The Lockheed Redemption

The Lockheed Redemption

The Lockheed Redemption

Aug. 1 1997 3:30 AM

The Lockheed Redemption

In the defense industry, failure pays off big.

In the Yale University Library, 11 books are cataloged under the heading "Lockheed." Of those 11, nine are cross-referenced under "bribery," "corruption," or "military-industrial complex." Other appropriate subheadings might include "cost overruns," "bailout," and "crash and burn."

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For a company whose history, from one angle, looks to be an almost uninterrupted record of malfeasance and incompetence, Lockheed has done rather well for itself. In fact, Lockheed Martin--as the company has been known since its 1995 merger with Martin Marietta--is the world's largest defense contractor, with 180,000 employees and annual revenues of $27 billion. If its proposed acquisition of Northrop Grumman is approved by the Justice Department, it will be a $37 billion corporation by the end of 1998. Given that, one might see Lockheed as an exemplary case of corporate rebirth. On the other hand, one might see it as evidence that in the defense industry, as in Hollywood, it's easier to fail upward than to disappear.

Of course, defense is an industry like no other. Barriers to entry in terms of technology and physical plant are prohibitive, which keeps domestic competitors out of the business. At the same time, national-security concerns keep potential foreign competitors at bay. The Pentagon's interest in keeping its weapons supply free from interruptions, meanwhile, means that no major player can be allowed to go under. Defense contractors are able to reap tremendous profits while rarely confronting the risks for which those profits are supposed to be the reward. The fact that a small number of contracts can determine a company's profit outlook for a decade places a premium on low-balling bids (which leads, almost inevitably, to cost overruns) and influence-currying. The result is a system with all the vices of both regulation and competition, and few of the virtues of either.

Seen in this light, perhaps Lockheed's record is not quite so dismal. Sure, Lockheed was the company that charged the Pentagon $646 for a toilet seat. But with Grumman charging $659 for an ashtray, how else was Lockheed to keep up? And yes, the Defense Department did pay for C-5A transport planes from Lockheed on which thousands of parts had not been installed. But Northrop bought parts from Radio Shack and put them on MX missile-guidance systems without proper testing.

That Lockheed has been consistently able to convince others--well, OK, to convince the U.S. government--to forget about its record testifies to the power of the human imagination. (It might also testify to the power of Lockheed's millions of dollars in campaign contributions, or to the effect of revolving-door employment in the defense industry.) Lockheed has made historical amnesia into an art form. A short bout of traumatic remembering seems in order.

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Ironically, the company's roots are as deep as any in the aerospace and defense industries. Founded by auto mechanic Allan Loughhead and his brother Malcolm in 1916--with, tellingly enough, designer Jack Northrop, who went on to found Northrop Aircraft--the company struggled until it produced the Vega, the plane that Amelia Earhart flew across the Atlantic. The Vega, together with a series of other sparkling designs, earned Lockheed a place in the high-end market. But the company did not capitalize on its advantages until the mid-'30s, when new management moved strongly into the passenger-plane market and started competing for military contracts as well (including a failed attempt to sell bombers to Germany in 1937 and a successful sale to Great Britain in 1938).

Lockheed's reputation was really made during World War II, when the company built both the C-69 Constellation transport (which became the standard for civil airlines in the immediate post-war period) and, more impressively, the P-38 Lightning fighter. Both planes did what they were supposed to do, and cost what they were supposed to cost. It's not clear whether that's been true of any Lockheed plane since. In 1959, for instance, Lockheed introduced the Electra turboprop commercial airliner. Within a year, three Electras crashed, and within two years, production was halted. At the same time, the company, thanks to well-placed payments to "consultants," sold its F-104 Starfighter jet--rejected by the Air Force--to both Japan and West Germany. Eventually, 175 of the jets sold to West Germany crashed, killing 85 pilots, while 54 of the Japanese jets were lost.

For the next three decades Lockheed found itself building planes no one really needed for more than they wanted to spend. The company tried to sell anti-submarine reconnaissance planes to the Dutch. It sold giant long-distance transport planes to the Indonesians, the Filipinos, the Brazilians, and the Italians. And it sold fighters all over the world. It made these sales, of course, primarily by bribing foreign officials. But that wasn't actually illegal in the United States until 1977. You might call it a creative and aggressive form of marketing. In the 1970s, the chairman of Northrop, which was also bribing its way across the globe, termed this "the Lockheed model."

At home, meanwhile, Lockheed was busy running up $2 billion in cost overruns on the C-5A Galaxy, the first real procurement scandal in defense-industry history. The company was also building the Tristar passenger jet, plagued from the beginning by equipment problems. Lockheed bribed the Japanese prime minister to buy the Tristar for All Nippon Airlines. What made these problems truly noteworthy, though, was that Lockheed only survived them thanks to a $250 million government bailout. The market had spoken, but Lockheed was able to convince the taxpayers to offer up a different answer.

Once it survived the bailout, the company was unable to avoid rebounding. The Reagan defense budgets helped, as did an aggressive marketing plan abroad and, most importantly, the merger with Martin Marietta and the acquisition of General Dynamics' F-16 fighter division. Lockheed helped build the Hubble Telescope--no surprise, really, given how it performed initially--and the space shuttle. It's currently building the F-117A Stealth fighter and the thoroughly unnecessary F-22 for the Air Force, and is bidding against Boeing for the contract to build the Joint Strike fighter, the last great contracting plum of the century.

Perhaps, then, "corporate rebirth" is a fitting tag line. But what's interesting is how similar Lockheed's tactics remain to those it deployed when it was running what was called "the grease machine." In 1995, for instance, the company tried to get the federal government to pay for the costs of its merger with Martin Marietta. That same year, it was investigated by the government on bribery charges related to F-16 sales, and fined $25 million for bribing an Egyptian minister to help arrange a $79 million sale of three transport planes. There's always, it seems, another corner to cut. The difference now is that the company has finally figured out how to make its more unorthodox tactics pay off on the bottom line. The startling fact is that once the merger with Northrop is done, Lockheed will have only one real competitor left. The past is gone. The future's bright. Only universal peace can mess things up now.