Rockwell Chairman Donald Beall said that although his firm "has no hidden agenda . . . to de-emphasize defense," it is putting relatively more of its investments these days into its growing commercial businesses--auto parts, electronics, newspaper printing presses and industrial control systems.
Hughes has set the most ambitious diversification course among the major defense firms. By the end of the decade, the company intends to increase its non-defense business to 50% of sales from 20% through expansion of its satellite-based telecommunications business and its aircraft simulator business.
"Telecommunications is exploding worldwide," said Hughes Chairman Malcolm Currie. "We are creating new markets for the future."
Weaning the economy from its Cold War footing is likely to generate an economic boom nationally by freeing resources for more productive investment. But many analysts say it is doubtful that the growth will sop up all the nearly 1 million California jobs that will be lost in defense.
The problem for California is that it receives about 18% of the nation's defense spending but only about 12% of general federal spending. Though the state will share in the general economic growth resulting from any "peace dividend," it will pay a disproportionately high price in defense cutbacks, said Hensley, the UCLA economist.
The best hope for overcoming that bias rests in the ability of defense scientists and engineers to apply their skills to new industries. It's a wild card that California has played successfully in the high-tech companies of Silicon Valley, the San Fernando Valley, Orange County and North San Diego County.
Aura Systems, founded in 1987, is a paradigm of a successful defense spinoff.
At first, defense contracts funded virtually all of the firm's research. But today, they account for just 10%, according to Kurtzman. The firm is trying to develop magnetic controls for industry, including plows built by Caterpillar Corp.
Aura Systems--in contrast to the practice of major defense contractors--has emphasized the use of small, multidisciplinary engineering teams aiming to achieve rapid product development. "It requires a whole new approach and a whole new orientation," Kurtzman said. "People got too used to government regulation, paperwork, reports, memorandums, auditors, quality inspectors and on and on."
A study last fall comparing small defense firms in Southern California and St. Louis found that contractors here were more aggressive in their efforts to find new business and international markets for their products. The survey by Carol Evans, a Georgetown University business professor, is believed to be the first detailed comparison of different regions' responses to defense cutbacks.
"Companies in Los Angeles are more healthy and don't have the same grim outlook," Evans said. "On the West Coast there is a greater receptivity to trade and foreign linkages. L.A. firms are at least two steps ahead of St. Louis firms."
Furon Corp., a $300-million Laguna Niguel aerospace manufacturer, is typical. When McDonnell Douglas announced its tentative deal last November to link up with Taiwan Aerospace, Furon's executive vice president for international sales, Larry Hanson, was on the phone that same day to Taiwan.
"My thought was to get together with the key people in Taiwan," said Hanson, whose firm wants to form a venture to export its plastic composite aircraft parts to Taiwan. "You need an infrastructure to support an aircraft industry, and we could be a part of it."
Small contractors such as Furon stand the best chance of adapting to the declining defense market, because their technology and products tend to have dual uses. The military technology held by prime contractors, on the other hand, has become less applicable to the commercial marketplace in the last two decades, according to Jay Stowsky, a political economist at UC Berkeley who has studied conversion issues.
In the field of artificial intelligence, for instance, the Pentagon spent lavishly through the 1980s to develop technology for the Strategic Defense Initiative or "Star Wars." But less generously funded commercial projects have surged ahead, Stowsky said. Similarly, a richly funded program to help the defense industry develop advanced computer chips dragged on for so long that commercial industry surpassed the technology by the time it was finished.
Indeed, defense technology spinoffs to the commercial world have dropped drastically since the 1950s, Stowsky said, arguing that it makes more sense today for the Pentagon to "spin-on" commercial technology to defense applications.
"The place where conversion is going to happen is at the level of materials and components manufacturing, where the technology really is dual use," Stowsky said.
