Slower Growth, Restrictive Budgets Force Belt-Tightening : Hughes Aims to Change ‘Cadillac’ Image

After years of explosive growth and wholesale expansion of its work force, Hughes Aircraft has entered an era of sharply slower growth and restrictive budgets that will require painful adjustments.

The company’s plan to cut its work force, announced late Thursday, is aimed largely at attacking its reputation in the defense industry as a “high-cost” contractor.

While Hughes remains healthy and growing, some of its groups have lost several major contract competitions recently and have become mired in problems on existing Pentagon contracts. Those groups include Hughes’ missile, satellite and industrial electronics businesses.

The stigma of Hughes being the “Cadillac” builder of the defense industry is not a new one, and eliminating the problem is likely to be a difficult job, industry observers say.

Voluntary work-force cutbacks by a defense contractor are far more complex than at a commercial firm, and such reductions often have a much different meaning than in the commercial world.

Thursday night, a company press release said: “Hughes Aircraft Co. . . . today announced its plans to reduce its work force during the remainder of 1986. The company plans to reduce its work force through normal attrition rates and discharge of substandard performers. . . .

“While the exact number of people involved has not been determined, a goal of 5% has been established as a guideline. . . .”

On Friday, however, Hughes put a different interpretation on its announcement, saying that the plan does not necessarily mean that it will end 1986 with fewer employees than it has now.

According to Hughes Vice President Ted Westerman, interviewed by telephone Friday, the 5% cutback means that while as many as 4,000 workers will be eliminated, the company at the same time will be hiring almost as many workers for jobs elsewhere in the company. Excluded from any cutbacks are Hughes’ 16,000 production workers. Any job eliminations will occur in the ranks of white-collar workers.

Little Reason to Cut Employment

The cutbacks will mean that Hughes will now hire only enough workers to cover attrition, Westerman said, leaving the company with between 80,000 and 82,000 workers by the end of the year. It currently has 82,000 workers.

“We never said we were going to cut the total number of our employees,” Westerman said. “One of the things we are trying to get across is that we have not stopped hiring people for critical jobs.”

Indeed, defense contractors such as Hughes have little reason to reduce employment, because wages are paid under government contract. Typically, defense firms lay off workers only when contracts expire or are canceled.

“There is no incentive to cut employees directly under a contract,” an Air Force official familiar with Hughes’ operation said. “It would not be prudent to cut a lot of manpower hours. In the next contract renewal, we would want to take funding for all those hours out.”

The Air Force officer said that if Hughes did begin to cut back work hours billed under contract, it would imply that the company had built “slush” into its cost structure. Nonetheless, a high-cost structure does hurt a contractor when it goes out to bid for new contracts.

Signs that Hughes’ high costs were cutting into growth have been popping up all around the company in recent years.

Bill Christoffers, president of Hughes industrial electronics group, said in a recent speech: “Our growth rate has fallen off sharply over the past few years. For each of the last three years, we have had to accept a smaller growth forecast than the year before, and last year’s sales did not meet even the reduced goal.

“We could raise our prices, but we are already high priced, so we would lose even more business. Last year, many of our product lines did not grow, and as a result all of our divisions had layoffs. We will not start growing again until our costs come down.”

The sharp slowdown in Hughes’ growth rate cannot be blamed on any single factor, such as high labor costs or the recent cost of a stylish new granite headquarters building.

In addition, the current growth slowdown was almost inevitable, so rapid was Hughes’ growth in recent years. In 1982, for example, its sales bounded up 33%.

“If we kept growing like we were, we would have consumed the entire Defense Department budget,” said Lee Pitt, a Hughes’ vice president. “We are now taking a deep breath.”

Rumors of major layoffs at Hughes have been circulating ever since General Motors acquired the company last year for $5.1 billion. Some employees have expected GM to lower the boom on Hughes.

However, General Motors Chairman Roger B. Smith denied Friday that GM’s top management put any pressure on Hughes Aircraft to make a 5% cut in white-collar employment. But Smith still praised the move and indicated that he thought that it showed that Hughes management was addressing its problems on its own.

“Hughes did that strictly on their own, but I want to give them applause for it,” Smith said. “I think it’s great to see them working on that.”