A year ago, the melting of the Cold War was seen as a doubled-edged sword for those who work in Orange County's defense industry.
With the Soviet threat greatly diminished, the Pentagon and weapons makers were forced to face a troubling question: Who's the enemy? And with no clear rival, how do you justify spending billions for new weapons programs that are the industry's lifeblood?
"The past two years were great for my grand-kids but bad for my business," said Richard A. Foster, president of Interstate Electronics Inc. in Anaheim. "The Soviet Union in effect declared Chapter 11, and the peace dividend was invented."
With the Persian Gulf War now over, the sands are shifting for the defense business again. Talk of the peace dividend has evaporated. And defense executives are breathing easier, hopeful that the Draconian cuts in the defense budget will now be kinder and gentler.
But the pendulum hasn't quite swung completely in the other direction. While the war has showcased the performance of weapons such as the Patriot missile--strengthening the case for proponents of high-tech weaponry--it hasn't erased the reality of tightening defense budgets worldwide.
The weak U.S. economy and the huge federal budget deficit will make it difficult for Congress to ignore the Pentagon budget as a target of further spending cuts. That means Orange County contractors may be unable to escape a destiny of decline.
Five contractors--Hughes Aircraft Co., Rockwell International Corp., McDonnell Douglas Corp., Loral Aerospace and Interstate Electronics Inc.--accounted for about 80% of the $2.9 billion in unclassified primary Pentagon contracts awarded to Orange County firms in 1989, the last year for which figures are available. That's down 9% from 1987.
The county lost 11,309 high-tech jobs, most of them defense related, between 1987 and 1990. Last year alone, the county lost 3,289 defense jobs. Technology and aerospace jobs account for about 7% of the county's work force.
Still, today's cutbacks are taking a smaller toll on the local economy than the winding down of the Vietnam War, when the county lost 22,470 defense jobs from 1967 to 1971. The county's economy is more diversified today, softening the impact of defense cuts.
"We live and die by the budgeting process," said Daniel Green, vice president of strategic military systems at McDonnell Douglas Space Systems Co. in Huntington Beach. "This is not a business for the faint of heart."
Based on interviews with aerospace officials, industry analysts and consultants, here is a look at Orange County's major defense contractors and some of the obstacles they face and their strategies for survival in the coming decade.
Strategic Vs. Tactical Arms
John A. McLuckey, president of Rockwell's Defense Electronics group in Anaheim, says the Bush Administration's defense budget proposal for fiscal 1992 gave a clearer picture of the future of strategic-defense programs than any news that came from the Persian Gulf War.
That picture is bleak, but not hopeless.
Rockwell is a contractor on some major strategic-weapons programs, including the MX missile, the smaller Midgetman missile, several submarine-navigation programs and the "Star Wars" anti-missile system, formally known as the Strategic Defense Initiative.
In Anaheim, the company builds guidance systems for the multiple-warhead MX missile, or Peacekeeper, and it is developing the single-warhead Midgetman missile. In Seal Beach, Rockwell is developing "Star Wars" programs, such as "Brilliant Pebbles," a space-based system that would destroy enemy missiles by smashing them with a number of small, rocket-propelled projectiles.
Unfortunately for Rockwell's local units, the Pentagon's proposed budget is more generous to tactical-weapons systems, or conventional arms, than strategic weapons, or weapons used in a nuclear war. This trend is transforming a number of Orange County companies, but none are affected more than Rockwell.
Congress has not yet funded production of either the MX or Midgetman and both programs could fall victim to a U.S.-Soviet arms-control agreement, analysts say. Defense Secretary Dick Cheney has said the programs will be "kept alive" for now.
"Those programs are hanging on by a hair. . . ," said Paul J. Nisbet, defense analyst for Prudential Bache Research in New York. Congress and the Pentagon "are keeping (the programs) on a string in case we can't reach an arms-control agreement with the Soviets."
The scheduled delay of MX tests and other missile-program cuts under a recent strategic-arms treaty could mean a dramatic cutback in work done by Rockwell several years from now. Cuts in the MX program could mean the loss of 200 to 500 jobs of the 6,800 workers in Anaheim and San Bernardino, McLuckey said. If Congress continues to fund the MX and Brilliant Pebbles program, he said, employment in Anaheim should remain relatively stable.
"We're not anticipating some major layoff and that would only occur if some surprise happened," McLuckey said.
