How the cancellation of just one weapons program closed a major defense contractor and left hundreds of suppliers in the lurch
THE NIGHT OF OCTOBER 16, 1986, was not exactly a shining moment for the U.S. Senate. In that normally genteel chamber, where politicians refer to each other as "my distinguished colleague" and "the honorable gentleman," and where euphemism often masks tough political choice, the debate had turned small and bitter.
There was Arizona's Barry Goldwater telling New York's Alphonse D'Amato, "You are out of your head." And there was an indignant D'Amato, suggesting to Goldwater that the general from whom he had been taking his cues should be "put in the dog pile." Interjecting himself into the coloquy was the urbane Daniel Patrick Moynihan, whose primary concern seemed to be that a prolonged debate might force him to miss an upcoming World Series game between the Mets and the Red Sox.
The atmosphere in the Senate that night crackled with political electricity. At midnight, the temporary appropriations that had kept the federal government operating during the previous two weeks would automatically expire. The members of Congress, eager to get home for some last-minute campaigning before the November elections, were rushing to finish their work on the 1987 budget. The plan had been to get the document to the White House by the end of the day for the President's signature.
Now, however, there was a snag. Tucked inside the $1-trillion appropriation was, in the scheme of things, a small and seemingly routine item -- $151 million for the first batch of new training jets for the Air Force, known as T-46s. There was no question that the Air Force needed a new trainer -- its young pilots were getting their first taste of jet work in antique T-37s, "Tweedybirds," first put into service in the mid-1950s. Compared with today's frontline fighters, the T-37s were strictly Stone Age, and the Air Force rated their replacement of crucial importance to the nation's defense.
The T-46 was also of crucial importance to Fairchild Republic Co., in Farmingdale, N.Y., representing, as it did, the company's only significant contract. By last year, the Long Island aerospace firm had built two T-46 prototypes, and along with $159 million from the Air Force, Fairchild had spent $129 million of its own in preparation for the production of the first batch of 650 planes. All told, the Air Force contract was expected to run eventually to $1.5 billion, with millions of dollars in follow-up business with allied governments overseas. The jobs of some 3,000 Fairchild workers were directly tied to the T-46 program.
With the passage of the Gramm-Rudman budget reduction act, however, the blue-suited generals of the Air Force were forced to trim $6 billion from the budget projections, and they immediately turned a cold eye to the T-46. Perhaps they calculated that the Tweedybird could soldier on for a few more years. Or perhaps they figured, of all their major defense contractors, a small and struggling Fairchild Republic was capable of mounting the least effective resistance. Furthermore, the company had had management and production problems with the aircraft -- there had been cost overruns and the prototype that was initially rolled out was missing crucial parts. For whatever reason, in March 1986 the Air Force announced that it would cancel the T-46 program.
Not surprising, the move did not sit well with New York State's delegation in Congress. Bad enough, they argued, that New York was already contributing more to the nation's defense budget than it was receiving in military pay and contracts. Now the Pentagon was proposing to snuff out a company that had served the country well, and had been a major employer on Long Island for 56 years.
The New Yorkers' complaint fell on sympathetic ears in a legislature where logrolling is a professional sport. Over the Pentagon's objections, $151 million for the T-46 was included in the 1987 budget bill.
On the night of October 16, however, the legislators from the Empire State met their match in Arizona's Barry Goldwater. Major General Barry Goldwater, to be more precise, of the Air Force Reserve. As chairman of the Senate Armed Services Committee, Goldwater had always been generous to his military alma mater, but when the Air Force said it wanted not to build a new airplane, that was that, as far as he was concerned.
And so as midnight drew near, in what was scheduled to be his last full day in the Senate after 30 years, Goldwater rose from his seat to offer an amendment to the 1987 budget. His proposal was not only to wipe out the $151-million T-46 appropriation for the coming year, but to retain in the Treasury $170 million appropriated but not yet spent from the previous year's budget. Addressing the need for some new training planes for the American pilots, Goldwater proposed, in addition, that nothing more be spent until the Air Force had conducted a competitive "fly off" between the T-46 prototypes and an upgraded version of the aging T-37.
It is a rare event in the Senate when a chairman of the Armed Services Committee takes to the floor to oppose a new weapons system, and he does so only with the near-certain knowledge that he has the votes to prevail. In this case, Goldwater's position was bolstered by the fact that the aging T-37's just happened to be built by Cessna Aircraft Co., of Wichita, in the home state of Senator Robert Dole, then the Senate's majority leader. Cessna, battered by a downturn in the general aviation industry, looked to the T-37 upgrade for its own short-term survival, just as Fairchild looked to the T-46.
