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More changes ahead for Md. contractors; Increase predicted in U.S. spending after years of decline


From his office in Linthicum, George E. "Chip" Pickett Jr. can watch airplanes coming and going at nearby Baltimore-Washington International Airport. But he's always looking farther than that.

The former Army intelligence officer is one of the defense industry's leading thinkers and strategists, peering into the future to help steer Northrop Grumman Corp.'s Electronic Sensors & Systems Sector through a period of complex changes.

His vision for the coming year for the defense industry:

More change.

But after a 1998 that saw both a continued slump in military spending and unexpected melodrama in Lockheed Martin Corp.'s failed attempt to purchase Northrop Grumman, Pickett foresees a somewhat sunnier 1999.

"From the sales standpoint, the picture is very good," said Pickett, who is the sector's vice president for marketing and business planning and spent seven years running the corporation's defense analysis center in Washington.

Some of the highlights most industry experts anticipate for 1999 include continuing consolidation of companies, but on a smaller scale than the megamergers of recent years; a new emphasis on international teaming, possibly even cross-border mergers; and an uptick in defense spending after several years of decline.

For the aerospace industry, 1998 was a vexing year. Profits hit a record level -- $7.4 billion in profits on sales of $140 billion, according to the Aerospace Industries Association -- driven mainly by commercial aircraft deliveries, space and export business.

Still, military spending was flat, and the top four defense companies -- Lockheed Martin, Boeing Co., Raytheon Co. and Northrop Grumman -- all reported weaker than expected earnings. Their stocks tumbled amid an otherwise rallying market.

While companies have cautioned that stocks are likely to fall short of expectations for 1999, the Aerospace Industries Association expects a better bottom line. Overall sales should grow another $4.5 billion in 1999, the association said, with even the slumbering military aircraft market climbing $1.3 billion to $41.5 billion.

Northrop Grumman has more defense industry jobs in Maryland than any other single company -- about 7,400. Pickett said that base will not shrink in 1999, and might grow slightly as work is transferred here. The unit recently became a "sector" of the corporation instead of a division, giving it more stature and responsibility.

But Pickett's perspective transcends simple job projections. His long view of the defense landscape begins with the military itself, which he said is "in the midpoint of change." Like a teen-ager entering adulthood, he said, the Department of Defense is coming to grips with "formative years spent within the confines of the Cold War."

"You're going to see more and more studies as [the Defense Department] basically works its way through the issues of where do we think the world is going, on the one hand, and what do we think national security policy ought to be, on the other," he said.

Several years ago, Pickett helped Northrop Grumman prepare for that struggle by steering away from the military aircraft business and into the areas of precision strike, surveillance and situational awareness -- a sea change that led the corporation to buy the Linthicum electronics operation from Westinghouse in 1996.

The defense industry as a whole has positioned itself for the post-Cold War world, he said, through the waves of mergers and acquisitions of the last four years.

Future mergers is a topic Pickett avoids, because his company has been mentioned in several rumored deals and Pickett does not want to fuel speculation.

Most experts agree that no more huge domestic mergers are likely, but say that the trend will continue on the subcontractor level -- with the faint possibility that several second-tier companies could combine with Northrop Grumman to make another giant.

Northrop Grumman has also been the focus of speculation about the start of a new trend in the defense industry: mergers with foreign companies. Britain's General Electric Co. bought Tracor last year, and then voiced interest in a blockbuster deal with a bigger company -- such as Northrop Grumman or Lockheed Martin.

Whether the U.S. government would permit a major cross-border merger is an open question, though Aerospace Industries Association President John W. Douglass warned last month that the Pentagon had better brace itself for the inevitable.

"They're going to have to [confront] it whether they're ready or not," Douglass said, pointing out that several government studies are looking at the potential impact of such a deal.

Another trend that complements the merger craze is the drive to change the relationship between the Pentagon and contractors. Called "acquisition reform," the effort involves adopting more efficient commercial business practices.

"My sense is that the taxpayer, the department [Defense] and indeed the industry have really benefited from acquisition reform," Pickett said. "We expect to see more of it in the future."

Defense companies will continue to expand into commercial business, he said, but will stick to products related to defense technology -- in contrast with disastrous commercial experiments of the 1980s, such as Grumman's failed attempt to market trucks. "Companies are a lot wiser and smarter now about the commercial applications of their capabilities," he said.

The Asian economic crisis hit aerospace companies harder than expected in 1998, and while its effects are lingering into this year, Pickett said the problem will not persist.

"Asia's going to come back. If you look at the demand for commercial airliners, it's not going down. This is a blip," he said.

One more comeback gives defense executives cause for optimism: Military spending is beginning to increase for the first time since the end of the Cold War. President Clinton has proposed adding $110 billion to the Pentagon budget over the next six years.

While Pickett said it is too early to tell whether the boost will have a direct impact on defense contracting, "you can't help but conclude that it makes things less bad."

Pub Date: 01/24/99

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