Hughes Aircraft Gets a Taste of ‘80s Reality : Under GM, the L.A. firm learns technological prowess isn’t enough. It has to make money.

Hughes Aircraft threw a big bash for 1,000 of its engineers and scientists last summer, an event where employees paid tribute to a new Army weapon they had just completed that day.

The 6,000-pound device is an electronic telescope--a part of the “Star Wars” defense system--that one scientist compared to “putting the Mt. Palomar observatory into an airplane.” Known as the airborne optical adjunct sensor, it was regarded as a technical breakthrough.

But one Hughes engineer felt privately that any tribute was ridiculous. The company had spent $196 million to build the one machine, a cost overrun of $132 million on its original $64-million contract, according to the Army. As a result, the firm forfeited $8.4 million in incentive profits.

“That’s classic Hughes,” the engineer said, referring to the Los Angeles aerospace firm’s deep love affair with science and technology, even in the face of sometimes-terrible financial consequences.

Until the beginning of this decade, Hughes operated within a protective cocoon of loose private ownership and cozy relations with the Pentagon. Then, a cost overrun or delay was more easily digested.

Hughes had developed a monopoly on certain spacecraft and electronics technologies, vaulting the firm to a position as the seventh-largest U.S. defense contractor. Words like “national resource” were used to describe Hughes because it so often received military jobs that no other firm could handle.

And when General Motors paid $5.2 billion to buy Hughes in 1985, it looked like the auto maker had walked away with the crown jewels.

Beneath the surface, though, the 1980s have not been so kind to Hughes.

The company has had to cope with massive changes in its market, threatening the very identity that it labored to build since its founding after World War II. Hughes has also experienced a series of monumental cost overruns during the 1980s that collectively approach $1 billion, it has been learned. In addition, quality-control failures in the mid-1980s have tarnished its image.

And now, GM is even seeking a reduction in the price it paid for Hughes through a private arbitration with the previous owner, the Howard Hughes Medical Institute. GM wants a refund of more than $200 million.

“While Hughes is a great company, I said GM was paying too much for it,” said H. Ross Perot, a former GM director who cast the lone board vote against the Hughes deal in 1985. “Now a couple of years later,” Perot added in a recent telephone interview, “they are basically saying, ‘We paid too much for it.’ Right?”

The issue is considered so sensitive or possibly embarrassing by GM officials that they will not discuss it. Meanwhile, Hughes Aircraft is struggling to set its own house in order.

Inch by inch, Hughes is being pulled and sometimes dragged into the mainstream of American industry. The transition may either save Hughes or critically injure it, but the changes are certain to alter its unique character. Today, it is still attempting to reconcile these issues:

- Competition has altered its military markets, jeopardizing the company’s basic monopoly. Its missiles, satellites and optical devices are facing unprecedented rivalry in the marketplace.

- Hughes is still learning how to behave as part of a profit-making corporation rather than as the hobby shop of billionaire Howard Hughes. But vestiges of the eccentric founder’s influence remain as deep imprints on the company. Its various divisions are autonomous, for example--so much so that some units have incompatible accounting systems.

- A whole generation of key Hughes leaders is retiring. Since GM acquired Hughes, the presidents of each of Hughes’ six operating groups have left, and the ranks of middle management have undergone similar wholesale change.

- Hughes has sometimes been racked by nasty turmoil among top executives. Former Chairman Albert D. Wheelon and Vice Chairman Richard F. Alden retired suddenly last year amid a bitter power struggle.

Hughes was once known in Washington as the “Cadillac of defense contractors,” but today it is seeking a new identity in line with changes in the marketplace.

“We’re trying to rationalize this right now,” said Hughes Chairman Malcolm R. Currie in a recent interview. “I’ll tell you frankly that I’ve instituted a process of strategic planning in the company which is creating the new vision for the company.”

Currie, who holds a doctorate in engineering from the University of California at Berkeley, began working for Hughes Aircraft in 1954. He holds numerous patents and is credited with a key role in the Hughes development of airborne radar and lasers. He took over GM’s Delco Electronics unit in 1986 after GM bought Hughes and was brought back Hughes as chairman in 1988.

His new vision for the company is likely to put greater emphasis on cost-competitive manufacturing rather than the historic focus on high-technology leadership.

“We still reach out technically, but there’s no question that in the last 15 years or so many companies have emulated Hughes,” Currie said. “There’s been a technological leveling that’s been taking place. And we’d be dumb not to recognize that.”

Currie added later: “I don’t think we’re ducking the nature of the environment we’re in right now. We’re looking at it. We’re putting it right on the table and addressing it. And we’ve got a lot of ideas for the future.”

Although Hughes’ airborne radar and satellite businesses are healthy, its divisions that pioneered guided missiles, ground radars and optical devices are in difficult market conditions.

“The technologies that really we pioneered in the early days--the laser, laser range-finders, the infrared systems, night vision--those things have all the hallmarks of becoming a mature industry, where you have many more competitors,” Currie said.

