How Westinghouse Lost its Way

A Cautionary Tale for America's Defense Industrial Base

BLUF (Bottom Line Up Front)

Westinghouse Electric's collapse from industrial titan to bankruptcy represents a critical case study in defense industrial base fragility. Founded in 1886, the company pioneered naval nuclear propulsion systems that revolutionized submarine warfare, yet ultimately failed due to strategic missteps, diversification away from core competencies, financial mismanagement, and volatile government contracting policies. Paradoxically, government Independent Research and Development (IR&D) cost recovery mechanisms—designed to subsidize contractor innovation—may have created perverse incentives that accelerated the company's decline by making defense contracts financially attractive even as they distracted from core commercial competencies. The company's dissolution eliminated a key competitor in naval reactor design, leaving the United States increasingly dependent on a single prime contractor model that persists today—with profound implications for naval fleet readiness and industrial capacity.

Engineering Excellence and Naval Innovation

George Westinghouse founded Westinghouse Electric Company in 1886, building on his earlier success with the railway air brake—a safety innovation that transformed railroad operations. The company's early focus on alternating current systems positioned it as General Electric's primary competitor in electrifying America, culminating in the famous "War of the Currents" and a 1896 patent-sharing agreement that established both firms as industry oligopolists.

The company's trajectory shifted dramatically during World War II and the early Cold War. Westinghouse's wartime research in microwave electronics yielded lucrative radar contracts for the military. More significantly, the company's central research laboratory—established in 1935—conducted pioneering work in nuclear physics. The Westinghouse Atom Smasher, unveiled in 1937, contributed to early understanding of photofission processes that would prove critical to nuclear energy development.

The Naval Reactor Revolution

Westinghouse's most enduring defense contribution emerged from its partnership with Admiral Hyman Rickover's Naval Reactors program. The company developed pressurized water reactor (PWR) technology for submarine propulsion, beginning with USS Nautilus (SSN-571), commissioned in 1954 as the world's first nuclear-powered submarine. This technological breakthrough fundamentally altered naval warfare by enabling submarines to remain submerged indefinitely, transforming them from submersible torpedo boats into true underwater vessels capable of global operations.

The Westinghouse PWR design proved remarkably successful and became the standard for the U.S. Navy's submarine fleet and later for nuclear-powered aircraft carriers. The S5W reactor plant, developed by Westinghouse for the Skipjack-class submarines in the late 1950s, represented a significant advancement in compact, high-power naval propulsion. According to naval historians, this design philosophy—prioritizing reliability, safety, and operational flexibility—established patterns that continue to influence naval reactor development sixty years later.

Unlike General Electric's competing boiling water reactor design, which saw limited naval application, Westinghouse's PWR technology achieved dominant market position in both military and civilian applications. The company's Bettis Atomic Power Laboratory in Pittsburgh, operated under contract with the Atomic Energy Commission (later the Department of Energy), became the center of naval reactor research and development.

The Postwar Defense Contracting Dilemma and IR&D Subsidies

The immediate postwar period proved turbulent. Westinghouse suffered a $53 million operating loss in 1946 following the abrupt cancellation of approximately $3 billion in defense contracts. However, the Korean War and accelerating Cold War competition drove defense spending to unprecedented levels. Annual revenues surpassed $1 billion for the first time in 1950.

CEO Gwilym Price oriented the company deeper into defense work during the 1950s, pursuing contracts spanning helmet liners, radar systems, jet engines, and nuclear propulsion. This defense expansion occurred within a regulatory framework established by the Armed Services Procurement Regulation (ASPR), first issued in 1948 and fully codified by 1959. A critical component of this framework was Independent Research and Development (IR&D) cost recovery, which allowed contractors to include R&D costs as allowable indirect expenses on government contracts.

The IR&D system, with roots in Treasury Decision 5000 (1940) and the War Department's "Green Book" (1942), represented the government's attempt to encourage private innovation while sharing technological risk. Contractors could pursue R&D projects at their own discretion, then recover these costs through overhead rates on defense contracts. The government gained access to emerging technologies without directly controlling the research agenda, while contractors retained intellectual property rights to innovations funded through their own IR&D budgets but reimbursed through contract overhead.

For Westinghouse, IR&D reimbursement created a complex dynamic. A 1977 study by economists Reppy, Barber, and Dews estimated that IR&D payments represented approximately 20% of reported company-financed R&D in the aircraft industry during 1973. While specific Westinghouse IR&D recovery rates remain difficult to reconstruct, the company's substantial defense contract portfolio during the 1950s-1970s would have supported significant IR&D cost recovery.

This system created potentially perverse incentives. The more defense contracts Westinghouse held, the larger its IR&D cost pool eligible for government reimbursement. Defense work became financially attractive not just for direct contract revenues but also for the overhead recovery mechanisms that subsidized broader corporate R&D efforts. This may have encouraged continued defense diversification even when such work diverted engineering talent from the company's deteriorating commercial turbine business.

Strategic Missteps in the Turbine Business

Yet this strategic emphasis on defense contracts created internal resource conflicts. Defense work drew engineering talent away from the company's traditional steam turbine business at precisely the moment when commercial utilities were demanding larger, more sophisticated power generation equipment.

Westinghouse's resource allocation decisions in the 1950s created cascading failures in its core business. Being roughly half General Electric's size, the shift toward defense contracts starved the turbine division of investment and engineering talent during a critical technological transition period—despite the availability of IR&D cost recovery to partially offset R&D expenses.

Emerging from World War II, both Westinghouse and General Electric produced standardized turbines rated between 25 and 99 megawatts. Beginning around 1950, utilities began demanding larger "reheat-style" turbines that could achieve greater thermodynamic efficiency. General Electric aggressively invested in manufacturing capability, developing larger forge presses and innovative metallurgy to meet these requirements.

Westinghouse recognized this trend dangerously late. One engineering manager testified in subsequent litigation: "Oh golly, that is when the real desires of the power industry became more apparent with respect to demanding turbines of larger capacity, extremely high pressures and high temperatures. And we simply had to put on a crash program to find out the behavior of these materials, so that we could keep our stresses within the bounds of what would be acceptable."

