Quid Pro Grow : Big Guys Get Something Too by Investing in Aerospace Transition

Amid the stunning changes in aerospace in Southern California, a little-noticed but reassuring phenomenon is the eagerness of big money to invest in the industry’s transition.

Chase Manhattan Bank wants to invest $100 million at a time to help Robert Paulson’s Los Angeles-based Aerostar Capital combine small aerospace companies into big-time suppliers of aviation parts and electronics.

The Pritzker family of Chicago is backing Jon Kutler’s Quarterdeck Investment Partners of West Los Angeles as it similarly attempts to put together sizable parts and service suppliers.

Venture capital from Orange County industrialist George Argyros and from Enterprise Partners of Newport Beach is backing former Northrop executive David Van Buren as he transforms Industry-based Tecstar, once a top-secret supplier on classified projects, into a provider of solar arrays for communications satellites.

And an arm of London’s New Court Securities is backing former Northrop and Rockwell executive Jim Edwards as he guides SeaComp of Irvine into the cutting-edge field of video-teleconferencing software.

The push for combining small firms stems from the same impulse that has driven the consolidation of major aerospace companies, including the pending Northrop Grumman-Lockheed Martin merger: The Pentagon and private contractors, such as Boeing, no longer want to spend time shopping for parts and services. Rather, they want to qualify key suppliers for major components and hand them long-term responsibility for on-time delivery, keeping up with technology and so forth.

“Qualifying key suppliers can reduce the companies you buy from by 80%,” says Edwards, who headed subcontracting for Northrop before retiring from the company six months ago.

But it’s not a simple matter of corporate downsizing. The number of supplier companies diminishes, but not necessarily the number of people at work on aerospace components. There are benefits as well as challenges for Southern California in this transformation.

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The best way to explain them is through stories of skilled people and companies--stories that reveal the many twists and turns aerospace has taken in this region.

Tecstar, for example, started in the 1950s as a secret supplier of electronics to the Pentagon and later became part of American Cyanamid, a New Jersey-based pharmaceutical and chemical firm.

In 1992, the Orange County venture capital firms Westar and Enterprise Partners bought it and named Van Buren, who had headed Northrop’s B-2 bomber program, president. The company then was losing money on $13 million in annual sales of solar panels.

Today, after acquiring makers of other satellite components, Tecstar supplies entire solar power setups for communications satellites. It employs 800 people and is profitable on $125 million in sales. And it is sharing in current glory as the supplier of solar panels to the Mars rover Sojourner.

Yet it may get larger still.

“We’ll pass $200 million sales this year, and we’re looking for acquisitions to expand our capabilities,” Van Buren says.

The need to grow also impels Composite Structures of Monrovia. The company started in Los Angeles in 1930 as Tool Resource & Energy, making water heaters, and got into military metalwork during World War II. Composite Structures made rotors for Bell helicopters during the Vietnam War and makes rotors for Bell and McDonnell Douglas Apache helicopters today.

Aluminum Co. of America (Alcoa) bought Composite in 1986, seeing aerospace as a growth business. But aerospace ceased growing shortly afterward. So Alcoa appointed one of its executives, David Ritticher, to run Composite in 1992 and then sold it this January to Quarterdeck.

The company has transformed its business in the last five years. It now gets half its $50 million in sales by supplying wing flaps for the Boeing 737.

“But it needs to be part of a larger group to afford the investment needed to be a sole supplier to Boeing,” says Kutler, who is seeking partners for Composite and other companies.

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There are many to choose from.

“There may be 1,000 small aerospace-defense supplier companies, including divisions that large companies want to sell,” says Paulson, who is looking for companies with $100 million or more in sales to combine in larger groups.

It’s worth noting that investment from Chase Manhattan and others is attracted by the skills and adaptability of aerospace companies and people, not by prospects of military contracts, which are few and far between now.

Edwards, after 41 years in aerospace, has transferred his skills to SeaComp, a $5-million-in-sales maker of computer wire harnesses that has become a value-added reseller of Intel’s ProShare microprocessor. SeaComp adds software to ProShare that allows consumer-product dealers and lenders to see and talk to one another while working simultaneously on financing documents.

New Court is so impressed, it is willing to finance $150 million in sales of the video-conferencing system, and SeaComp is gearing up for a big year.

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The lesson in all this for a region often worried about vanishing prosperity is that modern Southern California is not like places of old where copper mines played out or oil wells ran dry. This region’s resources now are its people and skills and the adaptability that can transfer from water heaters to solar panels to video software.

The challenge is that California is no longer alone in innovation. The whole U.S. economy and practically every state in the union is reaching for high-tech industry. California has competition.

So it should heed a lesson in the current consolidation of supply firms. That’s not a new concept but a variation on just-in-time supplier relationships that were pioneered by Japanese industry and brought to America in the 1980s.

Now even the Pentagon, which used to issue contracts with detailed instructions, has learned to rely on supplier responsibility, to say for a change, “Don’t simply follow orders; innovate and produce results.” If Southern California can keep doing that, its prosperity will be assured.