NARRATOR: For Hughes Aircraft Company, a major defense contractor, new economic realities meant moving into commercial markets. The company that built the radar for the B-2 stealth bomber, in December of 1993, launched the first of three satellites designed to broadcast 150 channels of TV across the United States to homes equipped with small satellite dishes.

For Bath Iron Works, another major military contractor, the attempt to launch themselves into the worldwide commercial shipbuilding market proved disappointing and they may be left dependent on producing destroyers for the US Navy.

For other major defense contractors, the culture of weapons making is all too profitable for them even to consider producing anything else.

Does the country lose when military contractors have no incentive to diversify? Should the United States be looking to other kinds of investments to spur its economy and create jobs?

Admiral JOHN SHANAHAN (USN, Ret.): I'm Vice Admiral Jack Shanahan, director of the Center for Defense Information. Our program today looks at the fate of US arms manufacturers in the light of what they, the arms manufacturers, consider to be an austere funding environment. But is it all that hard out there for our arms makers?

NARRATOR: One clear winner of the Cold War was the defense industry. Trillions of dollars were spent on weapons for a superpower standoff. Under President Reagan's military buildup, the 1980s were especially good to these companies. The Pentagon's annual purchases of weapons and equipment grew rapidly from $60 billion in 1980 to $101 billion by 1989.

Weapons buys represent only part of a much larger Pentagon budget. Since the collapse of the Soviet Union, Pentagon procurement has come down, but still remains close to pre-Reagan Cold War levels. And most big military contractors, even those with some commercial business, continue to believe that weapons production will provide them with lucrative income for years to come.

The US military reinforced this view by recently calling for a 50 percent increase in funding for new weapons. Wall Street seems to agree. Stock prices and profits for major weapons contractors have soared, even as these firms have downsized, costing hundreds of thousands of workers their jobs.

TODD SCHAEFFER: The problem in the defense industry is the same as it is throughout the whole economy.

NARRATOR: Todd Schaeffer is an economist with the Economic Policy Institute.

Mr. SCHAEFFER: The profits are up and the wages are down and people are being laid off at the same time the companies are earning record profits.

NARRATOR: Some defense contractors, such as Lockheed and Martin Marietta, merged, seeing strength in size. Others, such as General Dynamics, first stripped down to their "core competencies," in this case nuclear submarines and armored vehicles. Then, continuing the trend toward consolidation, in August 1995, General Dynamics acquired Bath Iron Works of Maine, which builds Aegis destroyers for the Navy. Defense companies, hunkered down in the military sector, can count on friends in high places.

Hughes Aircraft, on the other hand, took a different view of its long term interests when top officials assembled at an off-site retreat in 1988. They discussed diversification -- expanding into commercial markets while maintaining their military business.

ROBERT DANKANYIN: During the 70s and early 80s our growth rate had been about 20 percent compounded annually. In 1985 that growth rate started to slow, so that by the summer of '88 it had slowed to about 5 percent.

NARRATOR: Robert Dankanyin, now retired, became the Hughes vice president for Diversification.

Mr. DANKANYIN: Now the one thing we could agree to at that off-site was that our forecasts of defense budgets in the future were that they were going to go down. We couldn't agree how fast or how far, but we really could agree that they were going down.

NARRATOR: California-based Hughes has been producing weapons for more than four decades: Missiles, airborne radar, command and control systems. In 1994, the company still received $5.6 billion in Pentagon contracts, down only slightly from its peak in 1988.

Today, Hughes, as a wholly owned subsidiary of General Motors, has been restructured as Hughes Electronics. The company has moved into automotive and telecommunications products in addition to its military business. From Hughes video: "From 22,000 miles in space, new high-power satellites designed and built by the Hughes Aircraft Company will transmit approximately 150 channels of television programming and information services across the entire country."

NARRATOR: Direct TV, Hughes' riskiest commercial venture, started with a satellite launched in December 1993. In partnership with Hughes, RCA and Sony manufacture the system's home attachments and major entertainment companies provide programming for Direct TV.

Hughes believed that its long experience with military satellites would enable it to compete with cable television. Direct TV has become the fastest selling new product in consumer electronics history, with over 700,000 subscribers in the first year.

In addition to Direct TV, Hughes is applying military technology to GM automobiles. A device from fighter planes is going into cars. It's called the "head-up display."

Mr. DANKANYIN: The head-up display initially was designed for fighter pilots in very high speed aerial action, so they did not have to look down at their cockpit. They could look right through the windscreen and get all the information they needed to carry on a mission.