The company's engineering staff reported working Saturdays, Sundays, and occasional night shifts during the Korean War years of 1951-1953. A brutal ten-month labor strike from October 1955 to April 1956 further exacerbated backlog problems. Management responded by expanding production capacity while reducing research and development spending—a decision that left Westinghouse unprepared for the next technological shift.

The IR&D paradox becomes apparent: while Westinghouse could theoretically recover R&D costs through defense contract overhead, the company's management allocated those recovered funds to defense projects and corporate diversification rather than to the turbine metallurgy and thermal engineering research that commercial competitiveness demanded. The IR&D system provided financial resources but no mechanism to ensure those resources flowed to the company's most strategically critical needs.

The Price-Fixing Scandal and Its Aftermath

The Korean War armistice in 1953 created massive overcapacity in electrical equipment manufacturing. Westinghouse, as the second-largest player, initiated price cuts. General Electric initially resisted but eventually capitulated. Following a severe price war in 1955, executives from GE, Westinghouse, and Allis-Chalmers began secretly colluding on equipment pricing, submitting identical bids to utilities.

The conspiracy unraveled in 1959 when the Tennessee Valley Authority—a government-owned utility—awarded contracts to British firm C.A. Parsons at prices 30-40% below American quotes, triggering suspicions. In 1961, the Department of Justice charged 29 companies and 45 executives. Several executives received prison sentences—a rare outcome in antitrust cases of that era.

The scandal devastated industry pricing power and opened American markets to foreign competition. Allis-Chalmers, the third-largest American turbine manufacturer, eventually exited the business. For Westinghouse, the scandal compounded existing technical and competitive disadvantages against General Electric.

Government Policy Volatility and the Great Diversification

Donald Burnham assumed the CEO position in 1963 amid collapsing morale and deteriorating business prospects. Burnham had joined Westinghouse from General Motors a decade earlier, earning the nickname "Mr. Automation" for his manufacturing efficiency improvements.

President Lyndon Johnson's Great Society programs fundamentally altered defense spending patterns. The shift toward domestic social programs reduced defense budgets and changed contract structures. Return on investment for military projects declined from 10.2% in 1958 to just 6.3% in 1964. Westinghouse faced increasing pressure to accept fixed-price contracts for high-risk development projects—a shift that transferred technical and financial risk from the government to contractors.

These changes occurred even as IR&D reimbursement continued to flow through existing defense contracts. The reduced profitability of new defense work made the overhead recovery mechanisms increasingly important to corporate finances, potentially creating incentives to maintain defense contract volumes even as direct margins deteriorated.

Burnham concluded that Westinghouse could no longer compete by simply following General Electric's strategy. In 1966, the company revised its corporate charter—previously restricting operations to electrical systems—to permit entry into any business offering "suitable profits and growth using existing skills and strength reinforced as needed by acquired capabilities."

The subsequent diversification campaign proved disastrous. Between 1966 and 1971, Westinghouse acquired businesses in X-ray equipment, beverage bottling, desalination, education technology, car rentals, mail-order watches, home construction, and ocean engineering. The company partnered with Jacques Cousteau on underwater exploration vehicles and developed computer-managed learning systems for vocational education.

Burnham articulated this strategy through the lens of the company's traditional "Benign Circle" philosophy—the theory that adjacent businesses could stimulate demand for core products. The "All-Electric Home" campaigns of the late 1950s had successfully increased electricity consumption, benefiting turbine sales. Burnham extended this logic to urban development, acquiring home builders and planning entire cities like Coral Springs, Florida.

Defense Contracts, IR&D, and Core Competency Erosion

While pursuing diversification, Westinghouse's technical leadership in its core businesses continued deteriorating. In the mid-1960s, utilities again shifted requirements, now demanding even larger turbines rated between 500 and 1,000 megawatts to provide reserve capacity and prevent blackouts.

General Electric possessed the resources and technical capability to produce these supercritical steam units, which operated at extremely high temperatures and pressures. Westinghouse attempted to scale up existing designs rather than developing new technologies—a shortcut that failed catastrophically. Westinghouse turbines experienced failure rates approximately four times higher than competitors, triggering extensive litigation.

By 1974, nine utility customers had sued Westinghouse for up to $200 million in damages due to turbine defects causing operational breakdowns. The Bay Area Rapid Transit system filed additional claims regarding defective automatic control systems. These lawsuits represented the inevitable consequences of years of deferred research and development spending—spending that, ironically, could have been partially recovered through IR&D mechanisms had management chosen to invest in turbine technology rather than diversification.

The crucial insight is that IR&D reimbursement provided financial resources but no strategic guidance. Westinghouse management had access to government-subsidized R&D funding through overhead recovery, but deployed those resources to defense electronics, nuclear space propulsion, and corporate diversification rather than to the steam turbine metallurgy research that would have preserved competitive advantage in the company's most important commercial market.

Paradoxically, Westinghouse achieved significant success in nuclear reactor design during this period. The company's PWR design for civilian power plants gained substantially greater market adoption than General Electric's boiling water reactors. However, utilities frequently paired Westinghouse reactors with General Electric turbines, limiting the expected synergies between the nuclear and conventional turbine businesses.

The Uranium Debacle

Westinghouse's most catastrophic financial error involved uranium fuel contracts. In the late 1960s, the company sold turnkey nuclear plants to utilities, including uranium fuel at largely fixed prices. Critically, Westinghouse did not produce uranium—it purchased fuel on the spot market for delivery to customers, essentially establishing a massive short position in uranium prices.

Between 1966 and 1973, Westinghouse contracted with 26 utilities worldwide to provide approximately 65 million pounds of uranium over 20 years at roughly $9.50 per pound. The company apparently assumed the Atomic Energy Commission would release government stockpiles to stabilize prices, or simply failed to properly hedge this exposure.

