Hughes Deal Is Latest Step in GM’s Plan to Diversify Into Electronics

DETROIT â€”  Back in the early stages of the Vietnam War, when the Pentagon was rapidly gearing up defense spending, it asked General Motors to run an artillery shell manufacturing plant in St. Louis.

But while the defense industry was booming in the mid-1960s, so was the car business. GM didn’t want to be bothered with diversifying into ammunition; it refused. It took some heavy pressure from the Pentagon to get the auto maker reluctantly to agree.

Those halcyon days of ever rising sales of U.S.-built cars are long gone, however, and American car companies can no longer afford to be completely dependent on the wildly cyclical and import-sensitive auto business. Even though the last two years have been good ones for Detroit, the Big Three know that the competition from imports will only get tougher as the decade wears on.

As a result, they are all trying to use their automotive profits to diversify into hot new glamour industries: computers, robots, finance and especially aerospace and defense.

Flush with a $8.4-billion pool of cash built up from its recent record earnings, GM is leading the way. Wednesday’s announcement that General Motors had beat out Boeing and cross-town rival Ford Motor in the auction to acquire Hughes Aircraft for about $5 billion in cash and a new class of stock is just the latest sign that, under Chairman Roger B. Smith, GM is moving aggressively to shed its image as a hidebound durable goods manufacturer. It is becoming a dominant force in computer, communications, manufacturing and aerospace technologies.

Analysts agree that the Hughes acquisition is not only a good diversification move to offset GM’s car business but a logical outgrowth of GM’s purchase last year of Electronic Data Systems, the big Dallas-based computer services firm. They believe that EDS and Hughes, the two largest acquisitions in GM’s modern history, together could give the auto maker an enormous technology base that could be applied to a wide variety of manufacturing industries.

“This is obviously part of a change in long-term strategy for them,� says Martin Anderson, an auto industry consultant and a former member of the Future of the Automobile project at the Massachusetts Institute of Technology. “If you look down the road into the 1990s, and you piece all of GM’s acquisitions together, you can see GM taking itself apart and putting its new pieces back together in a new form in the next decade.�

GM’s recent purchases include small machine-vision and artificial intelligence firms.

GM’s Smith agrees, saying Wednesday in New York that Hughes, along with EDS, would provide GM with an important base in electronics. “Electronics is going to be the key to the 21st Century,� especially in the design and manufacture of cars, he said.

Smith added that Hughes will help GM compete more effectively with low-cost auto producers in Japan and elsewhere in Asia through the development of advanced computer-controlled manufacturing processes.

“The synergies that Hughes offers GM are extensive and of historical significance,� Smith said. “Hughes is one of the few organizations that has extensive experience in systems engineering. In cooperation with GM’s manufacturing engineers and EDS’ data processing experts, Hughes will be able to apply its expertise to GM’s manufacturing needs.

“Eventually, these advanced manufacturing and management systems can be marketed by GM to all of industry,� he added.

Meanwhile, industry observers also note that GM’s traditional strength in assembly line know-how could also benefit Hughes by bringing a greater emphasis on mass production techniques to the aerospace business.

“This is not just a simple counter-cyclical merger--it is a much more complex technological melding between aerospace and autos, and the technological benefits will flow both ways over the next few years,� says Anderson.

Beneficial to EDS

But other analysts argue that the Hughes acquisition may eventually become more beneficial to EDS than for GM’s basic car-making business. Maryann Keller, an investment banker and automotive analyst with Vilas-Fischer Associates in New York, believes that the efforts by EDS to develop vast electronic and communications networks could be aided by Hughes’ advanced electronics technology.

Keller doesn’t buy GM’s claims that Hughes will accelerate the use of new technologies in the auto business. “As far as I’m concerned, there is very little fit between autos and Hughes,� she says.

“Technology in the auto industry moves at a glacial pace, and so GM could have easily bought what it needs from outside suppliers. Apart from what it can do for EDS, you have to look at Hughes as a straight diversification move by GM, and in those terms it is still a good move.’

Given the auto maker’s size, however, even the Hughes acquisition won’t significantly diversify GM away from its dependence on autos. Sales of automotive products accounted for 96% of GM’s 1984 worldwide sales of $83.9 billion, so even with the addition of Hughes’ revenue of $4.9 billion (and a full year of sales from EDS, which wasn’t acquired until last October), GM’s non-automotive business would still have accounted for only a little more than 10% of its total sales last year.

The Hughes purchase also isn’t expected to put a crimp in GM’s future automotive product programs, including GM’s plans to make $9 billion in capital investments in 1985, especially since GM will still have most of its $8.4-billion cash cushion left after the acquisition.

“I think they are paying top dollar, but I think they can afford it under current conditions without any problems,� says David Healy, automotive analyst with Drexel Burnham Lambert.

(But during the bidding process leading up to Wednesday’s announcement, analysts had said they were less confident of Ford’s ability to fund both a Hughes acquisition and its aggressive automotive product programs, but they remain convinced now that Ford will soon attempt to forge another merger with a high-tech firm, possibly Sperry Corp.)

Could Weather Bad Recession

Now Healy forecasts that, even with the spending on the Hughes merger, GM could weather a bad recession in the auto industry over the next two years and still end up with a cash cushion of $3 billion at the end of 1987. He adds that the acquisition doesn’t significantly alter his 1985 earnings forecast of $4.2 billion for GM; the income that GM obtains from Hughes will be about as much as it could have earned on investments with the Hughes merger money, he says.

But in many ways the acquisition is less important for its size than for the direction in which it leads GM. After helping to turn Detroit into the “Arsenal of Democracy� with its mass production of tanks, planes, ships and other weapons during World War II, GM gradually moved away from defense and other non-automotive fields in the postwar period. It has only been since Smith took over in 1981 that the company has tried to reverse that single-minded approach to its business opportunities. It wasn’t until 1983 that the company finally formed a defense group to focus more of its attention on military sales.

That policy shift is taking time to have an impact. Despite its size, GM still ranks as just the 23rd-largest defense contractor in the nation, with sales of about $1.3 billion to the Pentagon and NASA. Its biggest defense contract currently calls for the production of about 55,000 utility vehicles for the U.S. Army.

Among other things, the auto maker also produces light armored vehicles for the Marine Corps, engines for military aircraft and transmissions and engines for tanks and other military vehicles. GM’s most technically sophisticated defense business is handled by its Delco Systems Operations in Santa Barbara, where the company produces defense electronics equipment, including navigation and guidance systems for aircraft, missiles and space systems.

From that relatively small base, the Hughes acquisition gives instant credibility to Smith’s efforts to focus more on defense. GM said Wednesday that many of those existing defense operations, including Delco Systems, will be merged into an independent GM subsidiary with Hughes and GM’s automotive electronics business.

“This is an extension of what Roger (Smith) has been doing to grow and diversify in those areas, like defense, that complement GM’s main line of business,� notes David Cole, director of the Center for the Study of Automotive Transportation at the University of Michigan. “Roger is very clearly trying to shift GM away from being an old-line industrial company.