Today’s Big 5 aerospace firms incorporate what, not so long ago, were 51 separate companies. The Distillation of the Defense Industry

By John A. Tirpak, Senior Editor

De Havilland Aircraft Boeing Argo Systems UTL Litton Precision Gear Rockwell International McDonnell Douglas

Hughes General Motors BET PLC’s Redifusion Simulation General Dynamics Missile Division Magnavox REMCO SA Raytheon STC PLC–Navigation Systems TRW–LSI Products Corporate Jets E-Systems Texas Instruments DSEG

Dalmo Victor (Singer/Textron) General Instruments–Defense Varian–Solid State Devices ITEK Litton Industries Teledyne Electronic Systems IMO Industries (Electro-Optical)

Honeywell Electro-Optics Fairchild Weston System Goodyear Aerospace Xerox–Defense/Aerospace Division Narda Microwave Loral Hycor Ford Aerospace BDM International Librascope LTV Missile Business IBM Federal Systems Unisys Defense General Dynamics–Fort Worth MEL Sanders Associates Lockheed Martin Marietta Gould Ocean System Division General Electric Aerospace General Dynamics Space Business

Northrop LTV Aircraft Operations Grumman Westinghouse ESG 1980 1982 1984 1986

54 AIR FORCE Magazine / July 1998 or a decade, the defense indus- industrial base can’t be sustained, let They believe that the consolidation F try has been shrinking with dizzy- alone reconstituted. will offer American companies a com- ing speed as Pentagon budgets plummet However, industry and Pentagon petitive edge over foreign rivals in the and contractors either merge or team leaders contend that the tectonic shifts contest to supply allies with military up to compete for the few remaining in the defense business are neither and civil aerospace hardware. US procurement programs. Civilian avoidable nor disastrous. They see the However, even those leaders who employment in the defense industry contraction as a realistic and necessary trumpet the benefits of consolidation has tumbled by more than 2 million response to a changing world and that include an important caveat. They main- workers—at one point dropping at the the shifts ultimately will save money tain that, if this “new and improved” rate of 1,000 jobs a day. Long-respected and broaden the base of technology military–industrial complex is to work, names in the business have either disap- upon which the US military can draw DoD and its suppliers will have to shift peared or become mere divisions in a for future weaponry. These leaders their thinking on how to do business. new family of mega-giant contractors. conclude the era of years-long wars of Specifically, they warn, the Defense The changes have given rise to attrition are over and that there is no Department must continuously come concerns in some quarters that the need to maintain an extensive, costly up with innovative ways to preserve shrunken defense industry won’t be capability to “surge” the production competition when there are only two able to rise to the challenge of another of large platforms such as fighters and companies—or just one—making vital great military conflict and that the warships. prod­ucts.

Bombardier

Boeing

Hughes Aircraft

Raytheon

Litton Industries

BDM (Carlyle

Lockheed Martin

Northrop Grumman

1988 1990 1992 1994 1996 1997

AIR FORCE Magazine / July 1998 55

“ “The Last Supper” in-house Pentagon study in 1993 deter- four of DoD’s five largest aerospace One of the red-letter events in the mined that the nation needed only two and electronics suppliers, and they recent wave of consolidation is known fighter aircraft makers, not five as was illustrate the magnitude of the con- to industry insiders as “the Last Sup- then the case. Likewise, DoD concluded traction the defense industry has just per.” The coinage refers to a 1993 it needed only one bomber builder, as gone through. Today’s big five in Pentagon dinner for the chiefs of the opposed to three. It came to similar aerospace—Lockheed Martin, Boe­ing, nation’s biggest defense contractors, conclusions regarding tanks, submarines, Northrop Grumman, Ray­theon, and hosted by then–Secretary of Defense missiles, satellites, and the like. Litton, ranked one, two, three, five, and Les Aspin and his deputy, William J. Perry, upon taking over as Defense nine in defense contracting last year— Perry (who later succeeded Aspin in the Secretary in early 1994, further em- consist of what were, just 14 years ago, top job). Along with the meal, Aspin phasized consolidation “in both pri- 51 separate companies, nearly all of and Perry served a blunt notice—the vate and public sector,” Gans­ler said. which counted as prime contractor or

