COLUMN ONE : Cold War Holds a Fire Sale : 1The aerospace industry, built up so quickly during the 1980s heyday, is being dismembered and sold for scrap. The full brunt will not be felt for years, experts say.
The lathes, grinders and drill presses at Norman Modglin’s small aerospace machine shop in North Hollywood are silent now, awaiting the pounding today of the auctioneer’s gavel that will liquidate a business handed down through three generations in his family.
Such scenes, the inevitable consequence of the Cold War’s demise, are being repeated across Southern California and the nation’s other aerospace centers every week. On Wednesday, Eaton Corp. will auction the electronic equipment from its AIL unit in Westlake Village, an operation that once employed 1,200.
To a debt-ridden nation, these are the heralds of the peace dividend. But the defense rollback is tearing apart the body of the aerospace fraternity: The productive capacity built up so quickly during the industry’s 1980s heyday is being dismembered and sold for scrap.
The will to manufacture something out of metal--the smell of cutting oil and the din of tools--is blood-deep in small shops like M & N Machine Co. And it was not just any old chunk of metal that Modglin cut. His aluminum pieces belonged to the fastest and highest-flying aircraft anybody in the world could make, the photos of which were proudly displayed on the lime-green walls in his front office.
Without political clout or public visibility, small and medium-size defense subcontractors and their thousands of workers are struggling as never before. “I feel really badly for my machinists. I have known them since I was a kid,” Modglin said. “They were the best machinists anywhere. I never thought this would happen.”
Fire sales of surplus equipment are happening not only at the hundreds of mom-and-pop machine shops such as Modglin’s, but at many prime contractors as well.
General Dynamics, the nation’s second-largest contractor, has held three major auctions to get rid of its surplus equipment, including high technology composite plastic manufacturing equipment left over from the canceled Navy A-12 attack jet program.
In Eaton’s case, the firm found its electronic manufacturing equipment was not even worth hauling from Westlake Village to its New York headquarters, said AIL President Jim M. Smith. The Westlake Village operation once made the electronic countermeasure system for the B-1 bomber, but the Air Force canceled that contract and the firm could not find other work, Smith said.
Indeed, U.S. manufacturing--the aerospace industry along with it--is going through the greatest consolidation and redistribution of industrial equipment in its history, says Richard Rubenstein, a vice president at Ross-Dove Co., one of the nation’s largest auctioneers of high- technology industrial equipment.
“Everybody is trying to get more efficient,” said Rubenstein, whose firm is General Dynamics’ auctioneer.
There is a long way to go, however. Though an estimated 60,000 California aerospace workers are already out of jobs and many companies are out of business, the contraction in the industry is just gathering steam; the full brunt will not be felt for years, experts say.
“The defense industry has too much capacity,” said James Blackwell, an expert on the Pentagon’s industrial base at the Center for Strategic and International Studies in Washington. “We really don’t know where the bottom is in the defense side of aerospace. Once a company leaves the defense industry, it is not going to come back.” Indeed, certain critical manufacturing capabilities may be lost permanently, Blackwell said.
A study two years ago by Blackwell found that 80,000 of the Pentagon’s 140,000 suppliers had already left the industry. Many of the operations left defense to work in the commercial world, but many others folded up. To hasten the shakeout, General Dynamics Chairman William Anders last week called on defense firms to get out of businesses in which they could not be leaders.
The defense acquisition budget peaked in 1985, before tumbling an inflation-adjusted 50% to $63.4 billion in the current fiscal year. Moreover, the full effect has not been felt because there is a lag of several years between budget actions and the spending effect.
Gen. Merrill McPeak, Air Force chief of staff, said in a recent interview that he expects the budget to fall another 20% to 25% during this decade--and that the bulk of those cuts will fall on procurement, rather than paying for military salaries or operating bases.
“It isn’t clear to me that it couldn’t go much deeper than that,” McPeak added.
From their gritty shops in such industrial enclaves as Gardena, Santa Ana, Van Nuys and Long Beach, the operators of tiny defense subcontracting firms already are facing a tough choice--lose money or liquidate.
At his peak, Modglin had 15 machinists working for him, generating revenues of $900,000 annually. But Modglin was hit with a double whammy. Not only was defense spending going down, but his biggest customer, Lockheed, announced last year that it would move its Burbank factory to Georgia. The Lockheed Advanced Development Projects Co., better known as the Skunk Works, is remaining here, but Modglin said that operation has not issued any requests for bids in months.
