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WAR WITH IRAQ

Military Buildup Gives Many Tech Companies a New Lease on Life

As defense spending rises, devices that once had only commercial applications are being modified for other purposes.

March 27, 2003|Joseph Menn | Times Staff Writer

When the telecommunications boom got underway in the late 1990s, Sierra Monolithics Inc. shifted some resources away from its aerospace business to concentrate on designing chips for commercial fiber-optic lines.

Now executives at the Redondo Beach firm are thankful they didn't give up on defense entirely.

"The optical networking work took a downward spin," said Chief Executive Charles Harper. "Fortunately, we were running a parallel business line in the aerospace side -- and that aerospace side took off again."

Sierra's chips are receiving and transmitting video from the military's unmanned Predator spy planes over Iraq. The privately owned company also made the radio beacons being carried by U.S. special forces so that they can be recognized by coalition planes and escape friendly fire.

Scores of businesses like Sierra are benefiting from the war dividend: Military spending has grown from $261 billion in fiscal 1999 to $361 billion in fiscal 2003, according to Defense Department figures.

For generations, technology developed by or for the military has been adapted for widespread civilian use. The helicopter, the Internet and the Global Positioning System satellite network all spawned mass commercial applications.

Now -- with the telecom and dot-com industries staggering and much of the rest of the economy just getting by -- the military seems to be returning the favor.

U.S. defense and security officials are rapidly buying up commercial technology and modifying it to suit their needs.

"Companies all over the country are reorienting their marketing people to look at the federal government -- even small and mid-sized companies that never did business with the government before," said John Palafoutas, senior vice president of the American Electronics Assn.

"The government is the only customer with money."

Many of the firms best able to capitalize on the military's largess are those, like Sierra, that already had their foot in the Defense Department's door.

In addition to the Sierra gear now with military forces, CEO Harper has high hopes for an ongoing military effort to replace heavy coaxial cable in planes with glassy fiber, an overhaul that will require optical chips.

"The amount of coaxial cable weighs more than all the electronics on an airplane -- and you can imagine how much electronics are on an airplane," he said.

Last year, 81% of Sierra's $6.2 million in revenue was from the military. This year, Harper expects it to reach 86% of $14 million.

Sierra was profitable for years before it changed strategy during the telecom bubble and then slipped into the red.

Now that it's refocused on defense, "we will be at cash-flow break-even this quarter," Harper said.

A recent shift in the Defense Department's procurement philosophy has made it far easier to sell to the military, said Stephen Forte, chief executive of Ascendent Telecommunications Inc. The Pentagon is demanding fewer extensive product redesigns, instead settling for the best already available.

"The Defense Department's willingness to bring in commercial technology off the shelf to solve their problems -- that's the biggest change," Forte said.

Like Sierra, Encino-based Ascendent could easily have perished in the telecom meltdown.

The 4-year-old firm makes phone systems that act as backups for office communications. The gear allows an outside cellular phone to function as an internal desk phone would, with access to company networks.

Ascendent's systems were originally designed to make life easier for workers toiling away from their offices. But they also are helpful for planners gearing up to recover from terrorist attacks or other emergencies.

In order to preserve the chain of command in a disaster, some government agencies require certain workers to stay away from their regular offices during periods of heightened security. That's helped sales of telecommuting aids such as Ascendent's.

And the Defense Department is buying Ascendent systems for the Pentagon that can track down workers in the event of an emergency. The systems send out mass notifications with voice or short text messages and can receive responses.

In the last three months, Ascendent's sales were five times greater than its sales for all of last year -- and virtually all of the business has been related to defense or security, Forte said.

Even if there had been no terrorist attacks on Sept. 11, and no subsequent military buildup, privately held Ascendent probably would have recorded its first profit this year. Now that profit will be much greater, Forte said.

Even some companies created specifically to escape the defense business are returning to where the money is.

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