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GM Move to Increase Defense Work Worries Competitors

March 28, 1985|From the Washington Post

WASHINGTON — General Motors Corp., lured by the prospect of billions of dollars in profits from the Reagan Administration's weapons buildup, is taking steps to triple its share of the Defense Department's budget over the next five years.

The world's largest car manufacturer also is aiming for bigger pieces of the aerospace and satellite communications businesses in an attempt to broaden its revenue base.

The automotive giant's stirrings are sending tremors through the industries on its target list, mostly because potential competitors believe GM will use its huge financial reserves--$8.6 billion in cash and marketable securities--to take over an already established defense-aerospace company.

Sophisticated Products

"GM's chances for success are very good. All they have to do is buy someone like Hughes Aircraft," said Paul H. Nisbet, a defense-industry analyst with Prudential-Bache Securities Inc.

California-based Hughes Aircraft Co. makes electronic and other sophisticated technical products and systems for military, space and commercial applications. It is one of several major defense contractors on GM's shopping list, defense and auto-industry analysts say.

Other takeover targets reportedly reconnoitered by GM include Bethesda, Md.-based Martin Marietta Corp., an aerospace, defense, electronics and building materials company; New York-based Sperry Corp., a diversified manufacturer of computers and electronic components, including equipment used in electronic warfare and flight simulation, and Seattle-based Boeing Co., a manufacturer of aircraft, missiles and other products used for commercial aviation, aerospace and defense.

"They've looked at almost everyone," Nisbet said.

GM has to look--and has to buy--to reach the ambitious goal it has set for itself, other analysts say.

"They're not really in the game, now. If they want to get in, they're going to have to buy someone," Edmund Greenslet, an analyst with Merrill Lynch, Pierce, Fenner & Smith, said of GM's current standing in the defense industry.

Defense and aerospace are long-lead businesses, Greenslet said. Contracts often run from five to 10 years. "Add-ons" stemming from modifications of hardware or services can make those contracts last even longer, he said.

Risk in Main Business

Thus, failure to get a piece of today's hot action could mean being frozen out of future contracts and profits, Greenslet said.

The risk in GM's main business is that customers may or may not buy all the cars it makes at the price GM wants for them. But the military usually takes what the defense establishment makes, which is another reason why GM is eyeing the high-technology weapons and satellite businesses, defense and aerospace analysts say.

"The only other thing that GM could do" to get on the fast track in defense "would be to win a lot of defense programs" now in development, Greenslet said.

"But you need a lot of specialized technological skills, a lot of research and development, to win those contracts. If you don't have those things, and if you want the kinds of share increases that GM is talking about, that usually means acquiring someone," Greenslet said.

GM officials demurred.

"We are not currently seeking such a relationship" with a defense contractor, said David S. Potter, vice president and group executive in charge of GM's 2-year-old Power Products and Defense Operations Group.

However, Potter acknowledged in an interview that GM is mounting an aggressive campaign to triple its defense-aerospace sales within the next five years. "If it takes six or seven years, that's okay, too," Potter said.

"You don't start off in the military procurement world with big, immediate jumps. . . . You've got to get into the R&D programs and the early phases of these things to earn the right to the production contracts. . . . That takes time," Potter said.

$83.9 Billion Worldwide

GM last year racked up $83.9 billion in worldwide sales--$1.3 billion, or about 1.5%, of which came from defense and aerospace. That $1.3 billion is 57.2% better than GM's $827 million in defense and aerospace sales in 1983 and 63.7% better than its $794 million worth of sales in those categories in 1982.

GM last year ranked 23rd in the defense industry, one place behind its chief domestic rival, Ford Motor Co. Ford's defense-aerospace sales of $1.5 billion came through its subsidiary, Ford Aerospace & Communications Corp.

"Certainly, we ought to up ourselves by 10 places" by 1990, Potter said. "But more important than the volume is the kind of volume" that GM is seeking, he said.

"I really do want a broadening of the base, and I want to make certain that we are in technologies that have a high likelihood of ultimate payoff in our primary product line," Potter said.

That means GM will pay particular attention to defense electronics--a $52 billion part of the defense and aerospace industries in fiscal 1984.

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