Simulation of Northrop Grumman’s Unmanned Combat Aerial Rotorcraft in combat. The UAV is targeted for production in 2012. The system technology for this and other Northrop UAVs is developed in San Diego.

On a visit to Northrop Grumman Corp. operations in San Diego, Chairman, CEO and President Ronald D. Sugar offers an example of how the company has responded to the influx of Department of Defense dollars into the region. When Northrop first entered the market here in 1999 with the purchase of Ryan Aeronautical, he says, that company employed a little more than 300 workers. Last year, Northrop’s employee ranks swelled to 4,300 and by the end of the 2005 will grow to an estimated 5,000.

“So we’re hiring,” says Sugar. “And we’re hiring highly skilled workers — primarily engineers — for high-paying jobs. These employees will be a crucial part of the effort to transform our nation’s military.”

Northrop Grumman’s experience is typical of San Diego’s largest defense contractors and reflects the prevailing view that the region’s defense industry is poised for another strong year of growth.

“The ongoing conflicts in Afghanistan and Iraq, while bad for the locally based 130,000 active duty military personnel, are good for the local defense industry companies,” says Mitch Mitchell, vice president of public policy for the San Diego Regional Chamber of Commerce. “The defense budget includes $72.7 billion for procurements and $61.8 billion for research and development contracts. We anticipate greater defense spending in the region because of the continuing evolution of the Defense Department into a 21st century fighting force focusing on unconventional warfare.”

Alicia Graham, research analyst for the chamber’s Economic Research Bureau, says federal spending, despite its effects on the U.S. deficit, is beneficial to San Diego’s economy. Total defense revenues here skyrocketed 21.7 percent in 2002, she says. In fiscal 2003 (the latest figures available), those revenues increased an additional 5 percent to $13.4 billion.

Dollars flowing into the region for homeland security projects are estimated at $37 million by the San Diego Chamber from an analysis of contracts of the Department of Homeland Security.

Defense-related activities represent San Diego’s second largest industry behind manufacturing and accounts for 10.1 percent of the Gross Regional Product. The Economic Research Bureau says San Diego’s military payroll continues to rank as the highest in the country, totaling $4.8 billion in fiscal 2003, a direct result of deploying the largest number of troops in the country who earn higher combat pay. That’s a 13 percent or $555 million increase from fiscal 2002. By comparison, Norfolk’s military payroll is the second highest in the nation at $2.8 billion, an increase of 11.8 percent over 2002. San Diego’s active duty military has swelled to 113,000, up from 108,000 in 2002.

Since 2002, the number of civilian and military workers supported by defense dollars spent in San Diego grew by 76,132 — from 1,456,036 to 1,532,168.

Northrop Grumman works with more than 100 supply companies in San Diego and in 2003 issued purchase orders worth more than $465 million with those companies, says John Pettitt, the company’s corporate lead executive in San Diego. (photo/lambertphoto.com)

In fiscal 2003, local employers were awarded $4.7 billion in defense procurement contracts — fifth highest in the nation and a 3 percent increase from fiscal 2002 — according to the Economic Research Bureau. Science Applications International Corp., the behemoth information technology company built by J. Robert Beyster, earned more dollars than anyone else — $928.2 million. Graham estimates that defense contracts to San Diego companies will reach $8.2 billion in fiscal 2004.

John Pettitt, corporate lead executive in San Diego for Los Angeles-based Northrop Grumman, says his company’s growth here matches the country’s need for more and better security at home and defenses abroad. The company has a $60 million payroll and works with more than 100 supplier companies in San Diego. In 2003, it issued purchase orders worth more than $465 million with those firms. No production work is done in San Diego, but employees support a variety of systems including unmanned aerial vehicles such as the Global Hawk and Hunter, radio systems for the F-35 Joint Strike Fighter, and command, control and communications for the Army, Air Force and the Space and Naval Warfare Systems Center San Diego. The company also performs repair and maintenance work on aircraft carriers and wide-deck amphibious ships and provides the 911 emergency dispatch system for San Diego city and county.

