Hughes Reshapes, Forms $7B Company

efense companies facing a shrinking federal market have spent the last half-dozen years deciding whether to consolidate businesses or conquer the competition. GM Hughes Electronics is in the process of planning both, working on its third round of cuts since 1989, but it also has acquisition plans in mind.

"Hughes can't remain a market leader without changing to meet its customers' needs. By strengthening our presence in Washington, we will enhance our ability to be more responsive to those needs," Smith said.

Washington is an ideal location to address the federal customers as well as overseas markets, which make up 30 percent to 40 percent of the company's sales, Smith said.

The firm is combining the operations that do the bulk of Hughes' government contracting. Hughes Aircraft, which earns 70 percent of its revenues from government work, will essentially disappear under the realignment.

Most of Hughes' aerospace work will be absorbed by the new company, but El Segundo, Calif.-based Hughes Space and Communications will still report to parent company GM Hughes Electronics.

The company's reorganization plans, first announced in March, are not the only changes Hughes has in mind for its future.

"We intend to make this new company a growth company through prudent acquisitions, intelligent investment in new product development, and changes in our cost structure and approach to business," Smith said.

Smith would not say what acquisitions the firm is mulling. But analysts say companies that remain possible targets for any of the defense giants to acquire include Beverly Hills, Calif.-based Litton Industries Inc. and E-Systems of Dallas, Texas.

The new products Smith said Hughes is working on include missiles for upcoming defense competitions, and the Navy's TAC-4 system, a large infotech procurement expected to be awarded soon.

The reorganized Hughes will also continue to expand its civilian offerings, like its high-tech transportation systems.

But even under its new organizational structure, analysts say Hughes will still have stiff competition from other industry giants like McDonnell Douglas, Northrop Grumman and a combined Lockheed Martin.

The whole defense industry is still downsizing, said Merrill Lynch analyst Byron Callin. "In an industry where sales growth has been nil, companies have to reduce costs," he said.

The decision to base Hughes' aerospace and electronics company in Washington, D.C. isn't expected to boost the capital region's employment figures, but it may help bolster its reputation.

Hughes expects to lay off about 4,400 employees through 1995. Under the new management structure, Hughes also will be selling off about 3 million square feet of office and manufacturing space in Fullerton, Calif. n

For the declining defense industry, being close to the number one customer is becoming increasingly important -- which is good news for the capital region's economic future.

Smith said Hughes is still deciding where in the Washington area its new headquarters will be located, but the firm expects to decide by the first of the year. About 3,000 Hughes employees already work in in Reston, Va., Germantown, Md., and Landover, Md. Eighty people, including Smith and the new firm's president and CEO John Weaver, will be transferred to Washington under the reorganization.

The new Hughes unit will combine the Aerospace and Defense, Missile Systems and Systems sectors of Hughes Aircraft Company and the Delco Systems Operations of Delco Electronics Corporation. Hughes Aircraft and Delco Electronics are subsidiaries of GM Hughes Electronics, which had 1993 revenues of $13.5 billion.

Hughes Aerospace and Electronics will be divided into four business units: Radar and Communications, Electro-Optical Systems , Weapons Systems, and Information Systems. All of Hughes' sensor business and space-based systems will fall within the new company.

Smith said the company's restructuring and its move to Washington give Hughes a better focus on its markets and its customers. "What we will have are lean, customer-focused operations, organized to be highly responsive in handling the delivery of products."