A respected research group in New York City has some awfully bad news for Maryland.
The Council on Economic Priorities, a liberal, nonprofit group, spent considerable resources assessing potential layoffs due to defense cuts, and concluded that Maryland stands to lose more jobs -- 187,000 -- than any other state in the country. It even outranks California, which the group estimates has 138,000 defense jobs at risk.
But J. Randall Evans, secretary of the Maryland Department of Economic and Employment Development, doesn't buy what he calls the "Chicken Little," sky-is-falling scenario. And a recent study by Lorraine Sullivan Monaco, an economist with the University of Maryland, concluded that Maryland's job losses due to defense cuts will be slightly less than the national average.
Indeed, at Westinghouse Electronic Systems Group, Maryland's largest defense contractor and its largest for-profit employer, the company is practically humming with optimism. The group has a $5 billion backlog and had $3 billion in sales last year, setting a record for new orders. Westinghouse, which employs about 17,000 people in Maryland, has no plans for laying off any permanent employees, although it has let go some of its temporary employees. Neither do a host of other Maryland defense contractors, including Fairchild Space and Defense Corp. and Martin Marietta Corp.
Is this merely an "ostrich response," as economist John Tepper Marlin, the author of the CEP study, called it? Or do companies and state officials in Maryland, where defense accounts for 3.8 percent of the gross state product, have a better crystal ball?
During the past few months, communities and companies across the country have been bombarded by conflicting data from think tanks, members of Congress, defense contractors and research groups on the potential impact of defense spending cuts. In the midst of this chaos, groups are trying to decided what to do -- companies are trying to fashion corporate strategies, communities are trying to plan development programs and states are trying to decide if they will need retraining and financial aid programs to help laid-off defense workers.
There's actually a simple explanation for the confusion. Different fortune tellers are using different assumptions. Some assume drastic defense cuts, while others expect mild ones. Some studies are based on across-the-board cuts, while others look at specific weapons programs reductions. Researchers have to make substantial assumptions about what the Pentagon will do, what Congress will do and how defense contractors will react.
For example, the Maryland Department of Economic and Employment Development has taken a relatively optimistic approach -- predicting a 2 percent decline in defense spending per year in real terms. Aris Melissaratos, vice president of Westinghouse, said he played a role in the optimistic scenario selected.
"I didn't think it was appropriate to come out with a scare," said Melissaratos. The reason? "The very people who are asking for the dramatic cuts are going to see to it that the cuts aren't dramatic. Those very same senators and Congress people who advocate cuts of 30 percent" change their mind when they find out it will affect a facility or base back home, he said.
But Harvey Kushner, chairman of the Montgomery County High Technology Council and former chairman of a defense contracting company, isn't so sure. He said defense cuts could easily be far more than double the amount assumed by the Maryland predictions.
Although the Council on Economic Priorities study says Maryland stands to lose the most defense jobs, followed by California, most of the job losses in those two states would be from jobs expected to be created. That's because the CEP assumes that the B-2 Stealth bomber, which is still in its infancy, will be killed. Fairchild Communications and Electronics in Germantown, AAI Corp. in Hunt Valley and Pressure Science in Beltsville have been named by Northrop Corp. as B-2 subcontractors. In contrast, the job losses projected for Missouri and Texas involve far more layoffs.
Evans acknowledges defense employment in the state "probably will go down by a little bit." The state is watching certain key contracts, such as the Mark XV Identification Friend or Foe System, the largest project at Allied Signal Inc.'s Towson facility. The $4.5 billion project is considered vulnerable and, if killed, could force the company to lay off 225 workers.
But state officials note that Maryland has a 3.3 percent unemployment rate, one of the lowest in the country, meaning it probably will be better able to absorb laid off workers than Texas, with 6 percent unemployment, or Illinois, with 6.2 percent unemployment. In addition, they argue that because Maryland's defense industry work force consists largely of highly skilled engineers and technicians, they may be able to move into other local high-technology areas, such as telecommunications and software development, where there is an employee shortage.
In fact, some local analysts note that the bloom has already been off the defense rose for more than a year in Maryland, with little apparent impact on the economy.
Defense spending in Maryland dropped 12.4 percent in 1989 from 1988. AAI Corp. laid off about 240 workers as a result of defense spending cuts, leaving it with about 2,300 employees in Maryland. In addition, over the past couple of years, Martin Marietta Corp. has reduced its Maryland work force by about 1,600, leaving it with about 3,700 employees in its Baltimore and Glen Burnie facilities. Yet during this period, the state unemployment rate continued to fall.