Following the 1973 Arab oil embargo, uranium prices soared to approximately $40 per pound by 1975. Westinghouse faced potential losses of $2 billion—equivalent to total shareholder equity. The company attempted to repudiate these contracts, triggering litigation from utilities. While negotiations and subsequent price fluctuations reduced ultimate losses to approximately $1 billion, the financial damage proved severe.

The Credit Subsidiary Disaster

Throughout the late 1970s and early 1980s, Westinghouse stabilized as a diversified industrial conglomerate. The nuclear energy business stagnated following the Three Mile Island incident in 1979, which effectively froze new reactor orders in the United States. However, the company's military electronics, broadcasting, and other divisions provided steady cash flow.

Westinghouse Credit Corporation, originally established in 1954 to finance consumer appliance purchases, emerged as an unexpected profit center. When Westinghouse sold its appliance division in 1974, the credit subsidiary lost half its customer base. Under John McClester's leadership, the division pivoted to commercial real estate lending, particularly in Texas.

Initial results appeared spectacular. By 1983, Westinghouse Credit reported $50 million in annual profit—far exceeding expectations. The division aggressively expanded nationwide. By 1989, it contributed 17% of total corporate profits, becoming the company's fourth-largest division and Pittsburgh's third-largest financial institution.

McClester and his successor William Powe operated with minimal oversight from Westinghouse Electric's industrial leadership. Incoming Chairman Paul Lego, appointed in 1990 from the industrial side, possessed no financial services expertise. The credit division approved loans exceeding 110% of property values and lacked basic portfolio analytics, including breakdowns of real estate exposure by property type.

The 1990 collapse of Drexel Burnham Lambert precipitated a commercial real estate crisis exacerbated by the Gulf War recession. In February 1991, Westinghouse announced a $975 million fourth-quarter writedown of Credit's assets, producing a $475 million corporate loss. By November 1991, additional writedowns reached $1.75 billion. Total charges ultimately exceeded $5 billion by 1992, devastating the entire corporation.

Lego resisted advice to spin off or sell the troubled subsidiary. After failed negotiations to sell Westinghouse Credit to General Electric, the board terminated Lego in January 1993. His successor, Michael H. Jordan—Westinghouse's first outside CEO—spent the next several years dismantling the industrial conglomerate.

The Final Transformation

Jordan, recruited from PepsiCo's international division, brought no sentimental attachment to Westinghouse's industrial heritage. He laid off thousands of workers and sold the electrical distribution, real estate, office furniture, and defense electronics businesses, raising $5.5 billion to retire debt.

Identifying broadcasting as the company's most profitable segment, Jordan spent approximately $9 billion to acquire CBS television and Infinity Broadcasting. In 1997, he sold the power generation and turbine business to Siemens AG for $1.5 billion—a price widely considered below market value. Thermo King, the refrigeration business, went to Ingersoll-Rand for $2.5 billion.

With these transactions, the industrial entity known as Westinghouse Electric ceased to exist. The corporate shell continued as CBS Corporation, completing the transformation from industrial manufacturer to media company.

Impact on Naval Nuclear Propulsion

The Westinghouse nuclear engineering division followed a complex trajectory. British Nuclear Fuels Limited purchased it in 1998, then sold it to Toshiba in 2006 for $5 billion. Under Toshiba ownership, Westinghouse announced construction of four AP1000 reactors at the Vogtle and V.C. Summer sites—the first new U.S. reactor orders in decades.

Both projects encountered catastrophic delays and cost overruns driven by design deficiencies, supply chain problems, and new regulations implemented after the 2011 Fukushima disaster. The V.C. Summer project was abandoned entirely in 2017. Financial losses forced Westinghouse into bankruptcy that same year, nearly destroying Toshiba in the process.

For naval applications, the consequences proved less immediate but strategically significant. The Naval Nuclear Propulsion Program, jointly managed by the Department of Energy and Department of the Navy, maintained continuity through the Bettis and Knolls Atomic Power Laboratories. However, Westinghouse's commercial collapse eliminated a major institutional repository of nuclear engineering expertise and reduced competitive pressure in naval reactor design.

The Navy's current Columbia-class ballistic missile submarine program and Ford-class aircraft carrier reactors represent evolutionary developments of Westinghouse's original PWR concepts. Yet the industrial base supporting these programs has contracted dramatically. Today, only BWX Technologies and Huntington Ingalls Industries maintain significant naval nuclear component manufacturing capability, supported by a fragile supply chain of specialized subcontractors.

Lessons for Defense Industrial Policy: The IR&D Paradox

Westinghouse's decline illuminates persistent tensions in defense industrial policy, particularly regarding Independent Research and Development cost recovery mechanisms. The IR&D system—designed to encourage contractor innovation by subsidizing R&D through overhead cost recovery—created unintended consequences that may have accelerated Westinghouse's strategic drift.

The company's experience demonstrates how volatile government procurement policies—shifting between cost-plus and fixed-price contracts, alternating between high and low defense spending, and changing technical requirements—destabilize long-term industrial planning. Yet IR&D reimbursement added a subtle distortion: it made defense contracts financially attractive even when direct margins declined, because larger defense contract portfolios supported larger IR&D cost pools eligible for government reimbursement.

A 1989 RAND Corporation study analyzing 300 operating divisions of 100 contractors over seventeen years found that IR&D represented a significant percentage of reported "company-financed" R&D—with estimates reaching 20% in aerospace sectors during the 1970s. For Westinghouse, this meant substantial government subsidies for R&D expenses, yet no mechanism ensured those subsidies flowed to strategically critical commercial technologies.

The Eisenhower administration's massive defense buildup for the Korean War created overcapacity that triggered the price-fixing scandal. The Johnson administration's Great Society pivot away from defense spending forced Westinghouse into increasingly disadvantageous contract terms. The Nixon-era regulatory changes affected nuclear plant economics. Each policy shift disrupted corporate strategy and financial planning, while IR&D cost recovery continued to make defense work financially attractive for reasons disconnected from strategic value.

