by its proximity to Washington and with a great sea port, the Old Dominion is once again gearing up for its portion of a major boost in military spending - more than $40 billion extra in this year's $369 billion defense budget - to help root out terrorism worldwide. With a defense industry already worth $30 billion, Virginia has long been a major military state, trailing only California in defense-related payrolls and contracts. "Virginia has for generations played a very major role and has been a home for a large number of men and women in uniform ranging from the Pentagon in the extreme north of the state to Hampton Roads and in between," says U.S. Sen. John W. Warner, who for 30 years has wielded enormous clout on defense affairs in Washington.

The new war on terrorism has defense industries humming in about every corner of the state. Although the impact has yet to be felt in the rest of Virginia's economy, there's plenty of activity. In Richmond, DuPont makes Kevlar for flak jackets and Nomex for fire-resistant combat flight suits. Researchers in Blacksburg help design software for the engineering of Unmanned Aerial Vehicles (UAVs) that have been used to great effect in Afghanistan locating elusive al-Qaida and Taliban terrorists. After the UAVs find such enemies, they are hunted down by U.S. Special Operations troops wearing night vision goggles made in Roanoke by ITT Industries (see illustration, page 8). The company has just snagged a $450 million contract to make more.

In Northern Virginia, the dramatic need for high-tech cyberweapons, such as combat communications and coordination systems, has sparked the biggest bout of initial public offerings (IPOs) for defense contractors in years (see story, page 10). Now there's an urgent demand for the software programs that can make sense of the tons of disparate information to prevent more terrorist attacks. "There's a growing awareness after 9-11 that we need to develop real-time intelligence from voluminous data," says Ken Dahlberg, executive vice president at Falls Church-based General Dynamics Corp. and head of its information systems and technology. Combat hardware is also getting a boost in Northern Virginia. At a site near Quantico, General Dynamics is testing the Advanced Amphibious Assault Vehicle, or AAAV, for the Marine Corps. Woodbridge could be the location of a new manufacturing plant to make 1,000 of the fast and maneuverable vehicles that, at about $2 million each, will help the Marines seize foreign beaches.

The densest concentration of the state's massive defense sector is in Hampton Roads. The dramatic, ship-like VASCIC building is a good vantage point to review it. Lying dockside near VASCIC, the new Nimitz-class aircraft carrier USS Ronald Reagan is being fitted out before commissioning next March at the Northrop Grumman Newport News shipyard. Farther down amid a clutter of cranes, the nuclear reactors of the carrier USS Enterprise are being refueled in a contract worth $1.5 billion. The shipyard's parent firm is now the largest private employer in the state with more than 30,000 employees, including more than 17,000 at the shipyard which it bought last year.

Just a few miles down the James River is the gigantic Norfolk Naval Station, home of the Atlantic Fleet, whose ships, including six aircraft carriers, are providing firepower and logistics for Operation Enduring Freedom in South Asia. Nearby at Little Creek Amphibious Base, Navy SEALS train for Afghan operations. In Virginia Beach, Oceana Naval Air Station is the base for many of the carrier aircraft striking al-Qaida. The Norfolk Naval Shipyard in Portsmouth will be refitting city-busting Trident submarines so they can attack terrorist camps with highly accurate conventional missiles rather than nuclear-tipped ones.

At Hampton, Langley Air Force Base is the staging area for conflict-bound F-15 bombers and soon to be home to a new generation of F-22 Raptor jet fighters. In the other direction, just beyond the tourist attractions of Williamsburg, is super-secret Camp Peary. Hidden by pine trees and chain-link fences, Central Intelligence Agency operatives may be training Kurdish guerrillas for the next phase of the war against terrorists - possible U.S.-led strikes against the regime of Iraqi strongman Saddam Hussein if the war expands.

The boom in Virginia's defense industry comes after a decade of uncertainty. Military spending got a boost under President Reagan during the 1980s but declined under Bill Clinton as the Soviet Union disintegrated. A new buildup is underway. But critics say that it is limited - President George W. Bush may reduce the number of U.S. troops next year. And Pentagon planners and Congressional experts are seriously rethinking what kinds of weapons they need. What they choose to do will have a major impact on Virginia's defense industries.

The discussion continues on so-called "transformational" weapons that would meet different threats than those of the Cold War. Thanks to easing tensions with Russia, the U.S. doesn't need to spend so much on nuclear missiles and bombers. Nor does it need as many artillery, tanks and tactical aircraft designed to turn back a Soviet invasion of Western Europe. What's needed instead are smaller, more mobile forces supported by highly sophisticated intelligence. Combat data will be assessed by computerized battlefield management software systems that can direct forces to counter terrorist threats. Homeland defense products range from new security systems at airport gates and in harbors along with biodefense weapons to counter biological terror weapons. Virginia has at least five private companies that specialize in biodefense, including Hadron Advanced BioSystems in Manassas and Public Safety Group Inc. in Woodbridge.

