Defense Firms Fail to Convert, Study Finds

In a finding that casts serious doubts on the ability of defense contractors to convert to a commercial footing, a survey of high-technology firms in Los Angeles County released Tuesday shows that they have grown even more dependent on the defense business in the last two years.

The companies, ranging from aircraft manufacturers to electronics firms, are adapting to the collapsing defense market by shrinking their operations and increasing their reliance on the Pentagon, according to a study by the Economic Roundtable, a nonprofit research group in Los Angeles.

The study, which was dominated by large companies that account for most of the industry’s jobs, further confirms that Southern California is losing its grip on high technology. Sixty-two percent of the high-tech firms in a five-county region said they expect employment in their industry to drop over the next five years.

Since 1988, Southern California, the heart of the nation’s aerospace industry, has lost 39%, or 153,000, of its high-tech jobs. The report showed that even the region’s high-tech firms that are not involved in defense work have shrunk by 20% over the last five years, based on data from the state Employment Development Department.

The study is believed to be the first regional or national effort to assess how well defense firms are adjusting to the biggest downturn since the end of World War II.

Defense conversion has been a failure by any definition, said Daniel Flaming, co-author of the report and president of the Economic Roundtable. Generally, defense conversion has meant helping defense companies find commercial markets for their technology.

The response by local and federal governments to the economic crisis created by the aerospace bust has been ineffective, according to 88% of the business executives responding to the survey.

“The approach has been to throw money out there and see if anything gets done, and at that there hasn’t been very much money,” Flaming said. “It is a conceptual failure because there hasn’t been a clear objective stated.

“It seems extraordinary to me that we have this level of loss and so little local action to deal with it,” he added.

President Clinton last year announced a $19.5-billion defense conversion program, which would retrain workers, fund new technology and help communities adjust to military base closures.

A White House official said Tuesday that Clinton’s program is less than a year old and it is too soon to judge whether it will be effective in helping defense firms find new commercial markets.

Only a tiny fraction of the $19.5 billion has been spent, and virtually none of the funds under the cornerstone Technology Redevelopment Program have reached industry. A new round of awards has been delayed for months by political battling between the White House and Congress.

“The person who thinks we can quickly beat our swords into plowshares has never tried it and probably never met a payroll,” said Bob Black, president of Plastics Research, a Santa Fe Springs firm included in the survey. The firm has lost half of its 100 workers in the last few years.

Black said he set a modest goal of getting 20% to 30% of his sales from commercial markets, but has found that “it is extremely difficult to reach potential customers. In defense, you can do business just by reading Business Commerce Daily, which has a list of all the contracts the government has up for bid.”

The Economic Roundtable sent survey forms to 1,263 high-tech firms and received responses from 358, including every large aerospace employer. The responses came from firms accounting for 85% of the region’s high-tech jobs.

The survey found that the share of sales attributable to defense contracts at Los Angeles County firms rose to 65% from 59% in the last two years. The finding was based on comparing responses from 43 firms in a survey conducted two years ago to the same firms in the new survey. Those 43 firms account for 74% of high-technology jobs in the county.

The increased dependency on military business can be explained in small part by the decline in commercial aircraft production in the last two years, but even if that had held steady it would not have changed the overall trend, Flaming said.

Moreover, a rebound in commercial aircraft production is unlikely to solve the deep and pervasive problems affecting the region, given the continuing decline in the defense business.

A companion study to the Economic Roundtable survey, written by defense consultant Michael Beltramo, suggests that even after the defense budget stops dropping in the years ahead, Southern California will face a second blow.

Beltramo’s analysis of recently declassified defense data shows that the Northrop B-2 bomber program and the McDonnell Douglas C-17 cargo programs accounted for 53% of defense contracting awards last year. Both programs may be ended before before 2000.

“In the last five years we haven’t done much conversion and we have another five years to do something on the issue of these aircraft programs,” Beltramo said. “It isn’t clear that we are going to be any more effective in the future.”

Flaming and Beltramo said that no government agencies have seized on defense conversion as a “core issue” and as a result, assisting industry has fallen through the cracks.

The report recommends that state or local agencies create programs to help small firms get access to private capital markets, improve communications with high technology industry and lay out future regulatory requirements more clearly.