For Weapons Makers, Peace Is HellEric Schine and James E. Ellis
When Northrop Chairman Kent Kresa took over in January, 1990, he faced the daunting task of fixing a faltering, scandal-ridden defense contractor in an era of declining defense budgets. Kresa moved fast, trimming the number of operating divisions to three from five. Once-cherished real estate was sold off, debt was slashed in half, and 5,000 workers were let go--12% of the Los Angeles defense contractor's work force. The results were dramatic: Northrop Corp. has posted six consecutive profitable quarters and built a $100 million cash cushion--all at a time when the company suffered the loss of billions in new orders.
Northrop is hardly alone in its earnest cost-cutting. But just when Northrop and other large defense contractors had begun breathing easier, President Bush's decision to slash the nation's nuclear arsenal has given them plenty of fresh cause for worry. Laments James R. Mellor, president of General Dynamics Corp., the nation's No. 2 supplier to the Pentagon: "The reaction to the President's speech just highlights the new reality that contractors have to adjust to."
TIGHTER BELTS. Like Northrop, GD was getting down to fighting trim. With 85% of its $10.2 billion in annual sales coming from federal contracts, the St. Louis-based company has tightened up by cutting 13% of its work force and slashing $1 billion in capital expenditures from those projected only 12 months ago. The plan is to boost its average sales per employee by as much as 10% annually, a goal the company made easier recently by selling off its in-house data processing operation and farming out future processing to Computer Sciences Corp.
Despite their dogged attempt to keep up with the pace of spending cuts, defense industry executives may soon be confronted with a wrenching shakeout. If they can't shrink capacity as fast as Pentagon dollars dry up, "mergers will happen," predicts Robert D. Paulson, an industry consultant with McKinsey & Co. in Los Angeles. "It's just a question of when the Defense Dept. and Congress decide it's O. K."
By itself, Bush's announcement is hardly a staggering blow to the defense industry. But the President's cuts of $20 billion, stretched out over several years to ease the pain, have ignited in Congress a long-suppressed desire to slash defense spending even deeper. That would spell problems for contractors who already have slimmed down and may not be able to withstand more cuts. Although Northrop's cost-cutting has widened its operating margins to 6%, from less than 1%, over the past two years, it still couldn't shrug off the loss of the B-2, says Lawrence M. Harris, an analyst with Kemper Securities Group Inc. The immediate loss of the $65 billion bomber program would force "severe consequences," including thousands more layoffs, he says. The B-2 makes up fully half of Northrop's annual revenues and 45% of profits. A third of the company's workers devote their time to the project.
Congress already has cut the original order for 132 B-2s to 75, and could cut it again to only the 15 planes now being built. And that may be just for openers (table). Despite a rush of enthusiasm after the gulf war for a missile-defense shield, the estimated $100 billion Strategic Defense Initiative is an inviting target--much to the chagrin of such companies as General Motors' Hughes Aircraft and TRW. "There's going to be a lot of turmoil and confusion," warns Hughes Chairman Malcolm R. Currie. "Out of it will come a smaller industry." GD President Mellor, for one, admits that his company is bracing for further cuts in orders for the $2 billion-a-copy Seawolf attack submarines, already cut to just 12 vessels from the initial 30.Some companies, no doubt, are better able to handle further belt-tightening than others. McDonnell Douglas Corp., which slashed its work force by 20,000 workers over the past 18 months, seems in relatively good shape. The company will continue to make Tomahawk missiles, though Bush has ordered that they will no longer carry nuclear warheads. Moreover, the St. Louis-based company just completed successful flights of its new C-17 transport plane. With the expanded U. S. role in the Mideast and elsewhere, the $7.7 billion in orders for the plane seem relatively safe for the moment.
Of course, that's what much of the defense industry thought about scores of other programs before Bush's decision to make deep cuts in weaponry. Some, such as the Lance missile, already are out of production. Thanks to one quick TV address, the Lance will have plenty of company: The $6.8 billion mobile basing of MX missiles will be cut, taking a chunk of business from Rockwell International, TRW, and Westinghouse Electric. Boeing Co. will lose $1.4 billion in work on the SRAM-II nuclear missile, another casualty of Bush's new directive.
ANXIOUS TIMES. Where will the ax fall next? That question will vex much of the industry for the next few weeks, as a House-Senate conference committee completes work on the fiscal 1992 Pentagon budget. Defense Secretary Richard B. Cheney, who has focused on cuts from base closures and troop reductions, will now be forced to slash hardware budgets as never before. One potential target: the Army's $35 billion LH, or Comanche, helicopter, which a team led by United Technologies Corp. and Boeing is due to begin producing in 1996. It may even mean some serious trimming for the $75 billion F-22 Advanced Tactical Fighter contract, awarded only last April to Lockheed, GD, and Boeing in a titanic showdown with Northrop and McDonnell Douglas. Although Lockheed officials say they aren't worried about the program's future, Gordon Adams, director of the Defense Budget Project, a private research group in Washington, questions whether "there will ever be enough money in the budget to move the F-22 toward production."
The prospect of such cuts is boosting anxieties from Burbank, Calif., to Hartford, Conn. Most contractors are keeping a stiff upper lip. Even with the B-2 cuts hanging over his company, Northrop's Kresa insists that "Northrop will be a healthy, viable company." Chances are, a lot smaller, too.
DEFENSE PROGRAMS UNDER FIRE
TOMAHAWK MISSILE Bush is eliminating the nuclear warhead-equipped versions--about 16% of the total--of this terrain-following missile, which won rave reviews in the gulf war. The Pentagon spent $442 million for all Tomahawks in fiscal 1991 and ordered an additional $284 million worth to replenish stocks after the war. McDonnell Douglas and General Dynamics make the missile, while the Energy Dept. makes its nuclear warhead
SRAM-II MISSILE Bush is canceling this short-range nuclear attack missile being developed by Boeing. Behind schedule and over budget, it was scheduled for first test launch early next year. Cancellation will save an estimated $1.4 billion
RAIL-GARRISONED MX MISSILE Bush scrapped this planned system to transport MX nuclear missiles on railroad tracks near military bases, reducing their vulnerability to attack. Cancellation will save an estimated $6.8 billion. Contractors include Rockwell International, Boeing, TRW, and Westinghouse Electric
MIDGETMAN MISSILE Bush stopped development of the mobile launching system for the Midgetman small intercontinental ballistic nuclear missile. The mobile system was being developed by Boeing under a $748 million contract. Now, some in Congress are setting their sights on the stationary Midgetman program, being developed by Rockwell, Hercules, and GenCorp
B-2 BOMBER Bush reiterated support for this phenomenally expensive bomber--it costs about $850 million a copy. But his softening on the Soviet threat has reignited congressional opposition. The Pentagon could save $30 billion by the end of the decade if the program is canceled
STAR WARS Although Bush stands firmly behind the Strategic Defense Initiative, congressional pressure is building to further downgrade the program to something less high-tech and high-cost than the estimated $100 billion system to detect and intercept enemy missiles in space. Major contractors: Rockwell, Hughes Aircraft, TRW, and Lockheed
DATA: DEFENSE BUDGET PROJECT, BOEING CO., McDONNELL DOUGLAS CORP., KEMPER SECURITIES GROUP INC., BW
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