NEW YORK — THE US defense industry now faces its greatest long-range challenge since demobilization following World War II. Given the rapidly changing political environment in Eastern Europe - with the Berlin Wall crumbling - the defense sector has found its entire strategic rationale coming under intense public re-examination. Numerous media stories speculate on the possibility of various defense companies merging or shrinking. That concern is underscored by the dips in some defense stocks during the past few weeks. But the long-range reorientation of the industry does not mean that most major contractors will suddenly find themselves locked out of the federal spending pipeline.
``The rallying cry that you are now hearing in Washington, both in Congress and from contractors, is that you must `preserve procurement accounts as a qualitative advantage to compensate for numerical troop reductions,''' says Rear Adm. Eugene Carroll (retired), deputy director of the Center For Defense Information, a Washington think tank.
``The momentum and inertia factors alone work in favor of continued spending for the biggest contractors,'' says Admiral Carroll. Multibillion dollar contracts are already in place. Moreover, suddenly mustering out huge numbers of personnel and closing down additional bases would trigger vehement criticism in scores of local communities.
Carroll believes that the biggest defense contractors will continue to find federal dollars flowing, for now at least. Firms that could be most quickly affected by an overall restructuring, he suggests, will be ``the smaller contractors who provide food, spare parts, training, etc.''
``There will be both winners and losers during the period ahead,'' says Lior Bregman, a defense industry specialist with Oppenheimer & Company. There could eventually be some mergers and consolidations, as well as a shift away from various ``big ticket'' procurement programs. He also expects an increased emphasis on such sectors as defense electronics, and space and intelligence gathering.
``Troop cuts would be quite good for the electronics defense sector,'' Mr. Bregman says with a laugh, since Washington would find it necessary to ensure better intelligence capabilities.
He holds that there are both rational and emotional reasons for the buffeting taken by defense stocks during the past few weeks. Many companies watched their share prices drop sharply following remarks by Defense Secretary Richard Cheney that he anticipates significant reductions in defense spending because of the altered political situation. Among companies that saw stock declines: Lockheed Corporation, Martin Marietta Corporation, Grumman Corporation, and General Dynamics Corporation.
But Bregman notes that the defense sector in general has been a relative underperformer during the past year, as Wall Street concluded early on that defense spending would be reduced following the large buildup during the Reagan years.
``The handwriting has been on the wall that future defense budgets would face reductions.''
Still, Bregman believes that a number of defense firms continue to look attractive. He likes E-Systems Inc., Loral Corporation, and Lockheed. The first two firms are in defense electronics; Lockheed, a multipurpose as well as aerospace contractor, is relatively ``well positioned'' for future growth, whatever happens in Eastern Europe. Bregman also likes smaller electronics-related companies, such as Stanford Telecommunications and California Microwave, both in California.
Michael Bunyaner, also with Oppenheimer, recommends United Technologies Corporation. The firm, he notes, has ``estimated only 26 percent of projected 1989 sales and 6 percent of operating profits'' as being directly linked to the military market.
``You now have to be careful'' in buying defense stocks, Bregman says. But, he maintains there still are, and will continue to be, good buys in the defense sector. Perestroika (restructuring) and d'etente notwithstanding, defense is not about to go away.