What Obama missile decision means for local contractors; Northrop CEO steps down
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KPCC business analyst Mark Lacter talks about what Obama missile decision means for local contractors; he also talks about why the Northrop CEO is stepping down.
Steve Julian: On Tuesdays we talk about the latest business stories with Mark Lacter. Mark, President Obama last week dropped plans for a fixed radar system in the Czech Republic. What does this decision mean for contractors in the Southland?
Mark Lacter: Here's a great example of how confusing the defense industry can be. As you point out Steve, the White House abandoned plans for the radar system, and also for 10 ground-based interceptors in Poland.
The new weapon of choice is known as the Standard Missile-3 (or SM-3) system. It’s preferred because the missiles are more maneuverable.
Huge diplomatic ramifications, of course, and conservatives are outraged, but it also could be a huge financial deal for Raytheon, which is the prime contractor for the SM-3 – as well as a bunch of subcontractors in Southern California. In looking at the local list, there are suppliers in Santa Barbara, Calabasas, Torrance, El Segundo, Newport Beach, Los Angeles, Valencia that could be getting a piece of the action.
Julian: Any idea how much they'll get and how many jobs it will generate?
Lacter: No idea whatsoever – the Pentagon is first requesting 250 of these SM-3 interceptors in its 2010 budget. But this is the ultimate trickle-down industry because so many companies get involved in manufacturing the components that fit into these systems (these interceptors are actually assembled at Raytheon's facilities in Arkansas).
It's also the ultimate political industry because lawmakers who might oppose a defense program on philosophical grounds are always under pressure to offer support because of the local jobs it can generate. Look at the C-17 cargo plane that Boeing manufactures out of Long Beach – and which Defense Secretary Gates has been trying to phase out.
Julian: But killing off the C-17 threatens how many jobs in Long Beach?
Lacter: About 5,000, along with many more subcontracting jobs in the area, and no member of Congress is about to vote for that. So lo and behold, a couple of weeks ago a Senate committee approved a $2.5 billion order for 10 more C-17s, which means that the Long Beach plant is probably safe through at least the spring of 2012.
That's good news for the local economy, but a questionable move when looking at the big picture. Now we'll need to see how this new missile program is sorted out.
Julian: It seems like aerospace and defense is a whole different world from other types of industries, even when it comes to personnel changes.
Lacter: That’s right. Case in point is Northrop Grumman, which is based in Los Angeles and is the second-largest public company in Southern California (revenue of almost $34 billion). It announced out of the blue that its chief executive, Ronald Sugar, would be leaving the company and that the number 2 man would be taking his place.
Now this is a huge deal for a huge company – and yet, there's very little being said about why it’s happening. Well, take that back – Sugar said he had been thinking about leaving for a while and that it was voluntary. But some of the analysts who follow Northrop wonder whether the board had decided that Sugar might not be the right person to run the company at a time when military budgets are shrinking (there’s been some reshuffling at other aerospace companies).
Julian: How long had Sugar led Northrop Grumman?
Lacter: For six years, which is not especially long in the CEO business, and he's leaving at the age of 61, which is four years ahead of the mandatory retirement age (the new guy is 48). So it would be nice to know more, but the defense and aerospace industry has a kind of don't-talk-don't tell policy on these things.
Revealing as little as possible is part of the culture – quite a contrast to other companies where a major executive stepping down is major news. I’m thinking of the departure last week of Disney’s studio head Dick Cook and before that the resignation of Rick Wagoner at GM. These are all publicly held companies, and if we’ve learned anything in the past year, it is the importance of those companies being accountable for their actions.
Julian: Mark Lacter is a contributing writer for Los Angeles Magazine and writes a business blog at LAObserved.com.
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