O.C. Contractors Expecting Layoffs, Diversification in Defense-Cuts Era

Orange County’s small and medium-size aerospace firms are on the defensive.

The announcement by Northrop Corp. Tuesday that it is shutting down its Anaheim plant next year, coupled with an earlier disclosure of a large job-reduction at Hughes Aircraft Co., has sent shivers through area companies that supply defense corporations with parts and services. “We are waiting around to see what’s going to happen,” said Chris Morgan, plant manager for Electronic Contract Services Corp. in Tustin, a Northrop subcontractor. “But we are preparing for the worst.”

The aerospace industry is slowly beginning to feel the effects of a downturn that some analysts predict will eliminate many smaller subcontractors and consolidate the weapons manufacturing sector that enjoyed unprecedented growth during the Reagan Administration.

“Some of the programs we’re involved in are beginning to mature, which means they are ending their production cycle,” said John Pigaty, sales manager for Exotic Materials Inc. in Costa Mesa. “And there aren’t any programs that are coming along to replace them.”

U.S. Defense Secretary Dick Cheney revealed last month a plan to reduce the Pentagon budget by $10 billion in 1990 alone. The program called for at least an additional $64 billion in cuts over the succeeding four years.

“On behalf of my grandchildren, I’m really pleased,” said Richard Foster, president of Interstate Electronics in Anaheim. “But if you are running a defense company, it’s going to create quite a shakeout in our industry.”

Just within Orange County, there are 93,000 employees working for 798 companies doing aerospace work, according to the state’s Employment Development Department. In 1983, about 80,225 people were employed locally in the aerospace industry.

“The aerospace industry is highly decentralized,” said James Doti, an economist and acting president of Chapman College in Orange. “I think the (job) loss could be considerable.”

Nobody can predict how severe the downturn will prove to be, but the larger aerospace companies in recent months have announced plans to trim their operations.

Northrop said last week that it would close its Anaheim plant by the end of 1990 as part of a consolidation with facilities in El Segundo and Hawthorne. The impending shutdown means that the 1,600 people now working in Anaheim will either be transferred or laid off.

And Hughes, the largest private employer in Orange County, announced two weeks ago that it is eliminating 6,000 jobs worldwide by the end of the year, mostly in Southern California. The company’s industrial electronics group--which has about 3,000 employees in Orange County--is one of three groups expected to bear the brunt of the cuts.

Budget reductions affect the defense giants sooner than subcontractors because they employ the engineers and draftsmen who design new weapons and aircraft. If fewer projects are approved, there is less of a need for those people, which results in layoffs.

Fallout to Be Delayed

The fallout won’t hit many subcontractors for another year or so because many of them are still working on contracts approved several years ago.

“Each time there is either a sharp upturn or downtown in the defense business, there is always a lag time before the contract dollars flow or dry up at the subcontractor level,” Foster said.

During the Reagan era, prime contractors and their suppliers enjoyed a seemingly endless stream of money. Between just 1981 and 1985, procurement spending rose 70% from $66.7 billion to $113.6 billion (both figures are adjusted to eliminate the effects of past inflation). The Defense Department estimates that procurement spending will be $78.8 billion in 1990.

Because of the budget reductions, many subcontractors are fighting for their lives with other suppliers.

“There are fewer dollars going around, so the competition for them is greater,” said Pigaty. “We have to work harder.”

Making matters worse, prime contractors generally do more of their own work in-house during a downturn rather than contracting it out. During good times, defense corporations such as Northrop or Lockheed Corp. usually subcontract work out because they don’t have the capability to do it or because their plants are running at full capacity.

Take for instance the case of Electronic Contract Services, which provides electronic assemblies and engineering services. The company had 55 employees at its Tustin office at this time last year. Now, it only has 40, and sales are down about 20%.

“Being a services company, our customers can often do the work themselves in their own facilities,” Morgan said. “As things get more tight, they keep the work in-house to keep their own people busy.”

The answer for many subcontractors to the coming crunch in military spending is to begin targeting commercial clients, particularly those involved in the production of civilian airliners.

The top three manufacturers of commercial aircraft have received orders in the last year for a record-breaking 2,600 planes.

Parker Bertea Aerospace for instance signed this spring a $700-million contract with Boeing to build motion control and hydraulic components for Boeing’s 737, 747, 757 and 767 commercial aircraft.

The company had been supplying parts to the C-5B and B1-B military aircraft programs, both of which were phased out this year.

“We have shifted production to more of the commercial projects already,” said Richard Charlton, vice president of corporate communications for Parker Bertea’s parent corporation, Parker Hannifin Corp. in Cleveland.

Exotic Materials, which builds infrared lenses and windows for such clients as McDonnell Douglas Space Systems Co. in Huntington Beach, is thinking of two new markets altogether: planes used by the Drug Enforcement Agency in drug interdiction and certain medical equipment that uses infrared lenses to perform tests including mammograms.

“We will just more diligently seek other business,” Pigaty said. “It’s the typical business situation that if one avenue doesn’t provide the revenue you have to seek other opportunities.”

Diversification Defense

Comarco Inc., an Anaheim firm that specializes in computer and engineering services for the military, is also fighting any possibility of a slump through diversification.

During the past couple of years, the company has begun manufacturing solar-powered emergency call boxes for freeways. It has won contracts to install call boxes in San Diego and Orange counties.

The call-box business now accounts for about 10% to 15% of the company’s total sales. Two years ago, Comarco was totally dependent on government contracts.

“I think it’s very important to diversify,” said Harrison Young, Comarco’s president. “We owe it to our shareholders to be able to weather the various economic downturns.”

For all their ingenuity, experts think many subcontractors won’t be able to entirely mitigate the damage wrought by the defense budget reductions by retooling their products for non-defense applications.

“Unfortunately, the growth in the non-defense side is not enough to make up for the loss in the defense sector,” Doti said.

Of course, Orange County will always have a strong defense sector, though it may never return to its heyday of the mid-1980s.

“The industry isn’t completely dead,” Pigaty said. “There still is a hell of a lot of money being spent.”

Staff writer David Olmos contributed to this article.

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Can contractors switch to non-military business? Page 3.