We have adapted that for autos, so that things such as your speed -- the key instrument cluster, rather than looking down and refocusing your eyes and taking them off the road, you can look right through your windshield.

NARRATOR: The National Highway Traffic Safety Administration attributes the vast majority of rear-end crashes to driver inattention and tailgating. Proponents of the head-up display believe it could have enormous safety implications because it would help keep the driver's attention on the road.

Joe Smalanskas, a Hughes aerospace engineer who worked on military programs for a quarter-century, now markets the company's commercial head-up displays.

JOE SMALANSKAS: We have head-up displays in the General Motors Pontiac Bonnevilles and Oldsmobile Cutlasses, and they use vacuum fluorescent display technology, which is a type of display you'd see on your microwave oven or VCR.

NARRATOR: Police departments are becoming an important market for head-up displays on vehicles.

SANFORD GOTTLIEB: What kind of information comes in?

Mr. SMALANSKAS: Dispatching information, if there's a crime coming down, if there's a vehicle he should be looking for, a person he should be looking -- stolen property.

NARRATOR: More than 200,000 head-up displays have been produced and they are now becoming popular for displaying navigational charts aboard recreational boats.

Military technology has also been adapted for use in school buses. "Forewarn" is Hughes' name for a radar system redesigned to protect school children from accidents when leaving the bus by allowing the driver to sense motion in blind spots around the vehicle.

BETTY HOUGLAND: My first two routes I do in the dark. And I had a student that after I thought that I had every student on, he came up beside the bus. And I heard the beeping and I looked in my mirror, I could hardly see him and he was coming up the side of the bus.

Mr. SMALANSKAS: We see "Forewarn" as yet another device that will provide safety and security for vehicle passengers in the future. Really, a family of products that would include side detection or the blind spot on your vehicle. It could be collision avoidance. It could include rear detection of the vehicle to be sure you don't run into objects. And then ultimately, it really probably gets into a forward-looking radar. At Air Force Association trade show: "From the exterior, the C-130J appears similar to the current model Hercules ...But don't forget, it's not what's on the outside, it's what's on the inside that counts."

"Welcome to Airjet's Defense Support Program Tactical Display demonstration..."

NARRATOR: One of the biggest problems for any company that has long sold most of its products to the Pentagon is learning how to sell to individual consumers.

LOREN THOMPSON: It requires skills and an attention to consumer tastes that very few of them are accustomed to. And my suspicion is that it's going to be pretty rocky for Hughes and all the other companies that try to do this.

Mr. GOTTLIEB: Are you finding any problems with this two-culture business problem of the defense and civilian?

C. MICHAEL ARMSTRONG: Sure, we're finding some problems.

NARRATOR: C. Michael Armstrong is chairman of the board and chief executive officer of Hughes Electronics.

Mr. ARMSTRONG: It's different to build ten things that might cost $100,000 apiece for one customer for one application versus building a million things for a million customers that cost $10. And the understanding of distribution, of merchandising, of advertising, or marketing, of turn around and cycle time, it's different. And culturally, as well as business-wise, it's different.

Mr. THOMPSON: We have, in the Defense Department, an acquisition system that has taken more than a generation to create. It is so perverse and so strange by the standards of the commercial marketplace that it will take many years. In fact, it may take another generation to dismantle it even if we have constancy of purpose, which is not certain.

Mr. DANKANYIN: We have not tried to change the culture of the whole company. That would be a very difficult, unrealistic task. Instead, we've taken small teams, we've immersed them in the commercial marketplace, and tried to change our culture in that way.

NARRATOR: Another defense contractor that has tried to escape being captive to the culture of weapons making is Bath Iron Works of Maine. Up until the early 1980s, 50 percent of Bath's shipbuilding production was for the commercial sector. But the Reagan administration abandoned federal support for commercial shipbuilding and sought a 600-ship Navy.

As Pentagon dollars flowed from Washington, Bath abandoned its commercial shipbuilding work and went 100 percent military. Today, it builds only Aegis destroyers. Meanwhile, foreign companies dominate the commercial shipbuilding market. But Bath has recently been trying to relearn the commercial shipbuilding skills it lost.

DUANE "Buzz" FITZGERALD: We're really going to have to revolutionize the way we do our work if we have any hope of competing with the best in the world.

NARRATOR: Under the direction of president and CEO Duane "Buzz" Fitzgerald, BIW looked for a way to break into commercial shipbuilding. Joined by an alliance of Japanese and Finnish shipbuilders and US shipping firms, BIW secured a matching-fund grant from the government's Technology Reinvestment Program, intended to encourage conversion efforts.