The new generation of highly sophisticated weapons, many with Virginia connections, is proving its worth. U.S. forces fighting in Afghanistan are using everything from night goggles to laser illuminators and special encryption radios to root out al-Qaida terrorist cells and Taliban fighters believed to support terrorists. In a stunning performance, U.S. troops have managed to secure most of the country in just a few months, thus achieving in a few months what Soviet army forces could not do in 10 years of fighting.

Even so, the conundrum over "transformational" forces among defense contractors has taken its toll in Virginia. Earlier this year, United Defense Industries, Inc. based in Arlington had expected to proceed with a $265 million contract to build the advanced Crusader artillery system that can fire highly accurate shells much farther than existing artillery tubes. Problem was, the Crusader was designed to fight more sophisticated forces than Afghan terrorists, such as Soviet tanks invading Germany. The Crusader was likewise large and cumbersome, so the Pentagon killed the project. Absorbing the hit, United Defense got into another deal. It is acquiring United States Marine Repair, a major ship overhaul company in Norfolk for $316 million. The point? As the U.S. responds to distant threats, it needs ships to ferry troops and gear and the vessels must be in good repair.

Besides large-ticket aircraft carriers, Virginia's greatest contribution against terrorism is likely to be in information technology. Secretary of Defense Donald Rumsfeld and the Bush administration have put a large premium on information to detect and destroy threats. Since Sept. 11, Virginia IT companies serving the U.S. military and related agencies have racked up a boatload of contracts that combined are worth several billion dollars. Spending by a proposed homeland security agency alone will run as much as $2 billion in 2003, according to Input, an IT sales and marketing research firm in Chantilly.

The Bush administration also wants to create a new federal agency to coordinate homeland security, focusing the spotlight on domestic concerns related to, but separate from, military issues. "Homeland security is going to be budgeted to a fare-thee-well," says Paul Lombardi, chief executive officer of Reston-based DynCorp. "The supplemental budget this year is just the start. In Virginia, and especially Northern Virginia, companies that are successfully (helping) federal agencies can't help but benefit because there's more work than there are companies."

Privately owned DynCorp posted $2.2 billion in revenue last year. The 54-year-old company has provided logistical support for the U.S. military from the Korean War to Desert Storm, assessing weapons, making sure computer systems can talk to each other and managing computer networks. At one time, the company made about 98 percent of its money on Pentagon contracts, Lombardi says, although the company began diversifying its federal IT customer base to compensate for decreased military spending during the Clinton administration. The war on terrorism surely will bring more defense contracts. "Two years ago our company was probably getting 48 percent of its revenue from defense contracts. This year, I'd say about 60 percent of our new business awards are for defense work," says Lombardi.

DynCorp, for instance, is putting together a new communications network for the Government Emergency Telephone System (GETS) that will add a wireless component so federal officials can talk if the landlines are cut. The firm is managing the program for a contract valued at $15 million a year. DynCorp subcontracts with wireless carriers, such as Verizon and VoiceStream, to provide wireless spectrum to power the system. Since Sept. 11, the wireless GETS systems have been deployed in Washington, D.C., and New York City, and DynCorp engineers are working to roll out the system to link major metropolitan regions across the country. "The wireless piece never existed prior to Sept. 11," says Lombardi.

DynCorp is also helping the FBI, which found on Sept. 11 that its agents in New York City couldn't communicate with their colleagues across the Hudson River because landline service had been severed during the attacks. The FBI has appointed DynCorp to be prime contractor for its so-called Trilogy Project, which will retool 28,000 computer workstations and hundreds of servers around the country. The firm is providing the FBI with the computer architecture and helping with system installations under a contract valued at up to $180 million. So urgent is the work that it must now be finished in 10 months rather than three years as originally planned.

Another player on the Northern Virginia defense scene is Jack London, who runs CACI International Inc. in Arlington. During the Cuban missile crisis, London helped chase Soviet submarines aboard a Navy "hunter-killer" aircraft. More than 40 years later, London is still helping with defense, albeit in a different, more high-tech way. As head of CACI, London has built a backlog of nearly $1 billion in federal IT contracts with U.S. military agencies. CACI specializes in taking off-the-shelf products and integrating them into customized computer systems so upgrades will be faster and cheaper. About two-thirds of the company's revenue, which is expected to be around $671 million in 2002, stems from defense-related work. The publicly traded company recently told Wall Street analysts that revenue for 2003 could jump as high as $831 million. "Our compound annual growth rate has been about 20 percent over the last five years, and my goal is to exceed that," says London.

Even prior to Sept. 11, London says U.S. military planners were trying to prepare for warfare based around networks that use distributed computing, wireless communications systems, sophisticated sensors and other intelligence-gathering tools to track clandestine foes. "There has been infrastructure modernization going on in the federal sector, especially defense, for a number of years. The events of Sept. 11 just accelerated it," says London.

