tv The David Rubenstein Show Peer to Peer Conversations Bloomberg October 17, 2021 10:00am-10:30am EDT
david: this is, uh, my kitchen table and also my filing system. over much of the past three decades, i've been an investor. the highest calling of mankind, i've often thought, was private equity. [laughter] and then i started interviewing. i watched your interviews, so i know how to do some interviewing. [laughter] i've learned from doing my interviews how leaders make it to the top. >> i asked him how much he wanted. he said $250,000. i said fine. i did not negotiate with him. i did no due diligence. david: i have something i would
like to sell. and how they stay there. you don't feel inadequate now being only the second wealthiest man in the world, is that right? [laughter] in january of 2013, phebe novakovic became ceo of general dynamics, one of the nation's largest aerospace and defense contractors. since that time, the stock is up more than 80%. i had a chance to sit down with phebe in michigan and saw what was manufactured by the company. when you became the ceo of general dynamics in 2013, there were not that many women who were aerospace executives. did you ever think when you were joining this company in 2001 that you could rise up to be a ceo? phebe: i never thought i would be the ceo. i think that would be highly aspirational. i have always been a big believer to do well in life by doing the job in front of you, being part of the team, but i
never could have believed that this would happen. david: do you get tired when people like me ask you what it is like being a woman and ceo of an aerospace defense company, or do you get asked that a lot? phebe: i think so. -- i think some. you and i have talked about this before. i approach this job primarily as a person, largely one formed by being a woman but not exclusively. so i think about myself as a person and in this position, not so much a woman. david: your stock is up 180% since you became ceo. do you think under president biden defense spending may level off and therefore it may be harder for aerospace defense companies to do as well? phebe: i think defense spending historically has been driven by threat or the perception of threat, and it is not a particularly safe world at the moment. that's number one. number two, president biden has been a lifelong supporter of national security, so this budget that he submitted to
capitol hill was a nominal increase. importantly, all of our programs were fully supported because of their criticality to the war fight. david: most of the large aerospace defense companies have moved to washington. do you see the pentagon leaders from time to time? do you go see the secretaries of army or air force or navy? what do you do in terms of interacting with them? phebe: so i think it's important that we know our customer, both from the uniform and military side. we tend to try to know them as well, and then, with each change of administration, we try to get to know the primary decision-makers and get inside -- get insight into the decision space, help them think about what we can provide. i spend time with all of them, and all of our major customers, primarily the army and navy. david: the american people obviously have a high regard for our military, but they do not tend to think of defense contractors as highly as they do of the military. do you think there is any reason for that? phebe: i do not think they are
particularly not beloved but this is the way i think about it. if the u.s. cannot avoid war through diplomacy or deterrence, it goes to war with the u.s. industrial base. we cannot go to war as a nation without us. we make all the products and services that provide our servicepeople with the weapons systems and protective devices that they need to survive and win. david: because of consolidation in recent years, we now have essentially five major defense companies. do you think that is enough? should we have more competition, or do you think that is ok? phebe: competition is driven by -- is driven in the defense industry by two things. one, the number of new systems coming out, and they are relatively constrained compared to the 1980's, went you had a lot more defense companies, and two, the complexity of each of the weapons systems. so the capitalization requirements for defense companies, the large defense companies, and we are one of them, which is significant.
