Painful Days Forecast for Area Defense Contractors : Economy: Military ‘build-down’ is expected to result in the loss of many more jobs and companies. Conversion, once considered a potential salvation, is believed by some to be a false hope.

Many of the San Fernando Valley area’s more than 300 defense contractors face a painful period of cutbacks, consolidation and closures--accompanied by widespread layoffs--in response to declining federal defense spending, according to industry analysts and executives.

About 8,000 of the Valley’s 118,000 defense industry workers are expected to lose their jobs this year, Dan Flaming, director of research and development for the Los Angeles County Private Industry Council, said last week.

The work force reductions are likely to increase sharply over the next few years as defense budget cuts currently under consideration by the Bush Administration and Congress translate into actual cuts in outlays to contractors and subcontractors.

Moreover, interviews with industry executives and experts make it clear that “conversion”--the proposed transformation of idled production capacity from defense to commercial use--is not occurring on a significant scale in the Valley.

Some analysts, in fact, believe that conversion, frequently cited as the industry’s potential salvation, is a false hope. And officials at several firms that have pursued it aggressively agree that it is, at best, a challenging, costly and long-term process.

The San Fernando, Santa Clarita and Antelope valleys were major beneficiaries of the massive defense buildup of the 1980s. Now, despite the possibility of military conflict in the Middle East, the waning of Cold War tensions has left thousands of defense workers in these aerospace-rich valleys potential casualties of a looming military “build-down.”

“Within the next year or two or three, you’re going to find a tremendous impact of downsizing and many companies are going to go out of business,” said Reeve Darling, president of a Los Angeles defense consulting firm. “It’s certainly a crisis.”

Darling predicted that 25% to 40% of Valley-area firms involved with the defense industry will either go under, merge with other companies or sell most of their defense-related assets and try to enter other lines of business in the next few years.

“Every defense company is reviewing its business strategy,” said Darling, who also is chairman of the Presidents Roundtable, a national association consisting of the chief executives of 50 defense-related companies.

The San Fernando Valley has long been heavily dependent on defense. It is home to roughly 120,000 defense industry jobs, or about 40% of the 295,000 jobs in the industry in all of Los Angeles County, Flaming said. Altogether, the county is expected to lose 20,000 defense-related jobs this year, he estimated.

Each layoff, in turn, creates an untold amount of hardship and heartache.

“We have people who have lost their homes, who have lost their cars and who have lost their families” after being laid off, said Rose M. Dagg, a bargaining committee chairwoman for Local 887 of the United Aeronautics Workers. It represents Rockwell International Corp. workers in Palmdale.

Overall, the defense industry accounts for nearly 20% of the 600,000 people employed in the San Fernando Valley--five times the percentage for all of Southern California. The figure for the Antelope Valley is about 29%, Flaming said. No comparable numbers were available for the Santa Clarita Valley, but it, too, has significant defense-related industries.

At least 15% of the residents of most San Fernando Valley neighborhoods are employed by the defense industry, with the greatest concentrations in the communities of the northwest and northeast from Canoga Park to Pacoima as well as Woodland Hills and Burbank, according to a study done for the Private Industry Council.

Warming relations with the Soviet Union and Eastern Europe and a severe domestic budget crunch have prompted congressional negotiators to propose reducing the defense budget by $10 billion in 1991, or about 3% below the level needed to keep up with inflation. They have suggested a total of $170 billion in inflation-adjusted cuts over the next five years.

If the reductions trigger a major restructuring of the defense industry, as some analysts predict, 4 in 10 defense workers could be without jobs by the year 2000.

The Valley was stung by Lockheed Corp.’s announcement in May that it will move much of its manufacturing facilities from Burbank to Marietta, Ga., by the mid-1990s as a cost-saving measure. The Valley area will lose as many as 5,000 jobs as a result.

Also hanging in the balance are many jobs at Northrop Corp. Its B-2 Stealth bomber program employs 2,400 workers in Palmdale and thousands more through subcontractors. The controversial $63-billion program is considered a prime target for the budget ax.

In addition, work is being done throughout the Valley area by Lockheed, Hughes and various subcontractors on the controversial Strategic Defense Initiative, or Star Wars program. Congress is expected to reduce dramatically President Bush’s $4.7-billion request for the space-based weapons system in the coming fiscal year.

Southern California’s once-robust and diversified economy has slipped in recent months, a trend reflected in the current real estate slump. Its ability to absorb thousands of displaced defense workers with years of experience and salaries to match is considered highly doubtful.

“At this time, we see no sector to offset these reductions,” David Hensley, director of California forecasting for the UCLA Business Forecasting Project, said recently.

Hensley said his pessimism was based, in part, on the reality that “a host of problems--ranging from high home prices to severe traffic congestion--is causing a palpable rise in dissatisfaction with life in California while making business increasingly reluctant to locate or expand here.”

