Below are three articles from the San Jose Mercury Newsdocumenting the decline of the defense industry in Silicon Valley after 1990:

Article 1: Sunnyvale plant's glory days dimmed

BY SCOTT HERHOLD
Mercury News Staff Writer
Saturday, November 13, 1999
 

Article 2: Leaner, meaner look is in works for Lockheed

BY MICHELLE QUINN
Mercury News Staff Writer
Saturday, November 13, 1999

Article 3: Defense dollars fade as valley booms. High-tech expansion offers new jobs, reshape firms
Sunday, November 28, 1999

BY PETE CAREY
AND MATT MARSHALL
Mercury News Staff Writers

Sunnyvale plant's glory days dimmed

BY SCOTT HERHOLD
Mercury News Staff Writer

                              At its industrial campus in northern
Sunnyvale, the sprawling buildings of Lockheed
                              Martin's Missiles & Space operation still
dominate the landscape but now seem subdued,
                              lacking the explosive bustle of what was once
Silicon Valley's largest private employer.

                              The division that served as a major stimulant
for the valley's infant electronics industry is
                              now a shadow of its former self. Today, it
employs only 7,850 in the Bay Area, well
                              below its peak of nearly 25,000 during the
height of President Reagan's military buildup
                              in the mid-1980s.

                              Its successes are almost as well-known as
Detroit's automobiles: the Trident and Polaris
                              missiles for the Navy, the Agena satellite
for the Air Force, the Hubble Space Telescope.

                              And its stumbles, too, rival Detroit's. Just
last month, the company announced it would
                              earn only $1 per share next year, less than
half of what it had predicted.

                              But some of Lockheed's most significant
achievements have come as byproducts. It has
                              played a less well-known and but critical
role in the development of early semiconductor
                              chips and such technologies as cellular
wireless systems.

                              In the 1960s, Lockheed's need for solid state
components that wouldn't break apart in
                              the harsh environment of a space launch
provided an early source of demand for the
                              valley's nascent semiconductor industry.

                              Later, Lockheed developed digital signal
processing, a technology initially used for
                              electronic eavesdropping. With modifications,
it became the technology behind cellular
                              phones.

                              Lockheed even delved into the arena of
information management, founding Dialog,
                              which was later acquired by Knight Ridder and
since has been sold to British interests.

                              At its peak, Lockheed was the largest private
employer in the valley. As its military
                              contracts rose and fell, the Sunnyvale
division had the power to profoundly affect the
                              local economy, shaping even its traffic.

                              But with the boom in personal computers
starting in the late 1970s, the valley became
                              less dependent on military contracts. Though
Lockheed's drop in employment was a big
                              part of the last recession in 1991, it did
not have quite the sting that earlier layoffs did
                              during previous recessions. Many Lockheed
engineers found work elsewhere.

                              ``That whole industry has gotten more and
more electronic every year,'' said Richard
                              Carlson, an economist with Spectrum Economics
in Palo Alto. ``That means that more
                              and more people have an easier time to shift.''

                              The Sunnyvale operations got their start in
late 1955, when Lockheed Aircraft Corp.
                              bought a 275-acre tract near Sunnyvale for
its Bay Area expansion. But there were clues
                              that the aircraft supplier, famous for
building the Elektra airplane that Amelia Earhart took
                              on her last flight, was at the beginning of a
sharp ascent.

                              In 1956, the Sunnyvale division -- known then
as the Missiles Systems Division -- was
                              named the major contractor for the Polaris, a
new intermediate ballistic missile being
                              developed by the Navy.

                              The American investment in satellites
received a huge boost in October 1957, when the
                              Soviet Union surprised the world by launching
its Sputnik craft. Worried that the
                              Russians were winning the race to dominate
space, all three branches of the military
                              poured money into new Lockheed developments.

                              The Lockheed engineers desperately needed
lightweight and durable circuitry for their
                              new generation of missiles. And that led to
the growth of the first integrated circuits -- or
                              chips -- at Fairchild Semiconductor, founded
by the so-called ``traitorous eight,'' the
                              engineers who had left Shockley Labs.

