Fleet-footed firms tip the transatlantic balance: The US contracting industry has been quick to respond, reports Phil Reeves

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THE planned merger of Lockheed and Martin Marietta is the most graphic example of the long, painful series of takeovers and cuts which have swept the United States' defence industry since the end of the Cold War.

It will create the world's biggest defence contractor, ousting McDonnell Douglas from the top, with annual sales of dollars 23bn. The merged company will have 170,000 employees, although the number is likely to fall once cost cutting starts.

'The arithmetic is simple,' said Norman Augustine, Martin Marietta's chairman. 'Three full factories are better than six half-full ones.'

The companies believe they have complementary businesses - Lockheed builds aircraft while Martin Marietta specialises in electronics. Many defence insiders believe it heralds a wave of mergers driven by vertical integration,after a series of companies in the same business combining to produce greater economies of scale.

In both cases, the aim is to stay alive in the face of falling US defence expenditure. The brunt of the government spending cuts has fallen on California, which has been the heartland of the US weapons and aerospace industry since the Second World War, churning out hardware ranging from the B-2 Stealth bomber to space programme components.

The dwindling supply of Pentagon dollars has sent the world's most advanced and powerful defence corporations - monoliths like Hughes Aircraft, Northrop, McDonnell Douglas - into a tailspin, forcing them to regroup, often with dizzying speed.

This year, Northrop purchased Grumman; last year, Lockheed acquired General Dynamics' aircraft division. And in 1992, Martin Marietta took over General Electric's aerospace electronics company.

In the past six years, the number of jobs in the defence and aerospace industry in California has fallen from 363,000 to 197,000, fuelling the worst recession in the Golden State since the Great Depression. It has only recently begun to abate. Economists predict a further 161,000 defence-related jobs will be lost by 1996.

One of the fittest companies is Hughes Aircraft. A division of General Motors, it has embarked on an aggressive conversion drive that last year ensured that one third of its dollars 8.8bn sales had nothing to do with military equipment and hardware but derived from the sale of commercial satellites and telecommunications and information technology.

Hughes has shed 32,000 jobs since the mid-1980s and has announced at least another forthcoming 3,200 losses, while contimuing to generate healthy profits. These days, the 50-year- old California-based company is not only known for making radar systems for F-15 fighters and Tomahawk missiles, but for communications satellites for cable interests. This autumn its satellite-to-home television operation, DirecTv, is due to go into service, beaming 500 channels into American homes via a dollars 700 18-inch dish.

While its future seems clear enough, the same cannot be said for President Clinton's strategy. His administration has to reconcile its conflicting aims of encouraging the defence industry to slim dramatically while ensuring that the US government's anti-trust laws remain in force. Many predict this will be no easy task.

(Photograph omitted)