The surge capability needed for aircraft, ships, and tanks during World War II, as in this B-17 plant, will not be needed in the 21st century.

level of defense spending, which was The guiding principles, according to major subcontractor heavyweights in already on a five-year slide, was going Gansler, were “that they wanted to their own right. to fall much farther, and fast. Most of encourage consolidation in order to With size comes clout. Last year, the guests were savvy to the situation; gain efficiencies, but they wanted to Lockheed Martin alone was paid 10 defense buyouts, mergers, and sell-offs maintain competition in all critical sec- percent of all defense procurement dol- had been proceeding apace since 1986. tors.” These guidelines “are basically lars. The top five contractors accounted However, Aspin and Perry urged their the same that Secretary [William S.] for more than 25 percent of the total. dinner guests to take consolidation much Cohen is using ... now,” Gansler said. That was roughly the same amount that further and much faster. Former Lockheed Martin chief Nor- DoD expended on the next 95 defense At the same time, DoD’s two top man R. Augustine, in a 1996 speech to contractors combined. officials insisted the Pentagon would a joint session of the Association of the Now, Lockheed Martin and Nor­throp not play a role in designating which US Army and the American Institute of Grumman wish to merge into a single companies should stay in business and Aeronautics and Astronautics, boiled firm. If the deal is consummated, the survive. Instead, they said, they would down the situation in blunt fashion. “It is number of “megas,” as some in the allow the market itself to rationalize much better to have 10 strong competi- industry call the big four contractors, the industry. tors than two,” he said. “Unfortunately, will shrink to just three, and the new Later, Perry flatly stated, “We expect that choice is basically irrelevant, since company would receive 28 percent of defense companies to go out of business. it is not among the options we have been the combined Pentagon procurement We will stand by and watch it happen.” given. The choice we have been given and research and development budgets. At the time of the Last Supper, the is more precisely characterized as one The Justice Department and Defense defense industry was burdened with between having 10 weak competitors Department moved to thwart the Lock- “enormous excess capacity,” according with dubious futures or two strong ones heed Martin and Northrop Grumman to Jacques S. Gansler, the current un- with hopeful futures.” merger, however. They do not neces- dersecretary of defense for acquisition sarily think the new company would be and technology. “The budget was plum- When 51 Equals Five too big; rather, they are concerned that meting, particularly [the] procurement Today, some of those defense con- the combination would create a virtual account,” he said. Gansler noted that an tractors with “hopeful futures” are monopoly in some areas—most nota-