Rockwell has already sharply reduced its dependence on Pentagon work, with defense now accounting for just 25% of its $1.9 billion in revenue, down from 46% just three years ago. The Anaheim unit, which is nearly totally dependent on defense work, accounted for 25% of the $2.93 billion in contracts awarded to Orange County companies in 1989.
And McLuckey has worked to shift the Anaheim division away from strategic-weapons programs, toward tactical programs. About 60% of the division's work now involves nuclear programs. McLuckey hopes to turn that figure around within five years, with 60% of the unit's business tied to conventional arms.
Rockwell has a $600-million contract to build navigation systems for the Royal Australian Navy's submarine program, which the company hopes will give it a leg up in bidding for a similar submarine project in Canada.
Rockwell is also upgrading the electronic gear in the Air Force's F-111F bomber and bidding on a contract to upgrade the Air Force's EF-111 electronic warfare plane. The EF-111 award, expected this month, could be worth up to $500 million to the company.
Instead of buying expensive new combat aircraft, some countries are opting to upgrade their old fleets instead to save money, said Alexis Cain, research director at the Defense Budget Project, a Washington-based think tank. Rockwell estimates that the market is potentially worth $2 billion worldwide.
The avionics and submarine contracts have boosted the Anaheim unit's international sales. "That change is very much appreciated," McLuckey said. "We can think of where we might be had that not happened."
Broadening the Mix
Sometimes you can tell where a big defense company is headed by the divisions it creates. And lately, Hughes Ground Systems Group in Fullerton, Orange County's biggest defense employer with 8,900 people, has been heading away from the defense business.
Military work will continue to be its core business, but the Fullerton unit has been following the lead of its parent company, El Segundo-based Hughes Aircraft Co., by diversifying into more commercial work. Hughes Aircraft has set a goal of shifting more than 50% of its business into non-defense work by the end of the decade.
"Our group is a mirror image of Hughes Aircraft as a whole," said W. Scott Walker, group president. "Most diversification attempts are failures, but we're hoping to change the average by going to bat more often."
Instead of diversifying by buying commercial firms, Walker's approach has been to take the company's military technology--ground-based radars, for example--and apply it to technology for civilian markets, such as in air-traffic control systems.
The air-traffic business represents the Fullerton group's major diversification effort. So far, the results have been mixed. In 1988, a Hughes-led contracting team lost a major competition with a group led by International Business Machines Corp. for a multibillion-dollar contract to rebuild the U.S. air-traffic control system. But Hughes won a $325-million contract to build a system for Canada in 1989.
"Air-traffic control looks more promising for them as a kind of diversification because it's not all that different from their defense expertise," said Michael Beltramo, a defense consultant in Los Angeles.
Another commercial venture is the Fullerton group's alliance with Hewlett-Packard Co. to build highly durable computers for use in government and industrial applications. The venture could be worth more than $200 million to both companies over three years.
Hughes is also studying how it could use its air-traffic control and radar technologies to help manage traffic on Southern California's highways. For instance, Hughes could develop sophisticated sensors that pinpoint traffic hazards on freeways, Walker says.
Despite these diversification efforts, company officials concede that there will probably be a continued decline in employment in Fullerton, where jobs peaked at 13,000 in 1986.
"The sum total of these efforts is there will be a down-tick," Walker said. "But I'm not particularly discouraged. We're not going to abandon defense."
'Star Wars' Gets a Lift
Raytheon Co.'s Patriot missile wasn't developed as part of the "Star Wars" program. But, ironically, the antimissile program's star is rising because of the Patriot's stellar success at intercepting Iraqi Scud missiles in the Gulf War.
While programs such as the MX missile and the B-2 bomber are slithering on the endangered list, "Star Wars" is getting easier to justify, defense executives say.
"It has graphically demonstrated the need for a missile-defense system," says Daniel Green, vice president and general manager of McDonnell Douglas Space Systems Co.'s strategic-systems unit.
"Star Wars" still faces budget and technical hurdles. But Space Systems has won $947 million worth of SDI contracts and could be the main beneficiary in the program's revival. One reason: The company's Delta II rockets could be used to deploy a space-based defense.
Rockwell International's Defense Electronics unit in Anaheim and its Strategic Defense Center in Seal Beach, which together have won $834 million worth of "Star Wars" work, could also benefit from increased funding for SDI.
In announcing a scaled-down version of the strategic-defense shield in January, President Bush said "Star Wars" will now concentrate on a defense against accidental or unauthorized launches, rather than the vastly complicated umbrella defense against a major Soviet attack originally proposed by President Reagan in 1983. Bush is asking Congress for $4.58 billion in "Star Wars" funding next year, a 58% increase over the current year.