so given those capitalization requirements and given the intimacy we need to have with our customers, i think we are pretty well-balanced at the moment. and by the way, when you think about competition, you have a monopsony buyer with enormous purchasing power. so while we may be a duopoly or, for some people, a monopoly, we are up against a very powerful customer, so there's a lot of shaping that happens in our contractual discussions with our customer. david: sometimes people say the defense budget is very high because the cost overruns new -- overruns of new weapons systems and so forth. is that a fair criticism, that sometimes cost overruns are high? phebe: if you think about the complexity of modern weapons systems, it is not unusual for some of them to have, early on, in the production or the development, cost overruns, but it is incumbent upon us as a defense industry that once we understand the technology and then how to build it and build it effectively, continue to take costs out as we go down our
learning curve, and that is an important part of the value equation we have with our customer, driving costs out of systems. david: today, what are the biggest challenges for general dynamics and what are the biggest opportunities? phebe: so i think in any business, the challenges are solving complex problems that come to you. you know, the problems that come to me and my senior leadership team for resolving tend to be highly complex and meddlesome. so, your ability to solve those complex problems are an important element i think of the value we add to the company. and then i think opportunity, you always want to make sure you have a creative enough mind and open enough mind to be able to see around square corners. what am i missing? you know, the "why" questions are really powerful. why are we not doing this, or
why are we doing this? i ask those questions a lot and in the answers, you can sometimes tease out some real opportunities, some hidden things. thinking creatively about opportunities and problems is really important. david: what about the industry generally? do you think they have big challenges now as the defense budget comes down a bit? phebe: i think we are all responsible and we have an obligation to find the latest and best technologies that we can for our customers and deliver them in the most cost-effective manner we can. and i think that is a challenge and an opportunity for all of the big defense companies. ♪
[engine revving] david: for more than 40 years now, the m1 abrams has been the u.s. military's main battle tank. it is a 68-ton monster that can knock out enemy tanks more than three miles away. [explosion] the abrams tank was designed at a time when america was prepared to fight soviet forces in europe, but it passed its toughest test in iraq in 1991 when it destroyed a huge iraqi armored force. [explosion] the u.s. army has 2000 abrams tanks in service, and they are all built by general dynamics. i got to see the abrams up close. [metal clanking] sounds pretty solid to me. and watched it muscle through a course at speeds above 43 miles an hour. to operate, soldiers 18 and older complete a six-week training course. i meet the age requirement, but i think i will stick to the family car. [engine revving]
let's go through the major divisions you have at general dynamics. so, one is the marine systems. now you, before you became ceo, you were the head of marine systems, is that correct? phebe: mhm. david: i think i have got it right. there are 68 submarines now in the entire u.s. navy fleet. do we really need a lot more submarines or are we just kind of replacing the ones we have? do we need more than 68? i think that is the number we have. phebe: i personally believe that the more submarines, the better. while people may be jaundiced or skeptical of my view given where i sit, i think from a national security perspective, u.s. underwater supremacy is critical to our national security, and the more submarines we can put in the water, the better we are -- better off we are to protect our shores and our assets overseas. david: it takes a long time to build a submarine. is it like, three years, four years, five years? phebe: so the attack boat, and
we are on about our 20-something attack boat, which is a virginia-class submarine, takes about 70 months to build. we are building the ballistic missile submarine replacement in the columbia class, which is replacing the ohio class, part of the nuclear deterrent and that will take us 84 months. these are long, complicated build cycles. david: what does it cost to build a submarine? i assume it is not, you know, cheap. phebe: the virginia class is about $2 billion a submarine, but they are highly survivable. -- survivable weapons systems, and by the way, as we have come down our learning curve, we have driven cost out of those submarines. so again, that is part of the value proposition with our customer. david: let's talk about another division, the land division, which is, i assume, the division that makes this tank. phebe: yes. david: all right. so why are tanks so important today? because with cyber and missiles being launched off of submarines
and so forth, do we really need tanks to kind of help the military that much? phebe: so since the dawn of human time, wars are ultimately won -- if they cannot be avoided, they are won with boots on the ground by taking territory. i don't see that paradigm changing any time soon. if we get into a really hot war, you need your tanks and you need your army to take land. david: you have an aerospace division. phebe: yes, we do. david: and there, the principal product is gulfstream jets. is that right? phebe: yes. david: is there a reason why you are not in the military jet business, unlike some of your competitors? phebe: well, general dynamics, before the big selloff -- you recall, in the height of the reagan buildup was the highest at the time -- the ceo at the time, and i think appropriately so to some extent, that it was important to liquidate at the
end of the cold war. so he systematically went through and sold off units of defense, including what was, at the time, general dynamics' fighter jet business. so we are out of that business. david: so you're in gulfstream. now, gulfstream is mostly a business jet, i think. phebe: almost exclusively. david: and so with covid, i assume business people were not flying around as much. were they buying as many jets? phebe: gulfstream is a pretty cyclical business. we are economy facing and as goes the world economy, that tends to drive our demand. and this was the third economic perturbation that i have seen since i have been at general dynamics, so what we have learned is to be a good cyclical and that is drive out costs faster than your revenue declines. so last year, we were the only successful aerospace oem to make a profit, a significant profit, at $1 billion, and we did that by reacting very, very quickly to the change in the marketplace. so demand was down and as a
result of the economic perturbations caused by covid, but demand has nicely begun to recover and we are in a very strong position in that recovery. david: let's talk about your last division, which is your information division, which i assume is mostly cyber related things and things you can't probably talk too much about. but is that where the greatest growth is going to be for aerospace defense companies, in cyber and other information technology? phebe: cyber is embedded in almost every single one of our programs, including the main battle tank. the upgrades that we make and continued improvement we make to upgrade the technology in, for example, that last one, includes cyber protection on multiple layers, so cyber is a growth area and has been for quite some time in the defense industrial base. we are very active and have been for 20 years in the cyber space and will continue to see growth. but i do not see it as exclusive growth.
