As Defense Cuts Deepen, Southern California’s Aerospace Industry Is : Down but Not Out


Few industries have meant as much to California in the past half-century as aerospace and defense, and in recent years few have taken such a severe beating.

Due largely to a decline in Pentagon spending, the state’s aerospace sector has been shriveling at a rapid rate. More than a third of aerospace-related jobs have been wiped out since 1986, and thousands more layoffs are coming.

Barring an unforeseen rearming of America, California’s aerospace sector almost certainly will never regain its former size or stature. Yet it remains a major economic force in California. With more than 300,000 jobs, it is the state’s biggest manufacturing employer--at least for now.


What has happened to California’s aerospace industry is reminiscent of what America’s steel industry went through in the 1970s and 1980s. Once a symbol of American industrial might, the steel industry employed nearly 550,000 people in 1975. Today, it employs about 237,000.

The forces rearranging California’s aerospace industry are still at work, and what worries many experts now is that most of the manufacturing jobs could disappear even if California remains the center of aerospace design and engineering.

Pentagon spending, the lifeblood of the industry, in 1985 began a decline that is expected to continue, at least into the late 1990s. That means no new big aircraft projects--the type that employs thousands of assembly-line workers--will be awarded, analysts say.

Even when this drought ends, it is questionable whether a major new military airplane will be built in California.

As defense budgets have dropped, contractors have consolidated and looked for the cheapest, most efficient places to manufacture. California struggles because of its reputation as a high-cost, bureaucratic place in which to do business, analysts say, though the Legislature recently took steps to correct some of the problems.

“When you talk about when the next-generation aircraft comes along and where it’s built, if we haven’t gotten our act together in California by then, it may be won by a California company but it may not be assembled in California,” said John R. Harbison, aerospace director for the consulting firm Booz Allen & Hamilton.


Case in point: Lockheed Corp. The Calabasas-based company’s designers remain at its famous, top-secret “Skunk Works” in Palmdale but aircraft assembly is done mainly in Georgia--having been moved from Burbank in recent years--and in Texas. (Lockheed still builds missiles in Sunnyvale, Calif.)

Lockheed’s strategy “certainly could be the model, because that’s the way it’s been going for the last few years,” said Kent Kresa, chairman of Los Angeles-based Northrop Corp., which builds 40% of the Navy’s F/A-18 fighter jet in El Segundo.

Further moves like Lockheed’s would be a big setback for the state, Kresa said.

The aerospace industry long was “a tremendous boon to upward mobility” for Californians, particularly minorities and immigrants, he said. Aerospace jobs provided “an entry level into an industry” that enabled those workers to reach “the middle-income and upper-middle-income (ranks) through their own skills,” Kresa said.

Doubts about manufacturing in California also could sink budding “defense conversion” projects, in which firms are trying to translate military technology into commercial uses, said Malcolm R. Currie, who led Hughes Aircraft Co. through a major diversification effort while he was the company’s chairman from 1988 to 1992.

Those ventures are doing their research in California, but whether they manufacture their goods in the state will depend on “the ability and willingness of California to turn around the business climate,” Currie said.

Add it all up, and aerospace “will be less important in job growth over the next decade or two than it has been,” said Cynthia Kroll, an analyst with the Center for Real Estate and Urban Economics at UC Berkeley.


Less important, but hardly irrelevant.

Even under the worst of scenarios, “the aerospace industry will continue to be an important factor in California’s economy, supporting over 700,000 direct and indirect jobs,” the consulting firm McKinsey & Co. predicted in a report to the Los Angeles Chamber of Commerce last fall.

What kind of jobs will they be?

Analysts say California won’t have trouble maintaining its role as the premier source of U.S. aerospace research, engineering and design--although many scientists and engineers have been among the thousands already laid off.

“When it comes to research-and-development activity, we have no competitor,” said Michael D. Rich, senior vice president at Rand Corp., the Santa Monica-based think tank.

The wellspring of engineering talent provided by the region’s colleges, and the host of military training sites scattered around the state, also support that prediction.

Limited, specialized aerospace manufacturing--communications satellites at Hughes and TRW Inc., for instance, or avionic equipment at AlliedSignal--also will continue to be strong in the state.

Those segments will make up the “core” aerospace and defense industry that will remain in California, but they won’t grow large enough to again provide California with the several hundred thousand aerospace manufacturing jobs it enjoyed in the 1980s.


Today, there are only three large aircraft assembly lines in the state: The F/A-18 in El Segundo, the B-2 built by Northrop in Pico Rivera and Palmdale, and the C-17 cargo jet that McDonnell Douglas Corp. makes in Long Beach. That’s still about half the military aircraft programs nationwide, but it’s “a lot less than there used to be,” Kresa noted.

The F/A-18 program still enjoys strong support. But production of the 20 B-2s on order likely will be done by the decade’s end--Northrop has already announced plans to shutter the Pico Rivera plant, which employs 7,600 people, around 1997. The Pentagon has yet to say how many C-17s it wants, and there’s still a chance the program could be canceled because of cost overruns and mechanical problems.

Beyond those planes, “I just don’t think there’s going to be any large production projects going anywhere” in the nation for the next few years because of reduced Pentagon needs, said Booz Allen’s Harbison.