Companies such as AAI are cautiously optimistic. Lawrence Rytter, executive vice president of AAI, expects some budget cuts in AAI's many defense programs, but he anticipates growth in the company's most important product line, simulators and trainers that are used by the Defense Department for training military personnel. Rytter said company officials hope further layoffs will not be required.
Executives of Germantown-based Fairchild Space and Defense Corp. are even more bullish about their defense business. Joseph S. Bravman, president of Fairchild Defense, is predicting about 5 percent growth above the inflation rate for the company's defense sector, which rang up almost $100 million in sales last year.
Even the cancellation of a few defense programs won't send Westinghouse into a tailspin, said Melissaratos. He said the company has between 20 and 24 programs, each worth more than $1 billion, and considers only a few of them vulnerable to cuts. The one that would most affect the Maryland operations is the Airborne Self-Protection Jammer, a radar-jamming system that has come under fire from Congress because of poor test results and massive cost increases.
However, Melissaratos's analysis assumes that the Air Force's Advanced Tactical Fighter and the Navy's A-12 attack airplane will not be killed, despite growing concerns about the high costs of those next-generation aircraft. Some members of Congress have expressed doubts about the need for the expensive, high-technology planes. Westinghouse is to supply the electronics on both aircraft.
"If major programs like that were to be canceled, you'd start seeing more of an impact," agreed Melissaratos.
One thing most studies fail to consider, according to business executives, is that many defense companies already have set out to find new business in other places: civilian agencies, commercial companies and overseas.
Under the tutelage of the French aerospace conglomerate Matra, its new parent, Fairchild Space and Defense, which employs about 1,650 people at facilities in Germantown, Frederick, Greenbelt and near Baltimore Washington International Airport, has high hopes for the global market. Bravman said that two years ago, the company had no international sales force and negligible sales overseas. At the end of this year, Fairchild expects 20 percent of its sales to be overseas.
Fairchild's game plan also includes a big plunge into the geographic information systems arena, an industry that provides computerized mapping for a wide variety of commercial and government uses. Likewise, although the space side of the Fairchild operation expects NASA sales to be flat, it hopes commercial space activities and overseas sales will keep business growing.
AAI, too, is looking to the commercial sector. It recently started a subsidiary to repair hospital equipment and is retraining its technicians to shift to the new business if it grows as the company expects.
Westinghouse Electronic Systems Group has perhaps one of the most ambitious plans in this vein. Four years ago, its nonmilitary business accounted for 16 percent of sales. The company's goal is to have 50 percent of sales in non-Pentagon defense products and services by 1995. It's already at the 23 percent mark.
Likewise in 1989, 18 percent of the company's sales were international. Its goal is to increase that amount to 25 percent by 1995. Melissaratos points to what he sees as a symbol of the initial success of this effort. The week after Poland broke with the Soviet Union, Westinghouse signed a $10 million contract with Poland to provide a massive new air traffic control system for the country.
Obviously, as these companies shift their sights to new products, the smaller companies that supply them with goods and services will have to keep up. Maryland officials say that if there is a weak link in the state's economy, it is these small suppliers, many of whom lack the money and manpower to shift gears easily.
Typical is the plight faced by Micro Machining, a small Baltimore County precision machine shop that provides Westinghouse with parts for the radar jamming devices it produces for the F-16 fighter plane.
"Our shop is busy now," said Kenneth P. Mowery, sales engineer for Micro Machining. But he said defense cuts are "probably going to hit us in the middle of the summer or the end of summer. Westinghouse doesn't have the orders it used to have from government, so therefore they are not subcontracting as much" on the F-16.
The company, however, has no plans to lay off any of its 46 employees. It still is getting steady subcontracting work from Allied Signal on the Patriot missile. More important, Micro Machining has embarked on a $90,000 program to computerize and redesign its facilities to enable it to switch quickly between different types of products.
Mowery said the changes should enable Micro Machining to go after non-defense business. The company, which received $20,000 from the state and an additional $20,000 from Baltimore County to help with the overhaul, said it already has landed work with a Connecticut medical company making parts for precision surgical instruments.
Will that commercial work eventually be enough to make up for lost defense business? Mowery said he thinks it will.
But, he conceded, "We're a little scared. As a matter of fact, we had hoped in 1990 to put up a new building and we've canceled those plans to expand. We leased some additional square footage rather than put our name on a loan to build something. It's shaky. We don't know what's going to happen."
And most other defense companies acknowledge that they, too, are dealing with cloudy crystal balls. "I think until the military services sort out where want to go, we won't know how we're going to be affected," Rytter said. "Right now everything is just speculation."endquad