Crunching the Defense Industry

March 20, 1994

Right now it's a Wall Street story. The battle between Martin Marietta and Northrop to gobble up Grumman is reminiscent of the "Pac-man" wars of the Eighties, with giant corporations trying to eat up one another lest they get eaten. In this case, Grumman was a morsel waiting to be consumed since the Navy ended its glorious era as manufacturer of F-14 Hellcats. But when Bethesda-based Martin made the friendly bid for Grumman, Los Angeles-based Northrop countered with a hostile higher offer. Martin may hit back by trying to buy Northrop itself, or get another company to do it.

This multi-billion-dollar battle is of immediate significance to stockholders and speculators. The din of financial combat, however, should not drown out the nation's vast stake in how defense industries consolidate as the Pentagon budget shrinks and post-Cold War threats proliferate.

So far, the Clinton administration has been silent -- perhaps content to let market forces effect an aerospace-electronics industry rationalization that has to come. But if Martin actually tries to add Northrop to a plate already heaped high with other takeovers, the government may or may not step in. It will be fascinating to watch.

The Bush administration was content to let laissez-faire work its will. Clintonites seem torn between those with anti-trust hackles and others who see in public-sector coordination, even with monopolistic contractors, the kind of "industrial policy" they espouse for the economy generally.

For the present, all three parties to the Martin-Northrop-Grumman struggle are so exclusively oriented to military products that their consolidation maneuvers are somewhat apart from a larger question: How the Defense Department can encourage scores of smaller contractors to develop "dual use" technology and products for both the military and civilian sectors of the economy. According to Richard Bitzinger, an analyst for the Defense Budget Project, the country is just at the beginning of a decades-long process to put its defense industry base in sync with new circumstances.

The Clinton administration may pursue a "dual use" strategy more assiduously than its predecessors. But Defense Secretary William Perry, an advocate of such an approach, has yet to articulate a comprehensive policy. This is needed. The U.S. cannot maintain an adequate industrial defense base to meet foreseeable needs unless defense contractors can tap into high-tech, low-cost products already in the civilian market.

The alternative would be continuing reliance on arms sales abroad -- a dangerous policy already too far advanced.

Because Grumman's absorption by either Martin or Northrop would offer different though competing assets to the industrial defense base, perhaps the administration can stay out of this fight. But sooner rather than later, it has to take a pro-active role in synthesizing the defense and commercial sectors. For our future security, a more definitive policy should be a major administration priority.

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