Defense industry seeks ways to cope with shrinking government budgets


An article in Tuesday's Business section incorrectly identified a senior vice president with Martin Marietta Corp. His name is Robert J. Polutchko.

The Sun regrets the error.

ARLINGTON, Va. -- It's World War III for the nation's defense contractors.

An industry that thrived during the Cold War is now falling victim to the resulting change in world order and is fighting for survival.

Military spending, as a percentage of gross national product, has dropped 24 percent since the defense buildup peaked in fiscal 1986 and is on the way to its lowest level in more than 50 years.

This does not necessarily bode well for companies like Martin Marietta Corp., Westinghouse Electric Corp., Grumman Corp. and General Dynamics Corp. Nor is it good news for states -- like Maryland -- that are heavily dependent on Pentagon spending.

As an indication of how fast the military's downsizing is being felt throughout Maryland, the state's Department of Economic and Employment Development is already questioning the results of a study it did earlier this year projecting a 50 percent growth in engineering jobs between 1986 and 2000.

Maryland, which says it has the third-largest concentration of engineers and scientists in the nation, was expected to add nearly 16,000 engineering jobs by the end of the decade. But Marilyn Corbett, a spokeswoman for the department, says if the study were being done today, it would probably be revised.

Indeed, a revision seems in order. The Pentagon is predicting a 30 percent drop in the number of engineering jobs linked to defense contracting by 1997. Engineers are not the only people in line for pink slips, according to Mark A. Forman, an economist with the Congressional Joint Economic Committee. Speaking last week at a two-day symposium in Arlington, Va., Mr. Forman said layoffs would be widespread.

The conference, titled "Coping With the Impact of Defense Budget Restructuring," was sponsored by the Institute of Electrical and Electronics Engineers.

Using Defense Department figures, Mr. Forman told of a 25 percent decline in business professionals; a 31 percent drop in what he called "operative people," primarily employees of subcontractors; and a 25 percent dip in craft workers.

Maryland is already feeling the impact, Mr. Forman said. A loss of well-paying defense jobs is adding to the state's fiscal woes by reducing tax revenues while increasing the demand for services as these people join the ranks of the unemployed.

Mr. Forman linked the loss of jobs to what the Pentagon estimates is a 37 percent drop in shipbuilding and repair work along with 22 percent declines in orders for both guided missiles and aircraft and parts for aircraft.

Another speaker, John J. Polutchko, a senior vice president with Martin Marietta, offered an industry perspective on the impact of a declining defense budget, and Noel Longuemare, a vice president with the local Westinghouse division, discussed the barriers the company is facing in its attempt to diversify into commercial markets.

Mr. Polutchko said there are too many defense contractors chasing too little business. "As a result," he said, "most companies are downsizing by reducing capital spending on more efficient factories, cutting research and development expenditures and laying off very talented engineers and scientists."

Mr. Polutchko said that while defense expenditures should not be justified on the basis of creating jobs, he encouraged Pentagon budget officials to assign a high priority to basic and applied research seeking breakthroughs in military technology.

"A shortfall of 10 percent in tanks, ships or aircraft is seldom decisive," he said. "But a failure to recognize the technology of the atomic bomb, stealth, smart weapons, night vision or other breakthroughs could have been disastrous."

To suggestions that the defense industry should be diversifying into commercial areas, Mr. Polutchko said it was not as easy as some might think. He compared it to changing the direction of a herd of charging elephants.

"People who suggest this probably have never stood before a board of directors explaining how, exactly, all the business risks will be mitigated," Mr. Polutchko said.

"Even more fundamental, where would the money for commercialization come from in an industry whose profit margins are limited by regulations and have severely eroded to 3 to 6 percent after taxes over the past decade?"

Mr. Polutchko encouraged the federal government to work with companies on creating policies to help shore up the nation's defense industry base while safeguarding national security.

Mr. Longuemare didn't offer a lot of hope to individuals caught up in the defense budget battle. He said a lot of the jobs that were eliminated during the recession would not be filled during better economic times.

Although the Westinghouse Electronic Systems Group based in Linthicum has been primarily a defense contractor, it has set a goal of having half its business coming from non-Department of Defense sources by 1995.

A major impediment to diversification, Mr. Longuemare told the group, is a lack of understanding of the commercial market. When doing business with the military, he explained, the Pentagon would normally say that it wanted a certain system to do a certain job, and the company would set the price.

Price is more of a factor in the commercial world where there can be some trade-off between cost and performance.

He warned that the excessive specifications that are a part of defense contracts lead to a corporate bureaucracy that is not conducive to doing business in the commercial market as it slows things down.

In contrast, he cited the case of Westinghouse's development of the propulsion system for an electric car. He said the company limited the program to a group of about 24 people and in eight months, they had developed a running system.

Mr. Longuemare also encouraged defense contractors to share the cost of a move into a commercial business by teaming with a partner or forming a joint venture. For example, Westinghouse teamed with Chrysler Corp. on the development of the electric car.

Another suggestion was to get involved in products that can be used in both the military and civilian markets. Westinghouse used that technique when its ground-based radar, developed for the military, was eventually sold to the Federal Aviation Administration to track civilian air traffic.

Many of the nearly two dozen speakers at the symposium stressed that a new war was being fought today. It's an economic war, and to win, U.S. defense contractors must not only move into new markets but they must do a better job than their rivals in Japan, Germany and other parts of the world.

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