As Goldwater finished his presentation that night, his equally determined colleague from New York took the floor for what he promised would be an extended discussion of Goldwater's amendment -- in common parlance, a filibuster. The T-37 was a "turkey" of an airplane, D'Amato argued, and investing any more money in it would be "like pouring money down a rat hole." Then D'Amato, in his best Broadway voice, began to read off the names of top Air Force generals who had testified in the past to the overwhelming need for the new trainer. And he read, in its entirety, a General Accounting Office report that had found the T-46 not only to have met but exceeded the specifications written by the Pentagon. At 10 p.m., D'Amato passed the rhetorical baton to his New York colleague, Moynihan, whose capacity for extended discussion is surpassed only by his facility for melifluous hyperbole. "This is not defense planning," he roared. "This is Gramm-Rudman."
Midnight came and went, and the federal government slipped officially into overdraft. At noon the next day, amid irritation and confusion, millions of federal workers were sent home. It was only hours later that the T-46 impasse was broken and Goldwater's fly-off was agreed to. The budget document was rushed to the White House, and the lawmakers fled the Capitol.
And what of the fly-off, the last hope for the T-46? If the Air Force has its way, it will never actually occur. "We're not going to buy the T-46 or any other trainer," an Air Force official explained recently. "We simply don't have the money."
On Long Island, Fairchild Republic seems resigned to its defeat. With losses from cost overruns on the T-46 amounting to $129 million, the company finally announced in March that it would shut down its Farmingdale plant by year's end, lay off its 3,000 workers, and bail out of the aerospace field entirely. Immediately, the effects of the company's decision began to ripple not so gently outward, to the far reaches of the American economy.
Fairchild Republic and the T-46 are just the most recent casualties in what will become an all-out war within the nation's military-industrial complex. Over the next several years, as big military-procurement budgets decline, many more new weapons programs will be pared and many more defense contractors will close their doors. As Senator Moynihan puts it, "A dozen and a dozen dozen crises will arise in the years ahead." (See box, "The New! Improved! Military-Industrial Complex," page 100.)
The words "defense contractor" usually conjure up the giants of the industry, such companies as Lockheed, Rockwell, and General Dynamics. But in fact, the military-industrial complex comprises some 60,000 prime contractors, plus hundreds of thousands of other suppliers that depend more or less on the Pentagon budget. The case of the T-46 illustrates how businesses of all sizes are likely to fare now that the Reagan military buildup is coming to its end.
Pasted on the wall of Timothy Murphy's office at Fairchild Republic is a poster of a menacing Arnold Schwarzenegger portraying the character of the movie The Terminator. The poster describes the movie's lead character as someone who "felt no pity, no pain, no fear." And with only slight exaggeration, these are precisely the requirements for the job in which Tim Murphy now finds himself.
For Murphy, you see, is Fairchild's own designated terminator, in charge of winding down the company's 470 subcontracts around the country. These are suppliers of everything from T-46 windshields and landing gear to control stick grips and toggle switches. And right now they are feeling as if their country -- and Fairchild Republic -- has left them in the lurch.
For Murphy himself, it is an agonizing job. "Some of these contractors are yelling at me, others just crying," he reports. "But if anybody's got any more problems than we have at Fairchild, I haven't seen it yet." On the day he spoke, Friday the 13th, the first 500 layoff notices went out, and parts of the Fairchild facility looked something like the excavated Pompeii: tools left on workbenches, technical manuals left open on desks, parts waiting, in vain, for installation in the first -- and last -- T-46 production model sitting, virtually completed, on the assembly floor.
Not all of Fairchild's subcontractors will suffer such dire consequences from the shutdown of the T-46 program. For a few it is a virtual death blow, for others just a minor blip. But for all of them, it is an unmistakable sign that defense contracting will become an increasingly brutal and risky proposition over the next several years.
Ronson Hydraulic Units Corp., in Charlotte, N.C., a typical subcontractor with $12 million in sales, supplies parts for military aircraft ranging from frontline fighters to huge transports to helicopter gunships. As a small company with limited engineering talent, Ronson bids selectively on weapons programs it regards as sure things, and in the T-46 trainer, company executives saw a stable, long-term program with broad political and military support and a nice market for spare parts far into the future. Ronson's initial 1984 contract with Fairchild would have generated business in the hundreds of thousands of dollars. "We had counted on it very heavily," recalls vice-president of marketing John McNair.
Because the Pentagon does not fund research-and-development work done by most subcontractors, Ronson spent $500,000 of its own funds competing for work on the T-46. It finally landed a contract for the hydraulic brake cyclinders. "You have to spend that kind of money just to get in on the action," McNair explains, "and hope to amortize it over the life of the program." Now with the T-46 having been canceled, Ronson is out about $300,000. The company has set out to recover the remainder from Fairchild but, according to "terminator" Tim Murphy, sorting out such claims could take years.
Actually, Ronson has some of its own terminating to do, with about 20 other suppliers it had signed up to provide parts for its T-46 brake. And it is down at this third tier of military contracting that the pain for the shutdown seems particularly acute.