and in our business, what is driving real growth on the defense side is submarines. david: one area we did not talk about that is an area some people think is important in aerospace defense is space. so some companies, some of your competitors, are building things for the space world. are you thinking about getting into space? phebe: we have some components, some lines of business that serve, largely as a merchant supplier, some of the space companies, and that is a good place for us. we have made our large capital bets elsewhere. david: what do you advise young women who want to be a ceo about the best way to prepare to be a ceo? phebe: be a part of a team, serve your team well and do the job in front of you as best as you possibly can. ♪
david: there has been discussion by the business on table and other organizations of which you are a part that ceo's and major company should -- and major companies should not only worry about their shareholders but other stakeholders, say, communities or customers. the obligation is not just to get the share price up. do you agree with that view or do you think that is a little bit shortsighted? phebe: i think successful companies have long had different constituencies and to be successful we have to serve those constituencies. but fundamentally, we are owned by our shareholders. so we have an obligation to them. david: some ceo's lately have been asked to take positions on public policy questions, voting rights or other things. do you have a view on whether ceo's should be addressing public policy issues or should they stick to just managing their company? phebe: i will comment on my own company. it is my view that we engage on
matters of principle, not policy or politics. i think principle is a good way to think about problems that this nation faces, and through that prism, and it is where i believe that my customers and my people are best served. david: today, many ceos are speaking out more than they did before. i understand what you've said, but you generally would take the view you shouldn't be speaking out that much on public policy positions? phebe: on public policy, yes, because there's a fine line between public policy and politics. and i think as a ceo you represent people of various political views and, frankly, no one elected me to be ceo for my political views. ♪
david: let's talk about your own background for a moment and how you came to be the ceo. so where did you grow up? phebe: i grew up pretty much all over. my dad was in the air force and we spent a lot of time in europe during the cold war. and i got a real sense of being an american. germany was still relatively in the 1960's coming out of world war ii and not the major industrial power that it is today, and we had a real sense of what the united states had done to save europe. david: your father was a serbian immigrant to the united states, is that right? phebe: yes. so my father's family suffered from totalitarian regimes both on the fascist side and the communist side and they were fortunate enough to escape with their lives during world war ii. and it was their dream to come the united states because when you have suffered from both types of totalitarianism, you
treasure democracies, and in particular, a market-based democracy, and he is an avid patriot, as is my mother. and they imbued me with that same sense of patriotism. david: so you grew up in various places in europe, the united states. and then you went to college at smith. phebe: yeah. david: so did you study aerospace defense at smith? phebe: [laughs] no. david: so what did you study? phebe: i was a government major and a philosophy minor. and i got a superb liberal arts background and education. so i learned to write and think in college. those are two critical values. david: most people that graduate from smith probably do not wind up in the cia, would be my guess. phebe: most, yeah. i suppose. david: so when you were interviewing for jobs at the end of your college career, did you tell people, i want to be in the
cia? or how did you happen to get in the cia? phebe: well, i had a sense of service to my nation, and it seemed a good place for me. so much in life, as you and i have talked about before, is finding place. and it was -- the agency was opening its doors to women, so it was a good opportunity for me. and i really enjoyed the service that i was able to provide. david: how long were you in the cia? phebe: about four or five years. david: and were you a cia agent? for you a spy, undercover? or can you even say today? phebe: so, we were what were called case officers. you might in the common parlance think about those as spies. david: when you were doing that could you tell anybody what you were doing? what did you tell people you were doing as a career? phebe: well, we had various stories that we told, approved stories, and i think we will leave it at that. david: your parents, did they even know? phebe: my parents knew. david: after you did that for a