Mr. FITZGERALD: We have been building ships exclusively for our Navy since the early 80s and the practices, the techniques that are essential to naval shipbuilding, complex naval shipbuilding aren't readily adaptable to commercial shipbuilding and, in many respects, don't add value for the commercial customer.

NARRATOR: It takes six times longer to construct an Aegis destroyer than a commercial cargo ship. Building ships for the Navy involves installing technologically complex weapons and protective devices under highly regulated military specifications. Commercial ships, on the other hand, are mostly steel with some relatively easy installation of equipment.

Because foreign competitors have such a head start in the commercial shipbuilding market, BIW is hedging its plans for new ships by exploring the construction of offshore power barges to generate electricity in developing countries.

Perhaps a more lasting legacy of their effort will be the way Bath Iron Works has revolutionized relations with its employees as a way to smooth the transition into new products.

Mr. FITZGERALD: Part of our long-term effort to diversify and change our business practices includes changing the way we deal with each other in the workplace. And we have recently executed a new labor agreement with the International Association of Machinists. It will change the way we do our work. It brings the workers into the decisionmaking process to an unprecedented degree.

NARRATOR: The shop-floor problems that used to end as worker grievances are now being resolved in a cooperative way through joint union-management teams. John "Stoney" Dionne is president of Machinists Local S6 that represents production workers at BIW.

JOHN "Stoney" DIONNE: We're involved in all decision making that takes place in this company now as a full partner. And I think that's a heck of a gain for this organization. There are still labor unions out there right now that are kind of looking at us and saying, 'Hey, how can we do this?' and, you know, 'Give us a little insight on what you did and how you did it.'

NARRATOR: The notion that workers possess brains as well as brawn, says Buzz Fitzgerald, has not always been popular among American managers.

Mr. FITZGERALD: Most of America's workplaces, particularly the organized workplaces, have operated on a basis that management makes the decisions, does all the thinking, and workers do all the doing. And all -- I guess it's origins must have been in the proposition that all wisdom resides at the top. Workers want to have some voice in their destiny and, surprisingly enough, that's been hard for us to come to grips with in -- those of us in management.

NARRATOR: Two parts of the labor-management contract are especially popular with the BIW workforce. First, there will be no layoffs for three years, a rare commitment in American industry, military or civilian. Second, the agreement calls for a continuous upgrading of skills to earn higher pay. Most of the Bath Iron Works employees have agreed to expand their existing skills or learn new ones.

Mr. DIONNE: Unions today are starting to look into the future, and they have to, because we're facing the 21st Century. And, you know, if we're going to survive, we need the company to survive with. And if the company's going to survive, they need us. And I figure if we're working as partners, we stand a whole lot better chance of still being here 10, 20, 30, 40, 50 years from now.

NARRATOR: Can military contractors, long supported by Pentagon purchases, compete in the commercial marketplace? Can they succeed as mixed defense and commercial enterprises?

It's too early to tell, but clearly Hughes has a unique and strong foundation to build on. As a $14 billion subsidiary of General Motors, Hughes has major financial backing for new commercial ventures and a ready outlet for automotive electronics. It also still has large Defense Department contracts.

Mr. DANKANYIN: I think we will continue to be a strong player in defense, but with defense budgets going down, the defense part of our revenues will stay about flat through the year 2000. Which means the non-defense part really has to grow to achieve our objectives of being the kind of company we want to be.

NARRATOR: By the end of 1994, less than half of Hughes Electronics' business was military. Compare that to 1985, when 85 percent was military or space.

Despite progress in developing commercial products, Hughes has failed to preserve jobs. The company had 15,000 fewer employees in 1993 than it did two years earlier, a 16 percent cut. As it has been with other major defense contractors, the workers, not management or the stockholders, have borne the brunt of the company's cost-cutting.

By contrast with Hughes, Bath Iron Works finds itself on more uncertain ground when it comes to diversification. Its new owner, General Dynamics, has given assurances that the labor-management agreement and the shipyard's efforts to commercialize will be respected. But foreign competitors may have the commercial shipbuilding market all locked up.

If that proves to be the case, Bath would continue to make Navy destroyers. Its internal reforms will probably pay off in lower costs, savings the Navy will be glad to pocket.

Large military contractors, such as Lockheed Martin, Raytheon and TRW, are selling non-military products to government agencies. But except for companies which had commercial divisions before the Cold War, such as General Electric, consumers can't find many products made by the big defense firms. Smaller defense firms with more limited resources have been forced to look to non-military markets out of necessity. They have a better record of entering commercial markets. Frisby Airborne Hydraulics of Long Island, for example, had been a long-time subcontracted for Grumman Aircraft when it saw the handwriting on the wall in the 1980s. This family-owned firm went from 90 percent defense to 70 percent commercial in a few years.

