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BusinessWeek: January 11, 1993 |
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Industry Outlook: MANUFACTURING
NOWHERE TO RUN, NOWHERE TO HIDE Congress has approved a weapons-procurement budget of only $53 billion this year, down 6% from 1992 and less than half the late-1980s' budgets. "You don't have to go to Harvard business school to figure out what is happening," says Michael Armstrong, chief executive at General Motors Corp.'s Hughes Aircraft subsidiary. Arms makers are going beyond the traditional strategies of diversifying, converting to civilian production, and boosting foreign sales. Late last year, for instance, Lockheed Corp. and Martin Marietta Corp. bought major units from rivals. More consolidation lies ahead. Grumman Corp. may be the next to merge. And companies such as Northrop Corp. may be consigned to subcontracting work. LESS FAT. The shape of the new defense industry is becoming clearer thanks to the Lockheed and Martin acquisitions. Lockheed will pay $1.5 billion for General Dynamics Corp.'s military aircraft business, whose $3 billion in revenues include F-16 fighters and part of the work on the Air Force's next-generation F-22 fighter. Martin's $3 billion acquisition of General Electric Co.'s defense electronics work makes it the biggest supplier of radar and satellite technology. As the two consolidate their acquisitions, industry employment could fall by 300,000 in 1993, predicts the Defense Budget Project, a Washington research group. Even with massive realignments, excess capacity will still plague the industry. Seven airframe makers will be vying for contracts that, in a year or two, will barely keep two or three afloat, predicts Jerrold T. Lundquist, an aerospace consultant with McKinsey & Co. The Aerospace Industries Assn. thinks backlogs for aircraft parts will fall to $28 billion this year, down 24% from their 1989 peak. That means companies such as Rockwell International Corp. and Grumman may emulate GD and LTV Corp. and exit the airplane business. GD is selling itself off piecemeal, returning the proceeds to shareholders through a stock repurchase plan. "The industry is imploding," says Lundquist. There's also a shakeout looming in everything from helicopters to armored vehicles, where FMC Corp. is combining its operations with those at Harsco Corp. The merged business will have annual sales of $1.3 billion and virtually all the military's business, since GD is getting out. The operation will be run as a joint venture, with FMC owning 60% and managing the company. IN A HURRY. For many, the motivation to merge or sell is heightened by the need to do so while defense units are still profitable--and still have value. In addition to selling its airframe operations to Lockheed, GD has peddled its Tomahawk and other missile businesses to Hughes Aircraft Co. for $450 million. These moves have enabled it to retire $370 million in debt. In the first nine months of 1992, it earned $641 million on $4.8 billion in revenues, almost double its profits for the same period last year. Even defense electronics, long spared the budget scalpel, faces a shakier future. Indeed, GE's sale to Martin Marietta could be the signal for such companies as Texas Instruments Inc. and AlliedSignal Inc. to bail out, industry analysts say. Some electronics outfits are still doing well, however, thanks in part to overseas sales. A West German Air Force contract for an airborne surveillance system should help E-Systems in Dallas post a 10% increase in 1993 net income, to $135 million on sales of $2.3 billion, predicts analyst Byron Callan at Prudential-Bache Securities Inc. Thanks partly to acquisitions, he adds, Loral Corp.'s profits will jump 39%, to $169 million this year. No one will emerge stronger from 1993 than Lockheed and Martin, both of which should dominate Pentagon contracting for years. The purchase of GD's F-16 fighter business will add $16 billion to Lockheed's revenues over the next decade and ensure it most of the work on the Air Force's $9.55 billion F-22 development aircraft. Martin's purchase of GE's aerospace business vaults it right to the top of the Pentagon's defense electronics list. It should earn $540 million on $10.3 billion in sales this year, says analyst Howard Rubel at C.J. Lawrence, and Lockheed $381 million on $13 billion in sales. One other survival strategy is to sell military gear to commercial markets, as Hughes and TRW Inc. are doing. They're betting big on such products as digital cellular-phone systems and radar-based collision-avoidance systems for vehicles. Still, even the most successful defense conversion can't bring back the old days, when a huge Pentagon contract meant that life was secure for another decade. | |
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