56 AIR FORCE Magazine / July 1998 bly, in the field of electronic warfare. F-16, F-22, and F-117 fighters, while to follow” the shut-out route, which he The lack of competition, the govern- Northrop Grum­man is the prime con- said would prompt competitors to follow ment said, would cause innovation in tractor of the Air Force’s Joint Surveil- suit in self-defense. “This is a trend,” this vital area to languish and would lance Target Attack Radar System and he said, “about which our government, endanger “our soldiers’ lives and our B-2 stealth bomber. as both a large purchaser of aerospace taxpayers’ wallets,” in the words of products as well as the guarantor of free- Attorney General Janet Reno. No to Monopoly market practices, should be evidencing The government has asked Lock­heed “At some point, the logical exten- a great deal more concern than it has Martin to sell off some of its electronic sion of consolidation is monopoly,” indicated thus far.” businesses in order to preserve competi- Gansler said. “When you get down to Northrop Grumman CEO Kent Kresa, tion in these areas. The company has the point where consolidation from two addressing the AIAA in Washington in declined, wants to pursue the merger to one eliminates total competition, May, said industry will avoid shut-out as now structured, and the issue is then it’s obvious you blow a whistle practices “not ... out of the goodness scheduled to be settled in court later and you stop.” of our hearts” but because “it’s good this year. Gansler emphasized that the gov­ business.” Any major contractor who The problem underlying the Lock­ ernment’s move on the Lockheed Martin “freezes out competitors by denying heed Martin and Northrop Grumman deal doesn’t signal a shift in policy them access to components” or “shuts merger, according to the government, and that consolidation probably should out those traditional vendors selling is one of “vertical integration.” When continue. second- and third-tier components a company has in-house capabilities “We’re ... trying to let the market up the value-added process,” Kresa down to the second- and third-tier sup- operate and not try to say to firms what observed, “will cut its own throat in plier levels, it can not only bid on new they should and shouldn’t do,” he as- the long run. It will stifle its access to platforms as the prime contractor but serted. “We simply want to get down to innovation and give huge advantages as a “package deal,” essentially select- the point with market forces operating to its competitors.” ing itself to provide subsystems. The whereby we still have competition left, Augustine, in his speech, also made problem with this is that other second- but we have greater efficiency. ... We’re a key point about the efficiencies to be and third-tier suppliers might never going to look at each case separately.” realized from consolidation. The merger get a chance to bid on the subsystem Ironically, the federal government that created Lockheed Martin, he said, work dominated by the prime, and the was warned about the vertical inte- eliminated 14 million square feet of un- in-house division, facing no competi- gration problem two years ago and by needed factory space and cumulatively tor, has little incentive to innovate or none other than Augustine himself. In produced savings of $1.8 billion a year, keep costs low. As time goes on, the a 1996 speech, Augustine pointed out most of which would be passed on to critics claim, competitors disappear that vertical integration threatened to the government in the form of lower from lack of work, and innovation is provide mega-companies “the oppor- overhead costs and lower bids on new further stifled. tunity, if they wish to pursue such a systems. Such savings, he noted, were The federal government argues that course, to ... shut out as sellers those equivalent to what the government says this proposed merger would “reduce traditional second- and third-tier com- it will eventually save “as a result of competition in the sale of advanced ponent suppliers who, operating at the the rather monumental effort of the tactical and strategic aircraft, airborne lower end of the manufacturing ‘food Base Closure and Realignment Com- early warning radar systems, sonar chain,’ normally sell to the ‘primes.’ ” mission—or BRAC.” systems, and several types of coun- Augustine warned then that there Kresa asserted that adding his com- termeasures.” Lockheed Martin is the were “disturbing signs that some in pany to Lockheed Martin would produce prime contractor for the Air Force’s the aerospace community have elected additional savings each year of some

Vertical Integration in Aircraft Sector: Current Capabilities

Sector Lockheed Northrop Boeing Raytheon Litton ITT Tracor Notes: The Xs denote Martin Grumman demonstrated capability at the system level. Platforms X X X 1 Raytheon E-Systems has done integration work on air- Systems Integration X X X X1 borne intelligence platforms. 2 Raytheon produces towed Radar decoys and off-board coun- Airborne Early Warning X X termeasures, not internal Airborne Fire Control X X systems. Surveillance X X X 3 Litton provides Electronic Imaging X X X Support Measures, not entire RFCM systems. Electronic Warfare 4 Tracor supplies threat warn- 2 3 4 RFCM X X X X X X ing receivers and transmitters, IRCM X X not entire RFCM systems. EOMWS X X Source: DoD

