The Lockheed Redemption
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."
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.
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.
