Weapons Makers Face Protracted Downturn
Weapons producers are girding for a painful and protracted downturn in which important military programs will be canceled and workers laid off, prompting concern that the industry may never see another heyday quite like the 1980s.
General Dynamics Corp., Hughes Aircraft Co., Litton Industries Inc., Lockheed Corp., Northrop Corp. and TRW Inc. have been laying off workers from at least some of their divisions in Southern California and anticipate further moderate cutbacks or zero growth for some time, the contractors have told The Times.
Although defense spending has slumped, a precipitous downturn in employment is not looming. Rather, a steady moderate erosion is expected to depress the industry and is likely to be offset only by strength in commercial aircraft production.
Weaker companies will drop out of the industry or merge with stronger competitors, leaving the United States with a smaller weapons manufacturing capacity and a more concentrated industry, executives said in a series of recent interviews.
The decline in federal defense budgets is expected to continue until at least the mid-1990s, forcing additional cancellations of weapons programs, employee layoffs and slumping profits.
Although industry optimists hope that spending will grow once again to modernize the armed forces after the mid-1990s, some analysts believe that the U.S. defense industry may have begun an unprecedented period of long-term erosion.
“I don’t see any reason why the defense budget should turn back up,” said James Blackwell, an analyst at the conservative Center for Strategic and International Studies in Washington. “There are big cuts coming that we have to face.”
The first installment occurred last week when Defense Secretary Dick Cheney unveiled a $10-billion cut in Pentagon spending plans for 1990 alone. At least an additional $64 billion in planned spending must be cut over the succeeding four years.
Although funding for weapons procurement has been declining steadily for several years, not until recently has the Pentagon begun to pare its list of weapons programs. As a result, there is an estimated $400-billion gap between weapons procurement plans and the funding that is available for them, according to Blackwell.
Defense procurement funding has plunged 44% on an inflation-adjusted basis since its 1985 peak. The full effect has not hit the companies because the long contracting pipeline from Washington to the industry is still full of older contracts. Just as the Reagan administration’s buildup of the early 1980s took years to gather steam, the decline is taking years to fully reach the industry.
In addition, real defense spending has fallen because inflation has eaten into the purchasing power of the available dollars, so the effect on industry has been and will continue to be gradual. Few major defense contractors in California, which employ an estimated 758,000 aerospace workers, expect employment to fall precipitously, and many are even confident that they can avoid the worst effects of any downturn.
“Even though we might find ourselves in a severe budget environment, I would expect that we would do reasonably well,” said Ralph Hawes, a General Dynamics executive vice president who oversees four of the company’s divisions in Southern California.
Lockheed Vice President Alan C. Chase said, “We feel relatively good about how we fared in the budget outcome. Our programs are of significant national importance, so they are durable.”
The cutbacks in defense have been largely offset on the West Coast by a historic boom in commercial aircraft production.
McDonnell Douglas has added about 20,000 jobs during the 1980s at its Douglas Aircraft unit in Long Beach for commercial aircraft production, and subcontractors have added thousands more.
Jobs Added
Boeing has added 28,000 jobs in Washington state in commercial aircraft production. The company spends more on subcontracting in Southern California than in any other region.
But not all defense firms participate in commercial aircraft production, and the declining defense budget has resulted in some rude surprises.
For example, TRW was hit unexpectedly last year with stop-work orders on three major secret programs. The firm was forced to undergo its first layoffs in years, ultimately letting 1,000 workers go.
TRW Executive Vice President Edsel D. Dunford said recently that the company anticipates a tough four or five years ahead, but no major downturn in employment is foreseen at its Redondo Beach operation this year.
Meanwhile, Northrop has dropped 2,300 jobs on its B-2 stealth bomber program in Pico Rivera and Palmdale in the last two years and expects to continue laying off workers. Northrop officials said they could not provide projections for additional layoffs but that the layoffs are attributable to the completion of B-2 development activities.
The Pentagon said last week that it has decided to postpone production of the bomber, owing to funding constraints and technical problems, which have delayed any employment buildup at Northrop.
