California Aerospace Industry Faces Sharp Decline, Report Warns

`CALIFORNIA'S aerospace/defense industry is at a critical turning point; defense budgets are shrinking and many major contractors are shifting production out of state. The state's response to the challenges ... will shape the size and mix of California's economy for years to come.'' These words of foreboding from a major study for the Los Angeles Area Chamber of Commerce are the subject of a summit meeting today between Gov. Pete Wilson and a dozen aerospace chief executives. Called by California Secretary of Business, Transportation, and Housing Carl Covitz, the meeting is ``an indication of how terribly important aerospace is to this state. The current study shows the numbers to be worse than anyone thought,'' says Mr. Covitz.

The report says the industry accounts for up to 1.4 million California jobs - 9 percent of state employment - far higher than most estimates. In the last four years, the state has lost 150,000 defense and related industry jobs. With continued defense budget cuts, the state is expected to lose 250,000 to 375,000 more such jobs in five years. One-fifth of manufacturing jobs in southern California are in aerospace.

``What is most disturbing is that most of the reasons for these declines are self-inflicted by the state,'' says Robert Paulson, director of aerospace practice at McKinsey & Co., which prepared the report. Besides a lack of support from the California congressional delegation in several key project votes, Mr. Paulson notes a regulatory environment that often impedes local local business activity with high taxes, air-quality restrictions, and lack of financial incentives.

Covitz says that there is a continuing threat that Washington will cut Northrop's B-2 bomber program, which generates 35,000 jobs. And Lockheed has already decided to move production of its advanced tactical fighter to Georgia. McDonnell Douglas is expected to move production of the MD-12X, its next jetliner, to another state.

`BUT you don't hear about the hundreds of small contractors that pull out silently or shift operations to another location,'' says Paulson.

US Rep. Don Edwards (D) of California says: ``Our transportation, education, and declining quality of life are the real issues.''

Jim Hankla, city manager of Long Beach and co-chairman of a county task force on aerospace, says raiders from a dozen states are wooing companies with promises of free land, tax breaks, capital investment and other incentives. ``Most of them have us beat when it comes to housing and labor costs,'' he says. ``It's an uphill battle.''

For some, the question goes beyond California to the future of American dominance in aerospace. ``Before California turns its back on ... the position we've worked so long to attain, we'd better reflect carefully on what our aerospace industrial base means for California and the nation,'' said Northrop CEO Kent Kresa in a recent speech here.

Both the chamber of commerce and Governor Wilson say they are committed to reversing the past record by more clearly trumpeting the economic stakes and alleviating regulatory and bureaucratic pressures where possible. ``The governor has shown a new commitment to the issue which is quite encouraging,'' notes Lockheed executive Steve Chaudet. ``The low level of priority and concern has been one of the biggest hurdles.''

In conversations with administration officials, aerospace representatives, and industry analysts, these are among the most talked about solutions:

* Find ways of circumventing competition for individual programs and contracts by developing a ``hive'' approach - forming common pools of facilities and personnel that any company could draw upon. ``Support for such arrangements eventually runs into antitrust concerns down the line,'' warns US Rep. Bill Lowery (R) of California.

* Help build a more coordinated and informed California congressional delegation that more actively supports initiatives of state concern. The delegation's support on defense-related legislation was only far below that of other major aerospace states, according to the report.

* More awareness of and communication at the state and local levels about the effects of key regulations and potential legislation. ``We don't want to leave; our capital investment here is enormous,'' says a Lockheed official. ``If the state could be more generous in removing some of these impediments, it would make all the difference.''