Thanksgiving all month for Lockheed Biggest defense firm had success in Nov. on 3 major contracts; Potential of $328 billion; It is like Orioles going undefeated, says chief executive

THE BALTIMORE SUN

Lockheed Martin Corp. had the kind of November that would make a good decade for most companies.

Three major government contracts -- three big wins, with a total value of $3.6 billion.

Total potential value: a preposterous $328 billion.

"That's like knocking the ball out of the park and taking the park home with you," Chief Executive Officer Norman R. Augustine said in a recent interview.

In a conference room at company headquarters in Bethesda, Augustine reflected on the past month with a mixture of pride, humility and bemusement. He knew Lockheed Martin was going to be a monster when he helped create it last year by merging Lockheed and Martin Marietta.

"But we've certainly exceeded, I think, what we had any reasonable right to expect," Augustine said.

The recent wins came on the heels of an already remarkable year that included winning the race to build the replacement for the Space Shuttle, piling adjective on top of superlative on top of sports metaphor.

"That's like expecting the Orioles to go through the season undefeated," Augustine said. "Any good manager would say you expected that, but you've got to realize it probably isn't going to happen." Except that for Lockheed Martin, it did happen. The Joint Strike Fighter, the airborne laser and the Space Based Infrared System were all landmark contracts awarded in November. All involved a major stake in the military of the future. All involved a vast potential payoff to the winning company -- in the case of Joint Strike Fighter, something like $300 billion, making it the richest defense award ever.

Lockheed Martin won or advanced in all three competitions. In the case of the Joint Strike Fighter, it and Boeing got the nod and funding to build competing prototypes that the Pentagon will evaluate, with the final decision scheduled for 2001.

It's easy to understand why Augustine would resort to sports to describe his situation, because little else in real life compares to the kind of dominance that Lockheed Martin has achieved.

"But like a baseball player who has just gotten half-a-dozen hits in a row, I think any reasonable person knows you can't expect to do that day in and day out," Augustine conceded. "I'm sure we can do much better than the industry averages. But we can't maintain this degree of perfection with any reasonable expectation."

The average defense company, he said, wins about 27 percent of the contracts it bids on. Lockheed Martin had been averaging a win rate of 60 percent even before the November returns came in.

Where do they go from here? Common sense would say the only direction left is down. Augustine does expect things to level out, and he expects the field of competitors to change. But neither he nor industry analysts expect Lockheed Martin to do anything but flourish for the next several decades.

Morgan Stanley, in a recent defense industry analysis, pointed out that Lockheed Martin's $30 billion in annual sales almost equals the entire annual defense budget of the United Kingdom.

"We believe that Lockheed Martin's leading position is such that it should be able to maintain its competitive advantage for about 20 years," the study concluded.

With revenues equaling those of its next two U.S. competitors combined -- McDonnell Douglas Corp. and Northrop Grumman Corp. -- Lockheed Martin is the thick-necked epitome of the recent merger craze in the defense industry. Its results validate both the hopes of those who thought bigger would be better and the fears of those who thought bigger would just be scary.

"It's true. They are the anti-Christ," joked Teal Group defense analyst Richard Aboulafia.

Hyperbole aside, Aboulafia sees no one on the horizon that competes with Lockheed Martin's diversity and economy of scale. That could only change, he said, if there is another mega-merger -- say, Boeing and McDonnell Douglas, which has been rumored.

Augustine expects some such beast to arise.

"From the nation's standpoint, I would encourage that," he said.

Merging Lockheed, Martin Marietta and later Loral Corp. has let the resulting company save $2.6 billion a year, Augustine said. Those savings, he said, drive prices down and help the Defense Department spend fewer tax dollars.

The emergence of another super company would not only mean more public savings, it would improve the marketplace, he said.

"From a competitive standpoint, I would much rather compete with strong, healthy companies that are not worrying about survival. Companies that are worrying about survival tend to be very unpredictable, to do irrational things, to take very large risks. And they distort the marketplace," Augustine said.

One company wringing its hands lately is McDonnell Douglas, shut out by Lockheed Martin and Boeing in the race to build a prototype Joint Strike Fighter. Already having renounced the large commercial airplane business, McDonnell Douglas now faces the prospect of losing its prestigious heritage in military aircraft as well.

Augustine, who criticized McDonnell Douglas' Joint Strike Fighter entry as being inferior from an engineering standpoint, said he is optimistic about the company itself.

"It's a quality company with a lot of talent, a very healthy backlog, and McDonnell Douglas will do just fine. They will have to do some things differently now. Every company in this industry has been through these wrenching periods where you have to redesign yourself. We just did it the last couple of years," he said.

Augustine does savor the irony of the current situation. "Throughout my professional career, Boeing and McDonnell Douglas were three to five times our size . It's kind of interesting to see the shoe on the other foot for a little while," he said.

He said that during the years of leading the smaller Martin Marietta, he identified with the sentiment that retiring Princeton basketball coach Pete Carril expressed earlier this year after dethroning the University of California at Los Angeles in the National Collegiate Athletic Association playoffs.

"He said, 'You know, just once in my life I'd like to be Goliath and kick the hell out of David.' In the old days, when we were little, I used to empathize with that."

