Ford Aerospace Treated for Years Like a Stepchild : Management: The auto maker has announced plans to sell its Newport Beach-based unit. But critics say the firm was abandoned long ago.

By JONATHAN WEBER

Jan. 14, 1990 12 AM PT

TIMES STAFF WRITER

Shortly after the U.S. 1986 military strike against Libya, C. E. Grubbs, a manager at Ford Aerospace in Newport Beach, read a newspaper article about the key role that his company’s sophisticated bomb-targeting system had played in the raid. He called a friend at Ford Aerospace headquarters in Detroit to talk about the exciting news.

But Grubbs discovered that not only had the company failed to seize a rare public relations opportunity, but no one in Detroit was even aware that Ford equipment had been used in the attack. To Grubbs, who left the company in 1988, the incident was just another example of Ford’s not-so-benign neglect of its $2-billion aerospace unit.

While General Motors likes to tout the supposed synergy between its Hughes Aircraft unit and the car-making operations, critics charge that Ford has traditionally paid scant attention to Ford Aerospace, which makes missiles, satellites and other defense systems. Indeed, the huge car company doesn’t even mention the defense business in its latest financial report.

“At Ford Motor, aerospace was never worth anyone’s attention,” Grubbs said. “They’ve taken an extremely myopic approach to the business.”

And now, with the defense industry bracing for huge Pentagon budget cuts while the auto business heads into a period of intensifying worldwide competition, Ford has decided that it cannot afford to keep the aerospace operation under its wing at all. The company said Friday that Ford Aerospace, now based in Newport Beach, is for sale.

The timing, analysts say, is peculiar.

Just 18 months ago, Ford appeared to be signaling a deeper commitment to the defense business with its purchase of BDM Inc., a well-known Washington-area consulting firm that provides technical and professional services for weapons system development, for what was viewed as a premium price of $425 million. With the defense industry retrenching in the face of budget cuts, moreover, even the best-performing aerospace firms might have trouble finding buyers.

And Ford Aerospace is not considered a jewel of the industry. Critics say management problems have undermined the company’s profitability, and the Aeronutronic tactical weapons unit in Newport Beach is considered to be in particularly poor shape. The satellite and space units are considered to be more attractive, and analysts say it is likely that the company will be sold off in pieces, either by Ford or an intermediary.

The appeal of such a strategy might be heightened by the fact that Ford Aerospace’s lease on 99 acres of ocean-view property in Newport Beach runs through the year 2052, and real estate experts say it could be worth $100 million, if the property could be rezoned for residential development.

“Ford Aerospace is one of the companies that never woke up to the realities of the 1980s and developed a cost-competitive strategy,” said Michael Beltramo, a Los Angeles defense consultant. “If you had a list of defense properties for sale, Ford Aerospace would be way, way down on the list.”

While Ford does not break out sales or profit figures for Ford Aerospace, the company confirmed that it has revenue of about $2 billion and says it is profitable. A spokeswoman maintains that the defense unit has one of its highest order backlogs ever, and that any problems are simply a function of defense spending cycles. In a statement issued late last year, Vice President John Slosar said the firm as a whole is “well positioned to grow in the 1990s, thanks to its particular areas of military expertise and its non-military diversification.”

But the company also acknowledges that nearly 70% of its business is with the military, and analysts are skeptical of the claim that its defense contracts will be relatively immune from budget cutting. “Everyone claims that,” scoffs Steven Binder of Bear, Stearns & Co. And Beltramo, Grubbs, and several other former managers and analysts maintain that the company’s competitiveness--especially in the tactical weapons business--has slipped dramatically in recent years.

Last year, Aeronutronic lost out on a huge contract to build a new anti-tank weapon for the Army with a bid that one source close to the situation said was absurdly high. Ford, said the source, offered a relatively low-tech proposal in the hope that the Army would opt for a cheaper system, but ended up with a higher bid than winner Martin Marietta, which proposed a far more sophisticated weapon.

Last year, Aeronutronic also ordered an unusual halt in all work at Newport Beach while quality control processes were reviewed, and more than 200 people were laid off during the year due to soft sales.

“If I could pick a firm to compete against, I’d pick Ford,” said Beltramo.

Ford Aerospace traces its roots to the Philco Corp., a defense contractor that Ford purchased in 1961. A year later, the firm was merged with Aeronutronic Inc., which Ford formed after its 1956 purchase of Systems Research Corp. Through the 1960s, the company emerged as a major developer and manufacturer of missiles and missile control systems, and the Western Development Laboratory in Palo Alto, established by Philco in 1957, carved out a presence as a satellite and space systems contractor.

