BUSINESS

The price of peace

Defence cuts will cost thousands of jobs

JOHN DeMONT December 11 1989
BUSINESS

The price of peace

Defence cuts will cost thousands of jobs

JOHN DeMONT December 11 1989

The price of peace

BUSINESS

Defence cuts will cost thousands of jobs

Washington’s Kennedy Center was sold out late last month for a performance by the fabled Red Army Chorus. Dressed in their customary crisp, redtrimmed tunics, the Soviet officers from one of the world’s great fighting forces opened their performance with The Star-Spangled Banner and closed with God Bless America as the audience stood and cheered. And fittingly, as the American cheers for the robust Soviet voices rang through the hall, across the Potomac River at the Pentagon, generals and admirals were preparing plans to shut down U.S. military bases and to scrap multibillion-dollar weapons systems that had been developed to meet what has become a warming Cold War threat. And as presidents George Bush and Mikhail Gorbachev met in Malta on the weekend to further reduce superpower tensions, the new warmth in Washington towards Moscow cast a cold shadow on the U.S. weapons industry, which is heading into a steep decline. The cutbacks are also expected to hit Canada’s $3-billion arms industry, which each year ships $1 billion worth of military equipment to the United States, although to what extent the cuts will affect Canada is not yet clear.

Spurred on by the U.S. budget deficit and the avalanche of political change in Eastern Europe, Defence Secretary Richard Cheney has ordered U.S. military spending, which will total $363.2 billion in 1989, cut by about $200 billion over three years beginning in 1992. But the push for peace will carry a high price. The

Pentagon’s cutbacks will mean sweeping changes in the multibillion-dollar U.S. arms industry, perhaps forcing plant closings, layoffs, mergers and bankruptcies across the country, military experts say.

But an even greater concern is that, with the U.S. economy already slowing, the cuts could tip the nation into a recession, perhaps dragging the rest of world’s economy down with it.

Still, some economists be_

lieve that the American economy will boom if defence spending is channelled to other, more productive areas.

Cutting defence contracts and eliminating the thousands of jobs that go with them will be a painful political process for the Bush government. The powerful defenceindustry lobby is fighting desperately to hang onto business, and influential congressmen are fighting to keep job losses to a minimum in their own constituencies.

Even so, eight years of steady increases in defence spending appear to have come to an abrupt end for military contractors who made billions of dollars during the 1980s on Pentagon contracts. Defence-industry executives first

learned that the tide was turning when the Reagan administration slashed billions of dollars from military spending plans last year, five years after President Ronald Reagan referred to the Soviet Union as an “evil empire” and pushed annual defence outlays to $357.6 billion in 1988 from $171.2 billion in 1980.

Although Bush pledged continued increases in military spending while running for president, military analysts say that events in Europe and the growing U.S. budget deficit, now standing at $178 billion, have forced him to change course.

Last month, Cheney called for the $200billion cut as part of the White House’s drive to reduce military spending to four per cent from six per cent of the gross national product, which stood at $5.7 trillion in 1988. Said Les Aspin, chairman of the powerful House of Representatives armed services committee: “Politicians are more afraid of the deficit than the Russians these days.”

The full severity of the reductions will not be known until next year. But early reports, coupled with the European developments, have led investors to sell off many U.S. aerospace, shipbuilding and military-technology stocks. Last week, the New York Stock Exchange’s Standard and Poor’s Aerospace/ Defence Index, which includes most of the big U.S. arms manufacturers, stood at 348.81, a 5.1-per-cent drop from 367.50 on Nov. 8—the day that the Berlin Wall was formally opened by the East German government—while during the same period, some individual

defence stocks fell by as much as 18 per cent.

And the U.S.-based Aerospace Industries Association estimates that every $1.2 billion cut from the Pentagon procurement budget could cost the industry nearly 30,000 production jobs and another 20,000 in related servicesector jobs. At the same time, a wave of defence-sector mergers may develop—particularly if investors continue to drive defence stocks down.

Grumman Corp. of Bethpage,

N.Y., and Northrop Corp. of Los Angeles, two aviation companies whose weapons programs face intense reductions, last week were the focus of takeover speculation. Said Howard Rubel, senior vicepresident at C. J. Lawrence Morgan Grenfell Inc., a Wall Street investment firm: “The handwriting is on the wall.

