GM Move to Increase Defense Work Worries Competitors

From the Washington Post

General Motors Corp., lured by the prospect of billions of dollars in profits from the Reagan Administration's weapons buildup, is taking steps to triple its share of the Defense Department's budget over the next five years.

The world's largest car manufacturer also is aiming for bigger pieces of the aerospace and satellite communications businesses in an attempt to broaden its revenue base.

The automotive giant's stirrings are sending tremors through the industries on its target list, mostly because potential competitors believe GM will use its huge financial reserves--$8.6 billion in cash and marketable securities--to take over an already established defense-aerospace company.

Sophisticated Products

"GM's chances for success are very good. All they have to do is buy someone like Hughes Aircraft," said Paul H. Nisbet, a defense-industry analyst with Prudential-Bache Securities Inc.

California-based Hughes Aircraft Co. makes electronic and other sophisticated technical products and systems for military, space and commercial applications. It is one of several major defense contractors on GM's shopping list, defense and auto-industry analysts say.

Other takeover targets reportedly reconnoitered by GM include Bethesda, Md.-based Martin Marietta Corp., an aerospace, defense, electronics and building materials company; New York-based Sperry Corp., a diversified manufacturer of computers and electronic components, including equipment used in electronic warfare and flight simulation, and Seattle-based Boeing Co., a manufacturer of aircraft, missiles and other products used for commercial aviation, aerospace and defense.

"They've looked at almost everyone," Nisbet said.

GM has to look--and has to buy--to reach the ambitious goal it has set for itself, other analysts say.

"They're not really in the game, now. If they want to get in, they're going to have to buy someone," Edmund Greenslet, an analyst with Merrill Lynch, Pierce, Fenner & Smith, said of GM's current standing in the defense industry.

Defense and aerospace are long-lead businesses, Greenslet said. Contracts often run from five to 10 years. "Add-ons" stemming from modifications of hardware or services can make those contracts last even longer, he said.

Risk in Main Business

Thus, failure to get a piece of today's hot action could mean being frozen out of future contracts and profits, Greenslet said.

The risk in GM's main business is that customers may or may not buy all the cars it makes at the price GM wants for them. But the military usually takes what the defense establishment makes, which is another reason why GM is eyeing the high-technology weapons and satellite businesses, defense and aerospace analysts say.

"The only other thing that GM could do" to get on the fast track in defense "would be to win a lot of defense programs" now in development, Greenslet said.

"But you need a lot of specialized technological skills, a lot of research and development, to win those contracts. If you don't have those things, and if you want the kinds of share increases that GM is talking about, that usually means acquiring someone," Greenslet said.

GM officials demurred.

"We are not currently seeking such a relationship" with a defense contractor, said David S. Potter, vice president and group executive in charge of GM's 2-year-old Power Products and Defense Operations Group.

However, Potter acknowledged in an interview that GM is mounting an aggressive campaign to triple its defense-aerospace sales within the next five years. "If it takes six or seven years, that's okay, too," Potter said.

"You don't start off in the military procurement world with big, immediate jumps. . . . You've got to get into the R&D; programs and the early phases of these things to earn the right to the production contracts. . . . That takes time," Potter said.

$83.9 Billion Worldwide

GM last year racked up $83.9 billion in worldwide sales--$1.3 billion, or about 1.5%, of which came from defense and aerospace. That $1.3 billion is 57.2% better than GM's $827 million in defense and aerospace sales in 1983 and 63.7% better than its $794 million worth of sales in those categories in 1982.

GM last year ranked 23rd in the defense industry, one place behind its chief domestic rival, Ford Motor Co. Ford's defense-aerospace sales of $1.5 billion came through its subsidiary, Ford Aerospace & Communications Corp.

"Certainly, we ought to up ourselves by 10 places" by 1990, Potter said. "But more important than the volume is the kind of volume" that GM is seeking, he said.

"I really do want a broadening of the base, and I want to make certain that we are in technologies that have a high likelihood of ultimate payoff in our primary product line," Potter said.

That means GM will pay particular attention to defense electronics--a $52 billion part of the defense and aerospace industries in fiscal 1984.

Defense electronics covers everything from missile guidance systems to tactical satellite communications to the microprocessors used to monitor engine functions in military ships and trucks, according to Mark Rosenker, spokesman for the Washington-based Electronic Industries Assn.

The technology used to launch missiles, guide aircraft and communicate with satellites also has derivative uses in the commercial electronics industries, which generated about $122 billion in fiscal 1984 sales, Rosenker said.

But even the term "commercial electronics" is fuzzy, Rosenker said. Many electronic devices--liquid crystal displays and other digital systems monitors, for example--originally designed for industrial and commercial use "can find their way to the military," he said.

Technology Development

Said Potter: "There is a lot of technology that is developed by the Department of Defense. It is also developed by the space program, and a lot of it is developed in the commercial world. If you want to participate in technology development in the United States, it is wise to participate in all three areas."

GM already is North America's biggest producer of microprocessors. Each of the 5.7 million vehicles that the auto maker rolled out in the United States and Canada last year had at least one on-board computer to monitor engine functions. Computers and robots also are used in production by GM and other auto makers.

Still, when it comes to high-technology defense projects, one rarely thinks of GM, said one aerospace industry analyst, who requested anonymity. "There are very big bucks in defense, but they are in sexier areas that aren't generally associated with General Motors," the analyst said. "Normally, when you think of GM, you think of surface vehicles," the analyst said. (Not surprisingly, GM does make trucks for the military.)

That idea that GM will have to buy its way into the modern defense industry raises Potter's eyebrows.

"We already have some existing organizations that have been doing military business for a long time," Potter said. "We are extremely good at airborne computers. We make the internal navigation system for the Titan 2 missiles" for the U.S. Air Force, he said. Martin Marietta Corp. is the prime contractor in the Titan 2 program.

GM's Allison gas turbine division, a member of the company's Power Products and Defense Operations Group, last year was awarded a $93-million Navy contract to develop a new turboprop engine for use in reconnaissance aircraft.

GM also has teamed up with California-based Garrett AiResearch Manufacturing Co. to bid on part of the Army's $40-billion LHX (light helicopter experimental) project. The mission of the LHX program is to replace the Army's aging, current fleet of attack and utility helicopters with a new generation of aircraft made of lightweight, but strong, composite materials.

Basic Difference

The basic difference between the LHX helicopter and current models is that the LHX will need only one person to handle its flight and weapons controls. Conventional military helicopters normally need two people. "We're going to make up for the second person with electronics," Maj. Donald Maple, an Army spokesman, said.

Maple said the GM-Garrett team wants to design and develop twin engines for the LHX helicopters. The Army says it will need 5,000 of the aircraft--thus 10,000 engines--with initial deliveries beginning in 1995.

Copyright © 2019, Los Angeles Times
EDITION: California | U.S. & World