As the Cold War fades into the dusty confines of history books, conventional wisdom dictates that budgets for defense- and military-related electronics contracts will steadily decline into the early part of the next century. With government-contract work radically scaled back and defense budgets slashed, electronics and computer companies are forced to scrutinize and redirect R&D and manufacturing dollars.

Redeployment efforts focus on identifying markets that fit existing or emerging technologies into civilian-use applications. Like most ventures, however, the road to successful conversion of defense-related business to nonmilitary markets can be riddled with mines--and rife with potential.

By 1997, the Department of Defense (DoD) predicts its spending will shrink to 3.6% of the US GDP (gross domestic product), down from 6.5% under the Reagan administration. The DoD's 1997 budget goal marks the lowest level of defense spending relative to national income since the end of World War II.

Private-sector defense-related jobs are expected to decline to 2.3 million by 1997, down from 3.2 million in 1991. Not surprisingly, the bulk of jobs lost will be in the manufacturing sector. See Table 1 for a breakdown of states most reliant on government funding--and thus hit hardest. Note the numbers for California.

The consequences of a continuous decline in military-based spending are manifold. In Southern California, for example, defense cutbacks dent more than just company profits and market strategies; coupled with a relentless recession, continual layoffs burden local economies, which in turn drain state and federal unemployment and social-service allocations.

California's economy is a symptomatic, albeit extreme, example of an economic downward spiral throughout the United States. Worldwide recession, increasing manufacturing competition from the Pacific Rim, and domestic-government cutbacks challenge, and often cripple, the competitiveness of local business. Other belt-tightening moves--Congress-man- dated military-base closings; decreased technology investment and research; and deferred infrastructure improvements, for example--collectively take their toll on the local economy.

The US departments of Commerce and Defense corroborate: They report a projected loss of approximately 605,000 professional and 597,000 "precision-production" defense-related jobs in the private sector by 1997. In late June, the US Congress announced mandates to slash defense-related university and scientific research by at least 60% for next fiscal year. The Massachusetts Institute of Technology (MIT) alone stands to lose more than $1 million in research grants.

Any business that relies heavily on military contracts has to rethink how executives, managers, and workers do business from the ground up. Fortunately, change and uncertainty can work to your advantage by drumming up new ideas for product manufacturing and marketing. "In order to survive, we must create new work," says ESL President Art Money, chair of the Defense/Space Consortium (DSC) in Silicon Valley.

The big picture isn't all grim

Companies are rapidly gearing up for change, and the federal government has actively spurred the transition to civilian-based work. The federal Technology Reinvestment Project (TRP) implements the Small Business Innovative Research (SBIR) program as well as eight statutory programs. Congressional funding for the TRP exceeded $471.6 million in 1993 (projections for next year approach $600 million).

The TRP assists companies that create products and process technologies that directly suit both defense and commercial applications. In addition, the program sponsors manufacturing education and training programs that strengthen workers' skills and, in the long run, improve US industrial competitiveness. In its first year, the initiative reviewed close to 3000 proposals from companies willing to invest in this project.

Government funding is one source of help for initial investment. Yet federal regulations and international trade quotas are hardly enough to save defense-dependent industrial giants. Southern California is a poignant example. Facing the demise of bil- lion-dollar government contracts, Northrop, Rockwell International, Hughes, McDonnell Douglas, and their extensive network of military-based suppliers and distributors are beginning to evolve and diversify both within and without their respective industries. Some are scrambling to find business in commercial sectors.

The biggest challenge for these giants, however, may be the task of converting their own company cultures. Moving from specialized "MIL-STD mentality" to more efficient, proactive, and nonproprietary modes of business can be a tough task. A company culture custom-tailored for government-contract work must yield to a different mindset if innovation and change are to succeed on a large scale.

Government initiatives (and millions in federal allocations) will be wasted if companies fail to secure real, long-term markets for their military-based production systems. Critics voice concern that these efforts are useless and that defense monoliths face imminent extinction in the next decade.

Fortunately, innovative efforts are working for some companies: By experimenting with new technology in applications previously too costly or impractical to implement, companies are beginning to turn a profit. The success of wireless television networks is one such example. This industry has a viable future because, for a few hundred dollars, consumers can now buy a small satellite dish to connect into the system. Another alternative is to customize commercial products and expand their environmental performance without altering schematics. By doing so, you can market previously commercial-only equipment to the US military.

So-called "dual-use" products and technology are cost-effective and efficient to produce. At Raytheon, for instance, Beech Aircraft is producing commercial and military aircraft from the same structural design; even better, the military jets roll off the same assembly line as their commercial counterparts. To accommodate MIL-STD specs, engineers custom-designed the production process to outfit the military aircraft throughout various stages of assembly (turn to pg 56 for more on Raytheon's conversion business).

