LOS ANGELES TIMES INTERVIEW : Michael Armstrong : Pulling Hughes Into the 21st Century

The Chinese economy is booming. Cost-concious American consumers are snapping up bargain-priced Chinese imports--everything from clothes to toys to electronic goods. That’s created a widening trade deficit with Beijing. It’s grown from $3.5 billion to more than $20 billion in five years.

All those “Made In China” labels make Mike Armstrong see red. As CEO of Hughes Electronics, Armstrong had a deal to sell communication satellites to China. But last year, after uncovering evidence of Chinese missile sales to Pakistan, Washington imposed sanctions against China that have prevented Hughes from selling those satellites. That’s cost Hughes money and jobs. Meanwhile other countries are making deals in Beijing to sell satellites. To Armstrong, it’s a classic case of foreign policy gone awry.

But China is only one of Armstrong’s problems. Since taking charge of Hughes almost two years ago, he’s had to refocus and recharge a company that had a long history of scientific innovation, but a less-than-compelling financial record. It’s a huge undertaking. Even after a massive restructuring and thousands of layoffs, Hughes still employs more than 50,000 people, making everything from missiles to radar systems to auto parts.

Armstrong is determined to counter cutbacks from Hughes’ largest customer, the Defense Department, by developing new ways to use the company’s technologies. The most dramatic example is DirecTV, a direct-to-home satellite system that will offer 150 channels of digitally transmitted television. DirecTV has required an investment of some $600 million, and though some are skeptical, Armstrong sees it as a major profit-center for Hughes in the next decade.

Armstrong, 55, came to Hughes after a 31-year career at IBM. The father of three daughters and one grandchild, he’s earned a reputation as a good communicator--he even writes a bi-weekly column for the Hughes newspaper--and a shrewd political operator. He’s employed both skills in turning Hughes fortunes around--the company recently reported strong increases in both revenues and profit margins. An expansive and expressive man, he likes to joke about his spacious office at Hughes opulent Westchester headquarters, “I can either work--or I can play basketball.”

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Question: When you came to Hughes, what problems did you identify and how did you try to remold the company?

Answer: The biggest problem was that our financial returns were in precipitous decline. Although we were a high-tech company, we were out of balance with being customer-driven and market focused. We were more like a laboratory in that we pursued excellence and achieved innovation for the satisfaction, accomplishment and esteem of it--but not necessarily to apply it and make money on it. So we reorganized the whole place toward a market-driven company.

Another great problem was the surplus in our defense business. We had to rid ourselves of the surplus in facilities, people, structure, executives and expenses. We also had to become cost-competitive. So we imposed on ourselves a 30%-cost-reduction program across the company, to get the base of our business competitive. That’s what we’ve been doing; those are the fundamentals.

But probably more important than anything in changing a corporate culture is communication. People have to understand where the business is going, they have to believe that’s the right place for it to be going, and then it has to be continually reinforced with change--and with some results. And we’re fortunate to have that; much of the hard work and change has resulted in a financially stronger and improved company.

Q: Your company has a special problem with China. Are you going to be able to launch satellites there?

A: It’s still under review. I had the opportunity (recently) to directly and personally communicate our problem to the President. He replied that he better understood the situation and would look into it further. We disagree strongly that the sanctions against China were ever meant to include commercial communicating satellites. Secondly, there is absolutely no risk of technology transfer. There’s more technology in a Boeing airplane, or even in an Atari computer, that could be applied to missiles than there is in our satellite. Finally, when we build a satellite to be launched in China, it’s a completely enclosed system. The satellite is crated, it’s accompanied by armed U.S. Air Force personnel, who guard it under lock and key in a warehouse in China until it is launched. There is no risk.

So what’s happened? The Chinese had given us a letter of intent for two data-communication satellites. They have since, because of the sanctions, given that order to Germany, and we have lost a $100-million order and several hundred jobs in Southern California.

We also had an understanding for 20 follow-on satellites. Just recently, the Germans announced they had secured a memorandum of understanding for those satellites. That’s $1 billion or $2 billion of business and could be 4,000 to 5,000 jobs--lost. China is the largest satellite market for the next several decades.

If we lose all the satellite business due to these sanctions, we will lose the technological leadership to whomever gets it, because they will own the largest market. So we are appealing to the Clinton Administration to either determine that sanctions do not include commercial satellites--whose primary purpose is to carry American television. Or, that they jurisdiction for these satellites belongs with the Commerce Department and not with State--because it is trade and not foreign policy.

