LOCKHEED'S CASUALTIES IN THE DEFENSE CONTROVERSY

WHEN its best friends begin to fault it, the Pentagon is obviously in perilous straits. Last week Texas Democrat George Mahon, a longtime supporter of the military as chairman of the House Appropriations Committee, rose in the House to complain that the Pentagon's "many mistakes" had created a public "lack of confidence." Mahon's old ally Mendel Rivers, head of the Armed Services Committee, grabbed a microphone to protest. "This is the way to tear down the military," he shouted. "Keep on saying it, and the enemies of the military will love you."

Not only is the Pentagon coming in for rising criticism, but its civilian suppliers as well. Congress and the public are deeply concerned about the spiraling costs of new weapons systems and their frequent failure to perform up to expectations. High prices and technical flaws plague many major weapons systems, including the Army MBT-70 tank (prime contractor: General Motors), the Navy LHA assault-ship program (Litton) and the Air Force Short-Range Attack Missile (Boeing). Last week all the censure converged on two huge defense projects, the Air Force C-5A transport and the Army AH-56A Cheyenne helicopter. Both are built by Lockheed Aircraft Corp., whose $2.2 billion in sales last year were made almost entirely to the military. Lockheed is the nation's second-biggest defense contractor, after General Dynamics.

Overruns and Cutbacks. The C-5A, at 728,000 Ibs. the world's largest aircraft, has been under intense scrutiny since a Pentagon cost analyst in January leaked reports of ballooning expenses. Rather grudgingly, the Air Force and other sources revealed that the procurement bill had climbed from an anticipated $3.5 billion for 115 of the planes to $4.4 billion for 120 of them. Congressional critics charge that the "overrun" resulted mostly from Lockheed's attempt to win the contract by making an unrealistically low bid.

The company denies the charges and disputes the size of the overrun. Its spokesmen say that $500 million of the extra expenses can be blamed on runaway inflation and Viet Nam dislocations, which could not have been accurately forecast when the contracts were signed in 1965. Not counting inflation, they claim that the actual overrun is an "extremely good" 10%. The plane itself has performed so well that, according to the company, Lockheed may collect a $22 million incentive bonus from the Air Force.

Yet Lockheed could suffer enormous losses if Congress forces a cutback in orders. So far, the company has firm orders for 81 of the C-5A's. Even if the full 120-plane run is completed, Lockheed stands to lose $285 million, according to Air Force estimates made public last week. Those estimates purposely tend to downplay the suspicions raised by C-5A foes, who had suggested that the Pentagon and Lockheed had been conspiring to ensure that the company came out of the contract with an ample profit. In any case, Lockheed disagrees with the Air Force loss figures; company spokesmen insist that on a full order, Lockheed can "at least break even."

Lockheed has based much of its future on the C-5A and the Cheyenne. While the former is in trouble over costs, the latter is being criticized for its performance. The Cheyenne, a highly advanced, heavily armed "compound helicopter" can both hover like a copter and fly on stubby wings, propelled by a "pusher prop" that speeds it up to 250 m.p.h. Last week the Army abruptly canceled Lockheed's production contract for 375 of the aircraft. Cancellation means a loss of $250 million in orders already in hand, and much more in potential business. Lockheed has already laid off some 700 workers at its Cheyenne plants in Burbank and Van Nuys, Calif. On Wall Street, its stock, which reached 50 earlier this year, fell five points last week, closing at 30.

The cost of each Cheyenne has risen from an expected $1.4 million to about $2.4 million. The immediate cause of the cancellation, however, was the Army's disbelief that a "satisfactory aircraft would be delivered." Rotor stability and control problems had shown up in tests of ten prototypes, one of which crashed. Some critics believe that the Cheyenne was a classic example of "brochuremanship"--the practice of selling the Pentagon on a new weapons system even before the contractor is reasonably certain that it can perform to specifications. Lockheed's Chairman Daniel Haughton protested last week that the Cheyenne's problems were "normal and to be expected in achieving a major technological step forward." He promised to fight in court against both the cancellation and the Army's planned attempts to recover about $54 million that it has given to Lockheed for production progress payments.

Corned Beef and Competition. Cost overruns have been standard procedure in American military history. There were corned beef scandals during the Civil War, and the West was won partly on padded Government contracts for shot, powder, rifles, bully beef and hardtack. Today's excesses can hardly be blamed on defense-industry "profiteering." While U.S. industry's overall return on investment rose from 7.1% in 1967 to 10.1% last year, the defense contractors' profits have dropped from an average 10.1% to around 7.3%

The reason for the decline has been the Pentagon's increased emphasis on competition among defense suppliers. That--and the current controversy --stems from a buying system, introduced when Robert McNamara was Defense Secretary, called "total package procurement." Under "TPP," contractors must estimate total costs of a complex project years in advance, and they are supposed to keep quite close to that fixed-price target. TPP was designed to end the egregious overruns that had been fairly common under the older system of contracting for each step as it came along. This had encouraged contractors to make unrealistically low bids in the research phase; once entrenched in a project, they could discover "unforeseen" expenses and plead for more money.

In TPP, contractors are also allowed to charge off some higher costs, but only up to certain limits--and the Pentagon can refuse to pay anything above that. On the other hand, manufacturers who produce items for less than the expected costs are rewarded with higher profits. There is considerable debate over just how high the C-5A overrun really is --critics, the company and the Air Force use different sets of figures--and just how much of it should come out of Lockheed's hide.

Embarrassing Virtue. The next casualty in the defense-cost battle is likely to be TPP itself. For all its faults, TPP does have the embarrassing virtue of making mistakes highly visible, because targets are so firmly fixed. Pentagon officers are now searching for a less rigid procurement system. One possibility is the so-called "milestone" concept, which prescribes renegotiation of contracts at various stages to take account of inflation and other unpredictable factors. That might keep the overrun from piling up too noticeably, but it will do little to pacify a taxpaying public that believes its pocket is the prime target of every new weapons system that comes along.

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