                              ``That early research was funded by the Army
Signal Corps, which was sneaking
                              contracts to places like Fairchild,'' says
economist Carlson, who once researched the
                              subject. ``All the big money was going to
outfits like GE, which was developing a
                              goddawful technique.''

                              Lockheed flourished with its contracts for
the Polaris and its successor, the Trident
                              missile. And the Air Force's Agena satellite,
also developed by Lockheed, became a
                              reliable workhorse in space on various NASA
projects. Over the last four decades, more
                              than 150 Lockheed-designed communications
satellites have been launched into orbit,
                              including Milstar, a massive military
communications satellite system.

                              The Sunnyvale division reached its zenith
during the Reagan administration, which
                              pushed such projects as the costly ``Star
Wars'' initiative. The company's single most
                              prominent landmark was the mysterious ``Blue
Cube,'' a squarish building that
                              controlled secret satellite communications.

                              Not every project was a success for Lockheed
engineers. The Hubble Space Telescope,
                              for example, was initially crippled by a flaw
in its mirror, a problem attributed to
                              equipment used by a Connecticut manufacturer.

                              Two years ago, a prototype Lockheed Martin
Corp. system designed to blow up
                              incoming enemy missiles missed its target for
a fourth straight time. The system, called
                              the Theater High Altitude Area Defense
system, or THAAD, has since had two
                              successful tests.

                              And business, too, has been less than stellar
since the merger between Lockheed and
                              Martin Marietta Corp. was announced in 1994.
In the last year, Lockheed Martin's stock
                              has fallen from a high of more than $54 per
share to $19 at Friday's close.

                              In fact, when the company reduced its
earnings estimates at the end of last month, it
                              announced the retirement of two key
officials, President Peter Teets and military aircraft
                              chief James A. Blackwell.

Saturday, November 13, 1999, in the San Jose Mercury News

Leaner, meaner look is in works for Lockheed

On the bubble: Even Missiles & Space not
exempt as parent company considers consolidation, downsizing
or selloff. Falling profits, loss of major contract bids
afflict contractor

BY MICHELLE QUINN
Mercury News Staff Writer

                              After suffering a decade of post-Cold War
cutbacks, the old warhorse of Silicon Valley --
                              Lockheed Martin's Missiles & Space operation
in Sunnyvale -- is facing its most severe
                              test yet.

                              Its parent company, Lockheed Martin Corp.,
confirmed Friday that severe financial
                              pressures corporatewide are forcing it to
consider further downsizing, consolidation with
                              other Lockheed Martin units or even the sale
of the Sunnyvale business formerly known
                              as Lockheed Missiles & Space Corp.

                              The rethinking comes as part of a sweeping,
companywide review as Lockheed Martin
                              fights declining profits and grapples with
the loss of major contract bids.

                              In an internal memo to employees Friday,
Lockheed Martin's CEO Vance Coffman
                              reasssured the troops that no decision had
been made but that every aspect of the
                              sprawling defense contractor was being
evaluated. A spokesman noted that the review
                              could end in no detrimental action for the
Sunnyvale operation, long considered the
                              company's crown jewel.

                              ``I think they are embarking on a bold
program,'' said Jeff Pittsburg, an industry analyst
                              and president of Pittsburg Institutional Inc.
of Great Neck, N.Y.

                              The broadened scrutiny, reported first in
Friday's Wall Street Journal, is just the latest
                              upheaval for the Bethesda, Md.-based company.
In September, the defense contractor
                              had announced a major restructuring that
included the planned sale of certain businesses,
                              with an eye toward making its operations
leaner and more efficient.

                              But Sunnyvale was spared, leading analysts to
suggest it was becoming even more
                              central to Lockheed Martin. A key supplier to
the Pentagon of missile-defense systems
                              and military satellites, the Missiles & Space
unit has roughly $3 billion in annual sales,
                              making it the largest company within Lockheed
Martin.