Moreover, the Pentagon has sought other companies to act as second sources for production of a number of Hughes weapons, including the Maverick, Phoenix and AMRAAM missiles, among other products scattered around the company.

The heightened competition has forced successive rounds of cost-cutting, a difficult process for a company used to the extravagant life style of private ownership.

Lodge Not Unique

Until recently, for example, Hughes operated a secret facility--unlike any other Hughes business--on a sprawling 232-acre site near Maryland’s Chesapeake Bay.

It was a duck hunting lodge, called the Gladding Gander, used to entertain members of Congress and other powerful people. The lodge was owned by a Hughes subsidiary registered in California as HESP Corp., an acronym that stood for Hughes Employees Special Project.

The lodge was sold in December, 1987, reportedly ruffling a few executive feathers at Hughes headquarters. John Winkel, former Hughes senior vice president for marketing, bought the lodge from Hughes for $1.55 million, according to property records in Kent County, Md.

The lodge was not typical of the expenses at Hughes, but it was hardly unique. The company also has sold off a luxury condominium in Washington used by executives and part of a fleet of private business jets.

The hunting lodge, the jets and the condominium were relics of a different Hughes Aircraft, the one under the loose ownership of Howard Hughes--the playboy, Hollywood mogul, aviator, financial wizard and, in his waning years, neurotic recluse.

Over three decades, Hughes was run in a manner unlike any corporation in American history. It was ostensibly controlled by Howard Hughes through his Howard Hughes Medical Institute, but the company existed largely in a vacuum.

In a recent interview, retired Hughes Aircraft Chief Executive Lawrence A. (Pat) Hyland said that during the nearly three decades that he ran the company, starting in the early 1950s, he saw Howard Hughes only twice. Hughes died in 1976.

“I saw Hughes a month before I came on the job and once about 18 months later,” Hyland said. “To my knowledge, he never set foot on the property again.”

Hyland said he received about 20 telephone calls from Howard Hughes through the years, but only two calls were for business. The other 18 calls were personal.

“On one occasion, he wanted a special alloy for some dental work,” Hyland said. “I sent annual reports to him. I assumed he read them.”

‘Borrowed No Money’

Hughes Aircraft returned to the medical institute only $3.5 million annually, which Hyland described as “rent.” The balance of profits were reinvested.

“We borrowed no money for years,” he recalled. “It was just dedicated to building good products.”

Some eccentricities flourished, as well.

Robert DeHaven, retired director of the Hughes flight test division, said the company maintained some of Howard Hughes’ personal aircraft, which at various times over several decades were positioned on his orders at airports all over the country.

“We learned once that Howard had a Convair in Kalispell, Mont.,” DeHaven recalled. “He had flown up there years before and just left it there.”

Two Lockheed Jetstars were parked in Georgia for 10 years. Other aircraft were in El Paso, Vancouver, British Columbia, and Blythe. Howard Hughes’ DC-6 was parked at the Santa Monica airport under 24-hour guard.

Alden, who was also Hughes Aircraft’s general counsel, recalled in a recent interview that “when Hughes died we had something like 32 airplanes spread around the country and ready to go because Hughes said he wanted to be ready to go. At the same time, we couldn’t paint the buildings. So they were a hideous green.”

While some of the targets for cost-cutting have been obvious, the company has also floundered in learning how to slim down in its new life as a GM subsidiary.

‘Jerking Us Around’

At one point in 1986, for example, Hughes President Donald White ordered engineers and scientists to work 45 hours a week for 40 hours of pay. The order created a backlash, especially among technical staffers who were already working the overtime voluntarily. The order was quickly rescinded.

“They are trying to save money every way they can,” said one research engineer at Hughes missile systems group in Canoga Park. “Morale is generally pretty crummy all the way around. They have been jerking us around too much.”

Nonetheless, he praised management for its drive for quality and for its willingness to buy good equipment for his laboratory.

Currie has won wide praise for his efforts to refocus Hughes and cut costs. But some military experts say these changes are years late in coming.

“Hughes is putting on a life jacket long after they have been in the water,” said Stuart Platt, the retired rear admiral who, as the Navy’s competition advocate, was responsible for eliminating many of Hughes’ monopolies. “Hughes had a form of arrogance that at one time was acceptable because it was earned but it hasn’t been the case for a long time.”

Platt, now a private executive, said Allen E. Puckett, who was Hughes’ chairman from 1978 to 1987, strenuously opposed the Navy’s effort to increase competition.

“Puckett had more than one personal meeting with (former Navy Secretary John F.) Lehman to express his personal opposition,” Platt recalled. “I don’t fault him for opposing us, but he failed to recognize a point where the changes became inevitable.

“He was throwing bricks from a glass house,” Platt added. “The breakthrough came when he began to have technical problems on the shop floor. That opened the way to competition because it took away his impregnable platform.”

Puckett rejects Platt’s comments out of hand. Puckett said he did not personally meet with Lehman specifically to oppose competition. But Puckett acknowledged that Hughes did oppose the Navy’s initiatives because they would end up increasing the government’s own costs.

