Regional Update (January-March 1998)

Index The State of the States Views from the Region Southeastern Manufacturing Survey Southeastern Economic Indicators

Cover Story - How Will the Asian Financial Crisis Affect the Southeast?

Defense Contractors in the Region Respond to Military Spending Cuts

Defense Contractors in the Region
Respond to Military Spending Cuts

A spate of media stories in the late '80s and early '90s focused on cuts in defense industry procurement spending and the impact these developments would have on state economies. In contrast to the doom and gloom predicted at that time, the Southeast has done quite well, and many companies that once solely relied on defense contracts are not only still in the defense business but are also thriving commercially. To remain viable, these companies undertook significant efforts to transform themselves, responding to cuts in defense spending through corporate mergers, partnerships with local communities and conversion to nondefense related contracts.

The Defense Industry in the Southeast

In 1987, the Southeast received $15.5 billion in defense procurement awards. This amount rose to a peak of $16.8 billion in 1994 and then leveled off to a total of $15.8 billion in 1996 — an increase of 2 percent since 1987. In contrast, the national net value of defense procurement spending was $133 billion in 1987, dropping to $109 billion in 1996 — a decrease of 18 percent (see charts on page 6).

The states in the Southeast (Georgia, Alabama, Florida, Tennessee, Louisiana and Mississippi) accounted for approximately 14 percent of the nation's defense procurement awards in 1996. Only two regions' net procurement award totals surpassed this percentage — the western United States with nearly 24 percent and the mid-Atlantic states with approximately 15 percent. In the West, California alone accounted for almost 17 percent of the nation's total defense procurement awards in 1996. During the same year, Virginia, in the mid-Atlantic region, accounted for nearly 9 percent of the nation's total. In contrast, in 1996, the Southeast's largest recipient of defense procurement awards was Florida with 5 percent of the nation's totals. Still, all of the states in the Southeast ranked in the top 25 states in total prime contract awards in 1996. In fact, Florida and Georgia placed in the top 10 states in the nation, ranking fifth and eighth, respectively.

In 1996, the six southeastern states were awarded 44 percent of the nation's aircraft engines and spares production, most of that in Florida. Tennessee received approximately 23 percent and Alabama 8 percent of the nation's military textiles business, which includes clothing and equipment contracts. The Southeast also garnered just over 26 percent of the dollar value of U.S. ship contracts, the majority of these awarded in Mississippi.

Many defense contractors have operations in the Southeast. For instance, United Technologies Corp. has an engine and space propulsion plant in West Palm Beach, Fla. Northrop Grumman makes aircraft doors at a plant in Perry, Ga., has an aerospace plant in Melbourne, Fla., and produces data systems in Titusville, Fla. Lockheed Martin, which is building the F-22 fighter plane for the U.S. Air Force in Marietta, Ga., also has plants in Americus, Ga.; Oak Ridge, Tenn.; Huntsville, Ala.; and Orlando, Daytona Beach and Titusville, Fla. Boeing boasts four operations in Florida, two in Louisiana, one in Georgia and one in Tennessee. Among the region's shipbuilders are Avondale Industries, with manu-facturing operations in Gulfport, Miss., New Orleans and Avondale, La., and Litton Industries in Pascagoula, Miss.

Turning Potential Negatives Into Positives

To achieve the national defense industry presence the region holds today, companies operating in the Southeast had to be creative in keeping business during the period of defense spending cuts in the late '80s and early '90s.

Many defense companies merged, switched to partnerships with local communities and focused on nonweapons production in efforts to retain skilled workers and introduce new technologies and in turn position themselves to take a piece of the shrinking pie of defense contracts.

A substantial merger took place in August 1997 when Boeing acquired McDonnell Douglas. Mergers diversify companies and balance the number of defense contracts as opposed to commercial contracts, expand the services each company can provide and the types of contracts it serves, and reduce the amount of subcontracting necessary on large contracts.

Another route taken by defense contractors in the Southeast has been converting former defense production sites to commercial production. While most of the large defense contractors — Lockheed Martin, Boeing, McDonnell Douglas and Northrop Grumman — have long had a commercial component in their businesses, these companies are adapting southeastern plants and moving production sites to meet the needs of commercial contracts as funding for military projects shrinks.