                              Earnings falling

                              On Oct. 28 the company predicted next year's
earnings would be sharply lower than
                              expected because of setbacks across the
entire front of its $26 billion defense and
                              aerospace operations. The company said next
year's profit likely would be cut by more
                              than half to $1 per share from the earlier
estimate of $2.15 per share.

                              As a result, the company plans to ``evaluate
all of our operations'' and assess ``the
                              viability of each and every component of the
Lockheed Martin Corporation,'' CEO
                              Coffman wrote in the Friday memo to
employees. ``Are we looking at Marietta and
                              Sunnyvale? Yes. And we're looking at
virtually every facility and operating company,
                              for that matter.''

                              Lockheed Martin has struggled over the past
few years amid the nationwide contraction
                              of the defense industry. In its heyday in the
mid-1980s, the Missiles & Space operation
                              employed 24,800 in the Bay Area. It now
employs 7,850 in Sunnyvale, Palo Alto and
                              Santa Cruz, with nearly 2,000 jobs being
trimmed since mid-1998.

                              The past year has been particularly trying
for Lockheed Martin, formed after the 1995
                              merger of Lockheed Corp. and Martin Marietta
Corp. Its stock was down 81 cents
                              Friday to close at $19, roughly one-third of
its value last November.

                              Other setbacks

                              Technical and business setbacks also have
dogged the company. The Lockheed Titan IV
                              rocket, built in Denver, failed in several
satellite launches. In 1998, the Sunnyvale
                              operation lost a bid to Boeing to be the lead
contractor for the National Missile Defense
                              program. Earlier this year, Boeing again beat
out Lockheed Martin for a $4.5 billion
                              contract to supply the government with
top-secret spy satellites.

                              An independent review panel in September, led
by a former Lockheed Martin executive,
                              said the company was suffering from
``systemic'' quality control and management
                              problems, mostly from cost-cutting efforts.
In addition, Lockheed Martin had lost the
                              confidence of its top customer, the Pentagon,
the panel said.

                              To its credit, after six misses, Lockheed
Martin's Theater-High-Altitude Area Air
                              Defense System, or THAAD, missile twice
successfully intercepted and vaporized a
                              mock Scud missile this year. The company also
has received 12 new commercial satellite
                              orders in the past year and has built and
launched a sophisticated imaging satellite for the
                              commercial market.

                              `Scrub down'

                              On Friday -- two weeks after the resignation
of two key executives -- spokesman Hugh
                              Burns said Lockheed Martin officials were
going through a ``scrub down,'' evaluating
                              each of six business areas: Is it making a
profit? Does it deliver on time? Is it on budget?
                              Do its products work?

                              If a division is not performing well enough,
the company could decide, among other
                              things, to consolidate, downsize or sell it,
Burns said. Burns, speaking from Bethesda,
                              declined to comment on Wall Street Journal
speculation that part of the Missiles & Space
                              operation could be moved to other Lockheed
sites near Denver.

                              He also wouldn't say when the decisions would
be made, although he said they would
                              happen quickly.

                              CEO Coffman explained the rationale behind
the companywide evaluation. ``This effort
                              is based on a simple business reality: If we
are . . .  staffed at a level higher than can be
                              justified by near-term new business
prospects, we will rapidly price ourselves out of the
                              market and jeopardize our entire
corporation,'' he wrote.

                              No comment

                              Executives at the Missiles & Space business
in Sunnyvale declined to be interviewed.
                              ``We don't feel it's in the best interest for
anyone for us to speculate because no final
                              decisions have been made,'' said Dave Waller,
a Missiles & Space spokesman.

                              ``No one is going to get a free ride,'' said
Burns, the corporate spokesman. ``No one is
                              going to slide. This is real. This is hard
work. We're in a business that's important to the
                              country. We're not making cornflakes.''
 

                              Contact Michelle Quinn at mquinn@sjmercury.com or

                              (408) 920-5749.

Defense dollars fade as valley booms
High-tech expansion offers new jobs, reshape firms
Sunday, November 28, 1999

                              BY PETE CAREY
                              AND MATT MARSHALL
                              Mercury News Staff Writers
 

                              Silicon Valley's once-giant defense industry,
overshadowed by an Internet boom and
                              reduced by dwindling defense contracts, is
struggling to find stability in a new, more
                              humble role.

