TIME: Almanac 1993/TIME Almanac 1993.iso/time/080789/08078900.022

Text File | 1992-09-23 | 10.2 KB | 197 lines

                                                                              BUSINESS, Page 36

An Era of Limits


As Congress debates next year's Pentagon budget, a dwindling
defense industry struggles to cope with the coming cutbacks

By Janice Castro


    When defense-industry executives gather to talk about
business these days, their cocktail of choice may be Maalox. As
Congress debates how to cut the Pentagon budget, one outcome is
virtually certain: programs will be abandoned and assembly lines
shut down. Under pressure to cut the federal deficit, Congress
and the Bush Administration are determined to shear billions of
dollars from military outlays. As a result, anxious
defense-industry executives from New York's Long Island to Los
Angeiles are frantically lobbying to keep their weapons programs
alive. Tens of thousands of jobs depend on the decisions now
being made on Capitol Hill.

    After the crackle and roar of the Reagan Administration's
$2.4 trillion military buildup, defense spending is in a steady
decline. The Pentagon budget is still staggering in size -- more
than a quarter of annual federal outlays. But in fiscal 1990,
for the fifth year in a row, defense spending will grow at a
slower rate than inflation. Adjusted for inflation, the $295
billion spending request that Defense Secretary Richard Cheney
has submitted for 1990 is 15% smaller than the 1985 budget.

    Cheney has offered Congress a blueprint for cutting $10
billion from the $305 billion budget request submitted by
President Reagan just before he left office last January. In his
plan, Cheney hopes to spare major strategic weapons like the B-2
Stealth bomber by trimming smaller but costly programs, notably
Grumman's F-14D jet fighter (saving: $2.4 billion) and the V-22
Osprey ($7.8 billion), an innovative tiltrotor aircraft made by
Boeing and Bell Textron. The Defense Secretary worked the
Capitol Hill corridors last week to make his case, while
President Bush courted key Senators and Representatives over a
series of White House breakfasts.

    But at week's end the House handed the President a sharp
defeat by approving a defense authorization bill that turned
his priorities upside down. By a vote of 261 to 162, the House
slashed spending for four major strategic weapons while
reinstating the F-14D and the V-22. The House decided to
restrict production of the controversial B-2 bomber to just four
planes during the next two years, and to authorize those only
if the Bush Administration agrees to scale back its $70 billion
program. The House also chopped $1.8 billion from the
Administration's $4.9 billion request for the Strategic Defense
Initiative, cut $502 million out of Bush's $1.9 billion plan for
a rail-launched MX missile, and completely eliminated $100
million for the Midgetman missile. Griped Bush: "Yesterday was
not the House's most memorable moment." The Senate is expected
to complete its own, equally tough spending prescriptions this
week. Differences between the two versions will be resolved in
a September conference.

    If the 1990 Pentagon budget is tight, the years that follow
promise even more bad news for hard-pressed defense firms. The
General Accounting Office estimates that as much as $150
billion will have to be hacked out of defense plans over the
next five years. One reason: giant, multi-year spending
commitments in the early 1980s are still rolling through the
budgets like a giant bow wave, pushing aside other priorities.
One of the biggest is the Northrop B-2, which is now expected
to cost $530 million per plane, making it the most expensive
weapons system in history. Eliminating the plane would create
huge savings, but the effect would be felt across the U.S., as
126 contractors in 46 states have a stake in the project.

    The five-year slowdown in defense spending is already
hitting military contractors hard. Since 1982, the number of
U.S. companies turning out hardware for the Pentagon has
plummeted from 120,000 to just 40,000. At most major defense
firms, profits are down and payrolls are being slashed. Los
Angeles-based Northrop, which lost $78 million in the second
quarter, is cutting its work force by 3,000 workers, to 41,000.
St. Louis-based McDonnell Douglas (1988 defense sales: $9.7
billion), the largest U.S. military contractor, reported a loss
of $48 million during the same period. If Cheney sells his plan
to end production of the company's AH-64 Apache helicopter in
1991, as many as 4,000 McDonnell Douglas workers in Mesa, Ariz.,
and Culver City, Calif., could lose their jobs.

    Hughes Aircraft, the General Motors subsidiary that makes
aircraft radar systems and missiles for the F-15 jet, has
announced plans to lay off 6,000 of its 75,000 employees in
Southern California. No new planes are being built at the
Lockheed aircraft plant just north of Atlanta, which once
produced such military mainstays as the C-130 and C-5
transports. Reduced to performing subcontracting jobs for Boeing
and Northrop, the plant has chopped its 20,000-worker payroll
in half.

