Consolidation catching on as industry's strategy?

Smaller industry may thrive even amid defense cuts

"Slammed by recession and Perestroikaera Pentagon cutbacks, Southern California's $25 billion-a-year defense business took it squarely on the chops in 1991," the Business Journal said this time a year ago.

Ditto 1992, with one important caveat: The industry began sorting itself out and making the first moves to cope with what is expected to be a changed industry.

The layoffs continued and the number of new contracts fell but the industry also showed tangible signs of the restructuring.

For instance:

* Century City-based Northrop Corp. signed two different agreements during the year to develop, and possibly produce, rail transit cars.

* Calabasas-based Lockheed Corp. bought a big chunk of General Dynamics Corp.'s defense business.

* Hughes Aircraft Co., headquartered in the Westchester section of Los Angeles, brought in a marketing executive from IBM to be its new chairman.

* A private-public consortium of defense contractors and other companies was formed to develop a transportation industry in the county.

At the beginning of the year, the key word was conversion. But as 1992 progressed, the emphasis seemed to shift to consolidation.

As the year began, local aerospace executives were talking about the need to look for more commercial work and convert defense and aerospace technology to private-sector uses. They publicly talked of reducing the ratio of defense work to commercial sales.

But later in the year, some of those same executives seemed to retreat from those statements and began saying consolidation was perhaps the way to beat the downturn in defense spending. They said the number of contractors would shrink, like the number of airlines has, so it would be best to start looking for acquisitions before becoming a takeover target.

But those apparent changes in strategy were little comfort to thousands of aerospace workers who joined the ranks of the county's unemployed during the past year. As in 1991, the numbers were startling.

Over the last two years, it's now estimated, aerospace employment in the county has dropped from close to 280,000 to about 200,000.

Examples of the job losses include:

* A year ago Hughes had 63,000 employees. By June, Hughes had cut 3,000 jobs and announced another 9,000 layoffs over the next two years.

* Employment at Douglas Aircraft Co. in Long Beach was 41,000 on Jan. 1, 1992. On Jan. 1, 1993, employment will be at 31,000 workers. In mid-1990, Douglas employed 53,000 people.

* Early in 1992, Northrop said it would cut 3,000 of its 36,000 jobs. Over the next three years, Northrop could take the heaviest hits on jobs as its primary military project, which currently employs 12,000 workers in Los Angeles County alone, comes to an end over the next three years. The project is the B-2 bomber which, after months of speculation and years of debate, was officially terminated in 1992.

* A segment of the industry that has received little notice is the dozens of small "job shops" that supply the large contractors. It's estimated that thousands of job shop workers have lost their jobs over the last 12 months.

In March an aerospace task force formed by county officials concluded projected cuts in defense spending "will have a strongly negative impact on employment in Los Angeles County. This impact will be greatly magnified by multiplier effects extending from the aerospace-defense complex to other industries in the region."

The task force projected that primary and secondary job losses in the county from defense cuts could range from 105,000 to a high of 420,000 between 1992 and 1995.

Perhaps the single biggest business development in 1992 in terms of its impact on the local economy was the termination of the controversial B-2, a stealth bomber that costs $865 million each to build.

Early in the year, President Bush said he would agree to cap the program at 20 aircraft, down from the Pentagon's original request for more than 130.

Northrop, the main contractor on the project, builds the aircraft at facilities in Pico Rivera and Palmdale. So far, 16 B-2s have been built or are in production, which means only four more will be built. Nationwide, the B-2 program employs 40,000 workers and a good chunk of those people are in Los Angeles County. In addition to the 12,000 at Northrop, there are thousands of local workers who do subcontracting work on the B-2.

Northrop has said that work on the B-2 will continue until at least 1995.

There was some good news for Northrop this year, however. The company received word that its work building the back section of the F-18 fighter plane at Hawthorne will continue and that possibly another 2,000 workers will be needed for the project.

The company also received military contracts to continue building anti-tank munitions and aerial targets.

Northrop said earlier this year it was creating a commercial aviation division to complement its work building 747 fuselages. In the autumn, Northrop became part of a team that bought the aircraft division of LTV Corp. Northrop was unsuccessful in its attempt to buy the fighter aircraft division of General Dynamics two months later, however.