Moreover, Westinghouse's failure to maintain research and development investment in core technologies—driven partly by defense contract distractions—created technical deficiencies that proved insurmountable. The company's diversification strategy, while partly motivated by declining defense returns, scattered resources and management attention across businesses with minimal strategic coherence. IR&D reimbursement provided financial resources but no strategic discipline.

Harvard Business School professor Alfred Chandler argued that acquisition-driven diversification distracted management from core competencies and diverted capital from essential technological development. The chronology suggests a more complex relationship involving IR&D incentives: Westinghouse diversified because its core turbine business was already declining due to underinvestment during the 1950s defense buildup. Diversification represented an attempt to escape a deteriorating competitive position. But IR&D cost recovery made continued defense involvement financially attractive even as it perpetuated the resource allocation failures that undermined commercial competitiveness.

The fundamental lesson may involve the difficulty of maintaining dual-use industrial capabilities when financial incentives become disconnected from strategic value. Westinghouse's naval reactor success did not translate into sustained commercial nuclear leadership. Its defense electronics expertise did not prevent turbine business failures. And IR&D cost recovery—intended to encourage innovation—instead subsidized strategic drift by making defense contracts valuable primarily as platforms for overhead cost recovery rather than for their direct contributions to corporate capabilities.

Contemporary Implications and the Modern IR&D System

Today's defense industrial base faces similar challenges, now operating under modernized IR&D regulations codified in the Federal Acquisition Regulation (FAR) and Defense Federal Acquisition Regulation Supplement (DFARS). Current rules require major contractors (those allocating over $11 million annually in IR&D costs) to report projects to the Defense Technical Information Center, with reimbursement limited to projects the CEO certifies will "advance the needs of DoD for future technology and advanced capability."

The Department of Defense currently reimburses approximately $4-5 billion annually in contractor IR&D costs. A 2020 Government Accountability Office report found that DoD lacks visibility into how these projects align with departmental modernization priorities, creating risks of duplicated effort or missed opportunities. The fundamental challenge Westinghouse faced—deploying IR&D-subsidized resources to strategically suboptimal uses—persists in modified form.

Consolidation has reduced the submarine industrial base to a single prime contractor (General Dynamics Electric Boat) with one major subcontractor (Huntington Ingalls Newport News). Nuclear component suppliers have contracted to a handful of firms. The Columbia-class submarine program—the Navy's top acquisition priority—depends on this narrow industrial foundation.

Recent Navy and Government Accountability Office reports identify industrial base capacity as the critical constraint on submarine production rates. The loss of competitors like Westinghouse decades ago eliminated the competitive pressure and redundant capacity that might have prevented current bottlenecks.

Westinghouse's collapse also eliminated institutional knowledge and engineering expertise that took decades to develop. While the Naval Reactors program preserved core capabilities through its national laboratories, the broader ecosystem of suppliers, engineers, and manufacturing facilities supporting nuclear propulsion has atrophied. Reconstituting such capabilities would require sustained investment over many years—a challenge for policymakers confronting potential great power competition.

The company's financial engineering disaster—the credit subsidiary debacle—offers additional warnings. When industrial firms pursue financial returns through non-core businesses rather than investing in technological leadership, the results can prove catastrophic. Today's defense contractors increasingly emphasize financial engineering, share buybacks, and diversification into commercial markets rather than research and development in core defense technologies. Modern IR&D regulations attempt to provide oversight, but the Westinghouse experience suggests that financial incentives disconnected from strategic priorities create persistent risks.

SIDEBAR: The Defense-Commercial Divide and Industrial Base Fragility

The Hughes Aircraft Example

During my time at Hughes Aircraft Company in the 1980s, I witnessed firsthand how the regulatory burden of defense contracting creates an almost insurmountable barrier to maintaining dual-use capabilities. This phenomenon—which contributed to Westinghouse's strategic confusion—has only intensified over the decades, creating a defense industrial base that is simultaneously overspecialized and dangerously fragile.

Hughes Aircraft, once Howard Hughes' personal aviation company, had by the 1980s become one of the nation's largest defense electronics contractors and California's largest industrial employer. After the Air Force essentially forced Hughes to remove himself from management in 1953 due to concerns about classified research concentration and his erratic behavior, the company thrived under professional management. Vice President Pat Hyland presided over 25% annual growth through the 1970s and early 1980s, producing everything from TOW and Maverick missiles to radar systems and the world's first synchronous orbit communications satellite.

But Hughes faced the same fundamental problem as Westinghouse: the company needed to navigate simultaneous commercial and defense markets operating under completely different rules. General Motors purchased Hughes Aircraft in 1985 for $5.2 billion, explicitly hoping to transfer Hughes' advanced electronics expertise into automotive applications. This strategy failed almost completely. The regulatory overhead structures required for defense work—Cost Accounting Standards (CAS) compliance, Federal Acquisition Regulation (FAR) Part 31 cost principles, Defense Contract Audit Agency (DCAA) audits, certified cost and pricing data requirements, and elaborate business systems monitoring—created overhead cost structures that made competitive commercial operations nearly impossible.

The Regulatory Burden

The magnitude of this burden cannot be overstated. Defense contractors subject to full CAS coverage (prior to the FY2026 NDAA reforms, contracts over $50 million) must maintain elaborate cost accounting systems that track and allocate every expense according to government-mandated methodologies. The FAR Part 31 cost principles specify which costs are "allowable" and which are not—prohibiting everything from alcoholic beverages (unallowable since 1986) to certain legal fees, entertainment expenses, and compensation above specified thresholds. Contractors must maintain government-approved business systems for accounting, estimating, purchasing, material management, property control, and earned value management. Material weaknesses in any of these systems can trigger payment withholding.

