It's survival of the fittest for L.A. defense firms.

It's survival of the fittest for L.A. defense firms

With no Cold War to fuel it and Pentagon spending likely to nosedive, Southland defense contractors are navigating through the most turbulent economic times since the end of World War II.

Though still a pillar of the region's industrial muscle, Los Angeles County's $25-billion-year military business is already badly bruised, having lost a staggering 69,000 jobs since 1986. And the coup's failure in the Soviet Union, apparently sounding communism's death knell, leaves local defense contractors bracing for a continuation of military spending cutbacks.

A cornerstone of the Southland's growth since World War II, the defense industry now faces a challenge that parallels the situation confronting Los Angeles County: How to change to meet the challenge of a changing economy. And, because of the key role defense has played in the area's expansion, its quandary contributes to Los Angeles'.

And from the San Fernando Valley to the South Bay, defense executives are scrambling to rethink what is probably more than just a periodic downturn in U.S. military spending. Indeed, the debate over Northrop Corp.'s $865-million-a-copy B-2 bomber, produced in the heart of industrial L.A., has come to symbolize what many believe is the end of free-flowing military spending.

"All the aerospace companies are redoing their strategic plans for the new world order. It's a matter of survival," said Jim Blackwell, a political analyst with Washington, D.C.'s Center for Strategic and International Studies. "Before there were skeptics in the defense industry about Soviet intentions. Now (after the failed coup) there can be no doubt."

Employing 236,500 directly in defense work, aerospace is still the county's No. 1 manufacturing segment, employing 29 percent of the industrial workforce. But its status with tourism and entertainment as one of the Southern California's "signature industries" may falter should the recession linger and U.S. defense cuts accelerate.

"Depending on how smart we are and how fast we can adapt, we may lose 100,000 to 150,000 more workers out of the defense business here. That would be a crash and burn," said Jack Kyser, chief economist of the Los Angeles County Economic Development Corp. "A lot of those aerospace executives have got to be in a state of panic."

The consensus among industry experts is that the weakest companies will be merged or forced into Chapter 11, while the strongest will team up to compete for smaller pieces of a shrinking federal budget pie.

But what will be the fate of the thousands of freshly laid-off aerospace engineers, chemists, designers and administrators? What manufacturing sector will replace the once unshakable defense business? What will become of the region's major universities, which hold tens of millions of dollars in Pentagon research contracts? How will government make up for the loss of millions of dollars in lost taxes if defense commerce goes into the tank?

"It's just too early in the game to know," said one defense expert.

Meanwhile, some local companies grumble that government red tape -- not the decline of the Red Peril -- has endangered their ability to do business in the Southland.

Evidence of the shakeout is abundant.

Hughes Aircraft Co., one of California's biggest employers, has said it will not add new operations in the region. Meanwhile, Calabasas-based Lockheed Corp., once the San Fernando Valley's biggest company, has already reduced its local workforce by 20,000 over the last decade.

Refocusing efforts

After decades building some of the Defense Department's most prized and expensive projects -- from the SR-71 Blackbird to the MX missile to the B-2 bomber -- local defense firms can expect their long-term growth areas now to be in defense electronics and communications, research and development and possibly high-tech military sales to U.S. allies, experts predict. There is even a move afoot across California to convert weapons plants into commercial assembly lines.

In the meantime, companies large and small are tightening their financial belts, bidding on deals to modernize existing combat hardware.

"There's going to be a lot of upgrading of what we already have because that's the only thing we can afford," said Ben Rich, who ran Lockheed's famed "Skunk Works" division from 1975 to 1990. "In a way it's a lot like the end of World War II when everything stopped."

General Dynamics Corp.'s Pomona division, for example, recently landed a $138 million contract to improve an existing missile system. Hughes, for its part, holds pacts to produce the Phoenix and Maverick missiles for the Air Force and is working to build an $837 million air defense system for Saudi Arabia.