For Aeronutronic, the core operations that have carried the company to this day were in place by the mid-1960s. The Shillelagh guided missile program, which ended in 1971, was worth some $500 million to the company, while the Sidewinder air-to-air missile and the Chaparral ground-to-air missile--both based on relatively simple heat-seeking guidance systems--remain important programs.

In the 1970s, work moved forward on the Pave Tack bombing system, in which a laser beam is trained on a target while the actual explosives track the laser. The jets that raided Libya used this system as well as Ford’s Forward Looking Infrared System (FLIR), which allows pilots and gunners to “see” at night and under adverse weather conditions.

In 1978, Ford received its first contract for a prototype of an Army air defense gun system, later known as Sergeant York. After persistent technical problems and some $1.3 billion in development costs, then-Defense Secretary Caspar W. Weinberger canceled the program in 1985 and some 1,300 Aeronutronic workers were laid off. Although the cancellation was viewed as a serious blow to the company, sources have said Ford was $200 million over budget and would have lost money if the Sergeant York had gone forward.

At its space systems unit in Silicon Valley, meanwhile, Ford Aerospace carved out a market building satellites, ground stations and sophisticated tracking and control systems for the military. Those operations, combined with the electro-optic technologies associated with the Pave Tack and FLIR systems, have given Ford Aerospace a strong presence in the so-called C3I area: command, control, communications and intelligence.

The company was also able to develop a good business in managing flight training ranges, building simulator systems for the military and performing engineering and support work for NASA at the Johnson Space Center in Houston and for the Air Force North American Defense Command in Colorado Springs.

From the 1970s through the mid-1980s, the Aeronutronic division was doing extremely well, knowledgeable sources said, while the space systems operations struggled. One high-ranking Ford Aerospace official said the company was “delivering profits by the wheelbarrow back to (Ford headquarters in) Dearborn,” with much of the success coming from lucrative missile export contracts.

But in the past few years, the official said, the company has begun to pay the price for sacrificing plant modernization and other expenditures during the profit making years: “They look for this year’s profits when they should be looking 10 years down the road.”

Grubbs, now a Newport Beach consultant, agreed that an “extremely conservative” management approach that was focused on finance rather than engineering and program development began to take a serious toll by the mid-1980s. “The number of games you had to play there to pursue a technology once you’d developed it was incredible,” Grubbs said.

He said the company was being “driven out of every one of its markets” because it was too conservative, and he cited the firm’s shutdown of its ammunition operation, its failure to sell the Pave Tack system more broadly and its loss of most of the Sidewinder business to Raytheon. In the latest bidding for the Sidewinder, Ford won only 23% of the business, according to Military Forum, an industry trade journal.

“The Sidewinders were a superb product,” said Tom Amlie, an Air Force analyst who was formerly technical director at the China Lake Naval Weapons Center. “But Ford didn’t keep up. I can’t say whether it was ineptitude or whether the cost of doing business is just too high in Newport Beach.”

Harry Klitzner, who headed the Chaparral missile program before leaving the firm in 1988 and now runs an Irvine defense consulting business, said Aeronutronic in recent years has gotten in trouble by trying to “fix things that weren’t broken.” Efforts to change the management culture in response to the defense contracting scandals have “degraded the company’s competitive edge,” he said. “They’ve been unable to maintain productivity on things they have built for years.”

Former Aeronutronic General Manager Louis Heilig, who retired in 1986, disagreed with the critics, maintaining that the company is in good shape and operating profitably.

And, again, a spokeswoman emphasized that Aeronutronic’s order backlog is one of the firm’s largest ever.

But sources say a major chunk of that backlog is from a single missile contract with Egypt, and Klitzner questioned the ability of the company to fill the backlog profitably.

Ford Aerospace’s satellite and space systems operation may be in better shape than aeronutronic, particularly with the 1988 award of a $394-million contract to build the next generation of Intelsat communications satellites. But the conservative management philosophy extends to the Silicon Valley operations, as well.

A space industry expert who is familiar with the Ford operation said the company’s conservative bidding strategy had prevented it from winning domestic communications satellite contracts, forcing it to rely instead on international orders and more sophisticated earth-observation satellites. The company has good technology, he said, though it remains only No. 3 in the U.S. satellite industry.

The source added that the operation was “in fairly good shape,” and might be attractive for a buyer who would be more aggressive in bidding against Hughes. “The lack of aggressiveness has been a major detriment to them,” he said.