GREG FRISBY: We've managed to make the change and I see no reason why other companies can't do it, too, if they are motivated from the top down. If management doesn't want the change to happen, it's certainly not going to happen.

NARRATOR: One of Frisby's early reforms was the inclusion of its employees in decision making about the products they make. Workers from different sections of the plant meet regularly to decide how to handle shop-floor problems.

Mr. FRISBY: Mainly what we wanted to do was get back to as basic an operation as we could, having people who actually work the machines tell us how best to make the changes necessary to bring the cost down on the job.

NARRATOR: Industry observers say that small and medium-sized defense firms would be greatly helped if the federal government, in partnership with state governments and private organizations, provided more low-interest loans and more advice in marketing, business planning and exporting. Programs exist for these purposes, but are under-funded.

What about the big defense contractors? They have been sustained for years by lucrative military contracts and other forms of federal aid. Now with federal dollars for weapons having declined, these contractors are sustaining huge profits by merging, cutting workers and closing plants.

Mr. SCHAEFFER: The strategy is there's fewer defense dollars coming in, but we could still be profitable if we lay off the workers. So, while there are people out there who say, hey, these defense firms are dinosaurs, let them die on the vine, we have to keep in mind the fact that they're not dying on the vine, the workers are dying on the vine. I read a report that there's already been 800,000 defense workers who've lost their jobs this decade and a lot more still to come.

NARRATOR: Economists like Todd Schaeffer point out that defense firms are great believers in federal investment. And if the federal government got involved in spurring the growth of other industries, like high-speed rail, industries that improve the daily life of Americans, military contractors might rethink their allegiance to weapons of war.

Mr. SCHAEFFER: Well, I think that defense firms, they're interested in going where the money is. And one thing that defenses firms are very good at is contracting with the federal government. They're very good at finding out what the federal government is looking for, what kind of dollars are available, and then going after them. Right now there's nothing else for them to go after.

NARRATOR: While the current political debate is all about what the government cannot afford to do, there are those who believe that there are needs the government cannot afford to ignore.

Mr. SCHAEFFER: And certainly there is a place for the federal government to step in and say there are other national missions that we can put you to and you can still be very productive and do something for the country.

NARRATOR: Though domestic budget reductions are all the rage, Schaeffer and the Economic Policy Institute see a need for additional public investment.

Mr. SCHAEFFER: The Department of Transportation every year comes up with an assessment of the status of the country's roads and bridges. And the last one they come up with found that there were 135,000 bridges that were structurally deficient. That means there's a crack in them. That means that they could potentially become one of those disasters.

NARRATOR: While investment advocates like Schaeffer recognize that laid-off defense workers might not have the same skills as those needed to rebuild America's infrastructure, they maintain that the nation as a whole would benefit from these kinds of public initiatives.

Mr. SCHAEFFER: What we're really lacking right now is a demand out there in the economy for workers. And a new national mission like fixing the roads, fixing the bridges, fixing the water treatment plants would create a lot of jobs and a lot of good jobs and at the same time give great economic productivity benefits to the country.

The 50 largest urban areas in the country waste about a billion dollars each every year because people are stuck in traffic and not, therefore, being as productive as they could otherwise be if they could get from point A to B much easier.

Unfortunately, the United States is just about dead last among industrialized countries in how much it reinvests in its own infrastructure, which is what Japan, Germany and the rest of the industrialized world are doing. They have big national public investments in things like high-speed rail, communications infrastructure. They're generations ahead of us. We're still patching roads, they're moving on to the 21st Century.

NARRATOR: Military contractors are looking to the next century. They're planning for new generations of high-tech war-fighting machines. But will this make the US more secure?

Domestic investment proponents see US companies, whether defense or commercial, competing for contracts to build other kinds of products -- high-speed trains, electric cars, solar and wind energy products, products they say would improve our quality of life, create jobs, and help make the US economy more competitive. Only time will tell which direction we choose.

ADM SHANAHAN: The world's governments today are spending $868 billion annually to maintain their military establishments. Let me say that again: $868 billion. The US share is just under one-third of this tremendous sum. So long as this kind of spending insanity exists in the world, there will be no incentive for arms manufacturers to change their business strategy and tactics.

For "AMERICA'S DEFENSE MONITOR," I am Jack Shanahan.