PERSPECTIVE ON DEFENSE CONVERSION : Lots of Solutions, Faint Hope of Success : The suggested rescue plans for Pentagon contractors won’t help much if cutbacks cause : 2 million layoffs.

Since defense spending started declining in 1985, the Pentagon has gotten the majority of its savings by reducing purchases from the defense industry. While the overall level of defense spending has dropped in real terms by 25% since 1985, defense procurement has declined by more than 50%, dropping from $125 billion in 1985 to about $60 billion today. It now seems clear that the Pentagon will continue to take most of its future cuts from the procurement area. As reported in Thursday’s Los Angeles Times, the Department of Defense intends to freeze all new weapons in research and engineering and postpone production indefinitely. Under such a policy, military procurement is liable to drop to about $30 billion within a few years.

Given the superiority of the current generation of American weaponry, this policy makes a great deal of strategic sense. However, for companies like Lockheed, McDonnell Douglas, General Dynamics and Rockwell whose primary customer has been the Pentagon, it will mean a traumatic change. Fortunately, given the backlog of orders from the military and the unprecedented high level of foreign military sales, most companies will have time to adjust. The question is what adjustments to make.

The ideal solution would be for the companies to convert their military facilities to the production of civilian goods, using the same workers; this, however, is easier said than done. The large defense contractors essentially operate without market discipline. They emphasize performance, not price. Cost overruns, high salaries and corruption are common. Their only customer, the Pentagon, has a vested interest in seeing that they survive in order to protect the military’s industrial base; the Department of Defense spreads the business around and has even bailed out companies. Finally, their marketers are technicians concerned with the specialized needs of the armed services, not salespeople trying to find new markets.

It is no wonder that in the post-Vietnam decline in defense spending, efforts by these companies to convert to civilian products were, in the words of Norman Augustine, president of Martin Marietta and former undersecretary of the Army, “unblemished by success.” The unusable buses that Grumman produced for New York City and the fragile subway cars that Boeing made for Boston are testimony to the truth of Augustine’s observation.

The easiest solution would be simply to downsize and continue to lay off workers. About 500,000 have been laid off by defense companies since 1987. Under the “no production program” that the Pentagon is proposing, another 2 million defense workers could be laid off by the end of the decade. General Dynamics, the nation’s largest defense contractor, dependent on the Pentagon for 90% of its business, has already formally embraced this downsizing policy.

A solution for a defense supplier that has significant non-defense business would be to emphasize and enlarge those areas. For example, General Electric is the nation’s third-largest defense contractor, but does only 20% of its business with the Department of Defense. This approach assumes that there is room for expansion in those areas, such as airlines, and that defense workers have the necessary skills. However, in most cases, there’s a lack of market or transferable skills.

Still another solution would be for the companies or affected areas to diversify. The defense company could acquire other companies; the Raytheon Co., for example, has purchased Beech Aircraft and Amana. While this may help the company’s stockholders, it will do little for the workers. Few of Raytheon’s displaced defense workers have been hired by its Amana Microwave division, even though Amana uses military technology. Similarly, an area heavily dependent on defense, like California or Missouri, could bring in other businesses, like biotechnology. That leaves the same problem of displaced workers: Aeronautical engineers and machine tool operators are not prime candidates for work in a lab.

Finally, there is the solution of marketing abroad. In 1989, American firms sold “only” $12 billion worth of equipment to foreign countries. In 1990, sales jumped to $18 billion. The total for 1991 is expected to exceed $30 billion. While this strategy may keep defense workers employed and defense profits up, it can create tremendous problems for this nation and the world. Let us not forget that Saddam Hussein used $50 billion worth of Western-made arms to create havoc in the Middle East.

Since none of these solutions will have more than a marginal impact, the Department of Defense must help the communities and workers adjust. In the 1991 Defense Authorization Act, Congress, against the wishes of the Pentagon, provided $200 million to help communities and workers affected by defense cutbacks. This amount is far too small to confront the coming problem. (It is less than half of what Congress has provided to help the former Soviet Union dismantle its military-industrial complex.) Congress should set aside $1 billion a year in the defense budget for the next five years to help communities and workers make their own decisions on how to adjust to what will hopefully be a permanent decline in the level of defense procurement.