Lockheed Martin: Ready For Boeing-Mcdonnell

SAN JOSE, Calif. - The aerosp and defense industry is merging itself down to two titans and a dozen or so smaller rivals.

When Boeing and McDonnell Douglas complete their proposed marriage, the new company will be in a position to square off against the former industry Goliath: Lockheed Martin.

So is Lockheed Martin worried about the new rival? Not as far as Missiles & Space President K. Michael Henshaw is concerned.

"It doesn't impact the strategies for the corporation at all," said Henshaw, who heads the largest of the company's 82 separate operating companies. "They'll be a worthy competitor, and we're not afraid of the competition."

The changing winds of aerospace are evident at Lockheed Martin in myriad ways. Entire layers of management have been deleted. Staid dress shirts and ties have given way to year-round casual clothing. Operating companies have been reorganized to delete duplication so that they work together as partners instead of in bureaucratic opposition.

It's a new attitude that's miraculous to some. Just a few years ago, aerospace and defense workers thought they were watching their industry flame out.

The Cold War had ended and the gravy train of defense spending that had chugged along since World War II had abruptly halted. Production plants closed. Research labs shrank to skeletal staffing levels. New contracts became rare gems.

Then the mergers began: Martin Marietta bought General Electric's aerospace group, which earlier had swallowed RCA's satellite business. Lockheed and Martin Marietta joined forces. Then Lockheed Martin acquired most of Loral. Just this past summer, Boeing bought Rockwell International's aerospace units. Before that, Northrop and Grumman merged while Lockheed, Hughes Aircraft and Martin Marietta all got chunks of General Dynamics.

Here in Silicon Valley, engineers who once would have spent their careers as cogs in the aerospace machine found themselves standing in the unemployment line.

But this past month has brought a steady stream of big news. It started with a $2 billion space-based-sensor-system contract award to Sunnyvale-based Lockheed Martin Missiles & Space, continued with that company's announcement that it wants 3,000 new workers in Sunnyvale by 2000, and culminated with this month's merger announcement from Boeing and McDonnell Douglas. Industry observers now say that aerospace's giants finally have pulled out of their nose dive.

"These companies figured out that they could fight each other to the death, or they could hook up and move forward," said Ken Herbert, a research director at Frost & Sullivan.

Herbert said the Boeing-McDonnell Douglas merger means that Lockheed Martin - viewed for nearly two years as the industry's 2,000-pound gorilla - now gets to wage war with a 3,000-pound rival.

The opening bell in the clash of the titans sounded Dec. 20 as the Air Force announced that the two are finalists for the $1.4 billion contract to build the nation's next generation of military rockets.

"Mergers make for a more stable playing field for the big players left standing," said Jon Kutler, president of Quarterdeck Investment Partners in Santa Monica. "The consolidations have taken excess capacity out of the marketplace . . . and now it's up to the remaining companies to keep finding efficiencies to make them strong."

That's exactly what Henshaw says he has set out to do at Lockheed Martin Missiles & Space's 600-acre Sunnyvale campus.

A big part of the industry's future, analysts agree, lies in commercial adoption of technology developed under government contract over the past 50 years. Space, once the sole province of nations, has become the last corporate frontier.

Among other things, today's commercial satellites let people communicate, watch television and figure out where they are - all lucrative and expanding markets.

Henshaw's Missiles & Space company currently gets just under one-quarter of its revenue from commercial clients. Henshaw hopes to push that up to one-third within the next three to four years. Boeing - currently dependent on its commercial jetliners - wants its space-based efforts to become just as important to its fiscal future.

To attract and keep commercial clients, however, the staid old aerospace bureaucracies must be turned on their heads and become more like the clients with whom they hope to work.

"Corporations cling to their bureaucracy like a security blanket," said Henshaw, who moved to Silicon Valley from a Lockheed Martin plant in Pennsylvania nine months ago and was named chief of Missiles & Space just three months ago. "That's what I went after. . . . I don't want a large staff between me and where the action is."

Henshaw deleted several upper management jobs and arranged for people who had been middle managers to report directly to him. He invited rank-and-file workers to e-mail him directly and set about trying to meet every one of the 12,700 Missiles & Space workers. Focus groups told him that workers and senior management had developed a mutual distrust; he has set out to retool their assumptions about each other.

Analysts applaud the effort.

"In reality, what the defense industry is trying to do is cut out that layer of middle management that the rest of corporate America figured out how to cut 10 years ago," Kutler said. "Remember that Lockheed Martin has already contemplated its navel and figured out what business it wants to be in and made some hard cuts and is off to the races. Boeing will . . . be trying to do in six months what Lockheed Martin has had two years to do."

Much of that work over the past two years has been in changing business attitudes, Henshaw said. Over the past few years, the Department of Defense has been working to cut costs by buying off-the-shelf components and equipment as much as possible. The days of made-to-order systems are over, Henshaw believes.

So Lockheed Martin has been reorganizing to make its 82 operating companies behave more like cooperative business partners than bureaucratic rivals. Within Missiles & Space, seven divisions build parts and systems that could be used in any number of Lockheed Martin projects, or in the projects of rival aerospace companies for that matter.

A new Solar Array Center in Sunnyvale, for example, builds three-quarters of all solar arrays produced in the world, Henshaw said, including those recently unfurled on the Russian Mir space station.

"We have to create common products to reduce costs and to reduce product cycle times," he said. "The whole world has been watching us consolidate and now they're looking for the efficiencies and cost savings."