FURTHER US DEFENSE WRITEOFFS LIKELY, ANALYSTS SAY
The tug-of-war over who pays to develop
new weapons--contractors or the government--is likely to lead
to more writeoffs by defense firms, analysts said.
    Singer Co <SMF> and Northrop Corp <NOC> recently announced
planned second quarter writeoffs related to costs of major
defense programs under fixed-price government contracts.
    "It's a case of companies paying for things that in a
different environment the Defense Department would have paid
for," said Howard Mager of Donaldson Lufkin Jenrette Securities
Corp.
    In recent years, the Defense Department, DOD, has increased
competitive bidding for weapons contracts and has asked
contractors to pay more of the costs of developing weapons
programs.
    The moves have helped cut waste and abuse by contractors
but have also dictated that the firms assume much more risk,
analysts said.
    "It's a stricter environment," said Anthony Hatch of Argus
Research Corp. "Contractors are absorbing more of the cost and
more of risk and that's likely to be the trend for some time to
come."
    The trend will probably lead to further writeoffs, the
analysts said. Programs most prone, they agreed, are the
Advanced Tactical Fighter, ATF, a new generation,
high-technology fighter plane being developed for the U.S. Air
Force, the C-17 air transport plane and the Light Helicopter
Experimental, LHX, under development for the Army.
    Other programs may also be affected, they said.
    The Air Force is expected to order 750 of the advanced
fighter planes in the 1990s at a cost of up to 40 billion dlrs,
analysts have said. Two teams of contractors are competing for
a contract to develop a prototype ATF.
    Lockheed Corp <LK>, General Dynamics Corp <GD> and Boeing
Co <BA> are teamed in competition against Northrop Corp <NOC>
and McDonnell Douglas Corp <MD> on ATF.
    The two teams fighting for an award to develop the LHX are
Bell Helicopter, a unit of Textron Inc <TXT>, coupled with
McDonnell Douglas, and United Technologies Corp's <UTX>
Sikorsky paired with Boeing.
    The C-17 is a four-engine transport plane. McDonnell
Douglas's Douglas Aircraft Co is working on two test planes,
and a production award for up to 210 of the aircraft should be
made by late 1989, a Douglas Aircraft spokesman said.
    Under the government's new procedures, contractors can
spend hundreds of millions of dollars on development and  
typically recoup their investments during production.
    But now the government sometimes awards production to a
second contractor who did not develop the system. General
Electric Co <GE>, for example, developed the F404 engine for
the Navy. But two weeks ago, the Pentagon awarded 30 pct of
F404 production to United Technologies' Pratt and Whitney.
    Such tactics have increased competition but the government
now risks decimating the industry by making it too competitive,
said Michael LaTronica of Redding Research Group.
    "Two years ago, defense contractors were their own worst
enemies. They were not cost efficient," LaTronica said. "Now
DOD has allowed the situation to swing so far back the other
way that you may be in danger of losing the defense industry as
a national resource."
    While the nation as a whole has posted trade deficits in
recent years, aerospace and defense has exported more products
than it imported, he noted.
    LaTronica and others said, however, that changes in
government procurement may be coming.
    "I hear that the Pentagon is looking into the situation,"
said John Diamantis, defense analyst at Pershing and Co.
    He said that some small defense electronics firms believe
the Pentagon will begin re-evaluating procurement policy and
perhaps start paying more development money.
    Redding Research's LaTronica, who still likes the industry
despite the probability of additional unforeseen writeoffs,
said, "There's been a swing in sentiment. The defense bashing
psychology of the last few years is starting to shift."
    LaTronica noted that one government official has recently
suggested that the winner of the ATF prototype award should get
sole production of the plane for a specified time.
    The investments are large. The Lockheed, General Dynamics,
Boeing ATF team, for example, is spending 691 mln dlrs just to
develop the prototype.
    The danger the Pentagon runs if changes are not made is
that companies will hesitate to bid to develop a program but
instead will wait for a second source production award.
    "But it may take a company going bust to really change
people's thinking," LaTronica said.
 Reuter