AIR FORCE Magazine / July 1998 57 $1 billion, “a majority of which will cycle time of 10 to 20 years for intro- The Pentagon has managed to keep accrue to our government customers.” ducing new technology, Gansler noted. competition alive as the industry con- The General Accounting Office, a con- The computer industry, for example, solidates but will have to increasingly gressional watchdog agency, said in an doubles the power of its products turn to nontraditional means of doing so, April report that there is “little evidence” every 18 months, and the Pentagon according to Eleanor Spec­tor, director that the Pentagon has been harmed by should emulate its success by pursuing of defense procurement. industrial consolidation so far. The Defense “something that’s more like [a] spiral “We still have two sources in every Department, it said, encouraged consolida- development process ... where you have sector that we need to compete,” Spec- tion to “eliminate excess capacity to remain a continuing evolution of requirements tor asserted, adding that consolidation competitive and financially viable,” adding and products that come along every few has been “very healthy” for the Defense that DoD expects “significant cost savings” years,” staying abreast of technological Department. “We have a strong, healthy from the shakeout. developments. defense industry in the face of a 60 Putting it more simply, Augustine He added, “Assuming we’re suc- percent drop in the budget,” she noted. noted that “two full factories” running cessful” in acquisition reform and As the supplier base narrows, though, at full capacity are more efficient “than in moving toward more commercial there are things that can be done to four half-full” ones. products, “we’ll have a far broader maintain competition even if there is industrial base.” only one supplier left for a given item. The New Industrial Way “We can provide things as gov- Part of the solution to maintaining a Forget About a Surge ernment-furnished [equipment],” she healthy defense industrial base, accord- Part of the savings to be achieved in said. “If teams form that don’t allow ing to Gansler, is to limit, as much as the defense industry lay in abandoning for competition in some cases, we can possible, the strictly “defense” aspect the practice of maintaining manufac- break up exclusive teaming. If teams of it. By using more off-the-shelf com- turing lines or tooling for the sake of form that create [a] sole source, we mercial technology, and by using new being able to “surge” their production in can have international competition. We computer-run, adaptive production wartime, Gansler observed. In the 21st can create firewalls within companies methods, the base of technology—and century, he said, “it’s not likely that, in if we have to. We can do dissimilar suppliers—upon which the Pentagon emergency conditions, you’re going to competition, as you saw with the non- can draw would be broadened so that start building airplanes or ships or tanks developmental aircraft vs. the C-17.” “we only have one industrial base.” or things like that” since such systems There is “a whole menu of things ... As an example, Gansler noted that would probably take far longer to build that we can do to create competition,” certain electronic cards used in the F-22 than the conflict would last. “You don’t said Spector, “and we will.” fighter and Comanche attack helicopter need the same stand­by capability that we Gansler observed that, if there is a are made on the same assembly line had envisioned for World War III, where sole-source situation, “you can always as those made for use in automobiles. you have huge amounts of equipment start up an R&D effort for the next-gen- “The computer knows” when the next coming back for repair and maintenance eration system to create an alternative, item on the line is defense-specific and and huge production increases,” such as rather than depend on one supplier.” All builds it accordingly, Gansler pointed in World War II. these techniques “exercise the buying out. Using such a process, an item that In Gansler’s view, the US would be power of the government,” he said. might have been very expensive due to likely to surge the “expendables, [mean- The prospect of dissimilar compe- the need to set up tooling and facilities ing] munitions, spare parts, things of tition has been used as a lever in the for a low-volume run suddenly becomes that sort. ... So, you need some standby Navy F/A-18 and Air Force F-22 fighter relatively cheap because it is made capability for those,” he said, but to programs, Gansler noted, and DoD has alongside high-volume items. the greatest extent, that should be held out variants of the forthcoming “So you get the overhead absorp- accomplished “through an integrated Joint Strike Fighter as competition. tion, you saved at least 50 percent civil–military” production line, so the Similarly, “competing missiles vs. on the cost of the defense goods, and Pentagon doesn’t have to pay “for ... airplanes” is an example of using dif- you have a greatly expanded industrial excess capacity sitting around waiting ferent approaches to the mission itself base,” Gansler explained. While such an for a surge requirement.” as the competitive prod. approach does not apply to items such An integrated commercial–military line as aircraft stealth technologies or sub- also provides for surge by simply shifting Foreigners Can Play marine quieting technologies—which the emphasis of production, he noted. Moreover, because the US will prob- have no commercial market—using Gansler acknowledged, however, ably conduct most of its future wars such practices as much as possible that in some areas—such as submarine as part of a coalition, Gansler said, and adapting them to defense-specific construction—“it may be just for the finding a foreign supplier/competitor products can produce enormous sav- purposes of maintaining an industrial on some systems is acceptable, since ings, Gansler said. base that you’re willing to accept the it is in the alliance’s advantage to have Using this commercial-goods and inefficiencies and the subsidies required interoperability. commercial-practices approach will to do it. So there are going to be cases Gansler said the Pentagon’s policy on help cut down the Pentagon’s onerous where that occurs.” foreign ownership of US defense firms