There is going to be a major restructuring in the defence industry.”

The biggest defence contractor, St. Louis-based McDonnell Douglas, which now has $9.4 billion in government military contracts, is concerned about the future of its $43.3-billion C-17 government aircraft contract. And Northrop will likely see orders for its $620-million B-2 Stealth bomber drastically cut. At the same

time, Grumman Corp., which received $3.3 billion in government orders in 1988, could lose contracts to build F-14 fighter planes and to modernize Ml tanks.

The Canadian defence sector, which only receives about one per cent, or $1 billion, of a

total of $100 billion in U.S. procurements, is made up of more than 150 companies and 60,000 employees. And while the key to success for some of these firms has been the development of specialized high-tech products, little is known about what impact the U.S.

defence cuts will have on these firms.

Clearly, weapons producers face hard choices. Many, like Hughes Aircraft Corp., the El Segundo, Calif.-based aerospace unit of General Motors Corp., have decided that the only way to survive without huge Pentagon contracts is to cut costs. As a result, it is cutting 6,000 jobs, eight per cent of its 72,000 workforce. However, none of these job cuts will affect its Canadian workforce.

Competition for the remaining military contracts will be fierce. Primary contractors, who receive the main contracts, are expected to sublet less work, and many companies will have to struggle to find new markets and specialty defence work spared by the slowdown.

Meanwhile, many companies are studying the possibility of diversifying into nonmilitary businesses to survive. El Segundo-based Rockwell International Corp., which only a few years ago counted on the B-1B bomber for 25 per cent of its $11.9 billion in annual sales, is now manufacturing factory-automation equipment, truck parts and newspaper-printing presses. At the same time, Lockheed Corp., the nation’s eighth-largest defence contractor,

is trying to solicit subcontracting work from commercial-aircraft manufacturers.

Cheney’s austerity measures will also have an impact on Canadian arms manufacturers who are already being squeezed in their domestic market.

Earlier this year, the federal government cancelled an $ 8-billion nuclearsubmarine contract and cut $2.74 billion from planned military spending over the next five years. Still, Canadian Defence Minister William McKnight maintains that, “Even if we see the normalization of political and military relations in Europe, Canada will continue to require modern, capable armed forces.”

But the main concern in the Canadian weapons-manufacturing sector is that the Pentagon’s cutbacks could lead to demands for protection against the $1 billion in Canadian military equipment sold in the United States each year. Said Archibald Conner, director of marketing for Halifax-based aviation company IMP Group Inc., which manufactures electrical cable harnesses: “Canadians may be left sitting on the outside.”

Still, Canadian arms-makers say they hope that they will be able to maintain their role as specialized suppliers to the giant U.S. military apparatus. Spokesmen for the London, Ont.-based Diesel Division of General

Motors of Canada Ltd. contend that they will win contracts to produce chassis for light-armored air-defer.ce vehicles for the U.S. Marine Corps. And officials at Torontobased CAE Industries Ltd., which manufactures flight simulators for the U.S. military, say that its market is secure.

Meanwhile, it is still unknown how badly the sharp reductions in military spending will hurt or stimulate the overall U.S. economy. While

some economists predict that the cuts will exacerbate the expected economic downturn, others think that the economy is resilient enough to withstand the sudden cutback in spending. Said Thomas McGuigan, president of Litton Systems Canada Ltd. of Toronto: “Even if the whole level of effort in defence drops significantly, there are a number of programs that are going to continue anyway—surveillance activities and the replacement of equipment.”

There are even those who think that the military reductions will help the U.S. economy in the longer term. For one thing, a reduction in military personnel could redirect talent from the military and defence industries back into other industries, and the billions of dollars previously spent on the military could be redirected into the private sector. For another, economists say that the cuts could reduce the U.S. budget deficit, which could in turn lower interest rates enough to spur an economic boom in the 1990s. But, for now, the powerful arms industry is clearly facing major uncertainties.

JOHN DeMONT

WILLIAM LOWTHER

ANNE GREGOR

Los Angeles

MICHAEL HARRISON