The downside of the anticipated “peace dividend” will not stop with those enterprises and employees on the front lines of manufacturing weapons systems and other military hardware and supplies.

“The potential adverse impacts on the local economy could be devastating,” said Burbank Mayor Tom Flavin, who is also executive vice president of the Los Angeles County Economic Development Corp. He said many Burbank retailers report that their business has dropped by as much as 40% because of Lockheed’s recent layoffs.

As the impact trickles down, many of the Valley’s defense subcontractors could be forced out of business, particularly those geared to a single product or weapons system, analysts said. The potential casualties include manufacturers of everything from airplane parts to electronics.

“That’s the key employment issue,” said Michael N. Beltramo, president of a Los Angeles management consulting firm that specializes in defense. Big contractors, he said, are only “the tip of the iceberg” when it comes to job losses.

Three-quarters of every defense dollar going to major firms such as Lockheed, Hughes and Northrop trickles down to hundreds of subcontractors and other businesses, Beltramo said. For every job lost by a prime contractor, the Los Angeles Economic Development Corp. projects that nearly three subcontracting jobs will disappear.

Madeline Pedego, president of EER Electronic Engineering Research, a Chatsworth defense subcontractor, said cuts in some of the projects her firm is counting on could be EER’s death knell. The company records about $3.5 million a year in sales.

Pedego’s firm is scrambling to convert from a military to a commercial focus by targeting telecommunications markets for EER’s electronic circuit assemblies and other high-tech products. So far, she said, “that’s not an easy transition to make.”

Others, including those who have transformed at least part of their operation, agree that conversion is easier said than done.

“A lot of people are thinking about it, but I don’t know a lot that are doing it,” said Charles Bridge, a vice president and chief scientist at Litton Industries, Inc.

Litton spun off its Aero Products Division in Moorpark from its military division nearly 20 years ago and began to focus on commercial markets. Although the transition has been successful, Bridge said it was costly and difficult and took five years to turn a profit.

It would be foolish for some companies to jump into commercial markets without doing the necessary preparation and without the financial wherewithal to keep operations going through the transition, Bridge said. “You can waste a lot of money,” he warned.

The hurdles to conversion are formidable. Commercial work tends to require a different set of skills and contacts than defense work. Military products are designed to government specifications, take several years to develop and are made in relatively small quantities. Commercial markets, in contrast, involve many customers, fast turnarounds and larger orders.

“I think conversion is a very harmful myth, an outright fairy tale,” said defense consultant Beltramo. Companies that jump into new areas without doing their homework, he predicted, “are going to go down in flames.”

When Bill Averill and his partner started ASAT in Woodland Hills two years ago, they expected to supply high-tech engineering services to the military. But defense cutbacks scuttled their plans, forcing them to look to commercial markets. “That was a difficult transition because we had no real basis of commercial business,” Averill recalled. “We had to find something that made sense for us as a business.”

They did. The firm has branched out to become the domestic distributor of computer systems manufactured by a British firm. ASAT’s operations, which employ eight, will be 90% commercial next year.

The Rocketdyne division of Rockwell International in Canoga Park, meanwhile, has also been spared much of the pain of defense cuts because it works primarily for NASA. And other firms have moved more heavily into the booming commercial aviation field.

At the same time, the chairman of another large defense contractor with operations in the Valley is skeptical about his company’s ability to make the switch to the commercial marketplace.

“We don’t have the skills, the products, to go to the private sector,” he said, declining to be identified by name. “It doesn’t just happen overnight. You have to have investments. Right now, the debt ratings of aerospace companies are all declining. I don’t have the wherewithal to go to the capital markets if I had a great idea.”

Ocean Technology Inc. in Burbank, a $35-million-a-year company that has about 500 employees, also decided that conversion was unrealistic. Instead, the firm--which makes displays and display data converters, primarily for the Navy--decided to look overseas.

“I think most defense people are looking at overseas markets,” particularly in Asia, said John Malloy, Ocean Technology’s vice president of business development.

Meanwhile, for many employees who already have received pink slips, the future is uncertain.

Highly skilled workers, such as engineers, may find jobs in the private sector. Some companies are conducting job fairs and providing referrals to employees. Legislation is pending in Congress to assist jobless defense workers, and the state has targeted $10 million for Los Angeles to retrain hundreds of laid-off aerospace employees.

“You can’t blame Lockheed or any big company for trying to save itself,” said Gloria Steele, 64, of San Fernando, who is “taking it one day at a time” after 19 years at the firm’s Burbank plant.

“But they have asked for our loyalty time and time again. They gave us something to look forward to. We had invested our life in this. And then they pulled the rug out from under us and said, ‘Do the best you can do.’ ”

Miller reported from Washington and Apodaca from Chatsworth. Staff Writer Amy Louise Kazmin in Chatsworth also contributed to this report.