John Rhea
The industry is only as healthy as the people who work in it make it.
WASHINGTON — The continuing saga of Cleveland-based TRW Inc. offers an insight into the climate of today's defense industry: despite all the orchestral enhancements President Bush seeks to implement in the new Pentagon budget, there's not likely to be enough chairs for all the prime contractors when the music inevitably stops.
Second- and third-tier subcontractors and their suppliers — particularly those in the electronics industry — need not lose any sleep over that fact. It doesn't much matter to them who writes the checks as long as there are enough zeroes after the dollar sign.
What does matter is getting on a winning team. This is why the subs and vendors would do well to monitor this situation. The bid for TRW wasn't the first step in this direction, and it won't be the last.
The restructuring of the defense industry was well under way before the traumatic events of Sept. 11 and today's accelerating response to them. Consolidation at the top is normal in all mature industries. There were 200 automobile makers before Henry Ford changed the ground rules with the Model T. In the oil industry the recent Exxon-Mobil merger put back together two pieces of John D. Rockefeller's Standard Oil empire that were spun off by the trust busters.
The electronics industry is maturing too. General Electric was one of the principal investors in RCA when Secretary of Commerce Herbert Hoover in the 1920s had the company created to pioneer the new radio industry. RCA did the job and is now logically folded back into GE.
Today's defense-industry climate makes a "Big Four" of Boeing, Lockheed Martin, Northrop Grumman, and Raytheon at the top look increasingly sensible. The primes' job is to package and integrate advanced technology, which has gravitated to the board-level subcontractors that use state-of-the-art components from commercial off-the-shelf (COTS) commodity vendors.
In this climate companies like TRW live with one foot in the grave and the other on a banana peel. If Northrop Grumman doesn't get the company, financial analysts expect Lockheed Martin, Boeing, and General Dynamics to put in their bids.
To recap the situation to date, Northrop Grumman first approached TRW to do a routine merger but was rebuffed by TRW executives, who didn't think Northrop Grumman offered enough. So on March 3 Northrop Grumman launched a hostile takeover bid, offering stockholders $47 a share plus assuming $5.5 billion of the company's debt.
TRW managers were not keen on that idea either and on March 13 put together their own plan of spinning off TRW's marginally profitable auto parts business (which was how the Thompson-Ramo-Woolridge company started in 1901) and in the process slimming down from last year's revenues of $16.4 billion to a planned $5.2 billion annually while boosting profitability. The company has scheduled a shareholders' meeting for this month in Cleveland to vote on the Northrop Grumman bid.
Northrop Grumman, with revenues last year of $13.6 billion, has emerged as a strong number-three company in the industry. An earlier planned merger with number-two Lockheed Martin proved to be outside the Justice Department's comfort zone, but Northrop Grumman apparently had no trouble last year buying Litton Industries for $5.1 billion and Newport News Shipbuilding for $2.6 billion, thus making it a viable member of the top tier.
All of the big four now have what appears to be the right mixes of aircraft, space vehicles, and electronics to be major players for decades to come.
That's the real challenge: anticipating what the business climate will be during those coming decades. The rationale for Northrop Grumman's acquisition of TRW would be its ability to create synergism in such areas as spy satellites, unmanned aerial vehicles (UAVs), and electronic warfare that have become the high visibility programs following the Sept. 11 attack.
But climates change. Today's defense environment is not what it was a decade ago during the Persian Gulf War — and certainly nothing like what it was during Korea and Vietnam. However, one underlying trend that I believe everybody can agree on in the wake of the Cold War involves a threat that comes from dispersed sources that are not easily identified. This should put a continuing premium on UAVs and electronic warfare.
Unfortunately, this climate is also going to put a premium during the early stages on expendables such as food, fuel, and ammunition — sometimes at the expense of needed improvements in technology and infrastructure, as was the case in Vietnam.
What does not change is the role of technology. Even before today's COTS era it was becoming increasingly obvious that technology was the driver and that military success hinged on putting that technology to work.
In that regard, I had a nostalgia trip recently when I visited the BAE Systems facility in Manassas, Va., for a briefing on the company's new line of radiation-hardened spacecraft computers. This is a premier research establishment that has pioneered semiconductor technology for military applications for 20 years, first under IBM, later under Lockheed Martin, and now under BAE Systems.
This is one of two organizations that broke the 1-micron barrier in semiconductor feature sizes under the Defense Department's Very High Speed Integrated Circuit (VHSIC) program. Ironically, the other was TRW.
I've been hanging out at that Manassas facility off and on for most of those 20 years, regarding it as something of a Delphic oracle in the wonderful world of semiconductor research. When I go there I find new company logos on the buildings, but the same people are doing the same work. The only major thing that has changed for them is where their paychecks come from.
Perhaps this is the real lesson of the current upheaval in the defense industry: the logos on the buildings and the color of the paychecks may change, but the industry is only as healthy as the people who work in it make it.
