Defense Firms Are Learning `Real World'

ALLAN JOHNSON has never forgotten the hassles his company had to endure to build a simple $20,000 racquetball court for a government-run missile storage base in Los Alamitos in the late 1980s.

``We had to hire a consultant to decipher all the regulations, and another full-time worker just for paperwork,'' says Mr. Johnson, president of Fibermux, a small engineering subcontracting firm for aerospace companies. ``Then we had to send eight copies of forms, together with eight samples of each material we used - sand, cement, blocks, wood, etc. It was totally absurd.''

Now that the cold war is over, dozens of defense and aerospace firms are having to diversify into the private sector, convert to new applications, or shut down. Johnson says the biggest firms have become so reliant on government they ``don't know how the real world works anymore.''

``They don't know what is required to put out ideas and produce products in a competitive environment,'' says Johnson, who has done subcontracting work for Northrop Corporation of Los Angeles, Lockheed Corporation, and McDonnell Douglas Corporation. ``They know how to push government paper, but they don't know how to get things done.''

Such comments were among scores of similar observations released last week in a survey of 60 top southern California aerospace firms and smaller subcontractors. The survey, conducted by the Economic Roundtable of Los Angeles, a nonprofit public-policy research foundation, examines how such firms are adapting to defense cutbacks and conversion. One conclusion: The five-county area with America's largest concentration of aerospace firms has grown more reliant on military spending since the cold war ended more than two years ago.

Because of recession, a drop in passenger aircraft orders, and military contractors' reluctance to convert to commercial work, the region's dependence on defense spending increased from 59 percent in 1991 to 65 percent in 1993, the survey found.

``We are watching the dismantling of the heart and soul of this country's aircraft design and production,'' says Michael Beltramo, a Santa Monica-based defense analyst. The 60 firms lost a total of 150,000 jobs between 1988 and 1993, as national defense spending dropped from $140 billion in 1987 to about $105 billion in 1993, according to the roundtable. That includes a drop from $12 billion to $6 billion in Los Angeles county alone.

``Yet despite so-called attempts at conversion, there is continued dependence on Uncle Sam,'' Mr. Beltramo says.

The worst is yet to come, Beltramo and others point out. A second study released last week by Beltramo & Associates, a Los Angeles-based management consulting firm, shows that more than one-half of the region's defense revenues rely on government contracts for the B-2 stealth bomber, which is scheduled to stop production in 1997.

Big firms adjust poorly

Examining the region's major defense firms in five counties - Los Angeles, Orange, Riverside, Ventura, and San Bernardino - the roundtable found that the largest firms had the most trouble adjusting to downsized post-cold-war spending. Some small- to mid-size companies added to their work forces. Those with 500 or more employees lost an average of 25 percent of their work force, while those with 100 to 499 employees increased 5 percent.

``We continue to explore non-aerospace opportunities,'' says Kent Cressa, president of Northrop, whose net sales have dropped from $5.69 billion in 1991 to a projected $5.06 billion for next year. The explorations include possible contracts with the Metropolitan Transit Authority to develop an advanced-technology, low-emission bus, and with Boeing for commercial aircraft frames. But ``any new business derived from these initiatives is expected to be small,'' Mr. Cressa says, ``and will not make up for the decline we see in the defense sector anytime soon.''

Part of the reason for the survey, explains Dan Flaming, president of the roundtable, was to try and understand what the firms wanted from both the public and the government, and what those interests might do to help. ``Of course these companies are extremely unhappy with government so far and yet they say they want some form of help from the public sector,'' he adds.

When asked how important it is for southern California's economic future that defense-related industries diversify into new commercial markets, 84 percent of respondents said either that it is important or critically important. But when asked to rate the effectiveness of federal, state, county, and city government in responding to the impacts of defense cutbacks, 88 percent rated every level of government as ineffective.

Little government help

``There's so much red tape and paperwork in dealing with the government, you can't believe it,'' says William Bundy, president of Bundy Manufacturing, a small aircraft-parts company in El Segundo. About 40 percent of Bundy's sales are to defense. He complains of a 2-inch-thick catalogue needed to explain procedure. ``It is choking the life out of attempts by aerospace manufacturers to try and succeed at new things.''

Depending on different standards of measurement, the federal government has allocated about $0.5 billion to $2 billion in the past three years to spur defense conversion. But many companies are loathe to use such funds, made available through the Technology Reinvestment Program, coordinated by the Department of Defense's Advanced Research Project Agency.

The survey also concluded:

* High-tech firms say they most need a stable regulatory environment, financing, and information about new markets.

* Businesses say their greatest interest is in strategies calling for independent growth and diversification: increasing each company's own share of its primary market, developing new products, and developing new markets for existing products.

* Firms are optimistic about their future, but have been wrong two-thirds of the time when predicting their own growth or decline. One in four indicate that they expect employment in their firms to decline over the next five years. Yet two out of three indicate that they expect total employment in southern California's high-tech sector to decline.

``Converting to a new industry is very difficult,'' says Clyde MacDonald, legislative consultant to the California Assembly's Task Force on Defense Conversion. ``You have to determine a need, develop a market.... What are you going to do, compete with Toyota [or] go up against Dow Chemical?''

Based on the survey findings, roundtable leaders came up with several recommendations. Key among them: clear regulations; better government/business communication; better analysis of public benefits in helping firms; and new ways of financing expansion, research and development, and other production facilities.

``We conclude that if elected officials could just have face-to-face contact once a month with members of these companies, that would do a lot to change the hostile climate,'' says Mr. Flaming, the roundtable president. ``Companies feel ignored, not understood, and not responded to.''