Now, of course, he's kicking David all over the place. Lockheed Martin leads or competes aggressively in every defense forum it chooses, from aircraft to computer systems, from space launchers to satellites.

How do the smaller companies stand up to that?

"I think they compete with us in exactly the way that Lockheed and Martin Marietta used to compete with them by picking our battles and being selective. You can't try to do everything when you're smaller than the people you're competing against."

Being selective also means joining partnerships on bigger projects. Even Lockheed Martin follows that route -- teaming with Boeing and TRW Corp. on the airborne laser, for example.

The advantage to Lockheed Martin's size is that it can ride out the withering cycles of the defense business. Even losing a project as seminal as the Joint Strike Fighter would not be crippling to the company.

"One of the things that worried Lockheed Martin was we didn't want to be in the position where a single contract could determine your survival. And that was sort of the whole point of what we've been doing," Augustine said.

Today, he said, it takes 10 contracts to make up just a third of the company's business.

On the other hand, Lockheed Martin's size raises concerns about preserving the nation's industrial base. Some had argued during the Joint Strike Fighter competition that McDonnell Douglas deserved to advance simply to keep another company primed with the skills to build warplanes.

The Pentagon didn't worry about that this time. But it might the next. "What basically you are buying by keeping some of these firms alive is a hedge against uncertainty," said Andrew Krepinevich, director of the Center for Strategic and Budgetary Assessments.

When unexpected security threats arise around the world, "if you have more firms rather than less, it increases the flexibility and hopefully also the capacity you have to respond."

Augustine agrees, though he said it would violate the American spirit of competition for the government to meddle much with the marketplace.

"When you start getting down to less than two competitors in a given field, then I think the government does have to interject itself. And I think we may see that in the years ahead just due to the shrinkage of the defense industrial base," Augustine said.

Lockheed Martin's size works against it in other ways. Large contracts are fine, but a company has to maintain a steady diet of ordinary work to survive.

At Lockheed Martin, for instance, the company has to find $1 million in new business every three minutes to maintain current operating levels, Augustine said.

Smaller firms often are more nimble at flitting from one project to the next. Augustine said he is trying to keep Lockheed Martin light on its feet by creating "virtual companies" within the company to go after individual contracts.

That means picking top players from Lockheed Martin units all over the country and linking them via computer.

On VentureStar, for instance, the next-generation space shuttle that Lockheed Martin is building under a $1 billion contract, scientists from five units of the company worked on the proposal in cyberspace.

Now that they won, they are being brought together physically as the project team.

The avalanche of new business being won by this approach means Lockheed Martin's 190,000 person work force is on the verge of stabilizing and even growing.

Just two weeks ago, the company announced 1,600 job cuts in what it hopes will be the final trims to complete the absorption of Loral.

"For the first time in 10 years, our employment is starting to pick up a little bit. We're hiring young engineers again," Augustine said. "Once we've completed the restructuring plans that we've already announced, I don't see any more on the horizon -- other than the kind of things that may arise from time to time in the normal course of a business, where a market shift takes place or you lose a contract or win a contract. But there are no more strategic changes in terms of employment and plants in the pipeline at this point."

The shrinking federal defense budget "is turning around now," he said. And Lockheed Martin is moving into non-defense fields: environmental cleanup, computer systems for the FBI and Postal Service, even the state's welfare administration.

"We now have in place at Lockheed Martin the portfolio in the basic defense area that we set out to create. We do want to continue to grow in the non-defense area. Future acquisitions in that area are certainly a possibility," Augustine said.

There are a few more major defense contracts looming.

Later this month, the Air Force will award about $2 billion to build a new rocket for launching satellites. The United Arab Emirates is deliberating between Lockheed Martin's F-16 and a French fighter plane for a major purchase.

And Lockheed Martin is partnered with several other companies in pursuit of the arsenal ship, a multibillion-dollar Navy program to float an innovative new missile platform.

Even if the company loses out on all of those -- and it is not expected to -- Lockheed Martin can ride its current success for some time.

Augustine points out that "when you bring 17 companies together and you have the pick of the people, you should be better than average." He said he tries to keep things in perspective.

"I'm acutely aware that in our business, you're no better than your last launch or your last flight. So we tend to try to display a little humility on the subject," he said.

Still, he's not about to surrender an inch of the ground Lockheed Martin has staked out as the biggest defense company on the planet.

"Our goal is not to be the biggest. Our goal is to be the best," Augustine said. "But we've found that to be the best, being the biggest is very helpful."

Top contractors

Top 10 Department of Defense contractors in 1995, ranked by value of contracts. In millions of dollars

Lockheed Martin ... ... ... ... ... ... ... ... $10,483

McDonnell Douglas ... ... ... ... ... ... ... ... 8,021

Tenneco ... ... ... ... ... ... ... ... ... ... . 3,710

General Motors ... ... .... ... ... ... .... .... 2,993

Northrop Grumman ... ... ... ... ... ... ... .... 2,913

Raytheon ... ... ... .... .... .... .... ... .... 2,890

General Electric .... .... .... .... .... .... .. 2,104

Loral .... .... .... .... .... .... .... .... ... 1,967

Boeing .... .... .... .... .... .... .... .... .. 1,780

United Technologies .... .... .... .... .... .... 1,775

Source: Aerospace Industries Assn.

Pub Date: 12/01/96

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