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<text> <title> (Apr. 30, 1990) Defense Industry:Biting The Bullets </title> <history> TIME--The Weekly Newsmagazine--1990 Apr. 30, 1990 Vietnam 15 Years Later The American Economy </history> <link 05463> <link 03852> <link 02271> <link 00595> <link 00129> <link -0001> <article> <source>Time Magazine</source> <hdr> BUSINESS, Page 69 Biting the Bullets </hdr> <body> Military suppliers scramble to get ready for the defense build-down By Janice Castro--Reported by Edwin M. Reingold/Los Angeles and Bruce van Voorst/Washington Row upon row, the vast hangars stand empty at Lockheed's 7.9 million-sq.-ft. aircraft assembly plant in Marietta, Ga. Once bustling with workers building such military aircraft as the giant C-5 transport and the P-3 antisubmarine plane, the facility has increasingly fallen idle as Pentagon spending has ebbed. For thousands of U.S. defense contractors, the unused hangars near Atlanta are a portent of what may lie ahead for them. As the cold war wanes and the Warsaw Pact unravels, Congress and the Bush Administration have begun to plan for the most substantial reductions in military spending since the end of the Vietnam War. As they do, U.S. military suppliers from Los Angeles to Long Island nervously await decisions on which of their programs will be slashed or eliminated. The coming U.S. defense cuts will bring wrenching changes in America's sprawling military-industrial base, whose $120 billion in annual revenues is larger than the entire economy of Sweden. The shrinkage will effect more than 250,000 firms in 215 industries, ranging from the shipbuilders that construct aircraft carriers to the clothing companies that sew uniforms. Says Frank Shrontz, chairman of Boeing, the ninth largest U.S. defense contractor: "We are going to face a broad realignment across the whole defense spectrum, and I can't tell where that's going to hit us hardest." Hundreds of towns will face layoffs as top military contractors slash their payrolls and cancel deals with smaller firms. Weapons manufacturers will scramble to develop new commercial products and expand markets for the military goods they will still produce. For many companies, the shifts will require fundamental changes in operating habits as firms accustomed to serving a free-spending Pentagon learn to compete with more efficient commercial producers, especially Asian ones. The epochal changes in Europe during the past six months are all the more dramatic for defense contractors because the shift comes on the heels of the Reagan era's $2.4 trillion defense buildup, the largest peacetime military expansion in American history. Deficit pressures forced reductions in federal spending as early as 1985, when U.S. defense outlays began to grow more slowly than inflation. Military suppliers started to feel the pinch of tighter budgets, but the reductions of the past few years have been mere potholes in contrast to the yawning craters that lie ahead. To minimize the damage, companies want to plan carefully for the crunch. But so far, no one knows how deep the cuts will be or exactly where they will fall. A lobbying war has broken out in Washington as companies, cities and states battle to preserve their defense contracts. New York's Grumman and its supporters carried out a lobbying campaign--described by one opposing Senator as "ruthless"--to keep alive its F-14D carrier-based jet, and won a contract for 18 new planes at $75 million each. Yet the range of cuts under discussion grows larger by the week, sowing panic in executive suites. Earlier this month, Republican Senators John McCain of Arizona and William Cohen of Maine proposed cutting the U.S. defense budget ($291 billion in fiscal 1990) 4% in each of the next five years. That was almost twice as much as the 2.6% yearly reduction proposed by Defense Secretary Dick Cheney, but not nearly so ambitious as the 10.4% whack for 1991 that the House Budget Committee suggested last week. One of the most potent arguments marshaled by defense contractors is that the cuts will turn American's military-industrial base into a Rust Belt, leaving the U.S. unable to supply its own defense needs. Some contractors contend, for example, that the cuts could knock them out of certain lines of business by driving away their suppliers. In one case, the Pentagon would temporarily end production of tanks at General Dynamics factories in Warren, Mich., and Lima, Ohio, then resume work by the end of the decade to make a new generation of tanks. But General Dynamics argues that about 15% of its 10,000 vendors in 48 states would probably go under in the meantime, while an additional 30% would be financially crippled. The firm also says it would lose its pool of skilled workers as employees found other jobs. The company estimates that gearing up again for production could take four years. The most endangered contractors will be those whose business is almost purely defense work. Northrop, the lead contractor on the B-2 bomber, counted on military sales for 92% of its 1989 revenues of $5.2 billion. Besides the Stealth bomber (price for each plane: $540 million), the company builds so-called smart weapons systems, guidance modules for MX missiles and other military hardware. After losing $80.5 million last year, the company cut costs by selling its Gulfstream IV corporate jet in January and its glass-and-steel headquarters tower in Century City, Calif., for $218 million in March. If congressional proposals to kill the $70 billion B-2 program prevail, some industry experts think Northrop's long-term survival will be in doubt. Many subcontractors and company towns will be hit hard as well. "The big prime contractors can take care of themselves. What worries me is the small fish," says Gordon Adams, director of the Defense Budget Project, a Washington-based research group. Since 