For 13 years, Tim Reed has worked at CAE-Link Tactical Simulation Systems in Silver Spring, assembling machines that look and feel like sophisticated weapons but are really only computer-based mimics.
The Defense Department increasingly has relied on simulators to teach its men and women how to fly sophisticated aircraft, fire weapons, maneuver tanks and handle ships. Simulators are cheaper than field exercises, and eliminate the dangers of new trainees crashing multimillion-dollar airplanes and the prospect of environmental havoc caused by missile explosions.
So it came as a surprise to the 33-year-old Reed when, early this summer, he was told that his paycheck would shrink by about $80 a week and he learned that other CAE-Link employees, including one of his best friends, would be laid off. After all, CAE-Link, which employed more than 800 people in Silver Spring, was the largest manufacturer of military and commercial simulation and training equipment in the world.
The upheaval that Reed and other CAE-Link employees are facing is symptomatic of the changes
transforming the military simulation business, in which even the preeminent players, like Link, may be in for some tougher times.
Although some of the turmoil in CAE-Link's military business was related to a corporate takeover, defense budget cuts and increased competition are affecting the company and others like it, both in the Washington area and in the half dozen or so other regions where the industry is concentrated.
Despite predictions to the contrary, the budget for military simulators will be hit by the Pentagon's defense budget cuts. Frost & Sullivan Inc., a market research company that tracks the military simulators market, said it is apparent that the military market will shrink after decades of almost continuous rapid growth in both size and application.
"Even people in the simulation business are feeling the downward pressure of defense budget cuts," said Jerry Snead, manager of marketing support for Hughes Simulation Systems Inc.
In particular, Frost & Sullivan predicted that the leaders in the training devices market, such as CAE-Link, will feel the pinch as orders decline for large, expensive simulators. With the budget squeeze, competitors have emerged who are offering smaller, less expensive models or who can upgrade older simulators.
Officials at Quintron Corp. in Chantilly, which had $25 million in sales last year, suggested that defense budget cuts will mean that the Pentagon will upgrade more weapons rather than buy new ones. That could throw more business to Quintron, which specializes in the modification of old simulators.
"If an airplane has some new black box, the simulator has to get that new black box," said Sim Cotton, Quintron's vice president for marketing. "Large companies do not like this modification work."
Likewise, Delex Systems Inc., an $18 million Tysons Corner firm, is specializing in smaller, "part-task trainers," so called because they can train individuals in only a few specific tasks.
For instance, one Delex trainer is designed to teach the crew of the Navy's A-6E Intruder, the carrier-based bomber, how to fire missiles. Unlike full-scale aircraft trainers, it cannot be used to train pilots how to fly the aircraft. But the cost difference is considerable. The part-task trainer can be bought for about $2 million, while full-scale flight trainers can cost $10 million to $20 million.
Then there is increased competition. CAE-Link and others are feeling the squeeze as more large aerospace and smaller defense companies are looking to the military simulation and training market in an attempt to find new sources of business, according to analysts.
Hughes Aircraft Co., which has a flight simulation facility in Herndon, has been moving aggressively into the military simulation market since 1988. So, too, has Delex, which historically had provided the Defense Department with analyses of warfare operations, engineering services and other professional services.
"I wouldn't be surprised if a number of the professional services companies try to get into the simulation market, because their current business is getting tougher to compete for, as the defense budget draws down and there are fewer dollars to spend on support contracts," said Delex President Paul Rogers. "At the same time, major defense aerospace companies are getting involved in the market. They can read the tea leaves as well as we can."
Companies said that price competition has become increasingly tough, with multimillion-dollar contracts going to companies that bid just a few thousand dollars cheaper that their competitors. Analysts say that this has hurt profit margins at established companies like Link.
The outlook for more elaborate simulators in the commercial market is more optimistic, in the face of record backlogs for commercial airplanes and a major shortage of pilots. But Link's work in Silver Spring is almost entirely military. The CAE-Link facility where Reed works in Silver Spring was once owned by Edwin A. Link, the American inventor who created the training and simulation industry in 1929 when he developed the first mechanical trainer, which simulated some basic flying conditions on the ground. The Silver Spring operation, which now specializes in producing anti-submarine warfare training devices used by the Navy, flourished for years, even after the Singer Co. bought the firm in the late 1960s.
Reed and other workers blame their problems on corporate raider Paul A. Bilzerian's January 1988 takeover of Link, and on CAE Industries Ltd., the Canadian company to which Bilzerian sold the facility seven months later.
When CAE purchased Link in August 1988, the U.S. military simulator industry was expected to boom. Increasingly complex and expensive weapons meant more training would be needed and probably less training could be done in the field on actual weapons.
Back then, the Canadian firm was searching for a way to enter the U.S. military market, which represents about two-thirds of the total global simulation and training business. Thus it jumped at the opportunity to buy some of the Link operations, paying $560 million.
When it was announced that CAE would be the new owner of the Tactical Simulation Systems in Silver Spring, Scott Cole, an assembly mechanic, said that morale -- which had been low under the short Bilzerian ownership -- soared. CAE Industries was experienced in the simulator industry, and dominated the commercial simulator market. Historically the company had taken about 50 percent of the worldwide commercial flight simulator market, and this year CAE's share has climbed to 85 percent, said Fred Fraser, a CAE spokesman.
But problems erupted almost immediately. Less than a year after buying some of the Link operations, CAE filed a lawsuit in Manhattan, charging that Singer had overstated the value of operations by at least $65 million. Then last year, the Justice Department filed a lawsuit against the company alleging at least $77 million in overcharges by Link from 1981 to 1988.
Because of troubles with Link's operations and the other subsidiaries it purchased from Bilzerian, CAE Industries's operating profits have dropped. In 1990, it recorded an operating loss of $7 million, compared with an operating profit of $23.6 million in 1989.
All this has led to rumors that CAE would like to sell the Link operations, something Fraser flatly denies. CAE has, however, embarked on a massive effort to put its U.S. house in order. It has already cut the staff of Link Tactical Simulation to 1,050 from 1,350 and reduced its facilities by 22 percent.
The company also has announced that it is considering further staff reductions and consolidation of operations at fewer facilities.
Reed said that several months ago, "there were a lot of rumors about us being shut down. In the beginning, we didn't really take it seriously. We figured it was just a management ploy to try to get us to work harder." Then a few months ago, he said his supervisor told him they didn't have money to make the budget and suggested that the mechanics agree to a one-day-a-week voluntary layoff.
Reed and the remaining employees are awaiting the final results of a reorganization effort, amid rising fears the company will consolidate the military simulator operations at its much larger facilities in Binghamton, N.Y., and close or further reduce the Silver Spring operation.
Lynnice Adams, an inspector at the Silver Spring facility, said a dozen fellow inspectors have been laid off, including the man who trained her nine years ago when she came to the company from a federal job training program. Joan Maxwell, who has worked in the cost accounting department for 11 years, said she was told her job will be eliminated by the end of September.
One analyst said that CAE-Link employees and management, like those in other high-technology industries, simply are learning that no industry is safe from defense budget cuts these days. Companies in the military simulator market will have to search for new ways of doing business if they are to survive and prosper, the analyst said.
But despite these words of caution for the simulator industry, the analyst is also optimistic. He said that given the difficulty in learning how to use increasingly high-technology weapon systems and the costs of alternative training methods, he believes that the simulator industry is "still the industry of the future."