US Defense Firms Scramble To Avoid Pitfalls of Peace

Companies consolidate, diversify, or just plain shrink

FROM a world-peace point of view the end of the cold war has been great. But for US defense contractors, there's no way around it: Peace is heck.

The Pentagon spend-up of the 1980s has been replaced by the defense spending plunge of the '90s, and the weapons industry is undergoing its most profound restructuring since the end of World War II. Some big firms are consolidating. Others are diversifying. Some seem willing to just get smaller.

"When you're talking about the defense industry, you're not talking about something that's monolithic," says Richard Bitzinger, an analyst for the nonprofit Defense Budget Project.

"They have a lot of options available to them," he adds.

Martin Marietta's announcement that it will purchase General Electric Company's aerospace division is but the latest evidence of this sweeping change. In one leap, Martin Marietta has doubled in size, creating an entity that will be a huge military electronics firm, easily the Pentagon's largest research and development contractor.

In today's defense business "there is room for strong survivors. There will not be room for a lot of weak companies," said Martin Marietta's chairman Norman Augustine when announcing the GE purchase.

Defense spending cuts are obviously driving this change. Predicting the future military budget is a pretty chancy business, especially with a new president taking office. But the Electronics Industries Association recently said it believes spending will continue to fall through at least 1997. Already, defense procurement spending has fallen to about 57 percent of its 1985 high.

Consolidation is one way many firms are dealing with this uncertain future. In recent months, firms have launched a mini-binge of consolidation. Loral purchased aerospace pieces of rivals LTV Corporation and Ford Aerospace. Hughes Aircraft paid $450 million for General Dynamics's missile business.

But the most drastic response to smaller military budgets probably belongs to General Dynamics itself. Since late 1991, chairman William Anders has aggressively sold off chunks of the company. Now the firm is marketing what it once called a core capability - its fighter production factories, which will be producing F-16s well into the next century.

General Dynamics appears to be, in essence, liquidating itself. It may transform into a shell company presiding over certain businesses, such as nuclear submarine production, for which no buyer can be found.

"I can see people 10 years down the line remembering General Dynamics the way they remember today Studebaker or Curtiss Wright," says Erik Pages, a defense analyst at Business Executives for National Security (BENS).

Diversification is the other major strategy for dealing with the defense budget downturn. Military firms' past attempts to expand into civilian businesses have not always gone well - Boeing's military helicopter division made a disastrous foray into light rail cars in the 1970s, for instance. But many analysts and industry executives still see diversification as a valid means of growth, particularly for mid-sized and smaller firms and those that already have some non-defense businesses.

In the past, civilian and military products were vastly different. Today that is no longer true, according to a BENS study. They share a host of high-tech subcomponents, from computer chips to optical devices.

Successful defense transition requires businesses that have the commitment to get through difficult adjustment periods and are willing to be flexible, according to the study. Galileo Electro-Optics in Sturbridge, Mass., for instance, has transformed itself from a firm largely dependent on contracts for military night-vision gear to a major supplier of remote sensors used in manufacturing.

Textron Aerostructures of Nashville, Tenn., used to depend on subcontracts for military planes for 70 percent of its work. Now that is down to 15 percent as the firm has forged overseas contracts and now makes wing parts for the European Airbus consortium.

No business transition is painless. Textron Aerostructures now employs 2,400 people, after a 1985 peak of 7,200. Defense-related layoffs have already devastated areas such as southern California, and as the industry shake-out continues, more job losses will follow.

President-elect Clinton has pledged to ease the pain of defense cuts by using the money saved on defense - around $60 billion over the next five years - for job-creating infrastructure investment and investment in civilian R&D.

But it is an open question whether these programs can replace the 250,000 defense jobs that the congressional Office of Technology Assessment predicts will be lost each year through 2001.

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