The Truth in Negotiations Act (TINA) requires certified cost or pricing data for contracts above threshold values (previously $2.5 million, raised to $10 million in the FY2026 NDAA), with severe penalties including contract price reduction and False Claims Act liability for inaccurate data. The Defense Contract Audit Agency conducts regular audits scrutinizing contractor cost allocations, IR&D expenses, and compliance with byzantine regulations. A 1979 Office of Federal Procurement Policy study found 877 different sets of procurement regulations comprising 64,600 pages across just 19 agencies—a situation that led to the 1984 creation of the unified Federal Acquisition Regulation, which itself has grown to over 2,000 pages of core regulations plus extensive agency supplements.

The Commercial Competitiveness Problem

This regulatory apparatus creates overhead cost structures incompatible with commercial competition. Commercial companies operate on lean cost accounting systems focused on strategic decision-making rather than government compliance. They invest in innovation and customer responsiveness rather than maintaining parallel accounting systems to track which coffee purchases are allocable to which contract. Commercial pricing responds rapidly to market conditions; defense pricing requires extensive cost buildup documentation and government approval.

For a company like Hughes trying to serve both markets, the result was predictable: defense overhead structures contaminated commercial operations, making the company uncompetitive in consumer and commercial industrial markets. GM discovered it couldn't simply "transfer" Hughes technology into automobiles—the organizational structures, cost systems, and business processes optimized for defense work actively inhibited commercial agility.

The result across the industry has been increasing segregation: companies either commit fully to defense work and accept the regulatory overhead, or they avoid defense contracts entirely. The middle ground—dual-use capabilities that can serve both markets—has largely disappeared.

The Implications for Industrial Surge Capacity

This bifurcation creates severe problems when defense requirements change rapidly. During peacetime drawdowns, pure defense contractors cannot easily diversify into commercial work because their cost structures make them uncompetitive. Their overhead rates, loaded with CAS compliance costs, DCAA audit expenses, and elaborate business systems infrastructure, price them out of commercial markets.

Conversely, when defense budgets surge or conflicts create urgent requirements, commercial companies avoid entering defense work because the compliance infrastructure takes years to establish and represents sunk costs that become liabilities when defense budgets inevitably contract again. The FY2026 NDAA attempts to address this through provisions like Section 1826, which exempts "nontraditional defense contractors" from CAS, FAR Part 31, and business systems requirements. Yet these exemptions apply only to firms that haven't held a CAS-covered contract in the prior year—creating a one-way door where entering the defense market triggers compliance requirements that make commercial work difficult.

The result is an industrial base with minimal surge capacity and little resilience. The submarine industrial base, for example, has contracted to essentially two major shipyards (General Dynamics Electric Boat and Huntington Ingalls Newport News) because the specialized infrastructure, workforce, and regulatory compliance systems required cannot be economically maintained by companies serving commercial maritime markets. When the Columbia-class submarine program requires increased production rates, there is no commercial shipbuilding sector that can rapidly expand into naval work—the regulatory moats are too deep.

The Historical Perspective

This represents a dramatic change from earlier eras. During World War II, automobile manufacturers rapidly converted to tank and aircraft production. Commercial shipyards built Liberty ships and escort carriers. In the Korean War, companies like Westinghouse could shift engineering talent between commercial turbines and defense contracts, even if imperfectly.

Today's regulatory environment makes such flexibility nearly impossible. A commercial satellite manufacturer cannot easily pivot to defense space systems because the two markets operate under incompatible regulatory regimes. A commercial shipyard cannot rapidly expand into naval vessels because CAS compliance, DCAA audit preparedness, and government-approved business systems take years to establish. The specialized knowledge required to navigate defense contracting has become as much a barrier to entry as technical capabilities.

Hughes Aircraft's trajectory illustrates this trap. After GM's acquisition failed to achieve commercial synergies, the company doubled down on defense—acquiring General Dynamics' missile businesses in 1992 for $450 million, including Tomahawk, Standard, Stinger, and Phalanx systems. But this further embedded the company in defense-unique regulatory requirements. By 1997, GM sold Hughes' defense operations to Raytheon, effectively admitting the impossibility of maintaining dual-use capabilities.

A Warning for Industrial Policy

Westinghouse's experience demonstrates how this dynamic contributes to industrial decline. The company pursued defense contracts partly because IR&D cost recovery made them financially attractive. But the regulatory overhead of defense work—the cost accounting systems, the DCAA audits, the business systems compliance—created organizational structures incompatible with the rapid innovation and cost discipline required for commercial turbine competitiveness.

Today's policy discussions often focus on increasing defense budgets or reforming specific regulations. The FY2026 NDAA makes important strides by raising CAS thresholds and creating exemptions for nontraditional contractors. Yet these reforms don't address the fundamental problem: maintaining a healthy defense industrial base may require accepting that defense and commercial work increasingly cannot coexist within the same organizational structures.

This creates a strategic vulnerability. An industrial base composed entirely of pure defense specialists lacks the innovation velocity, cost discipline, and surge capacity that commercial competition provides. Yet the regulatory requirements deemed necessary for government cost control and oversight make dual-use capabilities economically irrational.

Westinghouse discovered this dilemma in the 1960s and made the wrong strategic choice—pursuing defense contracts that provided IR&D cost recovery while starving core commercial capabilities of resources and management attention. Hughes discovered it in the 1980s and eventually split into pure defense (Raytheon) and pure commercial (Boeing satellites, DirecTV) entities. The pattern continues today across the industrial base.

Until policymakers confront the reality that current regulatory structures make dual-use capabilities economically unsustainable, the defense industrial base will remain fragile, overspecialized, and unable to expand rapidly in response to strategic surprises. The lessons from Westinghouse's decline suggest that financial incentives like IR&D cost recovery, absent broader structural reforms, merely subsidize strategic drift rather than sustaining genuine dual-use technological leadership.

SIDEBAR: Two Titans, Parallel Paths to Destruction

The Uncanny Similarities Between GE and Westinghouse

General Electric and Westinghouse Electric Corporation began as fierce competitors in the War of the Currents, became oligopolistic partners through their 1896 patent-sharing agreement, and ultimately followed remarkably similar trajectories to ruin—despite being separated by decades. Their parallel descents offer profound lessons about the fragility of industrial leadership and the dangers of financial engineering displacing core competencies.