while, you decided to go, where, business school? phebe: yes, so the cold war was winding down and, yes, i decided to go to business school. david: so you went to wharton. if you have a wharton mba, i assume it is easy to get a job. was easy for you to get a job? phebe: no. it was extremely difficult. i had rather an iconoclastic background and was seven months pregnant, so it was very hard to get a job. david: you have a cia background, you are seven months pregnant and find employers are not interested in hiring women like that? phebe: i had a number of interviews. i remember one in particular, i wanted to work for a steel company because i like making things, the tangible value of seeing, you know, the fruits of your labor and i walked in and here they are at a hiring fair at wharton and i walk in and they say "we're not hiring." i understand you're not hiring me as i waddle out of there. david: you finally got a job at the government office of management and budget, which
runs the budget of the u.s. government. so what did you do there? phebe: so i started out as a budget examiner and was fortunate enough to work my way up and ended up running the national security division, which is responsible for all defense and intelligence spending missions to the congress. david: after a while, you decided, i have had enough of this. the government salary is good but not that good. you decide you want to go into business, and you got a position in 2001 with general dynamics. phebe: yes. i had a stopover for four years at the pentagon. and then to general dynamics, and i went there because i remember thinking very distinctly, at these seminal times in your life when you have perhaps a bit of an epiphany, i sat at my desk in the afternoon thinking, i cannot afford to put my children through college. and i happened to know a number of ceo's, including the ceo of general dynamics, and i called him and i said "i am going to be leaving here soon if you would be interested." and called a couple of the other
ceo's, and i was fortunate enough to go with general dynamics. david: ok, so you went to general dynamics in 2001. and what was your initial job there? phebe: i was in strategic planning, but think about that as special projects for the ceo. and i ultimately kept a series of jobs as i moved up the chain at general dynamics. but i was also the chief of staff to the then-ceo and i learned a lot about how a very, very effective, powerful female ceo manages a company and learned a lot by watching a superb ceo operate. david: and you said, hey, i can do this job as well as this guy at some point? phebe: no. that would be the height of hubris. and i never suffered from that. i think i have been the beneficiary of a lot of learning. i was blessed with that. david: today, as you look at the opportunities women have to be chief executives, do you think they are much better than when you are coming along? and what do you advise young women who want to be a ceo about
the best way to prepare to be a ceo? phebe: so i think there are more opportunities for women than there certainly were in the late 1970's, when i entered the workplace, and that is throughout the chain. i tell, whether it is young women or young men, if you want to do well in this world, be a part of the team, serve your team well, and do your job as -- and do the jobs in front of you as best as you possibly can, and in functional organizations, the rest takes care of itself. in a dysfunctional organization, all bets are off. get out of it. david: what would be the skill set that a ceo really needs to be successful in today's environment? phebe: so i think a good leader needs fundamentally good character. good character is required. i think a smattering and a wholesome capability set, whether it is intellect in -- intellect or finance or ability to think strategically or solve complex problems, all those things are really important. and, frankly, perseverance.
sometimes, you just have to never, never stop, never quit, never give up. david: so you have three daughters. phebe: i do. david: and so you obviously got a private sector job to help support them and get them through college. and you have now, again, what, four grandchildren? phebe: four grandchildren. david: four grandchildren. so what do you do for rest and relaxation, spend time with your children and grandchildren? phebe: that is joyful, but i would not call it restful or relaxing. three toddlers and one newborn is hardly relaxing. [laughs] but my husband and i walk a lot, hike a lot, and we talk a lot. he is finishing his doctorate at princeton theological seminary in ethics, so i find those kinds of conversations really stimulating and interesting. they are a respite for me, but they are also a lot of mental gymnastics to try to keep up. david: other people have said it seems, to congress, it would seem having a spouse getting a degree from seminary is very
spiritual, presumably, and you are in the aerospace defense business. does anyone say that seems unusual? phebe: i think it is unusual, but when you are in leadership positions, it is important to look at all of your decisions through a moral prism, irrespective of the industry that you are in, and to make sure that you are doing the right thing and constantly question, am i doing the right thing? is this the right thing? and if you don't ask yourself those questions routinely, i think you run the risk of failing to see potential error. david: what is the greatest pleasure of being the ceo of general dynamics and what is the biggest downside? phebe: i think these jobs are such a great privilege i do not think i see a particular downside. the pleasure is the people and the team. we have a highly functional, very transparent, very cohesive team, and, frankly, you know, it is interesting -- know, this
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