Friday, Jan. 05, 1962

General Dynamics' Ordeal

Of the corporate giants born in the U.S. in the years after World War II, none grew so fast or so far as General Dynamics, now the 15th largest U.S. industrial company and the world's biggest privately owned military manufacturer. Big as it was, General Dynamics never really fused into a cohesive managerial or financial unity. And last week the fledgling giant was in sore trouble.

Barely four years ago, General Dynamics seemed the paragon of the U.S. defense business, a precocious infant that had come from nowhere to rack up earnings of $44 million on sales of $1.6 billion --figures that put it neck and neck with long-established Boeing. But by 1960, the company's once respectable profits had turned into a $27 million loss, and in 1961 the company's net losses hit $40 million in the first nine months alone. But the most staggering statistic about General Dynamics was that in its efforts to break into the commercial jet market, the company had suffered the biggest single product loss--$425 million--in the history of U.S. business.

The Inheritor. General Dynamics was put together in barely five years by John Jay Hopkins, an audacious, hard-living lawyer turned financial genius, who started off in 1947 with Connecticut's venerable submarine-building Electric Boat Co. as his base. Acquiring companies left and right in an effort to span the entire range of military hardware from submarines to missiles, Hopkins ran General Dynamics with scant organization and largely by the force of his own personality. This month, in the first of two articles called "How a Great Corporation Got Out of Control," FORTUNE relates how Hopkins, aware that his reputation as a hard drinker had lost him the Pentagon's confidence, brought in as his operating deputy a fellow lawyer who had made his career in government: Arkansas-born Frank Pace, previously Director of the Budget and Harry Truman's Secretary of the Army.

In April 1957, four days before Hopkins died of cancer, General Dynamics' directors, in defiance of Hopkins' wishes, elected Pace chairman of the company. When Pace took over, Hopkins had already committed General Dynamics to enter the commercial jet market with its Convair 880. Pace was enthusiastic about the plane too. "When the Government is awarding military contracts," he explains, "it looks with favor on a company with successful commercial accomplishments."

A Matter of Tailoring. Economically, the 880 was an ill-starred plane. Convinced that it would be first on the market with a medium-range jet, General Dynamics' Convair Division tailored the plane to the specifications of its first customer, unpredictable Industrialist Howard Hughes, who ordered 30 of the 880s for TWA. But when the planes were ready, it took Hughes a year to raise the money to pay for them. In the meantime, Convair lost an order for eleven more 880s from United Air Lines, which switched to a plane that Boeing had hastily tailored to United's own wishes, the 720.

Had Convair backed out of the commercial jet business with the 880 fiasco, it might have held its losses to perhaps $100 million. Instead, in an attempt to recoup its 880 losses, Convair decided to build a long-range jet, the 990, which, by using the then new fanjet engine, would fly faster (635 m.p.h.) than any comparable commercial jet. To save lead time, Convair skipped making a prototype, with the result that when the first 990s came off the production line, they could not fly at the guaranteed speed--and General Dynamics was forced to cut the sale price on early models and lose precious time in modifications.

A Staff Man. It was this series of disasters, all of which sent General Dynamics' jet development costs soaring hundreds of millions of dollars above Convair's original estimates, that landed G.D. in its present trouble. Pace insists that there were no obviously wrong decisions involved--just a run of incredibly bad luck.

But Pace's critics charge him with failing to exercise effective control over Convair, which, as the company's largest and most profitable division, he allowed to operate almost as an independent corporation, until he finally broke it up into four separate divisions last May. By failing to take hold of Convair earlier and to familiarize himself with its operations, argue these critics, Pace deprived himself of the opportunity to spot the danger signals that heralded coming crises. Pace concedes that "from the start, Convair resisted supervision." But, says he, "The people making decisions there had been doing so successfully for ten years. I'm a staff man to the nth degree. I never make a personal arbitrary decision."

The Corner. For Frank Pace and General Dynamics alike, the results of insufficient control at the top have been painful. Today, General Dynamics is being run not by Pace but by an emergency committee of five directors including Chicago Financier Colonel Henry Crown--the man who last week sold his ownership of the world's tallest building, the Empire State, for $65 million. Among other things, the directors' committee is seeking a new chief executive officer. Pace, who at 49 finds his big-time business career probably at an end, expects to step down in April, "if the company has turned the corner."

General Dynamics may well turn that corner in due time. The directors' committee is considering selling off the money-losing commercial products end of the Stromberg-Carlson Division and perhaps also the Liquid Carbonic Division, an indifferent earner. The remainder of General Dynamics' twelve divisions are operating satisfactorily in the black, and some Wall Street analysts believe the company will show a respectable profit in 1962--provided additional write-offs on the jet program do not exceed the $5 to $10 million the directors now predict. But before General Dynamics can realize the promise it once seemed to show, someone will have to give it the aggressive, even arbitrary, leadership to convert it from an artificial colossus to a unified corporation.

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