Southland Aerospace Down but Not Out
Southern California’s venerable aerospace-defense industry, once the region’s top economic engine and major source of local civic pride, will take another direct hit to its future with the acquisition of Northrop Grumman Corp. by Lockheed Martin Corp.
The merger, coming after a series of acquisitions of other Southland-based aerospace firms by out-of-state suitors, will result in an immediate loss of jobs among headquarters staff and local accounting, law and business service firms.
Also, the region’s chances for future aerospace-defense subcontracting work will suffer a competitive disadvantage without headquarters here to direct the business locally.
And hundreds of local aerospace subcontractors will find it tougher to survive with fewer major customers to buy their products and services.
What’s left is a regional industry still with a future. Southern California is home to hundreds of thousands of experienced aerospace workers, an abundance of manufacturing and testing facilities--and unmatched research capabilities.
But Southern California’s hand will be weakened by dependency on headquarters decisions made elsewhere.
To be sure, the area’s overall economic comeback from the severe recession of the early 1990s is not in danger because of aerospace deals. The recovery continues to barrel along, helped by surging business in computer electronics and software.
The communications satellite operations of Hughes Electronics and TRW are creating opportunity for scores of supplier companies. Even aerospace is doing well, thanks to increased orders to subcontractors for parts and structures for Boeing’s commercial aircraft.
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Meanwhile, the area continues to be a hotbed for technical innovation. “Lockheed’s Skunk Works and Northrop’s research operations remain here. This area has 11 engineering schools,” said economist Jack Kyser of Los Angeles County’s Economic Development Corp.
Nonetheless, “there is no upside for the local aerospace-defense industry in the Northrop-Lockheed deal,” said Robert Paulson, a longtime consultant to the aerospace industry and now head of Aerostar Capital, an investment firm.
Northrop-Lockheed is the fourth deal in the last 12 months in which a local defense headquarters has gone to out-of-state ownership. In 1996, Boeing Co. acquired the defense operations of Rockwell International. Then Boeing announced the acquisition of McDonnell Douglas Corp., including that company’s Long Beach-based commercial aviation division. Earlier this year, Raytheon acquired the defense electronics business of Hughes Electronics.
The loss of such headquarters can have a profound ripple effect.
First, there will be an immediate threat to the jobs of 700 employees at Northrop’s headquarters in Century City, as Lockheed Martin consolidates their work at its own head offices in Bethesda, Md.
Suppliers of business services to Northrop Grumman, such as Deloitte & Touche, the accounting firm, and Gibson Dunn & Crutcher, its law firm, will see diminished billings. Office equipment and real estate service providers will suffer.
Workers in aerospace plants won’t feel much effect for the present, experts agree. Northrop Grumman’s work on the F-18 fighter and B-2 bomber will go on undisturbed.
But the lack of a defense division head office will hurt this region when orders for new planes come along.
“Work tends to go primarily where the division boss sits,” Paulson said. Texas and Georgia, sites of key operations for Northrop and Lockheed respectively, will have an edge over California for future work.
The acquisition of Northrop Grumman, one of the last independent major contractors, will accelerate a long-term consolidation and downsizing trend for hundreds of Southern California subcontractors.
“We used to have 10 major contractors buying parts and services from local suppliers. Now we have two or three. So suppliers have to scramble” and accept lower profits if they hope to get contracts, said Jon Kutler of Quarterdeck Investment Partners, a firm that finances defense companies.
The end of the Cold War and the beginning of the decline in defense budgets in 1989 started the consolidation trend, which has taken local aerospace employment from more than 300,000 to less than half that number at present.
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The merger process has produced some subcontracting heavyweights. Allied Signal Aerospace of Torrance does more than $6 billion a year in defense industry sales. The company is expanding in the field by purchasing small aerospace firms.
“Allied Signal’s business won’t be affected much by this merger. It does business with all the contractors,” said Jim Edwards, a longtime aerospace executive with Rockwell and Northrop who now heads Irvine-based SeaComp Inc., a video-conferencing equipment producer.
Contracting out to smaller producers has characterized aerospace for years, Edwards said. “At Northrop,” from which he retired six months ago, “we outsourced all our machine shop work last year.”
But smaller companies, which typically employ a few hundred people and count annual sales in tens of millions, are running scared. Monrovia-based Composite Structures, a $50-million-sales supplier to military and commercial aircraft manufacturers, is negotiating to merge with other firms to grow big enough to survive.
“We’re talking with several companies, either to acquire or be acquired,” said David Ritticher, Composite’s president. “We need to be a company with $250 million in sales to get the attention of the aerospace majors.”
There is a price to pay in jobs for such consolidation, however much economic sense it makes in a time of declining defense budgets.
Why did the region that pioneered the aviation and aerospace industries lose its allure? A.T. Kearney Inc., a management consulting firm, has been hired by Los Angeles County to analyze this region’s challenges with respect to aerospace.
The Kearney firm hopes to hand in a report by September--just about when Lockheed’s acquisition of Northrop will become final.