58 AIR FORCE Magazine / July 1998 is to treat such proposals on a case-by- ensure the survival of the companies “and left it to the marketplace to work case basis. If a foreign company were to involved. Since then, the “megas” got it all out.” There is a “misconception take an equity stake in a US contractor bigger in order to acquire more market in Europe,” he added, “that DoD en- doing sensitive work, “they would have share and improve their bottom line. gineered it all.” to set it up as a separate operating unit. He warns that, in the next two or three Charles Masefield of the UK Ministry They’d still have the equity, but [they] years, the industry will see “some very of Defense, also addressing the AIAA, wouldn’t get the technology transfer.” big losers”—companies that failed to said that the leaders of several European Noting the competing interests of recognize the need to consolidate and countries recently issued their own foreign and US companies, Gansler missed the chance to get together with “Last Supper” message to European said, “You run into the [fact that] they’re suitable partners. Such companies, said contractors to start consolidating or be your ally in a military sense and then Bovin, will be “left behind.” hopelessly outclassed by the new large your competitor in an economic sense, The companies that moved to consoli- American companies. He predicted that and where that line is drawn becomes date in the early 1990s—when defense the mergers will come but not in the Photo by Jim Haseltine

Defense experts feel that even the eventual replacement of current sys- tems, like these F-16s, will come at a much slower pace than in the past.

more and more difficult” to determine. stocks were low priced—“got the best same rapid way that they took place Still, he warned against “the trend to- deals and the best partners,” Bovin said. in the US. There will be “evolutionary ward ‘Fortress Europe’ and ‘Fortress Companies only now looking to merge progress” in rationalizing the European America,’ ” in which protectionism will find it harder because defense defense industry, he said. prevents the alliance from benefitting stocks have risen in price, making The likelihood that the US will need from its members’ technologies. Such a acquisitions more expensive. to reconstitute a defense industrial base stance “is inconsistent with the concept European defense companies, on the scale that it supported during of coalition warfare.” Gansler wants to which face numerous obstacles to the Cold War is considered remote, at see more “trans-Atlantic linkages,” but consolidation, will have to overcome least for the fore­seeable future. Kresa he prefers to let industry work out the them if they are to compete with the of Northrop Grumman said that his structure of such cooperation for itself. big US firms, Bovin observed. company expects defense budgets to The mega-mergers in the US defense By themselves, Boeing, Lockheed remain “essentially flat” well into the industry are probably drawing to a Martin, and Raytheon are “twice as big” next century. close, according to Denis A. Bovin, as the major European defense compa- Kresa said that large numbers of vice chairman of investment banking nies combined, he said, and will be able defense platforms bought during the and senior managing director at Bear to offer more technology at a lower cost Reagan Administration will be getting Stearns & Co., an investment banking because of the efficiencies they have old and will come due for replacement firm that has participated in many of the realized through consolidation. in the next few years and that this “may deals that created the supercontractors. “European defense companies may keep things from getting worse” in the “We’re probably looking at the end be unable to compete in a few years defense industry. of what I would call the ‘leadership time,” Bovin asserted. Some in the Pentagon and Con- mergers,’ ” Bovin said at a recent AIAA From the perspective of exports, sav- gress feel the world is safe enough conference, “but we’ll pick up speed in ings in defense overhead, and cheaper to warrant skipping a generation of [mergers among] the secondary tiers.” new technologies, consolidation has systems. Whenever the replacement been “a wonderful development for actually occurs, Kresa said, “the Left Behind the US taxpayer,” Bovin said. He also pace will be much slower, and the Bovin said that the fast pace of observed that the Pentagon “devised a industry will not come back to its mega-mergers took place at first to vision” for the defense industrial base earlier size.” ■

AIR FORCE Magazine / July 1998 59