Defense Suppliers Sharpen Survival Skills Amid Cuts : Economy: Ingenuity and finding non-military markets are key. Some firms go out of state, others diversify.

WASHINGTON — As Defense Department cuts rippled through Southern California, Bill Guidice’s private security firm lost contracts with several military bases and laid off about 200 guards.

Yet even as he slashed his payroll, Guidice was laying the groundwork for expansion of his Anaheim business. Before long, Guidice’s United International Investigative Services rebounded by obtaining new contracts to provide guards for immigration detention facilities and IRS service centers.

“The writing has been on the wall for the last three years with the fall of communism,” said the Vietnam veteran. “I knew the cutbacks were coming.”

Guidice’s instincts were hardly unique. Most California businesses dependent on defense contracts are scrambling to find new markets, with varying degrees of success, according to a Times computer-assisted study of federal purchasing contracts and a series of interviews.

Although each business has its special circumstances, success or failure depends largely on a common set of factors: ingenuity, the existence of commercial markets for goods or services once sold to the military, access to capital and the effect of the California recession.

Just as Guidice did with United International, many defense-dependent firms are turning to other agencies within the federal government for new business. Others, such as General Landscape & Maintenance Co. of Orange County, are looking out of state for business that has dried up in Southern California. Firms such as National Fire Hose Corp. of Compton are busy exploring innovative ideas to develop new markets for their products.

And some, such as KM Records Inc. of Burbank, say they may have to shut down once the military work runs out.

Whatever the approach, many defense contractors in Southern California--from large aerospace firms such as McDonnell Douglas to smaller suppliers such as Ellis Poultry Inc. of Delano--are feeling the economic blows inflicted by the Pentagon budget ax.

The Times study found that after adjusting for inflation, defense purchases in Southern California declined by nearly $3 billion over the past four years, a 15% decrease.

And the cuts seem certain to get worse. President Clinton has announced plans to slice defense budgets through 1997 by $124 billion more than the $50 billion in reductions proposed by the George Bush Administration.

Without a doubt, Southern California firms are particularly vulnerable to sharp Pentagon cuts because they reaped much of the largess from the defense buildup in the 1980s. No other region in the nation benefited more in sheer dollars from Pentagon procurement than Southern California, where military spending approached $77 billion between 1989 and 1992, The Times study found. This amounts to more than 70% of all defense spending in the state.

The largest defense funding recipients in Southern California have been the huge, high-technology aerospace and defense firms that manufacture massive weaponry systems. So far, these companies have had a difficult time diversifying their operations. They have laid off an estimated 100,000 aerospace workers in Los Angeles County alone.

Jim Dertouzos, a senior economist at RAND, said that subcontractors within the aerospace industry are doing a better job of diversifying than large companies.

“The smaller firms have commercial markets that they can more easily enter into,” Dertouzos said. “It is the big defense firms with little commercial business that are really having a whole lot of trouble.”

Over the years, these large defense firms grew accustomed to working solely for the Pentagon. As a result, the process of putting a product on the market is “phenomenally new to them,” said Kathleen Shanahan, deputy secretary for economic development in California.

“There has been a trend for basically 30 years of building up this national asset of companies that unfortunately became overly dependent on the Defense Department,” Shanahan said. “This was not created overnight and it is not going to be gone overnight.”

The Times study showed that in Southern California more than 40 cents of every defense dollar spent--$32.2 billion since 1989--poured into the coffers of less obvious Pentagon suppliers such as farmers, entertainment firms and hotel chains. Some, like Guidice, have rebounded by winning contracts with other federal agencies.

Guidice opened a one-man security shop in Anaheim in 1980 after spending a decade with the Marine Corps military police. Taking advantage of his military background and small business status, Guidice built his company by securing contracts to provide security at more than a dozen military bases throughout California.

His crews protected Long Beach Naval Shipyard and National Guard armories in Compton, Lynwood and Los Alamitos before the contracts were abruptly canceled. Guidice said he expects to lose all of his military business before long.

Yet the company is growing. Government records show that through 1991, United International had diversified to where nearly half of its $9.2 million in government security contracts came from the IRS and Immigration and Naturalization Service, and many were for work outside California.

“I would rather employ people in California, but there are no jobs here,” Guidice said. “I’m out there in other states because that is where the work is.”

Recently, Guidice said, he sent about 70 employees who earn about $30,000 a year to Phoenix to open a new federal detention facility for illegal immigrants. He estimates that he has transferred 150 employees out of state.

Intercon Security of Alhambra followed a similar path. In 1985, Intercon assigned more than half of its 2,500 employees to military installations, including Long Beach Naval Shipyard.

Since then, the company has grown to more than 7,000 employees, with many stationed overseas, and only 15% of the work now comes from the military, said Intercon President Rick Hernandez. Intercon’s clients include nuclear power plants, the California Lottery, and several U.S. embassies and consulates stretching from Bangkok to Colombia.

“I’d have to say it was just prudent business not to have all of our eggs in one basket,” Hernandez said.