The delays in the massive $68-billion B-2 program are having a ripple effect in the industry. Hughes Aircraft, which builds the radar for the B-2, may have to reduce its B-2 work force of 1,500, according to Hughes Chairman Malcolm R. Currie. In addition to the B-2 program, Hughes took major hits in its radar programs for the F-14, F-15 and F-18 fighter planes, some of the firm’s most important projects.
“We are just trying to assess the impact,” Currie said. “It affects programs adding up to $1.5 billion (in annual sales) at Hughes. Some of them are stretched out, some of them are reduced and some are being cut (totally).
“It is going to hit us across the company but not in a drastic way. The bright spot is that a lot of these programs are very important, and I think they will go forward.”
Officials at Litton Industries said they anticipate flat defense budgets for at least several years and do not regard defense as a growth business.
The firm has cut employment at its Guidance and Control Division in the San Fernando Valley by 10% in the past year but has been adding workers at its Data Systems Division. On balance, the firm’s defense-related work force of 6,500 will trend slightly downward, Litton spokesman Robert Knapp said.
The downturn facing the defense industry will be seriously exacerbated by a surge in the prices of new weapons, something that has been termed “superinflation” by Norman R. Augustine, chairman of Martin Marietta Corp., a producer of military spacecraft and defense electronics based in Bethesda, Md.
The Pentagon is being squeezed between declining procurement budgets on the one side and sharply higher prices for weapons on the other, Augustine said.
For example, the B-2 bomber will cost a projected $500 million each, compared to $280 million for the B-1 bomber. And the new Advanced Tactical Fighter will cost at least $50 million each, compared to about $20 million for the F-16.
“You can’t have a 2% budget decline for too long because of the compounding of superinflation before it gets to you,” Augustine said. “That’s the reason we are finding it so difficult to cut the budget very much farther.
“You pretty soon have take out big chunks of force structure. From where I sit, it is hard for me to see that is good for the country.”
In some cases, the Pentagon is finding that it simply cannot afford to produce weapons that it has spent billions of dollars developing. The latest weapon to be terminated after development was the V-22 tilt-rotor, a hybrid helicopter-airplane.
Production will probably be delayed on such new weapons as the Advanced Tactical Fighter, which Northrop and Lockheed are developing for the Air Force, and the Navy’s A-12 Advanced Tactical Aircraft, being developed by McDonnell Douglas and General Dynamics.
The combination of increasing weapons costs, persistent budget deficits and reduced international tensions has led some analysts to question the need for continued defense spending at current levels.
“The Cold War is over,” declared Josh Epstein, a researcher at the Brookings Institution in Washington. “The troops are still where they stopped at the end of World War II. Why have a politically anachronistic military competition in Europe?”
Blackwell at the Center for Strategic and International Studies said public sentiment seems to be moving away from defense spending. He projects that the nation could settle toward a $250-billion annual defense budget, far below the 1990 fiscal year’s projected $295.6-billion budget.
Americans now view Japan and Europe as greater threats to their national prosperity than the Soviet Union is to national security, Blackwell noted.
“In the current procurement environment, defense firms are leaving the industry in droves because they can’t make an adequate profit,” he said.
Hawes, the General Dynamics executive, is concerned that the industry is losing weapons production capacity that would be difficult to regain. “We are building ourselves a problem,” he said.
Nonetheless, Hawes and other executives at the major prime contractors are confident that conditions will turn around in a few years.
“I am not yet willing to declare this world as the sort of peaceful, kinder, gentler world that we all wish it would be,” said Martin Marietta’s Augustine. “Until that happens, the best thing to promote peace is to build strength. The problems (between nations) still exist and have existed since the beginning of mankind, and I am afraid may exist for a lot longer, too.”
Both pessimists and optimists agree on one matter: The defense industry may never see another peacetime buildup like the one that occurred during the Reagan administration.
“I don’t think we will ever see another Reagan buildup again,” said Ron Hertenstein, director of research at Forecast Associates, a market research firm in Connecticut. “There seemed to be money for everybody, and there was rapid growth everywhere in the industry.
“I just don’t foresee that happening again. We are going to end up with a lean, thinner industry.”
