NEWS ANALYSIS : Right Stuff for Aerospace Industry : Defense: Positive developments mean California has strong chance of emerging with a vital contractor base.

After seven years in which everything went wrong for the California aerospace industry, some very important things are finally going right.

The decision this week by Lockheed Martin Corp. to move two major manufacturing operations from the East Coast to a once-threatened plant in Sunnyvale marks the first time that a consolidation by a defense contractor has actually benefited California. It was the latest in a string of positive developments for the state’s industry, which since the late 1980s has been pounded by the end of the Cold War and California’s poor business climate.

The Lockheed decision and others like it are important not simply because they preserve current jobs. Indeed, aerospace jobs nationwide--and possibly in California as well--will continue to erode for several years owing to past reductions in Pentagon budgets.

But the recent developments mean that California will be able to maintain the industrial infrastructure crucial to an eventual comeback of the industry. Despite the severe damage already done, the state now has a strong chance of emerging with a vital and intact aerospace contractor base.

Senior industry executives have turned bullish about the future of the industry and its role in California.

“The aerospace bust is over, quite frankly,” said Harry C. Stonecipher, president of St. Louis-based McDonnell Douglas Corp. “A big part of the story of aerospace in California is the big change in the attitude of people there. I like what is going on there.”

The key developments of recent months include:

* The Lockheed Martin decision to consolidate commercial satellite manufacturing in Sunnyvale, meaning that virtually all U.S communications satellites will be produced in California.

* McDonnell Douglas’ success in winning orders from Saudi Arabia for MD-11s and MD-90s, breathing new life into its Long Beach commercial aircraft plant.

* The apparent success of Northrop Grumman in persuading Congress to order 20 more B-2 bombers and support the new F-18E/F jet fighter, sustaining aircraft production here for more than a decade.

Further, half a dozen other programs crucial to California have won support from Republican lawmakers at a time when they are slashing spending everywhere else. GOP lawmakers have backed such key California programs as the NASA space station, the McDonnell C-17 cargo jet and a number of military spacecraft programs at Hughes Aircraft and TRW.

In addition, the Pentagon has elected not to seek closure of the Los Angeles Air Force Base, a key military spacecraft contracting center that supports thousands of engineering jobs at the Aerospace Corp. in El Segundo.

Stonecipher said dire projections about the defense industry’s long-term future resemble the wrong predictions that have followed every downturn in history, including after the Vietnam War and World War II.

“We haven’t seen the end of war,” he said. “We haven’t seen the end of human conflict. We have demonstrated that the best insurance policy for peace is to buy a great big deterrent.”

Meanwhile, the commercial aircraft industry is also poised for a rebound, which would help not only McDonnell but the big parts supply industry in Los Angeles County.

And California units of Lockheed, Loral, Hughes and TRW are investing billions of dollars into making satellites an important part of new communications systems for everything from wireless communications services to entertainment systems, raising the potential for an era of growth.

At Hughes Aircraft, for example, telecommunications sales jumped from $2.18 billion in 1993 to $2.53 billion in 1994. Most of the activity is in El Segundo, where Hughes’ satellite production plant is running at full speed. Similarly, TRW has recently won contracts covering production of five major military satellites at its Redondo Beach plant.

Each of these developments should help the state retain its huge infrastructure of aerospace subcontractors and the academic strength of its engineering schools--and that in turn will help the jobs to return once the market rebounds.

“There is enough of an industry base left that we could expand,” said Dan Flaming, president of the Economic Roundtable, a private research organization in Los Angeles.

Aerospace experts say the exodus of firms from California that began during the early 1990s has slowed considerably and that few major contractors are now considering plant transfers out of the state. Some credit the state government with creating a more business-friendly environment.

“California is getting more competitive,” said Robert Paulson, an aerospace expert at consulting firm McKinsey & Co. “Four years ago, it would have been more difficult for Lockheed to have justified transferring these operations into the state.”

McDonnell Douglas has also renewed its commitment to California. After a deal fell through to put production of its MD-95 passenger jet in Dallas, the company decided it would locate the program at its Long Beach plant. At the same time, the firm elected to put MD-11 fuselage manufacturing operations in Long Beach, after a contract with General Dynamics in San Diego expired.

McDonnell has startled analysts with its ability to produce profits at Long Beach, generally regarded as a high-cost manufacturing location, on production rates of less than one airplane per week.

“It has surprised everybody,” said PaineWebber analyst Jack Modzelewski. “It is amazing. They didn’t make a profit building 170 planes a year, but they are making money building 35 a year.”

Nonetheless, a full aerospace recovery remains a long way off. The Clinton Administration’s long-range budget suggests that Pentagon spending will continue to drop until as late as 1999, though Republicans are seeking to stabilize the spending sooner.

“The Republicans say they are going to keep things flat, but they are not,” said Modzelewski. “Budgets will still go lower.”

Cash outlays going to the defense industry will be down 10% to 15% over the next three years, Modzelewski said. Meanwhile, more than half a million more aerospace workers could lose their jobs before the bloodletting stops, according to analyst estimates.

Amid such a consolidation, some regions of the country will cease to be major aerospace centers, and California has been in jeopardy of being the big loser. Los Angeles has lost 60% of its aerospace jobs and California has lost 54%, according to figures compiled by the Economic Roundtable in Los Angeles.

But the prospect of the state becoming a bit player in the industry is much more remote than it was a few years ago. McDonnell, for one, has seen a major change in the attitude of local government and even in union workers who recently signed an amicable labor agreement.

“We are dedicated to California,” Stonecipher now says.