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General Dynamics: Flight Plans For A Much Altered Future

The Corporation


For the nation's No. 1 and No. 2 defense companies--McDonnell Douglas and General Dynamics--the New World Order is a frightening vision. Pentagon spending is in a tailspin, and both companies are coping with wrenching change--yet in entirely different fashions.

McDonnell is counting on its commercial airline business for future growth, though it may need a powerful partner to help with development costs. Meanwhile, GD plans to stick it out in defense. How? By cutting employment, research and development, and capital spending. Here's a look at two strategies for corporate survival.


During the final triumphant days of the Persian Gulf war in early February, Vice-President Dan Quayle spun through a General Dynamics Corp. factory near San Diego. Quayle had plenty of praise for workers at the plant, where the company assembles its accurate Tomahawk cruise missiles. "I am here at General Dynamics to thank you for not only supporting our troops but for also giving them the very best equipment in the world," Quayle told a throng of 3,000 cheering employees swept up in patriotic pride.

Rousing words, to be sure. But sadly for GD, they offer little solace these days. With Kuwait liberated and the cold war increasingly a quaint historical relic, GD's primary customer--the U. S. government--is quickly winding down most of the $10.2 billion defense contractor's major programs. In fact, GD will probably lose a third of its sales by 1995. The looming contraction has forced new Chief Executive William A. Anders into a risky strategy of slashing employment, capital spending, and research and development--all of which could dull GD's technological edge.

MORE TO COME. Anders, a 57-year-old former astronaut, has moved fast since assuming GD's top spot on Jan. 1. So far this year, he has laid off about 8,000 workers and announced plans to eliminate an additional 27,000 jobs, roughly 30% of St. Louis-based GD's current 90,000 workers, by 1994. Capital spending will drop about 60%, to $575 million, over the next four years. R&D expenses, which totaled a hefty $1.7 billion from 1987 to 1990, will fall to less than $850 million during the same period.

With heads rolling left and right, Anders has also championed a controversial incentive compensation plan tied to the company's stock performance, one which paid $7.5 million in bonuses to his new management team just five days after shareholders approved it. The idea is to help boost GD's depressed shares--a notion most welcome to the Crown family, which holds a 22% stake.

GD is also dropping its anything-goes approach to bidding. It will duck future projects that require hefty up-front investments and untested technology. Small wonder. Last year, GD took $700 million in charges on the Navy's canceled A-12 attack plane, a fixed-price development contract whose costs hit the stratosphere.

Now, GD prefers to risk only modest amounts of its own cash on new contracts. One example: The $75 billion Advanced Tactical Fighter contract won last month by Lockheed Corp., Boeing Co., and GD calls for the Pentagon to pick up the development costs and pay the contracting team a fee for its work.

The ATF win, a potential $ 20 billion deal for GD, was timely. GD's order backlog dropped 19% last year--the first such decline in a decade. Still, the ATF isn't enough to offset the A-12 cancellation and the likely huge drop in demand for GD's F-16 fighter jets and M1 tanks. And, true, GD recently won a contract to build the second $2 billion Seawolf nuclear submarine. But its Electric Boat Div. is expected to shrink overall.

GD's severe slashing of R&D expenses has some worried that the company will become so cash-conscious that it will fall behind technologically. When Pentagon spending finally picks up, says Prudential Securities Inc. analyst Paul H. Nisbet, "they might be ill-prepared to compete on future programs."

BIG BUYBACK? Anders insists that GD will not compromise its commitment to engineering but instead will pursue its contract battles more selectively. Besides, few big contracts are in the offing. So, meanwhile, he hopes to use this current lull in defense work to clean up GD's balance sheet. By scrimping now, the contractor will be able to build a cash hoard while it pays down its $636 million long-term debt, which has soared more than twentyfold since 1985.

Anders may buy back stock. Or he could diversify beyond defense, now 86% of GD's total sales. But the company's record here isn't exactly encouraging: A foray into telecommunications and other high-technology fields flopped during the 1970s. For now, Anders remains committed to the defense business. And just how well he manages GD's transformation into a smaller fighting machine will determine whether its gulf war performance is a portent of victories to come -- or a painful reminder of glory days gone by.James E. Ellis in Chicago

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