An Uphill Climb : Industry: Bill Kousens and his deluxe stair-stepper typify a strategy for success by defense-related companies that are trying to make the switch to commercial.
Bill Kousens was smart enough to see it coming three years ago. His Aerowind company in Santee was a manufacturer of nose cones and other machined metal parts for the Tomahawk and advanced cruise missiles, and business had boomed during the 1980s, thanks to the Reagan Administration’s arms buildup. Aerowind’s role as subcontractor to General Dynamics Convair missiles division accounted for 90% of its sales in 1989.
But Kousens saw the signs that the Cold War was ending. A “peace dividend” was on the way, he realized, and companies such as Aerowind and its 120 employees could end up footing the bill in the form of lost business and jobs.
So Aerowind--and many other San Diego companies in the same situation--began trying to commercialize, to wean itself from a dependency on defense business by developing products it could sell on the open market.
Today, after investing $1 million and three years, Kousens has such a product: a luxury stair-stepping exercise machine called NextStep that is made in the Aerowind plant off California 67, with much the same machinery its workers use to make missile warhead parts.
In light of continuing layoffs and expected further losses of military-related money, San Diego city officials have begun a program to help defense contractors do exactly what Kousens has done on his own: find other avenues of business that will keep jobs in the area.
But Kousens’ problems on the road from aerospace to aerobics exemplify the difficulties ahead for contractors large and small, both in San Diego County and throughout defense-dependent Southern California as pressure builds to convert to peacetime pursuits.
It’s more than finding a new product for a new era, Kousens and others are discovering. Conversion also means a change in the entire way business is conducted. Instead of competing for contracts that define what products to make, commercial businesses must develop their own product ideas, invest the time and money to make them real and find the market to purchase the fruit of their labor.
“It’s very, very difficult to take a company that’s spent its full history meeting demands of the Department of Defense and move into a commercial environment,” said Monson H. Hayes, president of Maxwell Laboratories, another San Diego company trying to lessen its dependency on defense contracts.
“It’s hard to get the products, to identify the market and then aggressively sell them,” Hayes said. “The difference is, corporate culture is one issue, but so is the lack of marketing people identifying markets where your technical expertise is applicable.”
Even three years after Kousens made his first move toward conversion, his deluxe stair-stepper, which sells for $1,500 to $3,600--the top model includes a built-in television and VCR--has yet to turn a profit. After previously dueling only with U.S. rivals in the missile business, Aerowind now must adjust to the commercial marketplace, where it competes with low-cost international factories.
Moreover, Aerowind is trying to adapt to the shift in corporate culture that occurs when employees go from producing low volumes of highly complex products such as nose cones to mass quantities of fairly simple parts that go into the stair-stepper. The processes require different kinds of workers and different approaches in management.
Still, Kousens says, the conversion to commercial products was his only hope of staying in business in light of declining defense dollars, a decline that is occurring much faster than he expected. And, although the new stair-stepper may not save the jobs of all 120 Aerowind workers, it has given the company a fighting chance to ride out what could develop as a severe shakeout of defense-based industry in San Diego.
Whereas Aerowind could compete on defense contracts because of special technology and skills of its work force that are rare anywhere else in the United States, his company is competing in the commercial arena on an international scale, against companies that operate in locales where labor, workers compensation insurance and taxes are fractions of what Kousens pays in Santee.
All of which means that San Diego might lose many of those jobs, even if the stair machine succeeds; Kousens said he may end up setting up a plant in Mexico, where labor is cheaper.
Kousens’ struggle exemplifies the shift many other San Diego companies are attempting, from giant shipbuilder National Steel & Shipbuilding Co. to mid-size electronics maker Maxwell Laboratories to tiny El Cajon-based tool distributor Tools & Metals. The questions that remain in Aerowind’s bid to succeed illustrate the risks involved.
The urgency many companies now feel to make the switch is growing. Last month, General Dynamics, a company that has rejected the idea of conversion, announced that it will sell its Convair missiles operation to Hughes Aircraft, a deal that could affect 600 San Diego-area companies, including Aerowind, that sell products and services to Convair. Many, if not all, of those San Diego suppliers could lose that business if Hughes moves the missiles operation to Arizona, as is rumored that it will.
Funded with $155,000 in grants earlier this year, the city of San Diego’s Economic Conversion Council will begin is first phase of work interviewing 50 local defense contractors to determine the impact of the budget cuts. The survey will also poll companies on what specific things the city can do to help them develop commercial products and services.
The survey “will send a message to these companies that we are interested in keeping them in San Diego, a strong message that they are important to us,” said Kurt Chilcott, director of the city’s Economic Development Department.
Dan Pegg, president of the San Diego Economic Development Corp., said that, once the survey is completed, his quasi-public agency will work with the city to develop a program to advise defense contractors on how to funnel their resources from defense work to commercial projects.
“The process really works best when a company like Aerowind says this is what they want to do, and they put their mind and resources to it,” Pegg said. “That’s where conversion begins, when management starts out looking for other strategic opportunities that fit in with the resources that they are already using for the military effort.
“Until that happens and there is a real commitment at that level, all the help in the world won’t accomplish much. These Aerowind guys should be proud of themselves doing it alone and staying one step ahead of the curve,” Pegg said.
Maxwell Laboratories once was nearly 100% dependent on military contracts, but it began accelerating conversion efforts once it saw that defense budgets would inevitably be slashed. Maxwell has reduced its dependency on defense contracts to 65% of total revenues this year from 93% five years ago, said Hayes, the president.
The company, whose technology revolves around pulsed electronic power used in lasers and capacitors, sees its main commercial opportunity in a new subsidiary called Foodco, which is developing a process that uses pulsed electric fields or pulsed light to sterilize food packaging, Hayes said.
Three large food companies are helping Maxwell finance the Foodco effort, he said, which could begin commercial operations this year.
“With the Berlin Wall coming down, the breakup of the Soviet Union and the dramatic decline in defense funding, it’s forcing us to work even more aggressively than we were before to convert to commercial lines,” Hayes said.
The possible departure of the Convair missile business, not to mention the 4,500 jobs that are now in jeopardy, only confirms for Kousens that he made the right decision to gamble on the new exercise product.
“We realized that, if we wanted to control our own destiny, we’d have to develop our own product line,” he said. “It was just a question of finding one in a growing field and designing something we could make with our existing equipment.”
The problem is, defense business has dropped much faster than Kousens thought it would. His revenues have dropped from a peak of $9.3 million in 1990 to $7 million last year because of reduced contracts for missile parts. That’s a double whammy for Aerowind because it increases the pressure to get new commercial products to market while leaving fewer dollars to spend on product research.
In January, Kousens got another shock when he heard President Bush announce to a nationwide television audience that he was terminating the advanced cruise missile program after August, 1993. At the time, Aerowind was banking on a longer life for the contract and was installing a $1.5-million piece of machining equipment that it had bought specifically to make advanced missile parts.
