BUSINESS, Page 36An Era of LimitsAs Congress debates next year's Pentagon budget, a dwindlingdefense industry struggles to cope with the coming cutbacksBy 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
