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Defenseless Against Cutbacks


Industry Outlook 1991: MANUFACTURING

DEFENSELESS AGAINST CUTBACKS

When do preparations for war fail to help U. S. defense contractors? When they happen during a recession--just as Congress is desperate to cut the soaring U. S. budget deficit.

No matter what happens in the Middle East, the recession at home, coupled with reduced tensions in Europe, translates into deeper cuts in the Defense Dept.'s procurement budget, which Congress has slashed by $19 billion for fiscal 1991, to $66.7 billion. "We've been through major declines before," says David J. Wheaton, vice-president for planning at General Dynamics Corp. " The difference now is that we don't see what would bring spending up again."

It won't be Desert Shield. In fact, the estimated $30 billion annual cost of the Middle East buildup will mean less to spend on new weapons. "The money has got to come from somewhere, probably right out of defense R&D and procurement budgets," says Phillip A. Karber, an analyst with BDM International Inc., a Virginia-based consulting firm. Among the biggest losers will be some of the largest U. S. military contractors: McDonnell Douglas and General Dynamics, developers of a new Navy attack plane, and Northrop, builder of the $62 billion B-2 bomber. Boeing Corp. could lose work on the MX and Midgetman missiles.

WINDING DOWN. It isn't that the U. S. won't spend money in the desert. Makers of sophisticated missiles, which are used for air combat, will do well. Already, Raytheon Co. and Martin Marietta Corp. see a surge in orders for the Patriot, and General Dynamics has received new orders for its Stinger missile. Lockheed Corp. has won $800 million in new orders for transport and tanker planes as part of a $20 billion arms deal with the Saudis. That deal also boosts Saudi orders for General Dynamics' M-1 tank to $1.5 billion. Washington will spend $10 billion on fuel, $3 billion for ammo, including missiles, and billions for tents, uniforms, and rations. But even if war breaks out, the Pentagon could wait four months to order more planes, tanks, and armored personnel carriers, because of huge reserves in Europe, says Gordon Adams of the Defense Budget Project, a Washington research group.

In short, weapons makers will have to depend on the whims of a tightfisted Congress for new revenues. Convinced that the last of the Reagan-era weapons programs are too costly to build soon, legislators will no doubt move to again delay development of the $75 billion Advanced Tactical Fighter (ATF) and the $30 billion light helicopter. They may also decide to halt production of the B-2 bomber at 15 planes.

Meanwhile, orders will be winding down for such money-makers as McDonnell Douglas' F-15 fighter. Industrywide, weapons backlogs are now down to about $162 billion, according to the Defense Budget Project, compared with $177 billion a year ago and $211 billion in the peak year of 1986.

Even the Pentagon is getting aggressive about canceling defense projects. In July, it terminated a $45 billion program to build the P-7A antisubmarine plane after Lockheed failed to correct a costly wing-design error. Next to go could be the embattled A-12 Navy attack jet that General Dynamics and McDonnell Douglas are developing. That $57 billion program is now an alarming $1.3 billion over budget and 18 months behind schedule. In late December, that prompted Defense Secretary Richard B. Cheney to threaten to cancel the project.

The defense industry must also contend with cuts in nuclear weapons this year. U. S. and Soviet negotiators may agree on reductions in their nuclear arsenals, which could affect MX and Midgetman contracts. Orders for Lockheed's Trident submarine missile may also be scaled back.

LOST JOBS. That's good for peace. But it will mean more lost jobs for a defense work force already buffeted by layoffs. From 1989 to the end of 1991, more than 50,000 jobs will have disappeared at military-aircraft plants, says the Aerospace Industries Assn. And this may just be the start of a shrinkage that could last through the early 1990s. More companies will have to combine production facilities and sell off real estate--steps that financially squeezed Northrop and Lockheed have already taken. In most cases, commercial orders won't offset military cuts. McDonnell Douglas, for example, may find new orders harder to get for its MD-11 jetliner now that the airline industry is reeling from high fuel prices and the recession.

Still, delays in production of new weapons will boost sales of some older ones. Last year, Grumman Corp. kept open its plane-building operations thanks to 18 new orders for F-14D fighters. Now, it hopes for orders for dozens more. "We'll be building planes well into the next century," predicts Peter B. Oram, president of Grumman's Aircraft Systems Div.

Most contractors, however, will have to look outside the Pentagon for new business. After making strides in everything from marketing computer terminals to selling commercial satellites, GM Hughes Electronics Corp. plans a big push into making cellular-phone equipment. Lockheed has just formed a joint venture with Japan Air Lines Co. to maintain and upgrade Boeing 747s, work it hopes will grow to more than $100 million annually by 1993. TRW Inc. is peddling its satellites for pollution monitoring. And Raytheon expects its energy-services unit, now with $200 million in sales, to grow to $500 million by the end of 1992.

But tracking acid rain and mopping up chemicals are small recompense for losing defense contracts. Like a recurring bad dream, 1991 will be another lean year for contractors. And not even a Mideast war will provide a wakeup call.Eric Schine in Los Angeles


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