The refocused SDI program is called G-PALS, or Global Protection Against Limited Strikes. It would use ground-based missiles to knock down ballistic missiles at various stages of their flight. Satellites and tracking systems would help guide the interceptors to their targets, and a space-based Brilliant Pebbles defense would supplement the ground defenses.
A companion effort, known as Theater High-Altitude Area Defense, or THAAD, would provide a Patriot-type of protection against short-range missiles, such as the Scud missiles that Iraq used during the Gulf War.
The THAAD defense, which could be deployed on Navy surface ships, would be able to protect a wider territory than the Patriot missiles. Space Systems, which employs 320 people in its "Star Wars" work, is studying technology that could be used for THAAD. Company and Pentagon officials say the target date for deployment has been accelerated to the late 1990s.
"The theater defense offers the most potential and the least debate in Congress," said Baker Spring, defense analyst for the Heritage Foundation, a Washington-based think tank that has supported SDI.
The Pentagon is expected to begin awarding "Star Wars" production contracts in the next several years, determining which local companies emerge as winners and losers in what could be the biggest defense program of the 1990s.
A Growing Exodus?
Should I stay or should I go?
That question once faced young Americans who got military draft notices. Now it also applies to county defense manufacturers.
For Newport Beach-based Loral Aerospace, Orange County's third-largest defense employer with 2,600 people, the county's high cost of manufacturing is an albatross around its neck.
By 1996, Loral Corp., the New York-based defense electronics company that bought Ford Aerospace Corp. from Ford Motor Co. last year, will be paying $1-million-a-month rent for the 99-acre hilltop property where Loral's Aeronutronic defense plant is located. Loral subleases the property under an eight-year agreement with Ford Motor. Loral officials say they don't foresee a plant closing despite the high rent in the future.
"We'll stay on as long as we can and look for an appropriate solution at the end of the eight years," Loral Corp. Chairman Bernard Schwartz said in an interview last fall.
In Newport Beach, the Aeronutronic unit makes guidance systems for Sidewinder missiles, including a new version under development for the Navy. Aeronutronic also makes Chaparral missiles and electronic gear for aircraft.
Schwartz said the division is banking on getting contracts to produce electronic gear for the Navy's F/A-18 jet fighter and a new AIM-9R Sidewinder missile for the Navy. He said the rent won't be a concern if the Newport Beach division wins enough new business.
Analysts say Loral may be tempted to leave the area. The last major defense contractor to cite high business costs as a reason for leaving the county was Rockwell's Collins Defense Communications unit, which moved operations from Santa Ana to Texas and Iowa in 1988, eliminating 534 local jobs.
Northrop Corp. shut a plant in Anaheim in 1989 at a cost of about 1,600 local jobs. But the company cited a corporate consolidation, not high manufacturing costs, as the reason for the move. Employees were transferred to other company facilities in Southern California.
Defense contractors who opt to stay in the county will have to be clever to remain competitive with rivals who move to regions of the country with cheaper wages, lower living costs and less-restrictive environmental rules. Brunswick Corp.'s defense unit in Costa Mesa, for example, switched to a four-day, 40-hour work week to reduce commuting time for its employees and to comply with air-quality regulations.
"It's an overheated environment," said Walker, the Hughes group president in Fullerton. "The costs are high, but another real issue is there are more world markets developing, acquisitions occurring outside Southern California, and this is another driver. You add the two together, and you get the exodus."
Even so, Walker says Ground Systems has no plans to move.
McLuckey at Rockwell noted costs associated with traffic, housing, medical expenses, environmental restrictions, worker compensation claims and taxes make it harder to maintain a production work force in Southern California.
But he said the likelihood of the Anaheim division remaining here is strong because of its ongoing programs, strong engineering talent, good testing facilities and low-volume production capability.
Last year, Rockwell said it would move its corporate headquarters to Seal Beach from El Segundo at the beginning of 1992. The move illustrates a common belief that defense companies will keep research and development as well as corporate functions in Southern California, whether they manufacture here or not.
"Engineering talent is more important to us than low-cost production and so we like this atmosphere in Southern California," said Foster, the Interstate Electronics president. "But it wouldn't surprise me if another plant closed. Consolidation studies are going on in lots of companies now."
When a big weapons program is canceled or delayed, the ripple effect spreads throughout the county's base of small subcontractors.