                              The major contractors during the big 1980s
defense budgets -- Lockheed Missiles &
                              Space Co., Ford Aerospace and Communications
Corp., GTE Sylvania, FMC Corp.,
                              ESL Inc. -- have downsized, merged, lost
their names or reinvented themselves as
                              commercial businesses to stay alive.

                              A reminder of this turmoil came only two
weeks ago when Lockheed Martin Corp. raised
                              the possibility of selling, consolidating or
revamping one of its crown jewels, its missiles
                              and space operation in Sunnyvale. And this
comes after Lockheed Martin's local
                              employment has fallen to 7,850 from nearly
25,000 in 1986.

                              Throughout Santa Clara County, the number of
employees working for military
                              contractors has fallen by half in a decade.
Only 2.1 percent, or 20,600, of the county's
                              962,100 jobs are in the major defense
sectors, down from 5.2 percent, or 42,100 in
                              1988, according to state Employment
Development Department figures.

                              Luckily, the cutbacks in defense were more
than compensated by the expanding civilian
                              sector. Jobs in civilian business services,
including software development, have rocketed
                              from 59,000 in 1988 to 129,200 last year,
according to EDD.

                              The defense slump ``coincided with a
wonderful time when you had a lot of new
                              economics blossoming in biotech, the Internet
and high-tech manufacturing,'' said Mike
                              Curran, director of the NOVA/Private Industry
Council that has helped thousands of
                              laid-off defense workers find new jobs. ``It
was an ideal situation of talented people and
                              empty space for them to grow into. All in
all, we are much healthier now, market-based
                              rather than national-policy-based.''

                              Leveling off

                              It's possible that this slump is now leveling
off. Over the past two years, prime defense
                              contracts have stabilized at about $2.8
billion to $3 billion a year in Santa Clara County,
                              down from a 1980s peak of $5 billion,
according to Defense Department data.

                              Still, Lockheed Martin is a clear example of
the troubled shift from military to civilian
                              work. At its sprawling Sunnyvale campus,
Building 107 was designed to foil enemy
                              eavesdropping during the Cold War. There's
not much to spy on now: The building is an
                              exhibit center containing a rambling display
of the company's past Cold War triumphs
                              and current commercial projects.

                              Not far away from Building 107 sits Peter
Kujawski, president of Lockheed Martin
                              Commercial Space Systems. He has been busy
pulling in new commercial contracts for
                              satellite production. In 1993, Lockheed's
Sunnyvale operation produced no commercial
                              satellites, but now Lockheed Martin's
commercial satellite portion is 25 percent of its
                              overall business. The ones it makes for the
military are specially adapted versions with an
                              ``M'' tagged on the end.

                              ``This is a challenge,'' Kujawski said.
``We're no longer just selling satellites with the
                              guarantee that they are going to provide
secure communications. We've got to worry
                              about our customer's business plan, which
includes everything from insurance to the
                              type of launch vehicle they want to use.''

                              Down the street from Building 107, another
building -- 104 -- sits on 26 acres where
                              engineers once worked on secret satellite
projects. It recently was sold to a developer. In
                              all, 68 acres of the company's formerly
600-acre campus have been sold off in the past
                              two years.

                              The stories of three other major companies,
several of them among the Bay Area's largest
                              defense contractors a decade ago, show how
they met the challenge of shrinking defense
                              contracts. Some have merged, some moved out
of town, and some got out of defense
                              work entirely.

                              FMC Corp.

                              FMC Corp. went through an upheaval similar to
Lockheed Martin's when the Army
                              ended production of the Bradley Fighting
Vehicle, one of its mainstays of business until
                              1995. At FMC's plant in Santa Clara,
employment plummeted from 7,500 in 1984 to
                              1,850 in 1996. Within FMC, blue-collar
workers were hit hardest: The International
                              Association of Machinists once represented
about 3,500 production workers; by 1996,
                              the bargaining unit numbered fewer than 300.

