Northrop's ATF Contract Loss Shakes California

DEFENSE CONTRACTS

THE defense industry that helped turn California into a mega-state after World War II is diminishing as a flywheel behind the world's seventh largest economy, affecting tens of thousands of workers. Military base closings, defense cutbacks, an aerospace exodus, this week's lost bid by Northrop Corporation for the biggest Pentagon contract of the 1990s - all are part of a declining weapons industry that is affecting the economy and stirring concern from Sacramento to San Diego.

Nor is California alone. A leaner military budget in the post-cold-war 1990s is prompting pink slips at companies from Los Angeles to Long Island and urging town fathers to look for ways to retrain defense workers and attract other industries.

By the mid-1990s, some economists predict, defense spending will be one-third less (in real dollars) than it was in the mid-1980s. Its contribution to total economic output is expected to decline from 5.5 percent to less than 4 percent.

Hardest hit by the latest Pentagon parsimony will again be those states with the biggest concentrations of defense contractors - Connecticut, Massachusetts, New York, California, and Texas.

Overall, the impact on the economy won't be "catastrophic," says Roger Brinner, chief economist with DRI/McGraw-Hill. But there could be longer unemployment lines in local areas.

The hope and heartbreak of what a big-ticket defense contract can mean, both for states and companies, was evident by this week's selection of a team of aerospace companies to produce America's 21st-century Advanced Tactical Fighter (ATF). The $12.1 billion development contract went to Lockheed Corporation, Boeing Company, and General Dynamics. Pratt and Whitney Corporation will build the engines.

The selection of the Lockheed group over the rival team of Northrop and McDonnell Douglas Corporation will mean thousands of jobs for Georgia, Texas, and Washington state. California and Missouri, where Northrop and McDonnell Douglas would have done the bulk of the work, are losers.

"Georgia, here we come," yelled Jeffery Dickinson, a program planner at Lockheed as a packed hotel ballroom erupted in cheers with the Air Force announcement Tuesday. Across town at rival Northrop's Hawthorne facility, company executives glumly gathered around TV sets. "It's a big blow - no question," says Northrop's Ron Owens.

The dejection and elation were understandable: Mammoth Pentagon contracts will be rare in the 1990s.

"This is the last of the biggies," says William Weida, a defense analyst at Colorado College in Colorado Springs, referring to the ATF program, which could ultimately cost $95 billion for 650 aircraft.

Subcontracts

Though southern California and Missouri appear losers, the changing nature of the defense world may cushion the impact. Today's complex weapons systems involve dozens - even hundreds - of specialized subcontractors. Benefits are diffused around the country.

Lockheed officials say the ATF program will involve 650 companies in 32 states. They predict 4,000 new jobs will be created in the Los Angeles area between now and the mid-1990s.

That is far less than the 17,000 new California jobs, by one estimate, that would have been created if locally based Northrop had built the plane here. But it isn't a shutout either.

"Many companies have pieces of these programs," says Gordon Adams of the Defense Budget Project, a watchdog group.

A loss to California

California's defense base is shrinking and is less important to the state economy.

Twenty years ago weapons work accounted for about 20 percent of the total state output. Today it is 8 percent. Economic growth and diversification have acted as a shock absorber against defense cutbacks.

Steve Levy, director of the Center for the Continuing Study of the California Economy, projects a loss of 100,000 defense-related jobs by 1995.

But with job growth of 3 million over the same period, that loss "simply doesn't have an effect on the California economy," Mr. Levy says.

Town fathers are less glib. They are worried not only about longer unemployment lines because of reduced Pentagon spending, but also about the flight of aerospace companies from southern California.

High housing and labor costs, traffic congestion, strict smog rules, and other factors affecting business competitiveness and employee morale have forced many defense companies in recent years to move elsewhere - the most prominent being Lockheed's decision last year to move local operations to Marietta, Ga.

"It raises a host of questions about California's competitiveness," says David Hensley, head of the Business Forecasting Project at the University of California at Los Angeles.

Base closings

Gov. Pete Wilson (R) and leaders in a number of localities have recently formed task forces to try to stanch the exodus. But they face stiff competition from other states. "Many states are here on a weekly basis with their governors wining and dining the CEOs of major aerospace companies," says Jim Hankla, city manager of Long Beach and co-chair of a Los Angeles County task force on aerospace.

Compounding California's woes is the proposed closing of 11 military bases around the state, which could cost 27,000 jobs.

Local officials across the country are trying to fight the base closures.