The source also said the company has some major program management problems and cost overruns on the GOES weather satellite, though he noted that such difficulties are not unusual on sophisticated satellite programs.

Patrick Dewitt, controller at the Space Systems division, acknowledged some problems with GOES but said they were “nothing out of the ordinary.” He added that the satellite operation is considered “a very successful, healthy part of Ford Aerospace.

Richard D. Johnson, a program manager at SRI International in Menlo Park, Calif., said Ford generally competes on the high end in the satellite business, and pointed out that the firm has an especially close relationship with the Japanese. Ford Aerospace recently delivered the second huge Superbird satellite to the Japanese space agency.

Johnson said Ford’s contract with NASA’s Johnson Space Center was the result of a historical relationship rather than the company’s special capabilities. He also said the satellite ground station and tracking services performed for the military would not be considered terribly special were they in the civilian sector. “Intelsat will let a contract like that, and it will be captured by a relatively inexperienced company in another country.”

The sale of the Aerospace unit will leave behind employees bitter about being neglected--and perhaps even exploited--over the years. “This operation was a cash cow (in the early 1980s) and delivered a very high quality product,” said an executive. “We helped get the car company back on its feet. And now, when they can reciprocate, they will not.”

FORD AEROSPACE: FACING AN UNCERTAIN FUTURE

Annual Revenue: $2 BILLION

Total Employees: ABOUT 17,000

Chief Executive: DONALD RASSIER

MAJOR OPERATIONS

Corporate Headquarters: NEWPORT BEACH Aeronutronic, NEWPORT BEACH: Tactical weapons systems Western Development Laboratories, SAN JOSE: Satellite ground terminals Space Systems Division, PALO ALTO: Satellites Colorado Springs Divisions, COLORADO SPRINGS, Colo: Command/control/communications for North American Air Defense Command BMD International Inc., MCLEAN, Va: Support services for military and space programs Space Missions Group, SEABROOK, Md: Engineering for space missions Sunnyvale Division, SUNNYVALE, Calif.: Satellite tracking and control systems Technical Service Operation, HORSHAM, Pa.: Military range management Space Information Systems Operation, HOUSTON, Texas: Engineering services for Johnson Space Center Ford Microelectronics Inc, COLORADO SPRINGS, Colo.: Design and development of advanced semiconductors

A COMPANY CHRONOLOGY

1956: Ford acquires a small defense research and development group called Systems Research Corp. and renames it Aeronutronic Systems Inc.

1960: Aeronutronic moves to Newport Beach.

1961: Ford acquires Philco Corp., a defense contractor involved in missile development and, through its Western Development Laboratories, space systems.

1962: Aeronutronic becomes a division of Philco.

1963: Western Development Laboratories selected to build a mission control center for Johnson Space Center in Houston.

1965: Chaparral surface-to-air missile program, still a mainstay for the company, is awarded.

1967: Sidewinder air-to-air missile program transferred to Aeronutronic.

1969: Air Force Satellite Control Facility established.

1976: Name changed to Ford Aerospace and Communications Corp. Intelsat V satellite program awarded.

1977: Pave Tack targeting system award.

1978: First Goddard Space Flight Center award.

1980: Space Telescope award. Nellis Range management contract award.

1982: Ford Microelectronics Inc. formed.

1984: Air Force automated remote tracking station (ARTS) award.

1985: Sgt. York tank-mounted gun program canceled, despite Pentagon investment of $1.8 billion. 1,300 Newport Beach workers laid off.

1986: Japanese Superbird satellite award.

1987: Name changed to Ford Aerospace Corp.

1988: Corporate Headquarters moved to Newport Beach. BDM International acquired for $425 million. HARM low-cost seeker award. Intelsat VII award.

1989: Loses to Martin Marietta in bidding for anti-tank weapons system that could be worth $3 billion. Houston mission control center upgrade award. Rumors begin to circulate that company may be sold.

COMPANY PROFILE: REVENUE AND CONTRACT AWARDS

TOTAL CONTRACT AWARDS

In billions of dollars: ‘83: 1.50 ‘84: 1.54 ‘85: 1.30 ‘86: 1.66 ‘87: 1.26 ‘88: 1.94 ‘89: 1.83

REVENUE IN 1989, BY SECTOR Defense Related: 67% International: 15% U.S. govt. (civilian): 14% U.S. commercial: 5%

CONTRACT AWARDS, 1988 Command, Control Communications: 48% Space systems: 23% Tactical weapons systems: 21% BMD: 8%