The High Cost of Competition

It is not every day, or every year, that a company gets a $2 billion contract in one swoop. Last week California's Lockheed Aircraft did--for construction of the world's largest transport plane, the C-5A. After months of deliberating over three proposals, the Defense Department gave the nod to Lockheed, whose bid for building 58 of the planes was lower by $250 million than the next lowest bid. Lockheed thus nosed out two tough competitors--Boeing and Douglas--to snare the aerospace industry's prize of the year. It will deliver the first C-5A in 1969, may get orders for far more than the original 58.

The four-engine, pure jet C-5A will be big enough to carry 600 armed troops or the army's heaviest trucks and tanks, yet nimble enough to land on short, front-line airstrips. It will make possible direct flights from the U.S. to any trouble spot in the world, also has enormous potential as a commercial carrier that could transport both passengers and air cargo on international flights at much lower fares than at present. It will fly 30% faster (550 m.p.h.) than Russia's huge AN-22, which is only a turboprop, carry twice the payload. Ten C-5As. could have handled the entire Berlin airlift, which required more than 140 lumbering C-54s.

Toughest Scramble. The C-5A carries a message for the U.S. aerospace industry: Government contracts from now on are apt to be fewer and bigger --and cost more just to compete for. Vastly increased costs of development, and the Pentagon's desire to avoid duplication, have already severely reduced the number of Government contracts and set the $20.7 billion aerospace industry off on the toughest competitive scramble in its history. Still, the rewards are so great that airframe companies have no choice but to compete.

One of Lockheed's selling points in the C-5A competition was its know-how in the manufacture of military transports, including two of the most effective, the C-130 Hercules and the new C-141 Star-Lifter. On top of $7 million from the Government, Lockheed since 1957 has put $11 million of its own money into its C-5A project, set up a special division at its Marietta, Ga., plant and hired 2,000 people to work on research, mockups and planning of construction facilities. Into its full-scale mockup, Lockheed put a completely equipped instrument panel, hooked it up with a computer three-quarters of a mile away, and had test pilots "fly" the plane for hundreds of hours. With its bid, the company shipped 20,000 pounds of charts, graphs and blueprints to the Air Force, followed up with 500 experts to explain them.

If Lockheed had the edge, Douglas and Boeing were not lagging in energy, expenditures and number of people involved. Douglas spent $12 million of its own and employed about 2,000 people on the project; Boeing spent $16 million and hired 1,300 extra employees. (Boeing's computers, ironically, had convinced the Defense Department back in 1962 that it needed a heavy transport.) Each company also constructed expensive mockups of the plane, worked on special landing gear and takeoff, landing and loading techniques. "It is difficult to accept the loss in view of the very great effort put forth by our people," said Boeing President William M. Allen when he heard of the Government's decision. "However, competition is tough in our business. We will now set ourselves toward other opportunities." Meantime, production lines will not be idle. Boeing last week received commercial orders for 87 jets worth $550 million, 54 of them from American Airlines.

Intangible Gains. The next billion-or-above contract may be for the supersonic transport, which is worth an estimated $2 billion for construction of prototypes alone. Boeing and Lockheed, the two chief competitors, have just about doubled for the SST what they spent on the C-5A. Lockheed already has some 670 people working on it, expects to have 2,000 by the end of 1966 Boeing has 500 at work. The SST will take at least 25 million engineering man-hours to complete v. 15 million for North American's XB-70. Since Lockheed has won the C-5A and Douglas was guaranteed a $1.5 billion contract for the Manned Orbital Laboratory last month, many in the industry feel that Boeing's chances of snagging the SST contract are good.

Despite the prodigious costs and efforts, losing bidders usually get a fair measure of return in technological "fallout," and are always in a good position to demand a prime chunk of subcontracting. Lockheed, for example, says it will farm out a full 62% of the C-5A's production. An intangible gain for both winner and loser is the almost inevitable increase in organizational efficiency demanded by the extraordinarily complex task of bidding for a C-5A, an SST or an MOL. Douglas says it had to "superorganize" itself just to bid for the C-5A, will be that much better prepared next time around.

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