For instance, when Defense Secretary Cheney canceled the Navy's A-12 attack plane program because of cost overruns, the main blows fell on its prime contractors, McDonnell Douglas and General Dynamics.
But seven Orange County subcontractors were also hurt. Parker Bertea Aerospace, which employs 3,000 people in Irvine, recently laid off about 41 workers, partly because of the program cancellation.
Typically, subcontractors receive 66% to 75% of the value of a prime contract awarded to a large defense firm, says defense consultant Beltramo.
For those smaller contractors, the coming years represent a period of increased uncertainty. Some say they are fighting a rear-guard action against further cuts in the work force.
Brunswick Corp.'s defense unit employs about 325 people, down from its heyday of 800 employees in 1970. Commercial diversification isn't much of an option for smaller contractors, such as the Brunswick subsidiary, which builds high-tech components for missiles and other military systems, said Delbert W. Parsons, the division's vice president and general manager.
Subcontractors often cannot afford to acquire commercial firms or invest in commercial research, and their work tends to be so focused on a few specialized defense programs that any commercial offshoots are coincidental, Parsons said.
"Right now, the business is more unpredictable than it was two years or five years ago," Parsons said. "I expect a slight downturn in employment, but I feel confident our business is not going to reduce that significantly."
Interstate Electronics' biggest program is making instruments and tracking systems for the Trident submarine's nuclear missiles. But that business has been winding down. Already, Interstate's share of the program has fallen from $177 million in 1986 to $30 million.
Some small subcontractors will benefit as larger contractors operate with leaner staffs and dole out more work, but others will suffer as large contractors such as Interstate, which employs 1,400 people, try to preserve jobs by doing more work internally, analysts say.
Adds Hughes executive Walker: "The cottage industry machine shops here will go down a tick with us."
A Glance at the Future
As officials in Washington and many Americans bask in the smashing battlefield successes of the allied forces in the Persian Gulf, the defense community may be tempted to utter a collective: "We told you so."
Some tout the success of the Patriot missile, the Tomahawk cruise missile and other "smart weapons" as evidence that the Pentagon's often-criticized investment in high-tech weaponry has paid off. While some analysts have used the opportunity to lash out at defense critics, others are resisting the temptation--at least publicly.
But many executives are delighted by the recent absence of contractor-bashing in Washington.
"It's certainly pleasant not hearing about $600 toilet seats," said Brunswick's Parsons.
The image of waste and fraud has given way to something akin to high-tech worship among the American public. The Gulf War may have reduced somewhat Congress' temptation to slash Pentagon budgets even more in the future, defense executives say.
"I think the industry got a bad rap," Rockwell's McLuckey said. "But there isn't any euphoria about whether there will be a major reversal of the trends we've seen, which is a decline in the defense budgets."
But the industry's improved image may be a hollow victory. Jobs are still going to be lost. Chapman College economist James Doti estimates that the county will have up to 10,000 fewer defense workers by 1996.
Industry executives, such as Interstate's Foster, are troubled by the trend. "If my son were coming out of engineering school," he said, "I'd tell him not to go into defense."
DEFENSES FOR A LEANER BUDGET
Contractors in Orange County are looking to a revitalized Strategic Defense Initiative program as a bulwark against the tighter budgets of the future. The success of antimissile defenses in the Persian Gulf War has given new currency to the idea of a ground-based system designed to protect against limited missile strikes. Here is the plan for one arm of SDI, developed by McDonnell Douglas Space Systems in Huntington Beach:
1. Satellite-based sensors detect the initial launch of hostile missiles and alert forces on the ground.
2. A swarm of rocket-launched infrared sensors identify and track incoming intercontinental or submarine-launched missiles.
3. The sensors forward tracking data to a ground-based computer for processing.
4. Targets are established and assigned to non-nuclear interceptor missiles that home in on warheads and destroy them as they re-enter the atmosphere.
Source: McDonnell Douglas
Total Value of Major O.C. Contracts
(in millions of dollars) Research and development, testing and evaluation: $769.7 Production: $1,823.1 Service: $335.9
O.C.'s Largest Program Awards in '89
Program Contractors MK48 Torpedo Hughes Ground Systems $383.4 million MX missile Rockwell $343.0 million Star Wars Rockwell, McDonnell $162.7 million Douglas, TRW, Sparta Trident missile Mission Research Corp., $76.6 million Rockwell, Interstate Sidewinder missile Loral Aeronutronics $27.5 million
Source: State Department of Finance
ORANGE COUNTY'S TOP 10 Defense contractors listed by 1989 prime contract awards. Awards in millions of dollars.