The business was started by Modglin’s grandfather, William Otto Modglin, a machinist who learned his trade in the boiler room of a Navy ship during World War I. He began by producing oil field equipment in 1945 and later moved the operation to North Hollywood. Modglin’s father, Walter, a UCLA business graduate, took over the business in 1957.
On the office walls are numerous letters of commendation to the company for the quality of its work. During the Persian Gulf War, the shop had one last hurrah, working around the clock to produce parts for the Lockheed S-3 Viking anti-submarine patrol aircraft.
The shop is full of old equipment--at least a full generation or two behind the new computer-controlled machines that many modern machine shops have. In fact, Modglin said he decided to forgo updating his equipment, rather than risk greater financial difficulties.
“I think I did better in the last 10 years without the computer-controlled machines,” he said. “My costs were lower. Many of the guys who bought the new machines are in even worse shape than I am.”
The defense downturn is so profound that even the most efficient firms have difficulty finding adequate work. Gordon Adams, director of the Defense Budget Project in Washington, noted that the Air Force and Navy plan to buy fewer than 300 aircraft per year through 1995.
“At that pace, we have severe excess capacity,” Adams said. “There is no way to maintain these small shops. We are going to lose them and not in a nice way.”
One signal of how much excess capacity exists is in the prices that surplus machinery can fetch. And auctioneers say that the equipment, right now, is selling for a tiny fraction of the value placed on it by corporate accountants. In some cases, $800,000 machines are being auctioned for $50,000, said Bruce Baird, regional vice president at Ross-Dove. A small but growing percentage of machinery is being shipped abroad, particularly to some Asian countries.
“What is used equipment in this country is state of the art in 90% of the world,” Baird said. He foresees a growing auction business in aerospace.
The aerospace industry has been pressing the Defense Department to pay some attention to the erosion of the defense industrial base, but the Pentagon does not want to even broach the subject of an industrial management policy, said LeRoy J. Haugh, vice president at Aerospace Industries Assn.
Members of Congress, though, are paying greater attention to the issue, he said--conducting studies and holding hearings on how much and what type of industrial capacity needs to be preserved for national security.
“There needs to be some serious thinking about the industrial base, because what is happening will have a lasting impact,” Haugh said.
Indeed, if the Pentagon ever has to quickly establish new machine-shop capacity, it will have to turn to foreign suppliers, who now provide more than half of the nation’s tools. “That’s assuming that people will want to sell them to us,” Adams said.
Already, the Pentagon, seemingly more concerned with saving money than the long-term viability of the domestic industry, is relying more on lower-cost foreign contractors, even as U.S. firms keep folding up for lack of business.
General Dynamics will hold three more auctions at its divisions in San Diego, Pomona and Fort Worth, Tex. Besides the machinery from the canceled Navy A-12 attack jet, the three auctions already held have sold off printed circuit-board manufacturing equipment and surplus parts from the space shuttle program.
“To us, they were just big chunks of scrap,” said Rubenstein, the Ross-Dove vice president.
Almost every major defense contractor is doing something to cut capacity. Northrop is shutting down two major facilities, one in Anaheim and another in Newbury Park. The firm has donated substantial office equipment to school districts--which, like the U.S. defense industry, are in sorry financial shape. Zoe E. Vanek, principal of Rowland Avenue School in West Covina, wrote the company that the used equipment was a “windfall beyond our imagination.”
Hughes Aircraft is conducting an evaluation of its capacity as well. Many insiders expect the company to shut down or vacate substantial operations in the El Segundo area by early next year. The firm has already shifted one small operation from El Segundo to its Fullerton plant. And it has huge excess production capacity at its Tucson missile factory.
Many large prime contractors, such as Rockwell International, have facilities they would like to sell. Rockwell Chairman Donald Beall said in a recent interview that the company would entertain bids for its El Segundo aircraft manufacturing site.
But the firm is not bothering to invest any effort in trying to sell it.
As auction-house workers tagged his equipment in preparation for today’s sale, an emotional Wallace Modglin said he doubted that he would be able to watch the bidding.
“It has been a good ride,” he said with resignation. “You can’t do anything about what has happened.”