Northrop Grumman is constructing a 200,000-square-foot building in Kearny Mesa that will open in the spring to provide more space for engineers and office workers, and recently broke ground on a new test facility in Rancho Bernardo in support of the Joint Strike Fighter that will be used by the Air Force, Navy, Marines and Royal Air Force. “Our business in San Diego looks very promising,” says Pettitt.

General Atomics, a privately held company that began in San Diego in 1955, is another major player in the region’s defense economy. Spokesman Doug Fouquet says total employment grew to more than 2,400 in December, an increase of 900 over the past five years, and more increases are expected in 2005.

General Atomics Aeronautical System’s Mariner Demonstrator completes a flight exercise off the coast of San Diego in May for the Navy’s Broad Area Maritime Surveillance unmanned aerial vehicle program.

General Atomics Aeronautical Systems is best known for its manufacture of the Predator UAV. “More than 84 percent of the total hours flown by the Predator unmanned aerial vehicles for the year were spent in combat,” says Fouquet. The company’s Mariner Demonstrator, a UAV built for homeland security, was tested off the coast of San Diego and Alaska last year.

In 2005, says Fouquet, General Atomics will move ahead with development of the Warrior UAV for the Army. The company also developed the Lynx radar system that has been in use by Army UAVs in Iraq since April. In May, the company was awarded a five-year, $145 million Navy contract to build an electromagnetic aircraft launch system for future aircraft carriers.

“2005 will continue to be a robust year,” says W. Erik Bruvold, vice president for public policy for the San Diego Regional Economic Development Corp. “The Department of Defense is likely to continue to invest in areas where San Diego contractors have strength. The Department of Defense continues to invest in platforms and technologies that rely on information technology, remote sensing, high-tech computing designed to create a smaller, more flexible, more intelligent force structure. San Diego companies are well positioned to provide those kinds of solutions.”

SAIC, which employs between 4,500 and 5,000 people in San Diego and generates about 81 percent of its worldwide business through federal contracts, is at the forefront in developing the applications and systems described by Bruvold, particularly in the area of homeland security.

W. Erik Bruvold, vice president for public policy at the San Diego Regional Economic Development Corp., says the Department of Defense will continue to invest in San Diego’s defense industry in 2005.

“SAIC was doing homeland security before it had a name,” says Ben Haddad, senior vice president of communications for the company. Before 9/11, the company’s VACIS system was used to inspect the contents of trucks, containers and cargo at U.S. borders for illegal contraband. Today it has a broader application in the war on terror and, says Haddad, is just one of many efforts being made in the field by SAIC and companies like Cubic Corp., Titan and others.

If San Diego’s defense economy has a soft spot, it is the uncertainty surrounding the next round of Base Realignment and Closure in 2005, the Pentagon’s process to streamline the nation’s defenses through the closure or consolidation of military installations. Previous BRAC initiatives removed the Naval Training Center but installed the Space and Naval Warfare Systems Command in San Diego.

The EDC has identified and aims to defend a number of military installations “at risk,” among them SPAWAR, the Marine Corps Recruit Depot, Naval Station San Diego and Marine Corps Air Station Miramar. Bruvold is optimistic about San Diego’s ability to weather this latest round, which will culminate in the fall when the president and Congress are presented with final Department of Defense recommendations. “Our chances are good,” says Bruvold. “San Diego benefits from a number of important trends in the Department of Defense. One is that there is an interest in synergies and coordinated activities between the various service branches and San Diego has a high concentration of these — ships, submarines, Marine and naval assets.”

The Chamber’s Mitchell shares that view but says a lot is at stake. “The BRAC hearings can have a tremendous impact on San Diego,” he says. “We could lose parts of our military complex that are essential to national security as well as our regional economy. Losses of any of the components means job reductions — we have thousands of civilian jobs tied to our military industry.”

On the other hand, says Mitchell, San Diego is positioned to receive military components from other areas in and out of California. “If the Department of Defense wishes to move an operation from Texas or Florida to San Diego, we have the ability to accept them within our infrastructure.”

Mitchell says San Diego is better prepared for BRAC this time. “We have done a tremendous job in assessing our military infrastructure and looking at where we may be vulnerable and planning the defense of our military infrastructure accordingly.”