TRW’s Lasers Point to New Era in Defense
The terms experts use to describe TRW Inc. these days are surprising.
“TRW has clearly positioned itself as the world leader in military applications of high-energy lasers, a technology that the Bush administration wants to accelerate development of,” says a Washington defense consultant.
“TRW has the leading edge in technology that could transform warfare in the next 50 years,” says a defense industry investment analyst.
TRW’s battlefield communications and control technology recently was part of the successful intercept of a dummy missile in a test of a national missile defense system. Its space-based laser, which is getting increased research funding from the Pentagon, will be part of whatever missile defense program develops over the next decade.
The Bush administration’s support for national missile defense has aroused worldwide controversy, but it’s really part of a larger trend in military affairs, as TRW’s emerging product line demonstrates.
The company also is the leading developer of airborne laser weapons that will be able to destroy missiles in flight. Such weapons, mounted on Boeing 747 aircraft, will be tested in 2003 and 2004.
And TRW is the developer of the tactical high-energy laser, a potential U.S. Army weapon that Israeli forces have used successfully in a test to shoot down Russian rockets.
In addition, TRW, which has its space and technology divisions concentrated in Redondo Beach, is developing solid-state lasers that can transform the design and manufacture of microchips--and possibly develop into compact laser weapons mounted on fighter planes and jeeps.
Yet this storehouse of technology gets no plaudits from investors these days. TRW’s stock price--which closed Friday at $43.52 a share--has gone nowhere in the last five years, and its price is 25% below what it was a year and a half ago.
The firm is burdened by its huge auto parts operations, which account for 64% of TRW’s $17 billion annual sales but only 38% of its pretax profit. The space and technology divisions do the opposite, bringing in 62% of the profit on 36% of the revenue.
The firm’s new chief executive, David Cote, who came from General Electric Co. two years ago and got the TRW top job this year, is under pressure from shareholders to get the stock price up.
Cote conceded last week that “TRW looks like a technology company being valued as an auto company.” So he is going to try to change the perception and the stock performance.
But TRW is not a simple company. It has been an auto parts company since the 1950s, when California aerospace pioneers Simon Ramo and Dean Wooldridge merged their fledgling aerospace company with Thompson Products of Cleveland.
They did so, Ramo explains today, because back then a technology company needed the reassuring “stability and dividends” of a basic industry automotive firm if it was to attract financing.
TRW’s auto parts operation is first rate--a world-leading maker of air bag mechanisms, electronic braking systems and other components. Also, TRW currently shoulders about $5 billion of debt resulting from the 1999 acquisition of LucasVarity, a British maker of auto and aerospace parts. But that acquisition helped TRW increase its supply of flight controls and other systems to Airbus Industrie, the growing European commercial aircraft maker.
All of that makes TRW a fascinating study on several counts. The company faces the challenge of realizing its potential in technology while reducing debt and resolving its aerospace and auto parts structure.
TRW also is fascinating because of the potential of its laser weaponry to transform warfare in the decades ahead. The Bush administration, led by Defense Secretary Donald Rumsfeld, is making “space systems and missile defense technologies, such as lasers, priorities for the next generation of warfare and deterrence,” says Jon Kutler, who heads Quarterdeck Investment Partners, a Los Angeles investment bank for defense companies.
Missile technology changed warfare as it evolved from huge intercontinental ballistic missiles of the 1950s to today’s computer-guided Cruise missiles and heat-seeking battlefield rockets. Missiles have made all planes, ships and tanks more vulnerable.
The antimissile defense is the laser, a megawatt-strong beam of concentrated electricity that burns through and destroys anything it hits. “It’s a weapon without delay. If it sees a target, it hits it at the speed of light,” says defense analyst Loren Thompson, chief operating officer of Lexington Institute, an Arlington, Va., think tank.
Thompson sees programs such as the airborne laser, in which TRW is teamed with Boeing Co. and Lockheed Martin Corp., going from research status to full military operations within the next five years.
The trend is clear. Antimissile strategies and pinpoint laser weapons reflect the growing importance of information technologies in warfare and defense budgets. It is an area in which TRW, and other Southern California companies such as Northrop Grumman Corp., Boeing’s space division and Raytheon Co.’s El Segundo operations, are proficient.
Expertise does not come quickly or accidentally. TRW has been working on lasers since 1961, says Tom Romesser, vice president of the company’s space and electronics division.
With the aid of Pentagon research funding, the firm has developed other technologies, notably microchips based on gallium arsenide, not silicon, that are the fastest semiconductors available. It developed the chips for military and space satellites and has adapted them for use in wireless telecommunications. TRW recently formed a joint venture with Hitachi of Japan to commercialize its telecommunications microchips.
Similarly, TRW’s efforts to develop a solid-state electrical laser--as opposed to lasers using chemical reactions--to generate high-energy beams are leading it to advances in laser lithography that can put more information on a single microchip. In that effort, TRW is working in a consortium with Intel Corp., Motorola Inc. and Advanced Micro Devices Inc.
What lies ahead? “In the short term, there is little Cote can do but manage through the slow period for the automotive industry,” says Pierre Chao, aerospace analyst for Credit Suisse First Boston. TRW’s chief executive has told analysts he will cut costs, reduce debt and concentrate on TRW’s advanced product areas.
Long term, Chao speculates, TRW could become two companies. TRW’s weapons developments are on the same path as U.S. defense strategy, Chao notes. That could make it “one of the great aerospace firms of the next 50 years.”
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James Flanigan can be reached at jim.flanigan@latimes.com
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Light Under a Bushel
TRW, in the words of an investment analyst, is “a great aerospace company buried under auto parts.” The company, based locally in Redondo Beach but headquartered in Cleveland, gets most of its sales from automotive products but most of its profit from aerospace defense work.
TRW sales and profit in each activity in 2000
Aerospace & technology: (Satellites, lasers, digitized battlefield systems, flight controls)
Automotive: (Air bags, vehicle controls, electrohydraulic braking, security systems)
Sales: $17.2 billion
$6.2 billion
$11 billion
Pretax Income $1.3 billion
$508 million
$820 million
Source: Company annual report