Shared Origins, Divergent Timing

Both companies emerged from America's industrial revolution as engineering powerhouses. GE was founded in 1892 from the merger of Thomas Edison's Edison General Electric and the Thomson-Houston Electric Company. Westinghouse Electric began in 1886 under George Westinghouse's leadership. Both pioneered electrical power generation, competed fiercely for utility contracts, and eventually dominated complementary niches—GE in generators and industrial systems, Westinghouse in AC power distribution and turbines.

For most of the 20th century, the two companies maintained an uneasy duopoly in the American electrical equipment industry. When Westinghouse engineers designed a new turbine, GE engineers studied it and developed competing technology. When GE developed radar systems, Westinghouse followed with its own defense electronics division. The 1961 price-fixing scandal implicated both companies in illegal collusion, demonstrating how intertwined their operations had become.

Yet their paths to collapse diverged in timing by roughly three decades. Westinghouse's unraveling accelerated in the 1970s-1990s, culminating in its 1997 transformation into CBS Corporation. GE's collapse unfolded more slowly, reaching crisis in 2008 and continuing through its announced breakup in 2021 and completion in 2024. Despite this temporal separation, the underlying dynamics proved strikingly similar.

The Financial Services Trap

Both companies discovered that financial services could generate profits more easily than manufacturing, and both convinced themselves this represented strategic diversification rather than strategic drift.

Westinghouse Credit Corporation started modestly in 1954 to finance appliance purchases. After Westinghouse sold its appliance division in 1974, the credit subsidiary pivoted to commercial real estate lending. Under John McClester and William Powe, the division operated with minimal oversight from industrial management, approving loans exceeding 110% of property values. By 1989, Westinghouse Credit contributed 17% of total corporate profits—the fourth-largest division. When the commercial real estate market collapsed in 1990, writedowns ultimately exceeded $5 billion, nearly destroying the entire corporation.

GE Capital followed a parallel trajectory on a vastly larger scale. While GE had always maintained equipment financing operations, CEO Jack Welch (1981-2001) massively expanded GE Capital into commercial lending, insurance, and financial services far beyond equipment finance. By 2007, GE Capital's assets reached $631 billion—accounting for more than half of GE's profits and making GE the world's largest non-banking financial institution. Like Westinghouse Credit, GE Capital was used to "manage earnings"—buying or selling liquid financial assets in the final days of each quarter to ensure GE's profits rose with comforting smoothness, exactly meeting Wall Street expectations.

When the 2008 financial crisis struck, GE Capital faced bankruptcy. At the crisis peak, literally no one would lend to GE in overnight markets. Only emergency interventions saved the company: a $3 billion investment from Warren Buffett, a $12 billion injection from private investors, and $139 billion in federal bailout funding. GE Capital was formally designated "too big to fail" and placed under Federal Reserve regulation. The unit continued bleeding for years, taking write-downs on everything from long-term care insurance to subprime mortgages.

In both cases, industrial executives with no financial services expertise allowed subsidiary managers to operate with minimal oversight. In both cases, the financial arms grew to dominate corporate profits. In both cases, management believed the financial engineering represented sustainable diversification rather than reckless speculation. And in both cases, the illusion collapsed catastrophically when credit markets froze.

The Turbine Business: Catastrophically Bad Timing

Both companies made spectacularly mistimed strategic bets on their core turbine businesses that accelerated their declines.

Westinghouse's turbine division—the company's historical foundation—suffered from years of underinvestment during the 1950s defense buildup. When utilities shifted to larger, more sophisticated turbines in the mid-1960s, Westinghouse lacked the R&D capability to compete with GE's supercritical steam technology. Turbine failure rates ran four times higher than competitors. By 1974, nine utilities were suing for $200 million in damages. The company's uranium fuel contracts—essentially an unhedged short position on uranium prices—cost another $1 billion in losses during the 1970s energy crisis.

GE repeated Westinghouse's mistake on a grander scale. In 2014, CEO Jeff Immelt announced the $13.8 billion acquisition of Alstom's power generation business—GE's largest-ever industrial purchase. The deal closed in November 2015, one month before the Paris Climate Agreement accelerated the global shift to renewable energy. Between 2010 and 2016, solar costs dropped 69% while wind costs fell 20%, collapsing demand for the gas turbines that Alstom specialized in producing.

The timing was catastrophic. GE purchased Alstom at peak market valuation just as the bottom was falling out. Analysts estimate GE paid 30-40% above fair value for assets entering secular decline. Gas turbine sales plummeted. The renewable energy transition that GE's leadership failed to anticipate destroyed demand for Alstom's core products. By 2017, the acquisition showed "single-digit returns, disappointing, below expectations" according to CEO John Flannery. In 2018, GE took a $23 billion write-down on its power division—double the cost of the Alstom acquisition.

Both companies doubled down on legacy thermal power technologies precisely when markets were shifting away. Both overpaid for acquisitions intended to cement market dominance in declining industries. Both demonstrated institutional blindness to fundamental technological and market transitions.

The Diversification Mirage

Both companies pursued aggressive diversification strategies that scattered resources across unrelated businesses while core competencies atrophied.

Under CEO Donald Burnham (1963-1975), Westinghouse embarked on what became known as "di-worsification"—acquiring businesses in X-ray equipment, soda bottling, desalination, education technology, car rentals, mail-order watches, home building, and ocean engineering. The company partnered with Jacques Cousteau to build diving saucers, developed computer-managed vocational schools, and planned entire cities in Florida. Burnham believed Westinghouse could "manage anything" and that these ventures represented logical extensions of the "Benign Circle" philosophy.

The strategy failed spectacularly. A French elevator company sold products at prices far below costs because management didn't understand their own cost structure. A mail-order watch distributor (Longines-Wittnauer) collapsed when Japanese competition arrived. Home building operations foundered when Nixon Administration policies changed. By the mid-1970s, Westinghouse was divesting $2.5 billion in acquired businesses while core turbine technology fell further behind GE.

