Northrop job cuts highlight economic challenge for state

October 23, 2011|Jay Hancock

The congressional "super committee" charged with mitigating large defense cuts has been silent, but Northrop Grumman and other defense contractors aren't waiting to find out what's going to happen.

They're already downsizing. Last week, Northrop's Linthicum-based Electronic Systems division said it would trim 800 jobs, most of them in Maryland. That's on top of 500 jobs eliminated in the division earlier this year. Those two steps easily represent $100 million sucked out of the state's economy, and it's only a portion of the overall, continuing defense shrinkage.

"Defense budgets are coming under intense pressure, which is likely to accelerate," Patrick J. McCarthy, who follows Northrop's stock for FBR Capital Markets, wrote in a recent report. "And relatively few new programs are being established."

In a way, it's an aftershock of the end of the Cold War. When the Soviet Union collapsed two decades ago, the Pentagon basically ordered the defense industry to consolidate and shrink. Northrop Corp.'s 1994 marriage to Grumman Aerospace and their subsequent purchase of Westinghouse's Electronic Systems division in Linthicum were part of the process.

Even so, pricey projects lived on, and the war on terror that began a decade ago added billions in new contracting opportunities. Now the war on terror is winding down, and huge, traditional-warfare programs that survived the end of the Cold War look less and less affordable.

Northrop makes radar and stealth electronics for the F-22 Raptor fighter, for which congressional funding has been cut off. It also makes the radar for the F-35 Lightning, another fighter, frequently described as the most expensive weapons program ever. The company suffered another blow recently when it lost the job of building a new aerial refueling tanker to Boeing.

"The culture of endless money that has taken hold must be replaced by a culture of restraint," then-Defense Secretary Robert Gates told reporters last year. It's no accident that his successor, Leon Panetta, sat on the budget committee when he was a congressman in the 1980s and was President Bill Clinton's budget director. His assignment is to cut costs.

But it's not just individual programs that are threatened, say Wall Street analysts. With a few exceptions, projected defense spending will shrink from stem to stern. That indicates a massive change for Maryland's economy, where defense spending rose from $8.6 billion in 2000 to $18.7 billion in 2010, according to the Census Bureau.

Lockheed Martin and SAIC have also been cutting defense jobs in Maryland. Subcontractors and other small operators will be following suit.

Unless a joint congressional committee comes up with an alternative by Thanksgiving, a deal made last summer could trigger $1.2 trillion in automatic spending reductions from previously budgeted levels over the next decade. Of those, half would come in defense and security spending. That's on top of more than $300 billion in defense budget cuts already agreed to.

Northrop's Electronic Systems shop booked $7.6 billion in revenue last year. (Not all of it was spent in Maryland.) Even if it loses the fighter jobs, the division will remain a crucial part of the company and employ thousands for years to come. Just not as many thousands.

"Electronic Systems is the heart of Northrop relative to technology and knowledge," says Aris Melissaratos, who was a top executive in the division before becoming Maryland's economic development secretary under Gov. Robert L. Ehrlich Jr. These days he's a senior advisor for technology development to the president of the Johns Hopkins University.

Like many manufacturers, Northrop is also making more hardware with fewer people, relying on automation and other productivity improvements. And because the Air Force relies on fewer, more sophisticated planes, the value of Northrop's products has gone up while the number produced has declined.

In the early 1990s, Melissaratos remembers, the Westinghouse facility in Linthicum employed some 17,000 workers and would turn out 50 radar systems a month for F-16 fighters or B-1 bombers. These days, he said, the plant may make fewer than half a dozen systems per month. It's largely a research and development shop now, rather than a factory.

As recently as 2009 there were 8,600 people working in Maryland for Northrop's Electronic Systems division. After the latest reductions are complete next year, there will be fewer than 7,000.

Economic development officials have placed great hope on Maryland's cybersecurity industry. As warfare moves from sea, land and sky into wires, the thinking goes, the defense industry will adjust and the state can make up for some of the traditional defense jobs it is losing.

Northrop, whose Information Systems group is as sophisticated about cyber warfare as anybody, is in the thick of this change. But new jobs fighting enemies on the Web are unlikely to make up for the ones that are going away, either at Northrop or in Maryland. No matter what the super committee does.

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