A Life Raft For Arms Makers

When troubled Avtex Fibers Inc. shut down its rayon plant in Front Royal, Va., in late 1988, the shock waves immediately spread east to the Pentagon. The Defense Dept. and NASA quickly pumped $40 million into the company, which was the nation's sole maker of continuous-filament rayon yarn for the nose cones and booster rockets of strategic missiles and space vehicles. That kept Avtex producing long enough to amass a yarn stockpile and gave the Pentagon time to line up another supplier.

Now, it seems that Avtex was an early warning. Cuts in military procurement budgets are threatening many defense companies. So many, in fact, that Congress and the Bush Administration are fretting that the nation won't be able to gear up quickly in a crisis. The defense industrial base "will not be able to respond in a timely fashion if it is allowed to wither away," said Defense Secretary Richard B. Cheney in a Feb. 25 report to the President and Congress.

To avoid that, the Administration is pulling together a life-support system. Cheney wants to keep up funding for defense research and development--$37 billion this year. But he'll take new weapons only to the prototype stage, then shelve them until they're needed. Meanwhile, the Pentagon will push increased arms sales to friendly governments to stretch out current production and keep factories alive. It is also shoring up industry finances by phasing out the fixed-price contracts that resulted in big losses at many companies. And it's urging defense contractors to adopt flexible manufacturing systems so they can switch from defense to commercial production--and back--in a hurry.

That won't be enough, critics contend. "If we follow Cheney's plan, we will be out of business in several defense industries," argues Representative Les Aspin (D-Wis.), chairman of the powerful House Armed Service Committee. Others, including outgoing Hughes Aircraft Co. Chairman Malcolm R. Currie, argue for a full-bore industrial policy. Otherwise, they fear the industry will be hollowed out, as it was after the Vietnam War. In 1974, Congress tried to double U.S. tank production to replace tanks given to Israel. There was plenty of excess tank capacity around. But only one foundry was still making turrets and hull castings, so it took more than two years to get output cranked up.

SHRINKING FLEET. The defense base is already getting thin again. In 1980, there were 22 major U.S. shipyards. Now, there are just five, largely because U.S. yards can't win commercial orders against overseas builders. The Navy plans to halve its orders, to five or six ships a year, which may be enough to sustain only one or two major yards.

Even more alarming is the shakeout among arms subcontractors. A study by the Center for Strategic & International Studies, a Washington think tank, shows that the number of defense suppliers plummeted even as military spending boomed during the '80s. Their ranks thinned from 118,489 in 1982 to 38,007 in 1987, partly because arcane Pentagon accounting rules drove many out. Today, there are just one or two domestic makers of such key items as airborne radars, optical coatings, plane navigation systems, and titanium wing skins.

To help slow this trend, Aspin proposes to upgrade existing weapons and keep making small numbers of them. For instance, the Administration plans to mothball the nation's only tank line, in Lima, Ohio, until a new tank is produced after 2000. To keep component makers going, Aspin would modernize more M-1 tanks. He also wants the Pentagon to keep buying F-16 fighters from General Dynamics Corp. But such ideas are costly. The Aspin approach "would bankrupt" the nation, argues Norman R. Augustine, chairman of Martin Marietta Corp. "I'd rather spend that money on research to look for breakthroughs--stealth, night vision, and other things that make a huge difference."

SHORT SHELF LIFE. Cheney is headed in that direction, but his plan has pitfalls, too. Merely making prototypes may let too many plants close, dispersing work forces and key skills. "When the time comes to unmothball the tank plant, there'll be no one to run it," warns Loren B. Thompson, deputy director for national security studies at Georgetown University. Beyond that, technology moves so fast, says Roger I. Ramseier, president of GenCorp's Aerojet aerospace division, that "I can't imagine a product that could be put on a shelf and then just produced at a later date."

Quickly shifting from military to civilian production and back again could be dicey as well. Some small defense suppliers are converting successfully (box). But the efforts of big arms makers to diversify have been "relatively dismal," says Peter B. Oram, president of Grumman Corp.'s aircraft group. U.S. companies that do both military and civilian work usually keep the two separate to avoid running afoul of Pentagon security and auditing rules.

Switching back and forth would be easier if the Pentagon used simplified, civilian-style accounting and production systems. Not only are its specs exotic, but Defense Dept. planners often dictate in excruciating detail how weapons are made. "Adopting commercial standards would encourage flexible manufacturing, which provides the opportunity for integrating civilian and military production," says Jacques S. Gansler, senior vice-president of Analytic Sciences Corp., a Roslyn (Va.) research company. It would cut costs, too. Murray L. Weidenbaum, former top economic adviser to President Reagan, estimates that paperwork accounts for up to 30% of defense-procurement expenses.

Trouble is, the Pentagon has made little progress in simplifying its rules. And time is short: Arms procurement is expected to drop to $50 billion in the mid-1990s from the 1985 peak of $126 billion.

In fact, Cheney may already be intervening more than he intended. In early February, he conceded that Defense is funding a new $4.5 billion aircraft carrier at least partly to keep the Newport News (Va.) shipyard and its suppliers financially sound. And the Pentagon says it might take measures to bolster McDonnell Douglas Corp. if the company's financial troubles worsen.

Defense planners are also rushing ahead with their first studies of how much manufacturing and technology may be lost in the current cuts. If necessary, says Deputy Defense Secretary Donald J. Atwood Jr., the Pentagon "will put effort into sustaining" critical technologies. Given how fast the industry is shrinking, the alternative could be a lot more Avtex-style bailouts.

      Here's how the Pentagon hopes to provide enough weapons-making capacity despite 
      huge defense budget cuts
      KEEP R&D ROBUST Maintain research spending but only make prototypes of new 
      weapons, rather than do costly full-scale production
      STANDARDIZATION Reduce reliance on exotic military specifications and buy more 
      commercially available components
      FLEXIBLE MANUFACTURING Encourage defense companies to adopt civilian-style 
      production techniques, so that vast segments of industry
      can quickly switch to making military goods if war breaks out
      ENCOURAGE FOREIGN ARMS SALES Spread the cost of weapons--and keep the surviving 
      defense plants busy--by boosting sales to friendly nations overseas
      NEW FUNDING TECHNIQUES Increase reimbursements for research and move away from 
      inflexible fixed-price contracts