U.S. Defense Spending
Source: Department of Defense.
In Perry, Ga., for instance, Northrop Grumman built a plant in 1990 for a missile production program that never received funding. The company converted the plant to an aircraft parts plant to meet a Boeing contract to produce doors for 747s. But because the plant is so large, much of the space was underused. To cut costs, the company decided to close the plant, sell the building and move the work to another plant. The building was sold, but in the meantime, the company won an additional contract to build doors for 737, 747, 757 and 767 aircraft. As a result, the company reversed its decision to close the Perry operations and chose to lease a portion of the plant from the building's new owners. Northrop Grumman now employs more workers at the plant than before the new contract.

A completely different approach to the cessation of defense funding was taken in the Tampa area in 1994. The Technology Deployment Center (TDC) was formed when the Department of Energy (DOE) announced that it was closing its defense-related Pinellas plant in Largo, Fla. The local community, the DOE, the University of South Florida and Lockheed Martin Specialty Components, which had been operating the plant, joined forces to maintain manufacturing and engineering capabilities while transitioning the plant to a for-profit endeavor.

According to Richard Streeter, executive director of the TDC, the approach was two-part: "The St. Petersburg/Clearwater Economic Development Council bought the building and equipment and the university worked with Lockheed and the community to preserve technology clusters and skill sets of employees and equipment."

The group began by making sure employees remained active honing their technical capabilities, like precision machining and battery technology, and learning how to interact with the private sector. At the same time, the TDC requested proposals for projects. A review committee composed of experts from universities, federal laboratories and technology transfer organizations evaluated the proposals on technical, marketing, synergism and employment criteria.

Twenty-four proposals were chosen for implementation during three proposal cycles. Many of these original projects are approaching commercial readiness. The projects include producing an instrument used in corneal transplant surgery, a universal battery charger, a handheld navigation communication unit, and a system that analyzes nuclear waste storage drums so that they can be properly transported and processed.

As a result of these successes, the TDC has retained eight of the plant's technologies and 108 high-technology employees as well as 41 other employees. Another 244 jobs have been generated around TDC activities, and it is estimated that, when several of the projects are commercialized, approximately 400 more jobs will be created. Some of the technologies at the plant were purchased by private companies that transferred their operations to the plant. The transition also created some new companies that purchased plant technologies. Custom Manufacturing and Engineering, an employee-owned contract-manufacturing firm, was formed by some of the plant's employees.

Additionally, the goals of maintaining the technology base and employee expertise and retaining employment for many of the plant's workers were achieved.

Southeast Operations Land New Defense Contracts

Another reason that the Southeast held onto many defense procurement awards is that the region has a history of specializing in certain component industries and has the facilities, engineers, equipment, skilled workers and capital in place to support them.

Lockheed Martin's F-22 project is currently in the engineering and manufacturing development stage at the company's Marietta, Ga., plant. The approximately $15 billion contract for this stage of production, awarded in 1991, employs 1,200 workers at that facility. The total contract for building more than 400 F-22s is worth approximately $72 billion, and the contract will run through the year 2014.

Avondale Industries recently won a Navy contract to build as many as 12 ships over the next decade. The approximately $9 billion contract means that the shipyard will add an estimated 1,000 jobs by the year 2000. At peak production, approximately 4,000 employees will be assigned to the contract.

In Decatur, Ala., Boeing is constructing a rocket plant that will employ between 2,000 and 3,000 people. Excavations for the plant began in November 1997, and work on the building will begin soon. The company will invest $450 million in the 2 million square foot plant. If the company does not receive an anticipated Air Force contract, the plant will be used to manufacture rocket parts. The state of Alabama offered tax breaks to lure the company to build in Alabama.

Southeast Defense Industry Manages Transition

The defense industry in the Southeast has experienced the effects of recent cuts in defense spending. Yet, even as some plants have closed, others have found ways to continue operations. Many companies have merged with other defense contractors and have chosen to use plants in the region to meet the demands of lucrative defense contracts because of the expertise and facilities at the plants. Still other merged companies have converted facilities that were built for weapons production to meet commercial contracts.

In another innovative approach to shrinking defense spending, federal and local governments formed a partnership with a community and university to help retain businesses and jobs. Their partnership transformed a DOE defense plant from a federal government-owned operation to a building that is owned by local government but houses private industries that are applying formerly military technology to commercial uses.

Because of the innovative approaches used by defense contractors, an excellent history of servicing defense contracts and pockets of expertise and experience, the Southeast has continued to win lucrative contracts. As a result, the effects of the cuts in defense procurement spending have not been as severe in the Southeast as they have in other areas of the country.