Hughes Never Really Meshed With GM

DETROIT —  In early 1985, General Motors Chairman Roger Smith teased Wall Street with the hint of a big acquisition that he described as a “lulu.”

He soon delivered. That June, Smith announced the acquisition of Los Angeles-based Hughes Aircraft Co. for $5.2 billion. “This is a super-historic day for us,” Smith boasted at a New York news conference. “Lulu is home now.”

By adding the renamed Hughes Electronics Corp. to GM’s stable, Smith hoped to achieve his dream of turning the world’s largest auto maker into an unparalleled technological powerhouse. Visions of robots, radar and lasers danced in his head.

But nearly a dozen years later, there is scant evidence that Hughes’ highly touted high-tech aerospace and defense know-how did much to advance GM’s ability to design, build and market cutting-edge cars and trucks.

A few auto components evolving from Hughes hit the market--an instrument display on Pontiacs and an electronic controller in the EV1--but nothing that has significantly dented the consumer consciousness.

In fact, some analysts argue that Hughes was an expensive diversion for GM that contributed to the auto maker’s near demise in the early 1990s. Instead of updating its product line, GM wasted resources and management on Hughes.

“It caused GM management to lose sight of its core auto business and they are just now recovering from that,” said Bear Stearns & Co. analyst Nicholas Lobaccaro.

Still, Hughes turned out to be a good investment. The anticipated sale of the Hughes defense operations to either Raytheon or Northrop Grumman is expected to fetch about $10 billion. That would nearly double GM’s initial investment and still leave it with ownership of Hughes’ rapidly growing space and telecommunications business that is worth another $5 billion to $10 billion.

“Hughes was bought for the wrong reason but turned out to be a great investment,” said Maryann Keller, an analyst with Furman Selz. “Sometimes it pays to be lucky rather than smart.”

At a news conference with reporters in Detroit on Wednesday, Hughes Chairman C. Michael Armstrong said initial expectations that the aerospace operation would quickly transform GM’s auto business were unrealistic. The main reason: The process of transferring technology is long and laborious.

Armstrong refused to discuss the possible sale of Hughes Aircraft but said the defense industry must continue to consolidate to reduce excess capacity and lower costs. “Hughes must participate in that consolidation,” Armstrong said Wednesday after a speech on trade at the Detroit Economic Club.

Hughes was acquired when GM was flush with cash and decided--as did its Big Three rivals--that the time was right to diversify away from the mature auto industry. GM, Ford and Chrysler all went on a buying binge, absorbing financial services, car rental and high-tech firms.

One of the apparently promising areas for growth was aerospace and defense, which was reaping the benefits of a Cold War military buildup under the Reagan administration.

As it turned out, GM bought Hughes at the peak of the defense buildup and Pentagon budgets dropped sharply for the next decade.

Moreover, GM’s stewardship of the aerospace company also raises some questions. When GM acquired Hughes, it was considered a national resource for defense technology, but today that leadership has slipped.

The two firms battling to devour Hughes--Raytheon and Northrop--were far smaller and less well regarded than Hughes in 1985. Hughes defense operations have taken some key contract losses, particularly in the optical and radar fields.

But in 1985, Smith touted the potential synergies, telling colleagues that “getting Hughes was like getting Caltech and MIT combined.” He rhapsodized about cars equipped like jet fighters with night vision and radar crash-avoidance and global satellite navigation systems. He was enamored with Hughes’ systems engineering, seeing it as a way to create new forms of efficient manufacturing and management that would leave the Japanese in the dust.

Not everyone bought the hype. Ross Perot, who became a GM director after selling EDS, saw the Hughes buyout as a major mistake that would do nothing to make GM a more competitive auto maker. “I do not believe that GM can become world-class and cost-competitive by throwing technology and money at its problem,” Perot told Smith in a letter.

At the time, GM’s profit per vehicle lagged competitors and its quality was far below that of the Japanese. Yet as a defense contractor, Hughes had little concern for cost containment and also had quality problems of its own.

After the deal was completed, GM and Hughes managers pulled out all the stops to prove that Hughes technology had practical applications to new cars and trucks. “They were ordered to cross-fertilize everything in sight,” said David Healey, analyst for Burnham Securities.

It is difficult for analysts to fully assess the GM-Hughes marriage because Delco Electronics, GM’s auto electronics unit, was moved under the Hughes umbrella. Hughes contributed more than $7 billion in profits to GM’s bottom line since 1985, but much of it came from the Delco.

Of course, a good deal of Hughes technology was utilized by GM. But analysts and Hughes insiders say there are no products, components or systems developed that GM couldn’t have obtained from outside suppliers and for less money.

“They could have bought all the technology they got from Hughes from outside suppliers for $100 million to $200 million,” said a former top Hughes executive assigned to the technology transfer program.

As early as 1990, Hughes boasted in its annual report that it had 150 technology transfer projects underway with Delco. But few of those projects have led to consumer products.

“There has been no such earth-shattering breakthroughs on the commercial side,” says Delco spokesman Milton Beach.

One of the first components was a “head-up” instrument display offered as an option on the Pontiac Grand Prix and Bonneville. Used on jet fighters, the head-up display projects key data, such as the speedometer and turn signals, into the driver’s field of vision through the windshield. Pontiac sold about 10,000 cars last year with the head-up display as a $250 option.

Hughes also helped develop a navigation system that GM sells in auto parts stores. The system uses global positioning satellite technology to allow drivers to identify their location and get directions to a destination.

Armstrong said Wednesday that Delco is working with Hughes on three auto projects using radar technology developed for the F-15 fighter. One is for an adaptive cruise control system that automatically slows a car if it comes into traffic. A second is a blind-spot radar system that can detect objects on a vehicle’s side. Another is a rear-bumper radar system that can detect objects within 20 feet of the car’s back end. All these systems are being tested and it is uncertain when or if they will be commercialized, Armstrong said.

Hughes also has been deeply involved in the EV1, GM’s two-seat electric-powered vehicle that went on sale in California in December. The company developed an inductive charging system used to recharge the lead-acid battery and the electronic controller that directs the flow of energy between the battery, motor and other components.

In another area, Hughes transplanted process technologies to GM assembly plants, company executives said. For instance, GM set up a systems engineering center to utilize Hughes technology in vehicle design and development.

There were hundreds of small technical problems that Hughes also worked on. It helped GM improve its auto painting processes, make fuel emissions control advances and solve lubrication and heat problems.

“There is a lot,” said Hughes spokeswoman Marcy Garber. “But a lot of our information is proprietary and is not made public.”