Jack Welch took GE down a parallel path, acquiring companies across health insurance, pharmaceuticals, entertainment (NBC Universal), appliances, plastics, and massive financial services expansion. Welch famously decreed that every GE business must be #1 or #2 in its market or would be sold—yet this philosophy encouraged acquisitions in markets GE didn't understand rather than investing in technological leadership in core competencies.

Welch's successor Jeff Immelt spent approximately $175 billion acquiring over 300 companies, attempting to maintain the acquisition-driven growth model. When that strategy faltered, GE began divesting: NBC Universal, appliances, plastics, financial services. By 2021, GE announced it would break into three separate companies (aerospace, healthcare, energy)—effectively admitting the conglomerate model had failed. By 2024, this breakup was complete, with GE Power spinning off as GE Vernova and General Electric rebranding as GE Aerospace.

Both companies convinced themselves that professional management skills were transferable across unrelated industries. Both believed that diversification reduced risk when it actually scattered resources and management attention. Both discovered too late that conglomerate complexity created systemic vulnerabilities rather than portfolio resilience.

The Cultural Destruction

Both companies developed toxic management cultures that prioritized short-term financial metrics over engineering excellence and long-term competitiveness.

Westinghouse's culture shift began with CEO Gwilym Price's pivot to defense contracts in the 1950s, accelerated under Burnham's diversification campaigns, and culminated in Paul Lego's mismanagement of the credit crisis. Engineering talent migrated from turbine R&D to defense electronics. Management promoted executives skilled at financial deal-making over those who understood thermodynamics and metallurgy. The company that once attracted top MIT engineers became a conglomerate run by generalists with MBAs.

Jack Welch institutionalized this transformation at GE through his "rank and yank" system—requiring managers to rank employees annually and fire the bottom 10%. This "vitality curve" created a culture of fear and short-termism where career survival required delivering quarterly numbers regardless of long-term consequences. Welch laid off over 100,000 workers while championing "shareholder value" above all else. He later admitted, during the 2008 crisis, that "shareholder value is the dumbest idea in the world. Shareholder value is a result, not a strategy."

Both companies discovered that destroying engineering culture is easier than rebuilding it. When GE needed to compete against renewable energy technologies, it lacked the institutional knowledge base that decades of short-term focus had eliminated. When Westinghouse needed to develop next-generation turbines, its best engineers had either retired or moved to defense projects. The technical excellence that built both companies proved far more fragile than executives assumed.

The Accounting Games

Both companies used aggressive accounting to obscure deteriorating fundamentals from investors and maintain stock valuations.

Westinghouse stopped making contributions to employee pension plans in the late 1990s after market gains, booking the avoided costs as current income. The company used earnings management through its various divisions to smooth results. These practices stored up problems for successors—when markets turned, pension obligations became crushing burdens.

GE's accounting proved far more sophisticated. Jack Welch openly acknowledged using GE Capital to "manage earnings"—the financial subsidiary's liquid assets could be bought or sold in the final days of each quarter to hit Wall Street expectations precisely. In 2009, the SEC charged GE with "overly aggressive accounting" and false statements. GE paid $50 million to settle without admitting wrongdoing. The accounting practices made GE's true financial health nearly impossible for outside analysts to assess, creating the illusion of consistent growth while masking systemic problems.

The Succession Failures

Both companies suffered from leadership transitions that exposed accumulated strategic errors.

Westinghouse CEO Donald Burnham retired in 1975, leaving successor Robert Kirby to manage the diversification disaster and uranium crisis. Kirby lasted until the early 1980s. His successors faced the impossible task of managing conglomerate complexity while core businesses declined. Paul Lego fumbled the credit crisis so badly the board fired him in 1993. Michael Jordan, the first outside CEO, essentially liquidated the industrial Westinghouse.

Jack Welch retired in 2001, having delivered spectacular stock returns through accounting aggressiveness, financial engineering, and fortuitous timing at a market peak. His successor Jeff Immelt inherited an unmanageable monster. The 9/11 attacks hit immediately, devastating GE's aircraft engine business. The 2001 stock bust exposed accounting issues. The 2008 financial crisis nearly killed GE Capital. Post-Enron accounting rules eliminated earnings management mechanisms. Immelt lasted 16 years but couldn't fix structural problems decades in the making. His successor John Flannery lasted barely a year before the board replaced him. H. Lawrence Culp Jr., appointed in 2018, presided over GE's final breakup.

Both companies demonstrated that "rock star" CEOs often succeed by mortgaging the future to deliver current returns. Welch left in 2001 at the market peak, his reputation intact. The catastrophic consequences of his strategies didn't become fully apparent until after his departure. Similarly, Burnham's diversification looked brilliant during his tenure—revenues and profits surged. The disasters emerged only after he retired.

The Defense Connection

Both companies' defense work created strategic complications that contributed to decline.

Westinghouse's push into defense contracts during the 1950s-1970s diverted engineering talent from commercial turbine R&D precisely when technological transitions demanded intensive focus. The IR&D cost recovery system made defense work financially attractive even as it scattered resources across low-synergy projects like nuclear space propulsion and experimental reactors.

GE's defense electronics businesses, while less central than Westinghouse's, still created similar distortions. GE Aircraft Engines benefited from military contracts, but defense systems development required different capabilities than commercial aviation. The regulatory overhead of defense work—CAS compliance, DCAA audits, government business systems requirements—created organizational structures incompatible with commercial competitiveness.

The Ultimate Irony: Nuclear Power

Perhaps the greatest irony involves nuclear power technology—an area where both companies achieved technical brilliance yet ultimately faced catastrophic outcomes.

Westinghouse pioneered pressurized water reactor technology for naval propulsion, creating systems that continue to power America's submarine fleet. The company's PWR design dominated civilian nuclear power globally. Yet this technological triumph couldn't save the company. The nuclear division was sold to British Nuclear Fuels in 1998, then to Toshiba in 2006. Under Toshiba ownership, Westinghouse's AP1000 reactor projects in Georgia and South Carolina encountered massive cost overruns and delays, forcing Westinghouse into bankruptcy in 2017 and nearly destroying Toshiba.

