From Swords to Plowshares : Lockheed Says Non-Defense Sector Will Drive Its Growth

Four months ago, Lockheed Corp. acquired General Dynamics Corp.’s military aircraft operations for $1.5 billion and became the biggest maker of fighter planes.

At a time of shrinking military budgets, the move reaffirmed Lockheed’s commitment to defense markets. For many analysts, it was also a signal that the company best known for developing Stealth planes, missiles and spacecraft might begin backing away from the non-defense businesses it has pursued in recent years.

But even though Lockheed remains, above all, a defense and aerospace concern, said Lockheed Chairman and Chief Executive Daniel M. Tellep, “the growth in Lockheed’s forecast will come from our non-defense sector.”

Lockheed already has a hand in everything from managing airports and collecting highway tolls to setting up satellite telescopes. Its non-defense operations are growing faster than its conventional defense business and accounted for 25% of Lockheed’s $10 billion in total sales in 1992, up from 16% in 1988. That growth is coming just in time: Tellep predicts that in five years, U.S. defense dollars will account for just 55% of Lockheed’s total revenue, down from 66% today and 80% five years ago.

Tellep believes the company’s non-defense operations will make up for much of that decline in defense-related work.

He calls Lockheed’s strategy “near-step diversification.” That means he wants to avoid past diversification missteps, such as shipbuilding and tunnels, and instead focus on markets where existing skills and technologies can be applied.

“We’re not going to move Lockheed into making patio furniture or canoes,” Tellep said.

Still, some analysts are skeptical. They note Lockheed’s recent stumbles in areas such as environmental services and computer graphics. Two weeks ago, Lockheed all but shut down its ailing commercial aircraft maintenance operation at Norton Air Force Base after it had invested $30 million in the venture. It plans to lay off 400 of the 450 workers there because of the slump in the airline industry.

Moreover, Lockheed’s bid to develop a high-tech train for Los Angeles County with Morrison-Knudsen Corp. and Hughes Aircraft was dealt a setback earlier this month when transit officials recommended awarding the contract to Germany’s Siemens.

Even Lockheed’s more successful non-military businesses--such as information services, airport management and commercial satellites--are viewed by many analysts as unlikely ever to be big relatives to its core defense business.

Some critics of the much-touted strategy of defense industry conversion to commercial markets--an idea backed by President Clinton--see Lockheed’s experience as evidence that the goal is mostly illusory. Analyst George J. Podrasky at investment firm Duff & Phelps said he believes Lockheed’s non-defense businesses “are all under review and may be in the process of being de-emphasized.”

Nonetheless, some observers say Lockheed’s strategy could work. “They’re inching out,” said Robert Paulson, director of the aerospace practice at consulting firm McKinsey & Co. in Los Angeles. “The devil in diversification is uncertainty. The farther you get away from products and customers you understand, the more likely you’ll fail.”

Instead, Tellep has high hopes for Lockheed Information Management Services Co. in Teaneck, N.J., which contracts with local governments to process parking tickets, child support payments and toll road collections.

That is not exactly high-tech stuff, but Lockheed believes its IMS unit can use some of its aerospace wizardry to solve more mundane problems, such as traffic congestion. For some new toll roads under construction in Orange County, for instance, Lockheed IMS is providing technology that will allow commuters to whiz through toll booths at top speed. Drivers will pay their tolls in advance and be given cards to insert on their dashboards. Lockheed sensors in the toll booth will pick up signals from the transponders and track the charges.

Analysts estimate that the IMS unit now produces less than 1% of Lockheed’s revenue, and it faces stiff competition from heavyweights such as General Motors Corp.’s Electronic Data Systems. But Tellep said he expects IMS revenue to exceed $200 million next year, or “high double-digit growth” over 1993.

Tellep also sees a bright future for Lockheed Air Terminal Inc., a Burbank company that manages Burbank Airport and five other U.S. airports and provides refueling services at facilities around the world. It also manages the Pearson International Airport terminal in Toronto. Lockheed and its partner have a 40-year lease on the Pearson terminal, which was completed in 1991 at a cost of $550 million.

Tellep said Lockheed Air Terminal is well positioned to benefit from a worldwide trend toward privatizing airports. If Los Angeles Mayor Richard Riordan’s proposal that LAX be leased to private interests is accepted, he said, Lockheed might be one of the bidders.

Even at Lockheed’s vaunted Palo Alto Research Laboratories, the research and development arm of the huge missiles and space systems group, eyes are now on new applications for its technologies.

The missiles and space division has seen its revenue shrink to $4.6 billion in 1992 from $5.1 billion in 1989 because of cuts in military and spacecraft budgets. But Lockheed thinks it can expand the division by chasing the commercial satellite market, even against tough competitors such as Hughes Aircraft and General Electric.

The company that built satellites used to spy on the former Soviet Union has teamed up with a Russian aerospace firm to market commercial satellite launching vehicles. A Lockheed telescope aboard a Japanese satellite has been used to study the sun.

And, in another project loaded with both risk and great potential, Lockheed has subcontracted with Motorola Inc. to build a global portable telephone network. The network, called Iridium, would provide direct communications to anywhere in the world. It would use 77 satellites and cost more than $3 billion to deploy.

Scientists at the Palo Alto labs are also finding new uses for technology developed for weapons and spacecraft--such as artificial computer intelligence originally designed for projects such as the Space Shuttle. This technology, which enables computers to scan and sort information, could be used by banks, for instance, to detect money laundering. Another service Lockheed plans to begin marketing to businesses involves updating archaic software codes on old computers.

“We would like to think that maybe as much as 20% or more of our business could be commercial by the turn of the century,” said Ernest Littauer, the Palo Alto lab’s assistant general manager.