US Defense Contractors Prepare For Years of Cutbacks and Change
LANDING a position at one of the nation's blue-chip aerospace and defense companies - such as Lockheed, General Dynamics, or Boeing - was once considered a guarantee of financial well-being and job security. But in this era of shrinking defense budgets, high deficits, and a sluggish commercial airline industry, it is just as often a doorway to unemployment.
This past week alone, McDonnell Douglas Corporation announced plans to cut about 9,000 jobs, Boeing up to 30,000, and United Technologies 10,500.
The outlook for the United States aerospace and defense industry is sober following the collapse of the Soviet Union and reduced public support for maintaining a massive military establishment. It is not jobs alone that are being cut: Entire companies that specialize in defense are being sliced up, repackaged, and sold, usually in a reduced size. General Dynamics sold a big chunk of its military aircraft business to Lockheed for $1.5 billion; General Electric sold its defense electronics operations to Ma rtin Marietta for $3 billion.
Additional sales of defense plants and a continued downsizing of the industry in general can be expected during the years ahead, says Jerrold Lundquist, an aerospace/defense expert with McKinsey & Co., a management consulting firm in New York.
Currently, there are 9,000 primary suppliers of defense products and an even larger number of secondary companies in some 200 defense-industry sectors, Mr. Lundquist says. But he predicts that those numbers will shrink substantially during the next few years through mergers, acquisitions, and plant closings.
Currently, 12 "top guns" of the industry compete in six or more market segments, he says. But Lundquist says that within a few years companies now in six market segments will be competing in only two or three. Several large companies will fold, he predicts.
Lundquist sees the current 13 companies in the space sector shrinking to five or six. There are seven primary fighter aircraft manufacturers and four major helicopter manufacturers. Lundquist sees that pie shrinking to three companies for fighter aircraft and one in helicopters.
"There are now some 2.6 million workers in the defense industry, representing about 2.6 percent of the entire civilian labor force," says a spokesman for the Defense Budget Project, a research organization in Washington. "But we anticipate that during the next three or four years, the defense component of the total labor force will shrink by roughly 1 million workers."
In addition, the Department of Defense itself - the nation's roster of active and inactive military personnel - is expected to continue to shrink by thousands of jobs, says Adm. Eugene Carroll (retired), an official of the Center for Defense Information, a research organization in Washington.
The overall impact of this downsizing in the defense sector will be most heavily felt in a number of key states - California, New Jersey, Connecticut, New York, Texas, and Florida - as well as at the community level, where former high-paid defense workers will have to be retrained for new types of civilian employment or move to regions with active defense plants.
DEFENSE spending has been increasing at an average real rate of 0.7 percent a year since World War II, Lundquist says. But given the sharply cyclical nature Defense Department outlays and a new administration that can be expected to look to the Pentagon for further budget cutbacks - Lundquist sees major reductions in defense spending in the 1990s. Defense spending will bottom out at around $213 billion at the end of this decade, he predicts. That would represent an $80 billion drop from the present level
For Wall Street, dramatic downsizing makes the defense sector a hazardous place to invest.
Salomon Brothers, an investment house, concludes that the current outlook for aerospace and defense companies "remains bleak," given continuing cancellations of orders for commercial aircraft and shrinking defense budgets.
Salomon recommends finding firms with growing strength in commercial markets, such as Raytheon (appliances, power plants, and textbooks), Litton Industries (manufacturing systems and resource exploration), and GM Hughes Electronics (commercial satellites).
Several brokerage firms have closed their defense-industry research desks - clear indications, veteran Wall Street analysts say, that there may not be much gold to mine in defense stocks in the years ahead.
One industry sector that could remain healthy despite Pentagon cutbacks, experts say, is defense electronics and anti-missile defenses.