Rule Changes Behind Sale of Missile Unit : Defense: A sweeping shift in Pentagon bidding procedures led General Dynamics to conclude it wouldn’t be able to compete soon. As a result, thousands in San Diego may lose their jobs.

Some of the reasons for General Dynamics’ decision to sell its missile operations to Hughes Aircraft are obvious.

But beyond the shrinking defense budget and the resulting tougher competition for contracts are sweeping changes in bidding procedures that would have frozen out the San Diego operation.

Those changes relate to the expected competition between General Dynamics and rival McDonnell Douglas to become sole supplier of the Tomahawk cruise missile, a competition that the San Diego operation does not believe that it can win.

The proposed sale for $450 million of General Dynamics’ Convair missile unit to Hughes, announced earlier this month, put 4,500 Convair jobs in limbo. The employees are awaiting word on whether Hughes will keep the missile operation here or move it elsewhere in a consolidation.

But several sources familiar with Hughes’ preliminary plans said it is likely that most, if not all, of the Convair missile jobs will be moved to Tucson, where costs are lower.

“My degree of confidence that those jobs are going to Tucson is 99%,” said Jack Modzelewski, an aerospace analyst at the PaineWebber investment firm in New York, who said he has discussed the sale with executives of both companies. “That’s the game plan. The bid only works on that basis.”

General Dynamics decided to sell its missiles operation to Hughes because it can no longer compete profitably in a business that is rapidly adjusting to the end of the Cold War and to the decline in arms sales, sources said.

The proposed combination of the two missile units is an example of the consolidations that will occur as defense contractors pool their resources to cut overhead. There are now too many firms trying to carve out a piece of a shrinking defense budget pie, said Paul Taibl, an analyst with Defense Budget Project, a Washington-based nonprofit research group.

“You’re going to see consolidations or teaming arrangements throughout the industry,” Taibl said. “The interesting thing in all this is, the industry is taking it upon itself to undertake the reorganization absent any government direction. It’s based on their economic self-interest, not any Department of Defense-led policy.”

The companies involved see the handwriting on the wall. Missile procurement, for example, has fallen 24% in two years, a steeper decline than overall military procurement, Taibl said. And that decline would accelerate greatly under President Bush’s proposal to cut missile procurement to just $4.5 billion in 1993, down from $5.9 billion this year, Taibl said.

Procurements of the Tomahawk cruise missile, the Navy version of the weapon made by 2,000 General Dynamics Convair workers in San Diego, are already in decline.

Total missiles to be purchased from Convair and its co-supplier, McDonnell Douglas, will drop to 176 in 1992 from an annual average of nearly 400 from 1986 to 1991. The Bush Administration has requested that Tomahawk cruise orders increase to 200 in 1993, and 282 in 1994 and 1995. The program’s future is uncertain after 1995.

The Air Force’s cruise missile program, which employs 2,500 Convair workers in San Diego, will be terminated in August, 1993, along with those jobs.

Meanwhile, Hughes is facing the end of its Maverick and Phoenix missile programs, and its massive Tucson facility will be half vacant by the end of 1992. Hughes officials have said that a primary purpose of the acquisition of Convair missiles is to consolidate unused plant space.

By pooling their operations, the new Hughes-Convair unit will have sales of about $2.7 billion and be in a better position to compete against industry leader Raytheon, which, with about $3 billion in annual missile sales, controls nearly half the market, PaineWebber’s Modzelewski said.

“You can’t compete with the Raytheon gorilla. They rule the jungle. They are critical mass,” Modzelewski said of the manufacturer of the Patriot and Hawk missiles.

General Dynamics had other worries that persuaded it to sell.

General Dynamics and McDonnell Douglas are now guaranteed pieces of the annual procurement of Tomahawks, with the lower bidder getting the lion’s share. But both companies expect the Navy to turn to a single source in the next year or two, with the lower bidder taking all.

In an interview last week, Michael C. Keel, vice president of General Dynamics’ missiles and electronics division, was not optimistic that his company could win such a competition.

“It is very unlikely that we could allow the Tomahawk to remain in place as a stand-alone program and be competitive” with McDonnell Douglas, Keel said in explaining the rationale for a sale of Convair’s missiles unit. There is a “reasonable likelihood,” Keel conceded, that Convair operations will be moved to another General Dynamics or Hughes facility outside San Diego if the Hughes deal goes through.

Looking at the totals of employees and factory space that the rival missile makers devote to cruise missile production, it seems obvious that McDonnell Douglas enjoys significantly lower costs.

Whereas General Dynamics’ Convair has 4,500 employees working in 1.2 million square feet of plant space in San Diego, McDonnell Douglas says it has only 1,650 employees working in 950,000 square feet of space in Titusville, Fla., and St. Louis.

A general shift from dual to single sourcing is under way in the defense industry, said Cai von Rumohr, managing director of the Boston investment firm Cowen & Co. The Stinger surface-to-air missile used to be made by General Dynamics and Raytheon but is now made solely by General Dynamics. The Navy’s standard surface-to-air missile that is now made by both General Dynamics and Raytheon could become a single-source job soon, von Rumohr said.

All of which would not lessen the irony if the proposed General Dynamics-Hughes unit loses the Tomahawk contract. Convair developed the weapon in the late 1970s, but was later forced to share the technology with McDonnell Douglas when the Pentagon mandated that there be two suppliers.