Business passes the buck

THE SECOND wave of massive US manufacturing consolidations has begun, but this time on a high note. The deal that will create America's biggest defence electronics giant - the dollars 3.1bn (pounds 2bn) sale of General Electric's aerospace division to Martin Marietta - was warmly applauded by Wall Street as a good match. Both are cost-conscious companies managed by quality-driven engineers. The key components of their businesses are complementary, not overlapping. So Martin Marietta, as the surviving defence contractor, is well placed to defy the odds in a shrinking if still huge market.

But the sale also portends a change in the shape of the US economy that will present a major challenge to the new Clinton Administration. It tells us that in the shrinking military contracting industry, companies have a choice between combining or getting out. Either way, the result will be huge-scale redundancies. National defence now accounts for about 6 million civilian and military US jobs, or almost 5 per cent of national employment. The US Office of Technology Assessment estimates that about 2.7 million of the 4 million civilian jobs will simply vanish by 2001.

The pattern of consolidation has been easy to trace this year. It began last February with the dollars 600m (pounds 385m) sale by General Dynamics of its Cessna jet business to Textron. Then the Hughes Aircraft division of General Motors agreed to buy the General Dynamics missile division for dollars 450m. Loral and Carlyle Group, an investment bank, later outbid Martin Marietta with a dollars 475m offer for missile and aerospace properties of the bankrupt LTV. Last month, the electronics marriage of GE and Martin Marietta was completed. In the crystal ball, one sees a few surviving mega-giants as others around them crash and burn. In Americanese, this is called industrial 'down-sizing'.

Since the stakes are so big, this inevitably turns into a complicated battle between predators and victims, with many of the spoils of war determined in Washington. A struggle along these lines has happened before in the US, when much of the steel industry was dismantled. And the repercussions are still being felt in the capital. Agents for the survivors are at work, attempting to shoot down some candidates for high-level positions in the new Clinton Administration. They want to make sure that more 'industry-compatible' people are awarded the jobs. The Wall Street Journal reported on a confidential memo last week which told one of these sordid tales.

Paula Stern, a front runner for the job of US Trade Representative, was portrayed by the newspaper as a victim of a smear campaign so vicious that it compared to the 'red-baiting' of the McCarthy era. A former chairwoman of the International Trade Commission, Ms Stern has been singled out in a whispering campaign by the US steel and semiconductor lobbies as not sufficiently pro-American. The Wall Street Journal quoted from an unsigned 'white paper on Paula Stern' which claims that she has been an agent for foreign interests and is not 'a champion of US industries, US workers, or of US unfair trade laws'.

Her big crime, it appears, is that she is a free trader who voted against import relief for the US auto industry when she was at the ITC on the grounds that imports were not the primary cause of the industry's problems. In addition, in the 1980s she voted against the extension of relief for the US steel industry that sharply limited imports. Now it appears that the US steel, semiconductor and textile industries are all working against her in favour of another candidate, attorney Alan Wolff, who has represented some of them. One of her most powerful detractors is the United Steelworkers of America, which played a key role in delivering the states of Michigan and Pennsylvania to the Clinton ticket and is now lobbying for more protection against steel imports.

The Paula Stern story is a good example of how some companies and industries resort to desperate tactics in Washington to try and camouflage their own deficiencies. Massive lay-offs and other such symptoms of industrial restructurings are not easy or palatable issues. However, job cuts have been the trend since the start of the US economic downturn and companies have turned to them as the cure-all for their problems. But evidence is growing that they are no substitute for sound growth strategies and may even hurt. For example, some companies have chopped off so much 'human capital' to better their balance sheets that they are ill-prepared to pick up new business as the US economy expands. In order to preserve their own reputations, the worst of these look for scapegoats abroad or closer to home in Washington.