“Clearly, the Navy overdid it,” Puckett said. “It became competition at any cost.”

At the same time during the mid-1980s, Hughes suffered from a series of quality-control problems. The military services refused to accept deliveries of weapons from Hughes while the company fixed the glitches.

‘Hopelessly Underbid’

In addition, the company was experiencing horrific cost overruns that were well hidden from the public. The $132-million overrun on the airborne optical adjunct sensor, or AOA, was characteristic of a Hughes tendency to promise too much technically.

Hughes asserts that the AOA is 1,000 times more capable than previous optical surveillance systems. It generates data equivalent to the entire Encyclopaedia Britannica 13 times a second. Nonetheless, it is a financial mess.

“AOA was in trouble the day the contract was signed,” said one engineer knowledgeable about the program. “It was hopelessly underbid.”

Other cost nightmares included a $250-million overrun that Hughes had to absorb on the Air Force’s advanced medium-range air-to-air missile. The Navy imposed a $200-million penalty that Hughes had to foot for its inability to carry out its development of the joint tactical information distribution system, or JTIDS. The command control intelligence system, or CCIS, a program for Norway, has had a $120-million overrun paid for by Hughes.

A radar and communications system for the space shuttle had a $94-million cost overrun that was paid by the government. A current project to build an air defense system for Egypt has a loss of $56 million and may go higher. And a large software project at Hughes’ Electro-Optical Data Systems Group had a 300% cost overrun.

Cost overruns on those seven programs alone approach an estimated $1 billion. Partly as a result of such overruns, Hughes’ profits are below the industry average, according to analyst Joseph Campbell with the Paine Webber investment firm.

In 1986, for example, Hughes had operating earnings of $312 million on sales of $7 billion, a 4.4% profit margin compared to an 8% industry average, Campbell said. In 1987, Campbell estimated, the company earned $408 million on $7 billion, a margin of 5.8%.

Other problems during the mid-1980s included late deliveries, which were plaguing a number of missile and optical programs. At one point, Hughes had fallen months behind in deliveries of gun sights for Bradley Fighting Vehicles. FMC, the prime contractor on the Bradley, reportedly had 280 vehicles parked in its factory lot waiting for the gun sights, according to knowledgeable sources.

“Our customers were ready to skin us alive,” one manager said.

Fewer New Programs

Hughes has solved most of these problems at enormous cost and through the efforts of employees. But the legacy is that the company is obtaining fewer new programs. It once boasted of winning 80% of its contract bids, but that percentage has slipped.

It once had a monopoly, for example, in the international market for air defense systems. It built systems for Japan, Switzerland, Spain, Canada, Greece, Malaysia, Korea, Britain, Singapore and the North Atlantic Treaty Organization.

But more recently, it has lost competitions in Saudi Arabia, Turkey, Portugal and Thailand. It also lost a huge contract last year to build a new air traffic control system for the Federal Aviation Administration.

Only last year, the company lost its two-decade-long monopoly on building combat control systems for the Navy’s nuclear submarine fleet. Raytheon blew Hughes out of the water on the next generation of the system, the CCS Mark II, with a winning bid of $405.5, compared to Hughes’ $658 million, according to defense industry sources.

Despite such setbacks, Currie said he is optimistic about the company’s future. He expects sales growth of 5% in the next several years, meaning little real growth after inflation. At the same time, the entire defense electronics industry has stopped growing.

“Our efficiency will go up,” Currie said. “We’re getting some problems behind us. So, I’m fairly optimistic. I think that we’ll be laying plans for the longer-range future.”

One problem that the company will have behind it is the internal strife between executives that manifested itself last year in the departure of Wheelon and Alden.

Factions favoring or opposing Wheelon had formed, and the turmoil that ensued deflected attention from substantive issues at a critical time.

In confidential interviews during the past two years, various Hughes executives have referred to one another as “jug head,” “showboat,” “hypocrite,” “bigot,” “loose cannon,” and “back-stabber.”

When Wheelon abruptly resigned for unstated “personal reasons” last May, leaks by other Hughes executives suggested that it was linked to a federal grand jury investigation into payments made to South American satellite-communications consultants.

Wheelon declined to comment, but no evidence has surfaced to indicate that he was involved in the South American deals, which occurred while he headed Hughes’ satellite business in the early 1980s before he became chairman.

Just weeks before Wheelon left the company, Alden retired, after he had mounted an effort to have GM oust Wheelon.

Currie said in a recent interview that he does not believe factionalism to be a current problem at Hughes Aircraft.

“You mean the Bud Wheelon factions? No, absolutely not,” Currie said. “I think I can give you complete assurance on that.”

Currie’s diplomatic management approach has won him wide approval around the company.

“Currie is very personable. He would make a very good TV anchorman,” one top scientist remarked, adding that Currie’s selection sent a signal to employees that GM would not assert direct control over Hughes’ affairs.

“GM is the most benign management we could have gotten,” the scientist said not long ago. “Some of our problems are of our own making.”