GM May Tone Down Risk Taking at Hughes : Some Competitors, Analysts See New Owner Putting Tighter Controls on Freewheeling Firm
When Hughes Aircraft was awarded a contract to develop the Pentagon’s largest and most important new missile system, the AMRAAM, it took on an enormous technical risk at a price so low that it swept away competitors.
It was the epitome of Hughes’ aggressive style: selecting a target at which to aim its massive resources, submitting top-notch technical designs, assuming contract risks that nobody else was willing to take and offering a price that was not guaranteed to produce a profit.
Unfortunately, AMRAAM was one of Hughes’ programs that went astray, and Hughes has exceeded the target price of the contract by $336 million over the last four years. It is now stuck with having to spend $200 million of its own money to complete the missile’s development.
Will Hughes be able to take those kinds of aggressive positions in the future, now that the company must answer to its new owner, General Motors, which has very set ideas on how to run a business?
Some of Hughes’ competitors in the defense electronics industry and many aerospace analysts say that Hughes will not have the freedom to assume such large risks in the future. As a result, they don’t think Hughes will be as formidable a competitor in future Pentagon programs.
Moreover, Hughes’ corporate culture, they say, is oriented to achieving “technical excellence” at a time when such a concept is inconsistent with the Pentagon’s evolving emphasis on affordable weapons. Often enough, the weapons with the most sophisticated design and the greatest capability cost far more than only a moderately less-capable product.
For both of these reasons, Hughes may never again duplicate the explosive growth that it has achieved over the past five years, when its sales soared by 88% to $4.9 billion from $2.6 billion.
“Hughes is known for being an aggressive bidder, and they are known for the very best technology,” said an official at Ford Motor, a Hughes competitor in several defense markets. “We could see Hughes not being as aggressive in the future.”
Added Larry Lytton, an aerospace analyst at Drexel Burham Lambert: “There are competitors of Hughes who are happy that the company is no longer independent, because they think GM is bound to meddle with Hughes and make it less of a competitor. I think that is a valid point.”
Hughes officials dismiss these statements as mere wishful thinking on the part of its competitors, who year after year have watched Hughes increase its share of almost every market it enters.
“We are aggressive in the sense that we have had to have the right price to go along with the technical capability,” said J. Richard Giacoletto, vice president of Hughes’ radar systems group. “I don’t anticipate any noticeable difference” under GM ownership.
Another top Hughes executive commented that Hughes’ reputation as an aggressive competitor is somewhat inappropriate, since the company achieves profits that are at or above the defense industry average. “If we were aggressive all the time, we’d go broke,” he said.
To be sure, Hughes is not likely to see any large-scale erosion of its position as the nation’s largest defense electronics supplier. Over the last 30 years, Hughes has become a leader in airborne radar, satellites, air defense systems and tactical missiles. No other firm in the industry ranks at the top of so many market segments.
Hughes has achieved its dominance in part by investing massively in research and development, and that has enabled it to submit lower bids than competitors when it came time to seek a new development program.
Once the program is lodged at Hughes, the company is relatively free to recoup the investment on later production contracts. But the strategy can be risky on fixed-price contracts in technically difficult programs, such as the AMRAAM missile case.
The company has operated with almost no interference from its owner, the Howard Hughes Medical Institute. Historically, the company has returned extraordinarily small dividends to the institute, instead funneling much of its cash back into research. Dividends to the institute have ranged below $50 million until this past year. But capital spending grew to an estimated $500 million this year from $208.5 million in 1980, according to Hughes Chairman Allen E. Puckett.
GM has sought to ensure that Hughes will retain its autonomy, providing a separate subsidiary for owning Hughes and a separate class of common stock that will be tied partly to Hughes’ profitability. But even this generous setup is likely to require greater accountability than Hughes has had in the past.
Even if GM does not curtail Hughes’ large research efforts, it will certainly review the firm’s broad strategy and will scrutinize any losses as large as the firm has sustained on the AMRAAM program, some Hughes officials acknowledge.
“I doubt we will have as much freedom, but I don’t think there will be a wholesale change,” said a Hughes corporate officer. “Instead of 100% of the decisions being made independently, maybe 80% of the decisions will be made here. If Ford or Boeing were sitting on top of us, I think there would be a lot more meddling and interference than we will get from GM.”
But that could change dramatically if Hughes falters in future years, a possibility foreseen by a top executive at a firm that competes with Hughes in the missile business.
“Hughes has a reputation of having very high technology, the best, but also of being a very high-cost producer. Maybe that was OK in the past, but we are moving into a new era,’ he said.
“The fundamental change is in the psychological mind-set with which we approach designing a weapon. Hughes is damn good in a lot of critical technologies, but they can’t continue to grow unless they get their prices down. Turning around their mind-set will be a very difficult thing to do.”
And getting Hughes to give up some of its technological bravado will be difficult to do in a company that has prides itself on engineering excellence. It may require some of the much-feared meddling to do it.
“GM could help in making that adjustment,” the competitor said. “They have just come through a tough time in the auto industry, and the defense industry is about to go through the same kind of watershed change in thinking.”