The Battle of Change

President Johnson's talk of economy may please most businessmen, but it sends a chill through the $20 billion defense industry, where the President has indicated that he intends to take most of his budget savings. In the second half of the 1960s, the current $51 billion defense budget is expected to drop to about $45 billion -- about where it stood three years ago. Though the deep effects on the industry are still in the future, both businessmen and the Government are showing increasing concern about what defense companies will do as Government spending levels off.

Some companies are already working on the problem -- but the Government believes that the industry as a whole is not worried enough about it. Washington has set up several study groups to look into the possible impact of cutbacks on the economy, and the Pentagon has sent Deputy Assistant Defense Secretary Arthur Barber barnstorming the nation to prod management. Said Barber to a group of defense industry executives in Boston last week: "What you have got to face is that the markets you're in are going to diminish, and that you've got to create new products."

Hardest Pinch. Some defense companies insist that continued international tensions and the need for ever newer weapons will make any severe defense cuts impossible over the long haul. The Pentagon argues that major cuts are possible, points out that heavy spending to develop basic weapons systems is over and that further outlays will be mainly for modifications to update them.

Since future Pentagon outlays are apt to go to big, well-managed firms that can afford to invest in cost-saving methods, small companies will be pinched hardest. Hundreds of tiny subcontractors, many of them in the vulnerable electronics industry, will be hurt if prime contractors are forced to do more work themselves to keep their own shops busy. As for the big contractors, their main worry is that the spending slowdown will hobble the growth rates they want to keep up.

Many defense companies have already begun to hedge against the future by concentrating more on the space program and other nondefense Government projects, but the most obvious solution is to turn defense skills to producing civilian products. Lockheed has in the works such diverse products as fuel oil registers, highway bridges, ferryboats, saltwater anticorrosion systems and new metal alloys. Republic Aviation has signed up to build the British Hovercraft air-cushion vessel in the Western Hemisphere, and Boeing and Grumman are both experimenting with hydrofoil boats. Sperry Rand's defense engineers have produced a machine tool that is run by a computer, and Glendale's Electronic Specialty Co. is diversifying into heating and ventilating equipment. Ampex Corp. has reduced its military business from 62% of sales to 30% by bringing out a new line of hot consumer audio and video tape-recording products.

Not So Easy. Spurred by these examples, many other firms are conducting studies to seek out their best civilian niche, but they are finding that it is a big turn from a space-age military product to an item for industry or the consumer. One major obstacle is that defense companies have neither the marketing nor the production facilities to switch over smoothly even to limited civilian goods. Such problems only harden the conviction in both industry and Government that the search must be pushed vigorously if the defense industry is to win the battle of change.

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