General Motors Corp. $764.5
Hughes Aircraft Corp.
+ High-tech electronic components; Firefinder defense systems; radar, sonar and battelfield communications systems.
OC-based employees, 1991: 8,904
Rockwell International Corp. $735.4
Satellite & Space Electronics Division
+ Navstar global positioning system *
Autonetics Electronics Systems
+ Sophisticated components and systems for military navigation and communication; guidance systems for strategic nuclear missiles; Hellfire, antitank missile.
Location: Anaheim, Seal Beach
OC-based employees, 1991: 7,200
McDonnell Douglas Corp. $649.4
Space Systems Division
+ Space stations; Delta launch vehicles; mission planning and payload integration services for the space shuttle; SDI.
Location: Huntington Beach
OC-based employees, 1991: 6,875
Ford Motor Co. $106.5
Ford Aerospace Corp.
+ Guided missiles and systems; space and missile propulsion units; military satellites; tactical weapons and military command, control and communications systems.
Location: Newport Beach
OC-based employees, 1991: 2,700 **
Figgie International Inc. $ 94.7
Interstate Electronics Corp.
+ Range testing for Trident missiles; global positioning equipment used for dtertmining position, location, velocity; flat-panel and other high-tech display screens; communications technology for satellite ground station.
OC-based employees, 1991: 1,400
Parker Hannifin Corp. $53.6
Parker Bertea Aerospace Group
+ Flight-control systems components; fuel pressurization, temperature and vent systems; in-flight refueling receptacles and nozzles; hydraulic control modules and nose-wheel steering systems; aircraft fire-suppression systems and missile propulsion control valves.
OC-based employees, 1991: 3,000
Northrop Corp. $43.2
Aircraft Division, Anaheim facility
+ Airframe sub-assembly and fuselage components
OC-based employees, 1991: 0 ***
Brunswick Corp. $35.4
+ TALD (tactical air-launched decoy); fire-detection and -suppression units for space vehicles; filters and fuel-management systems for aircraft and space vehicles.
Location: Costa Mesa
OC-based employees, 1991: 325
All-Bann Enterprises Inc. $24.4
+ Fuel- and water-pumping equipment.
OC-based employees, 1991: N.A.
Cartright Electronics Inc. $17.4
+ Electronic scoring systems for testing the accuracy of missiles or projectiles and other electronic warfare systems.
OC-based employees, 1991: 140
* Division consolidated in 1991.
** bought by Loral Corp. in 1990 and renamed Loral Aerospace *** plant closed in 1989
Source: State Department of Finance
Researched by ELENA BRUNET / Los Angeles Times
JOB LOSSES ADD UP
Here is a listing of job reductions and layoffs at Orange County aerospace and defense contractors since January, 1990.
Date Jobs Company/Division Announced Lost Reason Rockwell Defense Electronics Feb., 1991 50 Unspecified program termination Rockwell Satellite & Space Feb., 1991 100 Consolidation of Seal Beach unit Interstate Electronics Jan., 1991 50 Trident program winding down McDonnell Douglas Space Jan., 1991 200 Consolidation, Systems lower rocket demand Parker Bertea Aerospace Jan., 1991 41 A-12 canceled, commercial downturn Tracor Flight Systems Inc. Dec., 1990 60 Unit moving to Texas, defense cuts Parker Bertea Aerospace Dec., 1990 ** 361 Defense downturn, attrition Helionetics Nov., 1990 25 Xcell unit suspended; streamlining Interstate Electronics Oct., 1990 6 Trident program winding down Interstate Electronics June, 1990 47 Trident program winding down Pilkington Optronics May, 1990 20 Unit shut down; program cuts Northrop Corp. May, 1990 1,600 Plant closed; jobs transferred ITT Cannon April, 1990 80 Streamlining, defense downturn Orbit Instruments March, 1990 40 Shut defense plant in Cypress Interstate Electronics Feb., 1990 64 Trident program winding down Hughes Ground Systems 236 Attrition Group continued during 1990 Rockwell Defense * 750 Net change Electronics during year
* Net loss of jobs in Anaheim/San Bernardino as a result of 500 hires, 290 layoffs, 850 retirements, 110 other attrition during 1990. ** Layoffs and attrition during 1990 Source: Companies listed.