Defense contractors seek products to sell outside Pentagon

MAKING A STRATEGIC WITHDRAWAL

November 12, 1991|By Ted Shelsby

Times are changing for the nation's defense contractors.

Gen. Colin L. Powell, chairman of the Joint Chiefs of Staff, perhaps best summed up the changing environment at the Pentagon earlier this year when he was quoted by the Army Times as saying: "I'm running out of demons, I'm running out of villains. . . ."

The general was referring to the major changes in the Soviet Union that have already prompted President Bush to trim the nation's tactical nuclear weapons arsenal and is putting pressure on Congress to tighten military spending over the next five years.

As the Pentagon budget shrinks, defense contractors in Maryland are looking to new commercial markets to maintain their sales volume and employment base.

The Westinghouse Electronic Systems Group has moved into the production of automated electronic mail sorting machines. It also is offering a home security service that alerts police of a forced entry or calls you at your office if the children don't come home on time.

The local division of Westinghouse Electric Corp., which grew into the state's largest manufacturing company through the production of such military equipment as the radar used on the F-16 fighter plane, has set a goal of having 50 percent of its business come from non-Pentagon sales by the year 1995.

At least one respected economist says that defense contractors, especially the large prime contractors, may be making a mistake by diversifying into new markets.

Diversification not that easy

As military spending declines, defense companies should downsize, not convert. That is the message being delivered by Murray L. Weidenbaum, chairman of the President's Council of Economic Advisers during the Reagan administration.

Dr. Weidenbaum, who now serves as the director of the Center for the Study of American Business at Washington University in St. Louis, says that historically, major defense contractors have been successful in diversifying only into markets for products related to their own.

Dr. Weidenbaum said in a speech to a meeting of the Western Economic Association earlier this year that forays into civilian, non-aerospacemarkets by the larger specialized companies have been, for the most part, disastrous.

He cited the case of Curtiss-Wright Corp. as the most extreme example of the shortcomings of the naive diversification approach. It built more aircraft during World War II than any other U.S. company, then moved into new markets when it feared that military sales would never reach the heights that they did during the war.

The move backfired, Dr. Weidenbaum said. Curtiss-Wright never regained its business volume, while its competitors, who moved into the production of missiles and space vehicles, grew into billion-dollar-a-year operations.

Grumman Corp., the company perhaps best known for its production of the F-14 fighter plane, sought to diversify by developing and selling a minivan before Chrysler popularized the vehicle. The project failed because of the lack of a distribution system, Dr. Weidenbaum said.

The Westinghouse Electronic Systems Group expects the Defense Department to remain its biggest single customer, but it will account for a smaller percentage of total sales. By the year 2000, the Westinghouse division anticipates sales of $7 billion, with perhaps $4 billion coming from non-Defense Department markets and $3 billion from the Pentagon.

Twenty-seven percent of its sales of slightly more than $3 billion last year came from non-Defense Department orders. The group's recent moves toward diversification include work on upgrading the Soviet Union's commercial air traffic control system; airport and industrial plant security; development of satellites that can produce products in space; and computer printers.

Martin Marietta Corp. has transformed its Middle River complex into its primary unit serving the Navy, but a big portion of its sales are not related to Navy programs. The sprawling complex has undergone a major renovation in the past year as part of a plan to make it the country's No. 1 producer of thrust reversers for commercial jetliners.

Thrust reversers are units mounted on engines that act as brakes to slow the jet after it touches down on the runway. The reversers currently account for about a third of the Middle River operation's sales.

AAI makes shift

Few military contractors in the nation grew as fast as AAI Corp. during the 1980s.

Employment rose to 4,000 from 1,500 as the company produced a variety of products for the military, ranging from artillery shells and a lift trailer that loads nuclear bombs aboard long-range bombers to electronic simulation equipment to train sailors.

A few years ago, the Pentagon accounted for "virtually all" of the Cockeysville company's sales, according to spokesman William H.Herrfeldt. AAI is out to change that.

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