One of the most active contractors during the last 12 months was Hughes, the high-tech electronics and research company.

In March, C. Michael Armstrong, a marketing executive at IBM, became its chairman, succeeding Malcolm Currie who retired. Almost immediately, things started happening.

The company, which is owned by General Motors Corp., was reorganized to integrate its military and commercial work. In August, Hughes bought General Dynamics' missile division for $450 million and shortly thereafter announced it will move the division out of the Southland to Arizona. Earlier in the summer, as part of the reorganization, Hughes had announced that over the next 18 months it will lay off as many as 9,000 workers.

In terms of contracts, Hughes received a $120 million package from NASA to build a satellite that will track pollution around the world, and $70 million from Northwest Airlines to design a new passenger video system that will be more like a personnel computer than an entertainment device.

Other contracts Hughes received during the year included a $48 million package to develop a digital wireless telephone system in Russia.

Perhaps the most troubled local company in 1992 was Douglas Aircraft, a division of McDonnell Douglas Corp.

During the year there was constant speculation about the future of both Douglas, which makes commercial and military aircraft at a huge complex in Long Beach, and its parent company, the biggest military contractor in the country.

The speculation was driven by the apparent collapse of Douglas' deal with a Taiwanese company to build a new widebody commercial aircraft, the decline in commercial orders and the cost overrun of the company's C-17 military cargo plane project.

In late 1991 Douglas, with much fanfare, announced a partnership with the Taiwan company to build the MD-12. The deal has yet to be completed and many in the industry doubt it ever will, which raises serious questions about Douglas' ability to build a new aircraft and compete against Boeing and Airbus Industries.

During the past year, Douglas announced it was moving back the expected launch of the MD-12 to the end of 1993 while it continues to complete the Taiwan deal and look for other potential partners. The launch was originally expected sometime in 1992.

The significance of the MD-12, according to industry experts, is that Douglas needs a greater diversity of aircraft products to compete against Boeing and Airbus. Currently, Douglas builds the widebody MD-11 and narrowbody MD-80. Recently, it completed production of the first MD-90.

And Douglas nailed its long-anticipated deal this year with China in which Douglas will build and sell 40 MD-90s in Shanghai for commercial use in China. The $1 billion agreement could be expanded to 170 aircraft.

Meanwhile, though, significantly contributing to the problems at Douglas is the decline in orders by commercial airlines in 1992.

For example, in October Douglas said it could slash its production of the MD-11 in half by the end of next year.

Douglas' sole military project is the C-17, a potential $40 billion program that has been plagued by problems. Those problems continued during 1992 when flaws were found in the wings of the aircraft. So far, five C-17s have been completed and are being flight tested but it's doubtful whether all 120 of the planned aircraft will be funded because of the decline in defense spending.

After a fairly quiet 11 months, Lockheed ended 1992 with a huge announcement that it was going to buy the fighter aircraft division of General Dynamics for $1.5 billion.

The deal, which is expected to be completed in the next three months, puts Lockheed in a position to be the country's premier maker of fighter aircraft. General Dynamics makes the F-16 and Lockheed makes the new F-22.

But none of that makes much of a difference to local workers because GD makes the F-16 in Fort Worth, Texas, and Lockheed makes the F-22 in Georgia.

During 1992, Lockheed also won a $1.8 billion, three-year contract for ground support of the space shuttle program, and several other major packages that include work on the Strategic Defense Initiative and building Trident missiles.

A contractor that did not make many headlines in 1992 but continued fairly active was Beverly Hills-based Litton Industries Inc.

During the year, Litton's shipbuilding division in Mississippi maintained its $4.5 billion backlog of building ships for the United States Navy. Locally, the company also received a contract extension for its military communications system that is built in Agoura Hills.

Also in 1992, Century City-based Teledyne Inc. almost completed its reorganization by selling off 15 percent of its assets. But its legal problems mounted as it paid a $17.5 million criminal fine in connection with false testing of materials in a military contract. In addition, the company faces at least three lawsuits that have been joined by the Justice Department over charges of false testing and overcharging.