                              In 1992, FMC combined its defense operations
with Harsco's BMY Combat Systems to
                              form United Defense. Then, in the wake of
reduced defense budgets, FMC and Harsco
                              sold the stagnating division for $850 million
to the Carlyle Group investment firm, based
                              in Washington, D.C.

                              United Defense, which moved the manufacture
of the Bradley Fighting Vehicle to
                              Pennsylvania in 1995, is left with a much
smaller local workforce focused on high-tech
                              improvements to its products.

                              ``We're not having a going-out-of-business
sale or anything like that,'' said one United
                              Defense official. ``We're just changing the
way we do things to react to smaller defense
                              budgets.''

                              Ford Aerospace

                              Some Bay Area military contractors have
actually found a new source of life beyond the
                              military. Ford Aerospace and Communications
Corp., a part of Ford Motor Co.,
                              designed and manufactured communication
satellites, ground terminals and intelligence
                              devices for the military, mainly at the
Western Development Laboratories Division in
                              Palo Alto.

                              In the 1990s, this Palo Alto unit was carved
up into several parts after Ford Aerospace
                              was purchased by New York-based Loral Space &
Communications Ltd. Some workers
                              stayed with Loral. Others were transferred to
Lockheed Martin Management & Data
                              Systems-Western Region in San Jose.

                              While the unit's workforce in San Jose has
declined to 1,000, down from 4,000 in 1989,
                              the total number of workers here has
increased if the workforce of other spinoffs is
                              factored in, company officials said.

                              Loral, meanwhile, focuses now on commercial
satellites. But even here, there are risks.
                              Last year, in the wake of the Asian economic
crisis, Loral said it would lay off 300 of its
                              3,400 Silicon Valley workers because Asian
clients had backed out of contracts for some
                              of its commercial satellites.

                              Other companies besides Ford Aerospace were
bought out completely. For example,
                              ESL in Santa Clara was incorporated into
defense giant TRW Inc., and GTE Sylvania in
                              Mountain View into General Dynamics Corp.

                              Trimble Navigation Ltd.

                              Trimble Navigation, based in Sunnyvale, shows
how the loss of defense contracts can be
                              a blessing in disguise for Silicon Valley.
The company learned the hard way not to
                              depend on the military.

                              Until 1990, the company consciously focused
on the commercial market for its
                              navigation instruments and systems, keeping
its military business to a mere fifth of
                              overall sales.

                              But when the Persian Gulf War broke out in
1991, the company won an exclusive
                              contract to produce hand-held receivers for
the military. The offer was too good for the
                              young company -- founded in the late 1970s --
to turn down, recalls Ralph Eschenbach,
                              vice president of technology at Trimble, who
brought global positioning system (GPS)
                              technology to the company.

                              `Culture shock'

                              What followed was nothing short of ``cultural
shock,'' explained Charlie Arminger, vice
                              president of sales. When he arrived in 1989,
the company had $19 million in sales. By
                              1991, at the height of Desert Storm, the
company's sales had increased more than
                              sevenfold, to $150 million.

                              Trimble's production lines were so stretched
that it was forced to turn to other companies
                              to help meet the government's demands. Under
the contract, the company was forced to
                              make the receivers its priority. ``It was an
order from the president,'' Arminger recalled.

                              When the war ended, the government refused to
accept any more shipments of the
                              receivers, even though Trimble had
reorganized its production line around them. ``For
                              us, it was as though the war lasted for a
nanosecond,'' Arminger said. ``We were
                              suddenly left with a ton of inventory sitting
around. We went into a funk.''

                              Trimble was forced to slash jobs, and sales
plunged. The company has since recovered,
                              but only because it moved aggressively into
commercial production. It has since doubled
                              the amount of its sales to $300 million, and
only about 10 percent of its business remains
                              tied to military contracts.

                              ``We learned that the military game is like a
drug,'' Arminger said. ``Once you start to
                              play, there's a stringent set of guidelines
that create a corporate culture which is very
                              tough to back away from.''
 

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