Dual-use manufacturing takes a cue from businesses that have deliberately (and successfully) marketed products to both civilian and military uses.

Selling COTS (commercial off-the-shelf) components and ruggedized computers to the military evolved from a budget directive that sought to cut R&D time and money in half for many military contracts. Because a MIL-STD computer system, for example, may cost up to 5 times that of a commercial (nonruggedized) system, opting for COTS hardware could save the military millions annually. Manufacturing and marketing COTS products can be a tricky business, but with a bit of creative upgrading to ruggedize commercial components, companies such as Codar Technology Inc (Longmont, CO) simultaneously target both military and civilian markets.

Rethink business

Going beyond traditional conversion techniques, businesses once thought to have little in common are joining in shared research projects and long-term market planning, especially among competitors. And, in regions already home to interrelated industries, communication networks offer to grow new markets--and help convert existing ones. Silicon Valley, for instance, is rebounding. Companies are forming consortia and information networks, embracing alternative manufacturing methods, and creating markets that target remaining defense-related contracts and new consumer applications.

The Silicon Valley Defense/Space Consortium (DSC) is an alliance of business, government, and community leaders set to improving Silicon Valley's economic competitiveness. The DSC offers companies assistance in identifying partners and forming alliances; guidance and support in obtaining matching funds for dual-use and commercial-military partnerships; and conferences and workshops in areas such as marketing, commercial-product development, organizational change, and forming other strategic alliances.

The Consortium's charter sets forth a model for business success that seeks to grow a strong and diverse economic/ industrial base for the region by uniting talent from local government, industry, and education. Objectives include

• Developing a specialized infrastructure, using efforts such as technology collaboration among companies--and between business and university leaders
• Reducing the cost of conducting business by initiating dialogue between public- and private-sector leaders to work for common ground in tax rates, short- and long-term fiscal planning, and local regulatory procedures
• Retaining and expanding existing industry by promoting specialized focus groups to air grievances and brainstorm; reaching consensus on regional goals by involving a range of interrelated businesses
• Attracting new industry, such as environmental consulting, software, and entrepreneurial pursuits.

Last year, the Wireless Communications Alliance formed to share and develop applications for the expanding wireless market; this partnership involves ESL, Intel, Siemens, Teledyne Micro- wave, Trimble Navigation, Watkins-Johnson, and Wyse Communications. The DSC-sponsored endeavors prove that corporate and industrial diversity can link successfully.

Real-world applications

In the ever-expanding wireless-communications world, commercializing the global positioning system (GPS), a DoD-commissioned technology program called NAVSTAR, opens a host of applications for a former military-specific technology. GPS, which is a radio-navigation system that employs RF transmitters in 25 satellites, uses receivers to decode satellite signals and calculate latitude, longitude, and altitude of points on Earth.

Commercial applications range from surveying and navigation equipment to airplanes and trucks. GPS's accuracy improves ground-based radio-navigation accuracy by 10 to 100 times. Military-specific companies working with GPS technology include ITT Defense, GEC-Marconi Defense Systems, Alpha Products, and Honeywell. But geologists and weather forecasters, oil conglomerates, and rental-car companies are some of the myriad civilian-use buyers of this technology.

Rental cars, for example, are a testbed for GPS-related tracking of the optimal route for point-to-point travel. Small on-dash color displays provide directions and digital maps for business travelers or drivers unfamiliar with local geography or interstate routes. CD-ROM makes data storage and retrieval practical and economical for such large-scale applications. Thus, GPS creates a commercial market and sparks a de- mand for mass-market software as well as the hardware needed to access it.

Because GPS still has an integral role in future military-based applications, it bridges commercial, military, and scientific-research applications. One detractor, however, is that commercial proliferation of GPS-based products must rely on military control and regulation of satellites, which involves US taxpayers (annual costs for the GPS exceed $500 million).

Other wireless applications that incorporate microwave, infrared (IR), and RF technology include mobile computing for offices, businesses, warehouses, and universities. To date, the lack of interoperability among and between products has been a major drawback; because vendors have not invested enough time, effort, and money into improving compatibility, the market, as a whole, has suffered.

DEC is currently working to co-develop base wireless LANs from existing AT&T systems; Motorola's MNI (Mobile Network Integration) makes Motorola's products more interoperable and improves compatibility with other wireless systems and services.

Interoperability is clearly an investment in the future: Economic forecasters expect the US market for wireless LANs to grow from its current $36 million to $350 million by the end of the decade--and more than $500 million worldwide. Moreover, in November of last year, the IEEE approved the 802.11 MAC protocol. With some modification, IEEE 802.11 will become a worldwide standard for wireless LANs and protocols.