All-American Gourmet Co. of Orange is counting on a different market. All-American racked up sales of $6.3 million in frozen dinners and vegetables to the military over the past four years. Even though company officials expect a reduction in sales to the military, they see no appreciable impact on their overall business.

Company spokeswoman Linda Eatherton said that All-American, a division of Kraft Foods, believes that it has a loyal following of military customers who will continue to buy All-American products after they leave the armed services. The company will simply change its emphasis from military commissaries to commercial grocery stores.

“We are cognizant that the marketplace continues to shift,” Eatherton said. “People will still buy our products. They have to eat.”

Other California defense contractors are fortunate enough to be retaining their current levels of defense funding.

Consider Santa Barbara Research Service, the nation’s leading manufacturer of thermal imaging components that allow military pilots to navigate at night. With about $200 million in mostly defense contracts, the company projects that its government-sponsored research will increase in coming years and its 1,800-employee work force will grow slightly, said Ken Ando, the firm’s director of marketing.

“We are not really representative of the aerospace business in general,” Ando said. “We’re one of the lucky few. We are expanding and our sales are increasing dramatically.”

Overall, military-sponsored research and development in Southern California amounted to $19.6 billion since 1989, or 25% of all defense spending there, according to The Times study.

Among the beneficiaries of the vast Pentagon research funds are California universities and colleges, which were awarded $487 million over the past four years, a figure that does not include tens of millions of dollars in free-standing grants for other defense-related research. USC received $146 million and University of California campuses $149 million, the Times study found.

Officials at California universities said they have not received any indications that the Pentagon plans to significantly reduce their funding for academic research.

“The Defense Department has a long tradition of supporting basic research in science and engineering,” said Charles Kruger, dean of research at Stanford University, which relies on the Pentagon for 10% of all research at the school.

No such assurances of continued defense funding have been given to San Diego Community College District, where instructors offer training in electrical, welding, weaponry and cooking classes at naval training centers in four states.

Over the past 18 months, the San Diego Community College District has seen its defense contracts reduced by a third, from $18 million to $12 million. These cuts have forced the layoffs of 200 full-time instructors, most of them former military personnel who teach at naval training centers in four states.

The cuts could grow, as the Naval Training Center in San Diego is one of 20 major California military installations targeted by the current round of base closures. If the training center is shut down, it would mean consolidating some instructional programs at San Diego Community College and shifting jobs to other training centers in Illinois, Florida and Mississippi, said spokesman Barry Garron.

As the defense dollar continues to shrink, some Southern California firms are searching for opportunities out of state where costs are lower and the business climate seems more receptive.

General Landscape & Maintenance Co., a 55-employee Anaheim firm that has relied solely on the Defense Department for its $2.25 million in annual revenue, has lost landscaping work at Edwards Air Force Base and Norton Air Force Base, with March Air Force Base next on the list, said general partner Carl Romero.

The company has turned to the private sector in Southern California to pick up the slack, but found the economy sluggish, Romero said.

“We’ve had to look outside the state, in Arizona, Nevada and Texas, because there is more activity going on there,” Romero said. “That is where the promise is.”

Other firms see opportunities in the state--if they have the ingenuity to convert their products.

Officials at National Fire Hose Corp. in Compton have been trying to develop new markets. But because there are only so many uses for rubber fire hose material--such as boat bumpers and machine part covers--the firm expects “to feel a crunch in 1993 and 1994,” said Frank Lane, director of government sales.

Military business at National Fire Hose is off 30% and the firm has dismissed one-fifth of its 100 employees, Lane said.

“We’re working on trying to recoup the business,” Lane said. “We’re trying to come up with new uses for fire hoses, new products and new ideas. We’ve gone through changes in personnel. We’ve been struggling.”

Finally, a number of companies are resigned to their demise. For some, such as KM Records in Burbank, their fate is sealed because they have survived by selling the military outdated technology that the commercial world gave up on long ago.

For about $1 million a year, KM Records provides an array of recorded music, from country singer Dolly Parton to jazz musician David Sanborn, for Armed Forces Radio stations around the world.

KM relies on the Pentagon for about 75% of its sales. The company now employs the minimum 17 workers it takes to furnish the military with 88 hours of programming each week, down from a high of 50 workers a few years ago.

Because vinyl records have largely been replaced by cassette tapes and compact discs on the consumer market, KM Records has little hope of replacing its defense business.

Said KM manager Chuck Swift: “If the government contracts were to downsize and go away, it’s a fair assumption that this company would close its doors.”

Times researcher Murielle Gamache contributed to this story.

Defense Spending in Decline

Using 1989 as base year for calculations, a Times analysis of federal records shows that procurement spending nationwide by the Department of Defense dropped 18.5% between fiscal years 1989 and 1992, after the effects of inflation are taken into account. In California, defense spending declined 15%. Spending in current dollars, not adjusted for inflation, also declined during the period but did so less dramatically.

Source: Los Angeles Times analysis of Federal Procurement Data Center records.