Q: Even with cutbacks, the Defense Department is still an enormous customer. What is the future from your perspective as a supplier?

A: Right now, defense is about 40% of our business. There is no question in my mind that at whatever level this country decides to budget to defend our soil and our values, we will deploy a competitive force structure. The question is how will we do that. I don’t believe there’s a lot of money for a lot of brand-new weapons programs. We have a lot of programs already out there that will have to be competitive against an enemy that is not so easy to define and to find. So technology upgrades to existing weapons systems are going to be an important part of the defense business in the future. Fortunately for us, electronics are where most of those upgrades will occur, and we are perfectly positioned in that area.

Q: Give me an example of how such an upgrade might work.

A: Let’s take missiles. A lot of us saw Tomahawk missiles perform admirably in the Gulf War. On the other hand, some of those missiles landed outside their specific targets, but within the range of error that the missile was built to serve. Technology today permits future Tomahawks to be built with much more precision, reducing casualties and damage to areas near the target site. So we can create better, more effective weapons, by improving what we have and not creating entire new programs--and save a lot of money by doing so.

Q: I’ve read that you don’t like the term defense conversion. What’s wrong with it? A: It doesn’t describe the reality of what works. In fact, I think it describes just the opposite, because I don’t see any plant that has been converted from building war stuff to building commercial stuff. As Norm Augustine, the chairman of Martin-Marietta likes to say, defense conversion is unblemished by success. On the other hand, diversification has terrific opportunities. Diversification means investing to extend technologies into new markets, to do new things. You may or may not be able to use existing facilities or people. Conversion suggests taking a plant, and the people who work there, and have them start doing something new. That just doesn’t work.

Q: You said some time ago that if California didn’t get more competitive, manufacturing was at risk in the state. Have things changed enough for you to rethink investing in plants here?

A: Progress has been made. The state put forward a balanced budget, and they did it in a timely manner. There’s been a very much needed and significant change in the workers’ compensation laws. The state took a very modest step toward tax improvements, and changed some of its regulatory procedures.

Those are all good steps, but what California needs to do is to benchmark itself against the competition. That doesn’t mean trying to keep defense or aerospace business, because those firms will downsize and consolidate irrespective of anything the state might do. What we need in this state is new investment. The state needs to sit down and say how competitive are we, and what can we do to encourage business to invest in this state. Hughes is a California company. We are betting the state will become competitive. We invested in the electric-car project in Torrance; expanded our satellite facility in El Segundo, and we invested in our digital cellular manufacturing in San Diego. Hughes is putting its money where its mouth is. But if we can’t build products competitively in California, we’ll build them someplace else.

Q: What about DirecTV, your direct-to-home satellite project? What about this idea makes you willing to invest something like $600 million?

A: The first answer is choice. We’re going to offer 150 channels, in a way that gives people the ultimate personal choice. They can watch what they wish and pay for only what they watch. The second thing is quality. It’s a completely digital system--digital video and digital sound. The quality will be CD-plus. Third, we believe that people are willing to pay to see what they want to see--as long as it’s simple. So rather than having to get up and dial the phone, or make some pre-arrangement, you can order what you want with your clicker. So ease of use is a key.

Q: How important is this venture to the future of Hughes?

A: I think by the end of the century we have the potential to be the largest provider of television in the industry. It could be many billions of dollars a year in new revenues, it could be 10 million subscribers and it could be thousands of jobs. It has the potential to become, by itself, a business as large as our entire operations are today.

Q: What other defense-related technologies do you see as having the potential for consumer appeal?

A: We are developing some interesting things for automotive technology. For instance, we’re repackaging fighter-aircraft radar and currently have a system called ForeWarn that we put on school buses to tell the driver if all the children are away from the bus before he proceeds. There are about 9,000 children injured by school buses every year. I think we can really lower that number. We’re at a point in the cost curve where this is a $2,000 item. That’s probably not too high to protect a busload of kids. It probably is too high a price for a feature on a Chevrolet.

But as we keep improving the technology, we can begin to think of collision-avoidance technology on our automobiles. For instance, radar for adaptive cruise control rather than the stagnant system we have today. Radar could tell us what’s around us and adjust the car’s speed to maintain a safe distance. That would give us more time to relax, and make for a safer trip. There are other technologies we can apply to automobiles--imaging systems developed for aircraft could improve drivers’ night vision, and we’re working on headlights that throw out more light with less glare. If we can develop just one of these technologies so that they become standard equipment, that could mean tremendous growth for Hughes Electronics.