Firms stung by Pentagon cuts Many subcontractors have folded or slashed their operations; Unseen casualties; Small businesses are hit by cost cutting by big companies

THE BALTIMORE SUN

The doors to the little shop are locked. The paint is beginning to peel and the crab grass and dandelions shove through the white gravel lot once dominated by employee cars but reduced to a storage area for a handful of boats.

Sun Machine Co. once was a thriving firm on the shores of Sue Creek near Essex. But today, the two-story, sand-colored concrete block building is nothing but a symbol of how deeply slashes in the defense budget have cut.

Hundreds of subcontracting companies across the state -- most of them small and unknown to most people -- have either been driven out of business, like Sun Machine, or forced to slash their operations to stay afloat in what one person described as "the hidden pain of defense downsizing."

They are the faceless victims of the unrelenting push by bigger prime contractors to reduce costs amid massive Pentagon budgets cuts.

"It has been devastating for many of these subcontractors," Richard A. Bitzinger, an analyst with the Defense Budget Project, a Washington-based nonprofit research organization, said.

Although complete figures are unknown, the swath of the blade is startling. For example:

* Lockheed Martin Corp.'s Middle River plant has severed ties with 5,250 suppliers in just the past two years.

* Westinghouse Electric Corp.'s defense complex in Linthicum has chopped the number of outside suppliers to 830 from the 2,700 it used in 1990.

* AlliedSignal Inc. Communications Systems in Towson has cut its subcontractors in half in the past 18 months -- to 600 from 1,200.

Full impact not weighed

Despite the enormous economic importance of subcontractors and the number of jobs they generate, no one has a grip on the full impact of the cuts that have occurred.

"The fact of the matter is that the Pentagon and the government is unaware of the full extent of their suffering," said Mr. Bitzinger.

That goes for state officials as well, even though Maryland is the fifth most dependent state in the nation on military contracts.

"We don't know how many of these companies have disappeared, but we know they have disappeared," said Marsha Schachtel, who monitors defense and federal activity in the state for the Maryland Department of Business and Economic Development. "The commercial real estate companies tell us, 'They were here last month, but they're not here this month.' "

Realizing that small and medium-sized contractors would likely feel the brunt of any decline in Pentagon spending, the state agency mailed a questionnaire to 454 companies in late 1990. Companies were asked what would happen if defense spending continued to fall.

Of those responding, more than half predicted significant loss in employment. Nearly 68 percent said they would cut up to 25 percent of their workers.

One out of every four companies predicted the elimination of up to half of their jobs, and 7 percent said they would be forced to cut their work force by up to 75 percent.

Since the state's survey, the Pentagon's procurement budget -- which purchases things such as tanks, airplanes, rifles and ships -- has plummeted almost 60 percent.

No follow-up

Despite the dire predictions, the state never followed up.

"We don't have the evidence to judge what happened to these companies. We don't know if their predictions came true," Ms. Schachtel said.

But Kenneth A. Lewis has no doubts about the consequences for Maryland's subcontractors. "That is exactly what happened," said of the forecasts of massive job losses.

His Southwest Baltimore-based company, Kenlee Precision Corp., has hired some employees from firms that have folded: Sun Machine, IMI Industrial Machine, and LBL.

"A lot of companies have gone out of business," said Mr. Lewis, who was cited by President Clinton last year at a White House luncheon for his successful transition from defense contracting to commercial markets. ". . . It has been tough for a lot of people."

Big contractors also hit

Cutbacks haven't been limited to subcontractors, of course. Three of Maryland's largest defense contractors -- Westinghouse, Lockheed Martin and AAI Corp. -- have eliminated more than 13,000 jobs since Pentagon spending began its long decline after the fall of the Berlin Wall.

Those cuts have rippled throughout Maryland's economy. Mr. Bitzinger estimated that subcontractors eliminated one job for each one eliminated by these larger companies.

Michael Conte, director of regional economic studies at the University of Baltimore, said the decisions by prime contractors to reduce their number of suppliers "may have wiped out 50 companies, or more -- machine shops, repair shops, specialty rolling mills, the list goes on and on."

"This trend is not limited to Maryland," said Paul H. Nisbit, president of JSA Research in Newport, R.I., which concentrates on defense and aerospace companies. "And it's not limited to defense contractors."

More in-house work

Mr. Nisbit said companies all across the country are moving toward using fewer outside firms. "Most companies have eliminated 75 percent of their subcontractors and suppliers and a lot of these companies have gone out of business," he said.

A recent survey of defense contractors by Defense News, an industry publication, found that 63 percent of the U.S. contractors are trying to reduce their number of subcontractors.

Sixty-seven percent said they were doing more work in-house and 74 percent said they are finding their subcontractors leaving the defense industry.

Mr. Nisbit said that the current trend among prime contractors is to use what they call "quality" or "certified" subcontractors. In return for the subcontractors taking on more of the responsibility of delivering inspected parts ready for use at a reduced cost, the selected few are being awarded bigger portions of the work still being contracted out, he said.

Sun Machine was one of the victims of this trend. Prior to that, it was a thriving small enterprise with 25 workers and $3.6 million a year in sales, turning out for Westinghouse a steady flow of parts used in B-1 bombers and F-16 fighter planes.

The company's former president, George C. Thiess III, who now runs a smaller machine shop in Ormond Beach, Fla., said Sun Machine "had too many of its eggs in the Westinghouse basket."

Westinghouse accounted for $2.8 million of its 1990 sales.

But that business had dwindled to about $200,000 a year, forcing the closing of the Essex shop.

James F. O'Hara, said a sharp decline in business from defense contractors was a big factor in forcing his company, IMI, in the Bare Hills section of Baltimore County into bankruptcy and eventually out of business two years ago. He said there was "not enough defense work to go around."

When the end came, the 62-year-old company had only 35 workers, down from 60 in the mid- 1980s, when defense spending was still on the rise.

An official with Fleck Machine Co. Inc. in Hanover, said the company depended on Westinghouse and Lockheed Martin for 80 to 90 percent of its business.

When sales dropped by 25 percent, the number of workers fell to 24 from from a peak of 32 in 1990.

Mr. Conte said most of Maryland's small businesses have 20 to 40 workers, and few people notice when these companies eliminate jobs or go under.

But the numbers add up, especially in states like Maryland that are heavily into defense manufacturing.

"Everybody says we have to diversify into commercial market," said Mr. Thiess, "but that's hard for small companies like mine."

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