1982 the number of U.S. firms making hardware for the Pentagon has plummeted from 120,000 to only 40,000. The new defense cuts will almost certainly drive thousands more out of the military-supply business. "You bet we are concerned!" says Bill Barth, president of Right Away Foods, an Edinburg, Texas, packer of C rations, which relies on the Pentagon for 95% of its revenues. Barth, whose staff of 700 employees assembles 3.1 million cases of dehydrated field rations a year, says he is banking on projections that the sharp reductions in active-duty personnel will be offset by stepped-up reserve training. If so, Right Away's foods would still be needed. In the past, contractors could ride out periodic U.S. spending downturns by stepping up their overseas sales. But the export market has grown much tougher as Western arms dealers face increasing competition not just from one another but also from sophisticated new weapons suppliers in the developing countries. Moreover, the supply of weapons is growing while demand in many regions is falling because of high national-debt levels and lower oil-producing income in many countries. At the same time, the cooling of superpower tensions has sparked a global fire sale of existing weaponry, from Soviet MiG fighters to Israeli Uzis, making it harder for weaponsmakers to sell new hardware. A major, and controversial, issue for military-oriented companies is whether to diversify or rededicate themselves to becoming better competitors. Grumman Chairman John O'Brien bristles at criticism that his company has failed to find nonmilitary business. Grumman has tried in vain over the years to diversify into everything from buses to solar-power systems. Says O'Brien: "It's a waste of money, a concept that won't work. Employees can be retrained to produce cars or buses or trucks, but where's the market for those products?" Kent Kresa, Northrop's chief executive, sees diversifying as folly and pins the company's future on lower-cost, high-technology weaponry. Says he: "We are principally a defense contractor, and we are in the business to stay." Other companies hope to shift to more commercial business, often by adapting proven military technology for other purposes. Boeing maintains that its expertise in developing satellite-killing lasers can be put to use designing medical lasers to zap cancer cells. Hughes Aircraft, a GM subsidiary, has modified some of its Top Gun gadgetry for road warriors. Starting next year, some GM cars will feature a modified version of the fighter pilot's heads-up display. The system will project key dashboard information, such as speed and fuel levels, onto the windshield. Says Hughes Chairman Malcolm Currie: "Our defense-to-commercial ratio is now about 80-20, and I've set a goal for the mid-'90s of 60-40. We have to create something that didn't exist before, not just go out to compete in the baby-buggy market." Medium-size firms are learning to make the transition too. Williams International (1989 revenues: $200 million) of Walled Lake, Mich., makes the compact FJ-44 jet engine that powers Boeing's cruise missile. Now the company is adapting the engine for use in high-performance corporate jets. Workers will face difficult adjustments, a prospect that worries many labor leaders. Dan St. Clair, shop committee chairman at United Auto Workers Local 683 in Minneapolis, fears that defense cutbacks could put hundreds of skilled machinists, millwrights and others out of work at the local FMC plant, where they make cannons and naval rifles. St. Clair thinks the Pentagon should set up a fund for displaced workers. Pentagon officials, he says, "could afford to use some of the money they save to retrain people for other livelihoods." For all the pain and dislocation they cause, tighter defense budgets could lead to a more efficient industry. As the Pentagon encourages more competition for contracts, companies that grew lax during the Reagan buildup will be forced to improve the quality and cost-effectiveness of their products. McDonnell Douglas, the No. 1 defense contractor, is currently competing with Boeing for a contract to build a new generation of light military helicopters. McDonnell Douglas boasted last week that its new choppers can be easily repaired in the field. Everything from their turbine engines to their pit-viper cannons can be fine-tuned with twelve simple tools that weigh only 2 lbs. and can be carried in a small canvas bag. Some economists believe U.S. industry as a whole will become healthier and more competitive by moving away from military production. Reason: the Pentagon procurement process is so elaborate that the development of new components often takes several years rather than the six-month turnaround that is commonplace in other manufacturing. "It's very clear that today's commercial electronics are higher performance, lower cost and higher quality than the same goods built by defense contractors," says Jacques Gansler, a Washington-based defense economist. Moreover, much of American's innovative brainpower will turn to designing products that enhance, rather than threaten, human lives. If inventors working for the military and space programs could create everything from bulletproof plastic to magnetic-resonance scanners, they could probably come up with consumer products that would put even Sony to shame. THE BIGGEST GUNS <table> 1989 Pentagon sales, Defense portion TOP COMPANIES in billions* of total revenues* McDonnell Douglas $8.75 60% General Dynamics 8.53 85% General Motors 7.80 6% Lockheed 7.31 74% General Electric 7.25 17% Fiscal 1989 Defense Share of total TOP STATES contracts, in billions** U.S. contracts** Calfornia $23.1 19.3% Texas 9.3 7.7% Massachusetts 8.8 7.3% New York 6.6 5.5% Missouri 6.3 5.2% </table> <qt> <l>* Source: Defense News</l> <l>** Source: Defense Budget Project</l> </qt> </body> </article> </text>