GE developed boiling water reactor technology and achieved significant market penetration despite Westinghouse's PWR dominance. GE nuclear plants operated worldwide. Yet in 2017—the same year Westinghouse declared bankruptcy—GE sold portions of its nuclear business to Électricité de France and began winding down operations. In 2022, EDF acquired GE's remaining nuclear assets. Both companies' nuclear technologies proved that engineering excellence alone doesn't guarantee corporate survival.

Contemporary Implications: A Warning Unheeded

The parallel failures of GE and Westinghouse offer stark warnings that contemporary corporate America continues to ignore. Both companies:

Allowed financial engineering to displace manufacturing competence
Pursued short-term stock price appreciation over long-term technological leadership
Destroyed engineering cultures through cost-cutting and "talent management" systems
Made catastrophically timed major acquisitions in declining industries
Used accounting aggressiveness to obscure deteriorating fundamentals
Created conglomerate complexity that became systemic vulnerability

In 2022, David Gelles published The Man Who Broke Capitalism: How Jack Welch Gutted the Heartland and Crushed the Soul of Corporate America. The book argues that Welch's management philosophy—maximizing shareholder value through financial engineering, aggressive cost-cutting, and quarterly focus—became a template widely copied across American industry. Companies from Boeing to Home Depot adopted Welch-trained executives and Welch-style management practices.

The results have been disastrous. Boeing, run by Welch protégé Dave Calhoun, faced catastrophic quality failures with the 737 MAX. Former GE executives spread "rank and yank" systems across corporate America, destroying institutional knowledge while enriching shareholders and executives. The philosophy that nearly destroyed GE has metastasized throughout the economy.

Westinghouse's earlier collapse offered similar warnings that went unheeded. The company's pursuit of defense contracts at the expense of commercial competitiveness, its reliance on financial subsidiaries for earnings, its diversification into unrelated businesses—all these mistakes were evident by the 1980s. Yet GE and others repeated them anyway.

The Final Accounting

In 1892, when GE formed, and in 1896, when it joined the newly created Dow Jones Industrial Average, it represented American industrial might. In 1886, when Westinghouse Electric was founded, it pioneered technologies that electrified the modern world. Together, these companies powered America's rise to industrial supremacy in the 20th century.

Today, Westinghouse Electric no longer exists as an independent industrial entity. Its name survives as a brand on various products, and its nuclear division emerged from bankruptcy under private equity ownership. But the integrated industrial company that George Westinghouse founded is gone.

General Electric completed its breakup in 2024. GE Aerospace (the rebranded parent company) retained aviation. GE HealthCare spun off in 2023. GE Vernova (containing the old GE Power and renewable energy businesses) separated in 2024. The 132-year-old conglomerate that once embodied American industrial excellence has been dismembered.

Both companies proved that even century-old industrial titans with world-class engineering capabilities, dominant market positions, and seemingly unassailable competitive moats can destroy themselves through strategic drift, financial engineering, and management cultures that prioritize short-term metrics over long-term competitiveness.

The questions these parallel failures raise are profound: If GE and Westinghouse—among the most successful and admired corporations in American history—could collapse through management decisions that looked rational at the time, what does this say about the durability of any industrial enterprise? And if contemporary executives learned so little from Westinghouse's earlier collapse that they repeated the same mistakes at GE, what likelihood exists that today's generation will learn from GE's failure?

The defense industrial base implications are particularly sobering. Both companies made critical contributions to American military power—Westinghouse through naval nuclear propulsion, GE through aircraft engines and defense electronics. Both companies' industrial capabilities have now fragmented or disappeared entirely. The lesson appears to be that even defense-critical industrial competencies cannot prevent corporate suicide when management prioritizes financial engineering over manufacturing excellence.

For policymakers concerned about industrial base resilience, the parallel collapses of GE and Westinghouse suggest that the problem runs deeper than specific policies or regulations. These companies destroyed themselves from within, through choices that seemed brilliant at the time but mortgaged long-term competitiveness for short-term financial results. No amount of government subsidy or favorable regulation could save companies determined to engineer their own destruction.

Conclusion

Westinghouse Electric's century-long trajectory from electrical pioneer to media company represents a cautionary tale of strategic drift, financial mismanagement, and the challenges of navigating volatile government policies complicated by well-intentioned but potentially distorting subsidy mechanisms. The company made foundational contributions to naval nuclear propulsion, developing technologies that fundamentally altered maritime warfare and continue to power America's submarine fleet seventy years later.

Yet that same company squandered its competitive position through underinvestment in core technologies, ill-conceived diversification, and catastrophic financial decisions. Government policy volatility—shifting defense priorities, changing contract structures, and regulatory uncertainty—contributed to but did not solely cause this decline. The Independent Research and Development cost recovery system, designed to encourage innovation, may have paradoxically accelerated decline by making defense contracts financially attractive even as they diverted resources from commercial competitiveness. Management failures and strategic misjudgments proved equally significant.

For today's defense industrial base, Westinghouse's collapse serves as a reminder that technological leadership requires sustained investment, strategic focus, and organizational discipline. Financial incentives—including IR&D reimbursement mechanisms—must align with strategic priorities rather than creating perverse incentives for resource misallocation. The consolidation that followed—leaving single prime contractors in critical capabilities—creates efficiency but eliminates the competitive pressure and redundancy that promotes innovation and resilience.

As the United States confronts renewed great power competition and accelerating technological change, the health of the defense industrial base becomes increasingly critical. The lessons from Westinghouse—both its successes in developing revolutionary naval technologies and its failures in sustaining competitive advantage despite access to government R&D subsidies—deserve careful consideration by policymakers, military leaders, and industry executives alike.

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Tuesday, January 20, 2026

The Rise and Fall of Westinghouse Electric: A Lesson for the Defense Industrial Base