Table 1

New revenue bases

Other areas of new-market growth for military technology stem from mass data storage and retrieval, security, and multimedia. High-capacity data storage unites media, software, and hardware. Financial, medical, scientific, and automotive markets, for example, depend on efficient and economical access to large chunks of data--from tens of gigabytes to thousands of terabytes--just to conduct day-to-day business.

For more than a decade, Dallas-based EMass Storage System Solutions has been involved with data-storage products for government-contract work, such as intelligence, reconnaissance and surveillance, command and control, and aircraft maintenance and modification. The company's strategy for research, production, and marketing now includes targeting scientific and technical, financial services, medical, seismic and weather, broadcast media, insurance, and educational applications of data capture and storage.

Security is--and will continue to be--an explosive market opportunity, especially as information and communication networks proliferate and become increasingly easy to access. A rash of Internet break-ins in late spring proved a painful and costly reminder of LAN/ WAN system vulnerability. Software manufacturers, their customers, and even the federal government suffer financially and proprietarily from security breaches.

Economists in the electronics and computer industries expect multimedia to take off toward the end of the decade. Although multimedia did not grow specifically from military technology, many dual-use and former defense-related companies are turning to multimedia for new sources of revenue. Multimedia applications have almost universal appeal: Executives traveling in various time zones or located on different continents can arrange teleconferences, video conferences, or pen-based on-screen brainstorming sessions. Initial equipment costs can be prohibitive, but conducting a transcontinental teleconference may cost a lot less than air travel.

In the last three or four years, many computer companies allied with media and publishing companies and electronics companies to exploit new educational and entertainment markets. Successful appli- cations include virtual reality and personal handheld communication devices.

Personal communicators continue to decrease in size and cost. In late June, Motorola introduced the Envoy, a personal-communications device that sells for around $1500. Using Envoy, you can receive faxes and e-mail and shop electronically via on-line catalogs.

Another commercially viable technology is the Digital Satellite System, a satellite-TV system. For just under $700, consumers can buy an 18-in. satellite dish to hook into a new form of TV that promises to compete with cable. DSS offers 175 new channels. This commercial system results from a joint venture linking Hubbard Broadcasting, Hughes Aircraft, RCA, and General Motors.

Virtual reality is a prime example of dual-use technology: To train fighter pilots, the military uses virtual reality for in-flight simulation; civilian markets continue to expand into interactive-television and video-game applications. Automakers are experimenting with virtual-reality head-up car displays. Odometer, speedometer, and gas-gauge readings project onto a car windshield, eliminating the need for drivers to take their eyes off the road to check instrument readings.

In addition, because multimedia involves a diverse range of hardware and software products and has grown-up in the '90s, its applications are increasingly security-conscious. Multimedia tools available today let you distribute tamperproof executable files that incorporate sound, animation, text, schematics, and other relevant data.

Multimedia has two main drawbacks: initial equipment investment and lack of integration among infrastructure, tools, and applications. In an attempt to address these issues, IBM joined with Sybase to develop and market tools and application examples on the RS/6000 platform. This partnership tackles both problems in an attempt to convince customers that their initial investment will be worthwhile for the long haul.

Looking ahead

Overall, the quickest and easiest route to profitability in the defense-conversion race may be for businesses to emulate the coalition/alliance-based model already up and running in Silicon Valley. This business model may prove to be a blueprint for economic recovery elsewhere, particularly in regions already equipped with a high-tech industry base, such as the Route 128 belt in Massachusetts.

By teaming with related (or interrelated) industries, companies can exploit the strengths and resources of competitors to mutual advantage. This industrial commensalism allows companies to concentrate on manufacturing and selling the best products and services available in the marketplace.

Most important for the economy, though, is the innovation that results from collaboration. New technologies and products evolve and spur new markets, which increases profits. New products and technologies also demand a larger and better skilled workforce. Consortia help form networks and manufacturing/technology alliances, which involve corporate executives, scientific researchers, and factory workers alike. Obviously, demands for across-the-board employment fuel more than just the local economy.

Fostering an entrepreneurial spirit via a loosely aligned network of autonomous companies is a blueprint for future economic success. It speeds technology sharing via enhanced communication. And it helps innovation thrive. The foundation of the 21st-century "Information Age" may prove that a free flow of proprietary information doesn't hinder profitability but rather works to ensure it.

1. Gallant, John, "GPS receivers: System revolutionizes surveying and navigation," EDN, January 7, 1993, pg 31.

2. Mosley, JD, "Multimedia," EDN, March 16, 1992, pg 101.

3. Multimedia: Challenging the Client/ Server Infrastructure, Business Research Group, Cahners Publishing Co, January 10, 1994.

4. Saxenian, AnnaLee, Regional Advantage: Culture and Competition in Silicon Valley and Route 128, Harvard University Press, 1994.