Predicting and pre-empting what terrorists might do is the mission of ManTech International Corp. of Fairfax. ManTech, for instance, helps with laser-guided bombs that are used to destroy terrorist sites in Afghanistan.

Securing U.S. outposts overseas is another specialty. After a car bomb exploded outside the U.S. Embassy in Karachi, Pakistan, in June, ManTech was hired by the U.S. State Department to assess ways to improve security in and around the building, part of a contract to develop "technical countermeasures" and deploy them at more than 250 U.S. foreign-service posts. At Guantanamo Bay, Cuba, ManTech is installing secure communications to help military personnel keep better tabs on the hundreds of detainees from Afghanistan being kept for questioning. The company went public in February, selling 8 million shares of stock in an initial public offering that raised $110 million.

Another Fairfax defense firm that recently went public is Anteon Corp. It collected $250 million after selling 15 million shares in its offering. The company boosted its share price twice before trading began and shares are selling about 40 percent above the IPO price. As with others, Anteon is using advanced IT systems to bring information closer to the battlefield. When Bush sent troops to Afghanistan, Anteon sent personnel to help provide network administration for two of the key computer systems designed for sharing information among NATO allies and coalition forces.

Coordination can be much harder than simply getting troops and supplies to a war zone. "During the Gulf War, troops, ammunition, supplies and food were dumped in the desert," says Joe Kampf, chief executive officer of Anteon. "But no one knew where anything was." So, when the Air Force needed a way to coordinate supplies and troops, it called on Anteon to manage and integrate the Cargo Movement Operations System - known as the Federal Express of the Air Force.

Larger, marquee-name defense companies are developing computer systems too. One is Lockheed Martin, which was the largest defense contractor in Virginia with $14 billion in defense work until Northrop Grumman bought Newport News Shipbuilding last year. General Dynamics, which ranked No. 6 in contracts last year, has various systems to coordinate intelligence, guide aircraft and artillery to targets and assess the result.

All of the big defense companies have been jousting as the trend toward consolidation in the defense industry continues. Last year, Virginia became a battleground for both General Dynamics and Northrop Grumman. Attracted by its efficient management and big backlog of Navy orders, General Dynamics made a bid for Newport News Shipbuilding, which had become independent after being spun off by Texas conglomerate Tenneco in the mid-1990s. Northrop Grumman quickly countered and after tit-for-tat combat for stock and cash, emerged victorious. Now, Northrop Grumman has just won another battle, this time for Cleveland-based TRW Inc. The final settlement was engineered by TRW Chairman Phillip Odeen, well-known for his community affairs work in Northern Virginia. Northrop Grumman plans to spin off TRW's auto parts business and keep its formidable defense units based in Northern Virginia and California.

The shipyard and TRW fights are just more in a series of takeovers. In recent years, brand names such as jet fighter-maker McDonnell Douglas have been absorbed by bomber-maker Boeing. Los Angeles-based Northrop Grumman was close to bankruptcy in the mid-1990s when it began a a highly profitable acquisition spree. Not to be outdone, General Dynamics, famed for its submarine-making Electric-Boat Division in Groton, Conn., picked up destroyer and frigate-maker Bath Iron Works in Maine.

Both Northrop Grumman and General Dynamics have been winning applause on Wall Street. Their stocks had been stagnating in the low $40 a share range more than two years ago but are above $100 a share now. In fact, defense stocks appear to be doing so well that some ponder if they could be forming a bubble of overvaluation of the type that plagued Internet stocks in the late 1990s.

There are big differences, however. The defense companies tend to get involved in "legacy" contracts that last for years whereas the business of dot-coms tended to be short-term. Also, much of the big spending on defense has yet to trickle into the rest of Virginia's economy. "We won't see an impact on the Virginia economy for at least a year," says Christine Chmura, head of Chmura Econometrics & Analytics, a Richmond forecasting firm. One problem, she says, is that the recent recession was worse than earlier predicted and it will take more time for a recovery.

Back at VASCIC, however, Northrop Grumman Newport News is gearing up to hire 1,500 engineers and others over the next few years to help out with its seven-year-long backlog in orders. The yard has gotten a boost since aircraft carriers, often criticized as outdated, have again shown their value because they can project air power without the messy politics of getting foreign governments to agree to airbases on land. "The debate used to be, 'do we need aircraft carriers?'" says Irwin F. Edenzon, vice president of business technology development at Northrop Grumman Newport News. "Now it will be: 'Do we need more aircraft carriers?'"

A fair question. As it has from the start of this nation, Virginia is supplying the manpower and hardware for the sad but necessary business of defense.

Reported by Garry Kranz in Northern Virginia, Paula C. Squires in Richmond and Alexander H. Haislip in Washington

Return to Virginia Business - August 2002