"It's an unmitigated disaster," exclaims Anthony Detroia, president of a small Long Island machine shop, Tangent Machine & Tool Corp. "The whole island is sinking." The T-46 cancellation is only the latest in a string of bad news for Detroia and other Long Island machinists. Grumman Corp., also nearby, has slowed from 24 per year to 8 its production of F-14 Navy "Tomcats" -- the fighters featured in the movie Top Gun. And Detroia has also lost a sizable bit of wing work on the 757 jetliner, which The Boeing Co. has decided to shift to Japan. As a result of all this, Tangent has chopped its own work force from about 50 machinists to 22, and seen its $3 million in revenues easily cut in half.
"It's been one cutback after another," Detroia complains. "Things are so competitive now that every time a job goes out, you have 500 people bidding on the same thing, just to stay alive. I've been in business 34 years, and this is the worst I've seen it. It's damned grim."
So grim, in fact, that Detroia is thinking of closing shop. "We've stayed afloat up to now by refinancing our mortgage, our equipment -- everything," he says. "But the time will come when we can't do that anymore."
At Ragen Data Systems Inc., in the blue-collar Long Island town of Central Islip, the T-46 cancellation is also only one cloud on a darkened horizon. With sales last year of about $8 million and a staff of 160, Ragen had contracted with Fairchild to build the fuel systems for the new training plane and other devices. President Arthur Douglas estimates the work would have brought the company $4.5 million in sales over the life of the program. And, like most component manufacturers, the company had spent a major portion of its own funds to complete the design work on the fuel system -- in Ragen's case, an investment of about $250,000.
What most bothers Douglas, however, is not the design money that will never be recovered or the fuel systems that will never be sold -- future contracts for military and nonmilitary work will eventually put those losses in perspective. No, what really galls him is the Pentagon's new practice of taking products designed by companies like his and, on subsequent contracts, shopping the specifications around to cut-rate shops for manufacture -- shops without design departments can easily underbid him. For the Pentagon, it is all part of a campaign to lower the cost of spare parts and avoid stories of $600 toilet seats. For military contractors, however, it seems like nothing less than theft of their proprietary data.
"There are two ways to go out of business," Douglas explains only half-joking. "One is to give away all your information. The other is to not accept any contracts that require you to give away all your information. It's a catch-22 situation."
The feeling of having been used is much the same at Teleflex Defense Aerospace Co., in North Wales, Pa., where the Pentagon has mastered the technique of adding insult to injury. First came the shutdown of the T-46 program, in which the company had invested at least $500,000 in cockpit controls designed specifically for the new trainer. "We took a brutal hit," admits contracts manager Gerry Curran, who estimated Teleflex would have generated sales of $8,000 per aircraft. Then, in attempting to get hold of the Teleflex design for use in other planes, the services began sending threatening letters: if the company refused to turn over its designs, the military would reverse-engineer the items -- take them apart, measure their specifications, and come up with its own drawings. These drawings would be passed out to bidders for spare-parts work.
It is just such threats that have prompted contractors to form a new organization, the Proprietary Industries Association, based in Glendale, Calif. Its members range in size from divisions of ITT down to companies of fewer than 20 people. And its goal is to allow military contractors once again to exercise proprietary rights over the things that they design at their own expense.
"You can't continue to invest in innovation and development and not be able to expect a return," says H. Bud Hill, a former submarine officer who is now an attorney for the association. "Once you surrender your data, a job shop that doesn't have your engineering overhead could easily do the job for less."
In some cases, says Hill, the military has simply confiscated information that is protected by trade-secret laws. In other cases, it has offered to by the rights -- but at only a fraction of their value. "The developer of a technology might be looking at a big market -- maybe sales of 10,000 units over five years. But the Navy, say, would need only 500 units. So there is wild disagreement over what is a reasonable price."
Hill warns that if the Pentagon sticks to its guns, it may actually drive up the price of spare parts rather than drive it down -- the result, he says, of too few suppliers deciding not to compete for government work. Teleflex's Curran agrees. "It's going to reach the point where nobody is going to want to deal with the military," he says. "I know we are looking to get away from it -- the percentage of our work that is in defense has gone way down. And we're not alone."
At Morgan Stanley & Co., in New York City, aerospace analyst Robert Kugel finds the whole situation rather ominous. "The outcome of all this may be that in 5 or 10 years, the technical superiority the United States relies on to provide deterrence will be whittled away. In trying to fight waste and fraud, the military may be setting the stage for disaster in the future."
CORRECTION-DATE: October, 1987
A story in our June issue about the hazards of defense contracting ("A Farewell to Arms") contained complaints from various company owners that the Pentagon, in effect, had been trying to take away their proprietary technology. One of those cited in the article -- incorrectly, as it turns out -- was Arthur Douglas of Ragen Data Systems Inc., in Central Islip, N.Y. In fact, the Pentagon has never tried to "snatch away" or appropriate any of his company's designs.