Indeed, future cuts in the Defense Department budget, along with the recently announced closures of several military bases in the state, will lead to the loss of a further 125,000 California jobs over the next four years, the California Commission on State Finance has predicted.

Those losses would be added to the 330,000 aerospace-related jobs that McKinsey estimates have already vanished statewide since 1986.

Even at reduced levels, however, the aerospace industry still wields formidable clout in terms of the people it employs, the taxes it pays and the thousands of other businesses it supports.


Robert Paulson, McKinsey’s aerospace director, said: “Clearly, the industry will be smaller because the defense budget will be smaller, but I have no reason to believe California will lose its preeminence as the best aerospace center on the planet.”


* Aerospace and defense still directly employs more than 300,000 Californians, or about 13% of the state’s manufacturing jobs, according to the state Employment Development Dept. The ratio climbs to 20% or higher in Los Angeles and Orange counties. Throw in the suppliers and other firms dependent on the defense companies, and total aerospace-related employment still stands at about 900,000, McKinsey estimates.

* The number of jobs related to making aircraft and parts alone--107,800 as of June 30--is about where it was in 1977, prior to the huge military buildup during the Carter and Reagan years.

* The Pentagon this year will still pump about $50 billion into California for both weapons contracts ($37 billion) and for military personnel and facilities ($13 billion), or about 20% of the nation’s total defense spending, according to the Commission on State Finance. To be sure, the agency says the state’s Pentagon income is down one-fifth from 1988 and likely will keep dropping--to $33 billion by 1997--because of future budget cuts and the base closures.

* The business has one of the highest minority working populations--about 30% on average--of any California industry, McKinsey estimates.

* Just one company, Northrop, awarded $548 million in contracts last year to more than 6,750 California-based suppliers.


Dozens of additional programs contribute to California’s position as the center of aerospace development in the United States.

Rockwell, for instance, has 22,000 Southern California employees producing rocket engines in Canoga Park, space-shuttle equipment in Downey and aircraft guidance systems in Anaheim, to name just a few of its programs.

Then there’s Hughes. Although the General Motors Corp. unit is moving its missile business to Tucson from several locations in Southern California, Hughes continues making communications satellites in El Segundo, radar systems in Fullerton and industrial electronics in Newport Beach.

Hughes--which claims to be California’s largest industrial employer, with a $2-billion annual payroll in the state--also recently pointed up a striking irony for California: The same drop in military spending that has led to California’s aerospace slump now could give the state the time in which to bolster its manufacturing competitiveness.

Hughes, whose chairman C. Michael Armstrong has been a frequent critic of California’s business climate, was recently thinking of moving its headquarters from Los Angeles, perhaps to another state. But after California lawmakers passed workers’ compensation and tax reform in recent months, Hughes decided to stay put.

Because no major defense programs are expected in the next few years, California has that period to make additional changes that would help its companies grab the next aircraft-manufacturing jobs awarded by the Pentagon.


“There is time, that’s the good news,” Kresa said.

Before then, more wrenching job cuts will occur in the state, even though “it’s most likely that the worst is behind us,” said UC Berkeley’s Kroll.

Among the trouble spots is McDonnell Douglas’ C-17 program, which employs 10,000 workers in Long Beach and elsewhere in Southern California. Douglas’ commercial jetliner operations here, which employ another 12,000, also are threatened because of poor sales.

Also, Northrop’s production of the B-2 currently employs 11,800, but look for about 6,000 of those to get laid off in the 1994-95 period as production of the 20 bombers on order gets closer to completion.

Mergers are another threat. With military budgets shrinking, a rash of takeovers is expected in the next few years as the industry consolidates; the Clinton Administration is even mulling whether to relax antitrust laws to promote such deals. Mergers often lead to layoffs as the combined entities seek to be more efficient.

In that environment, there’s only so much that the state of California can do to help the industry thrive.

Hughes’ Armstrong conceded recently that Hughes still would have consolidated its missile business in Tucson even if the recent California legislative reforms had already been in place. The overriding economics of the defense industry dictated it, he said.


Nonetheless, Currie said California has to retain its aerospace manufacturing jobs and try to secure new ones, even if its famed research-and-engineering base remains intact. Otherwise, its employment rolls, its tax base and its “critical mass” of aerospace expertise and physical infrastructure will be irreversibly eroded by the 21st Century, he said.

“If all we do is build on that (engineering) resource in order to manufacture products and build companies elsewhere in the nation,” Currie said, “then we haven’t gained very much in the end.”

Blown Out of the Sky

Defense outlays in California have declined steadily since their peak in 1983, a fall expected to continue. The figures below are in constant 1993 dollars, meaning that each year’s outlay is adjusted to have the same purchasing power as in 1993.

Source: California Commission on State Finance

Since the late 1980s one-third of the manufacturing employment in certain big sectors of the state’s defense industry has been lost.

Sector Jobs, 1988* Jobs, June ’93 Change Percent Change Aircraft/parts 159,600 107,800 -51,800 -32% Search/navigation 123,600 70,700 -52,900 -43% Missiles/space 79,900 48,400 -31,500 -39% Communications 30,900 28,400 -2,500 -8% Shipbuilding 13,100 11,100 -2,000 -15% Total 407,100 266,400 -140,700 -35%

*Average for the year.

Source: California Employment Development Dept.; U.S. Labor Dept.