    The impact of defense cutbacks is amplified as it ripples
through the communities where plants and bases are located.
Pentagon economists estimate that each dollar spent in
contracts triggers $1.60 of spending in the local economy.
Reductions have a roughly equal and opposite effect. On Long
Island, for example, defense contractors have cut their work
force of 60,000 by more than one-fifth since 1987. As a result,
an estimated 26,000 other local workers, from pizza-parlor
employees to department-store clerks, have lost their jobs.

    Long Island-based Grumman, which has produced military jets
since World War II, builds the Navy's F-14D, the highly
maneuverable fighter featured in the 1986 film Top Gun. Because
Congress has slowed annual production of the Tomcat to just
twelve jets, Grumman is reducing its 19,000 work force by 3,100.
If Cheney's proposal to cut production even further is carried
out, many of the 5,600 Grumman workers who make Tomcats will be
put in jeopardy.

    As the industry contracts, many big companies are getting
out of the business. More than 60 defense operations have been
put on the block in the past two months. Other firms are
building up cash reserves against an uncertain future by paring
back their defense ventures. Minneapolis-based Honeywell, the
leading supplier of lightweight torpedoes to the U.S. Navy, has
sold three military electronics and communications subsidiaries
since last August, and is seeking to shed a fourth. In what has
become a military garage sale, bargains aplenty can be found.
David Smith, a senior vice president at the Raymond James &
Associates brokerage in St. Petersburg, estimates that the rush
to bail out of the defense business has depressed the value of
such firms as much as 25% since last October.

    Traditionally, U.S. defense contractors have coped with
periodic downturns in Pentagon spending by boosting their
military exports. But that is no longer an easy market. Last
year, according to the Stockholm International Peace Research
Institute, global arms imports totaled $34 billion in constant
1985 dollars, a 14% decline from the previous year. Among the
reasons: the winding down of regional conflicts like the
Iran-Iraq war, reduced oil prices and fewer petrodollars for
military customers in the Middle East, and a falloff in Third
World purchasing power caused by high debt levels.

    In addition, Western arms dealers face an increasingly
stiff challenge from the developing countries. "All of God's
children are producing military weapons," remarked a U.S.
contractor, "so the competition is blistering." New arms
exporters crowding into the market include Brazil, Argentina,
South Korea, Taiwan, India, Singapore and South Africa. At last
month's Paris Air Show, Brazil proudly displayed its new Embraer
EMB-312 Tucano, a turboprop military trainer jet that has been
ordered by Britain's Royal Air Force. As more countries step up
production of military hardware, they are buying less from
traditional suppliers. Tokyo's insistence earlier this year on
participating in joint production of the FSX jet with the U.S.
suggests that Japan, the world's sixth largest importer of
weapons, may be moving in that direction.

    U.S. military manufacturers will have to learn to cope with
keener foreign competition, just as consumer-products companies
have done. Otherwise, according to a report by the
Washington-based Center for Strategic and International Studies,
"in place of the arsenal of democracy, the U.S. may find it has
only the best pizza parlors in the world." Robert Costello,
until recently the Assistant Secretary for Acquisition in the
Pentagon, has urged American companies to enter into joint
ventures with foreign manufacturers to capture more offshore
business.

    While cuts in the defense budget are undoubtedly necessary
to shrink the country's deficits, the U.S. cannot afford to let
its defense-industry base shrivel away. One harmful effect would
be reduced domestic competition at every level, from small
subcontractors to major suppliers, which would put upward
pressure on procurement costs.

    To cut costs and preserve programs, former CIA Deputy
Director Bobby Inman maintains that defense procurement policies
must be streamlined. Defense contractors complain, for example,
that the Pentagon insists that parts and equipment be built to
military specifications, when less costly, commercially produced
gear would often be just as good.

    Other military experts support the establishment of an
industrial policy for defense. New York City Democrat Ted
Weiss, a member of the House Foreign Affairs Committee, is among
a growing school of defense experts proposing "dual-use"
planning by military contractors to seek commercial as well as
defense applications for their research and manufacturing
efforts. Such planning might help ease the boom-and-bust cycles
of defense procurement. Perhaps more important, it could help
stimulate the development of new high-technology consumer
products, strengthening U.S. economic security at the same time
defense firms are bolstering national security.


-- Dan Cray/Los Angeles and Bruce van Voorst/Washington