Concluded Wolfgang Demisch, an aerospace analyst with New York-based UBS Phillips & Drew, "Nothing is going to happen instantaneously, but I think you'll see Los Angeles companies focusing on the performance of existing jobs, trying to improve their financial positions and strategic reserves. They realize that if the tide is receding, all the boats are going to float lower."

Just two years ago, Los Angeles County defense companies had major pieces of the nation's most expensive programs, $11 billion in prime contracts alone -- three times the amount of the nearest California county, Santa Clara, according to the California Commission on State Finance.

"If you go back to Korea, what has driven system acquisition in the defense budget has been the idea of an increasingly technological threat from the Soviet Union," said local defense consultant Michael Beltramo. "Los Angeles always benefitted, because it was always the heart and soul of this country's high-tech research and development. Now, with the decline of that threat, it will be real difficult to propel the defense budget towards whiz-bang new products."

Roughly one-third of the $53 billion the Golden State received in defense contracts last year went to an area now under the budget ax: missiles and space exploration. About 19 percent, or $4.4 billion, went into aircraft and parts; 14 percent, or $3.4 billion, went into electronics and communications.

Less military dependence

Well before Soviet President Mikhail Gorbachev introduced perestroika four years ago, some local companies saw the writing on the wall and began investing in the commercial side of the aerospace business.

Companies like Hughes and El Segundo-based Rockwell International began deemphasizing military work years ago, and now even contractors like Lockheed and Northrop are looking for more commercial work. Even before the botched Kremlin coup, Lockheed Chairman Daniel Tellep said the company will, over the next five years, reduce its dependence on defense business to 60 percent from 74 percent.

"If those companies can build the most elaborate defense surveillance system in the world, why can't they track commercial ships at sea or passenger trains," said Jon Goodman, director of the entrepreneurial division at the USC School of Business. "If the creative people in those companies can see outside the traditional channels of distribution and selling, they can thrive. There are a thousand different applications for military technologies."

But conversion from strictly regulated and high-overhead military work won't be easy. Nobody is sure if there will be enough work in commercial aviation, satellites or space-vehicle work to go around.

"Defense companies produce high-technology products and cannot all of a sudden switch over to low-technology. It has rarely been done when a company that specializes in high-technology has been able to make the conversion to a new product line," said James Ragsdale, an industry veteran at Lockheed. "One of the things to consider, too, is the people. Many people come to the industry to work on high-technology systems like advanced fighter planes. They don't want to build subway cars" -- as some local officials have recommended.

Meanwhile, like many companies, defense contractors chaff under the nation's toughest air, land and water quality regulations. In addition, there are soaring workers' compensation rates, exhorbitant home prices and gridlocked freeways. All of that makes Southern California a tough place to do business, whether the contractors stay in defense or shift to something else.

"The defense budget is clearly on a downward slide and that's the driver of our business machine," said one Hughes executive, who spoke on the condition of anonymity. "But now the AQMD (South Coast Air Quality Management District) is saying we can't exceed our historical emissions. So what happens when the economy turns around, when we try to convert to commercial stuff? Can we recover is the issue."

Aerospace executives cite some results of what they see as an increasingly hostile business environment:

* McDonnell Douglas, parent of Douglas Aircraft Co., must fly its planes out of California to paint them and has decided not to build its new MD-12 widebody commercial airliner in Long Beach.

* Lockheed is moving its Burbank aircraft manufacturing operations to new facilities in Marietta, Ga., costing the Southland 6,000 workers. That decision will be especially painful considering that Lockheed was awarded a hotly sought $100 million contract to build the Air Force's Advanced Tactical Fighter jet.

Said Carl Covitz, secretary of California's Department of Business, Housing and Transportation, "We have lost our competitive advantage over other states. The dominant theme I hear is that we're overly regulated, making things very expensive. We need to make California conducive to do business again by streamlining the process."

John Fuqua, president of the industry's trade group, the Aerospace Industries Association in Washington, D.C., predicted consolidation. "We are already heading in that direction because there is probably overcapacity," he said.

Added consultant Beltramo, "L.A. will have to transition into other areas to find substitutes for defense work. It's definitely a game of survival of the fittest." [Graph Omitted]