THE VIRGINIAN-PILOT
Copyright (c) 1994, Landmark Communications, Inc.
DATE: Sunday, August 28, 1994 TAG: 9408270193
SECTION: BUSINESS PAGE: D1 EDITION: FINAL
SOURCE: BY CHRISTOPHER DINSMORE, STAFF WRITER
LENGTH: Long : 460 lines
Newport News Shipbuilding got a glimpse of the future on Monday, and quite possibly its salvation.
Representatives of the United Arab Emirates visited the massive Peninsula shipyard Aug. 22 as part of a mission to decide where to build ships for its navy.
Newport News Shipbuilding is one of five finalists - and the only U.S. shipyard - competing for a contract to provide at least four fast frigates for the oil-rich Persian Gulf state.
The sale would help push the shipyard toward its goal of becoming less dependent on the Navy for work. The Peninsula yard's once flush backlog of orders to build warships has thinned in the wake of the country's massive defense drawdown.
Its once huge work force is being pared down. Meanwhile, the shipyard's Texas-based parent, Tenneco Inc., is watching closely to see how the yard adjusts and whether its multimillion-dollar investments to keep the yard competitive will pay off.
Just how the shipyard will survive and prosper is laid out in a five-year plan, ``Toward Newport News Shipbuilding 2000.'' This blueprint for the future weaves together the threads of programs and projects that have developed at the yard in recent years under a common strategy to seize more commercial work.
Newport News Shipbuilding intends to re-enter old markets and find new ones as it looks for work in the post-Cold War world. Even as it tries to protect its nuclear shipbuilding business, the yard wants to develop markets for its fast frigate design and get involved in nonship projects where it can use its nuclear expertise.
The shipyard hopes to cut its reliance on Navy work to a little more than 50 percent of its workload by 1999. That's a far cry from 1989, when Navy contracts accounted for 96 percent of the yard's sales.
``We're not trying to downsize the Navy side of our business,'' said Thomas C. Schievelbein, the yard's vice president of strategy and naval program development. ``We're trying to grow the other sides of the business. We're still trying to get all the Navy work we can.''
To execute its plan, the yard must overcome a corporate culture that has grown accustomed to the rigors, paperwork and specifications of being a defense contractor. It must also become competitive with other shipyards worldwide, many of which operate with the luxury of huge governmental subsidies.
``I personally think Newport News among U.S. shipyards has the best chance to become both a commercial and military shipyard,'' said James R. McCaul, president of IMA AssociatesInc., a Washington-based shipyard consulting firm. ``They've got tremendous assets, both in people and physically.''
The yard may have the potential to integrate commercial and military work, but getting there could prove difficult and painful to workers facing the specter of layoffs or cutbacks in overtime.
This year 94 percent of its revenue is directly or indirectly from the Navy.
Commercial ship work of any kind amounted to just $25 million of the shipyard's $867 million of revenue in the first half of the year.
``There's some difficulty in switching from Navy shipbuilding, which is totally custom shipbuilding, to far simpler series-built commercial ships,'' said a Shipbuilders Council of America spokesperson. ``It's not going to be easy, but that doesn't make it impossible.''
With less work to do, the yard's employment has tumbled to under 21,000 today from a high above 30,000 in 1986. And with even less work on the horizon, the yard has said it will continue to reduce the payroll to about 14,000 by the end of 1996.
The yard's backlog has dropped by nearly half in two years to $3.7 billion at the end of 1993 from $6.6 billion at the end of 1991.
The shipyard's plans presume it wins a contract to build a new aircraft carrier for the Navy, designated CVN-76. The carrier, budgeted at $4.6 billion, would resolve the falling backlog. And oddly enough, it's the linchpin to the yard's plan to become a diversified commercial shipyard again.
``The centerpiece of the strategy is you have to have CVN-76 to do everything else,'' Schievelbein said.
McCaul said, ``If they don't get that aircraft carrier, it's curtains. It will be hard to implement any strategy without the aircraft carrier.''
Indeed, the yard has said it would lose the ability to build carriers if it doesn't win the contract. Sought by the Pentagon, the carrier has overcome most hurdles in Congress and is awaiting final votes in both the House and Senate and President Clinton's signature.
Part of the yard's strategy to protect its core nuclear Navy work includes making sure it gets the job of refueling the carriers it has built since 1961. The Nimitz-class aircraft carriers have a life span of 40 to 50 years, but the fuel in their nuclear reactors need to be replaced halfway through that life, said John E. Shephard Jr., the shipyard's director of strategic planning.
Such refueling is very time-consuming and lucrative. The yard is finishing a four-year, $1.8 billion overhaul and refueling of the Enterprise. The Nimitz is scheduled for overhaul and refueling in a few years.
While no other shipyards in the nation - public or private - are outfitted to do such work, the Navy could shift the work to its Puget Sound Naval Shipyard in Bremerton, Wash., with some retooling, if it wanted to, Shephard said.
To make sure it remains the Navy's yard of choice, Newport News is building a state-of-the-art nuclear refueling facility. Estimated to cost about $20 million, the facility would allow the yard to refuel warships as efficiently as possible.
``Newport News is probably in a pretty good position because they're the only big platform producer, aircraft carriers in other words,'' in the country, said Carol Lessure, analyst with the Defense Budget Project, a Washington-based nonpartisan think tank.
The yard also hopes to get a piece of the only major new Navy shipbuilding project in the works. It wants to build the LPD-17 class of nonnuclear powered amphibious assault ships, which will be awarded later in the decade. The Navy says it plans to build between nine and 12 of the ships.
``The tough thing there is breaking the perception that we're the Navy's nuclear yard,'' Shephard said.
Besides breaking the Navy's perception, the yard must convince the world it is capable of building more than U.S. Navy warships.
Foreign shipyards are nearly two decades ahead of their U.S. competitors in what is known as modern serial shipbuilding. That involves manufacturing ships in a series so such costs as design and engineering are paid for quickly and many parts can be standardized.
Despite being a relative newcomer to the serial shipbuilding, U.S. yards like Newport News Shipbuilding may have the competitive upper hand in some areas, according to the Shipbuilders Council. For example, wage rates and steel costs here are competitive with other major shipbuilding nations, and a weak dollar makes U.S. purchases relatively attractive.
U.S. yards also have the infrastructure to build just about anything. And the federal government recently introduced a program to guarantee long-term loans to buyers of ships built in U.S. yards.
No sooner were the final regulations introduced on that program than Newport News Shipbuilding announced it had a letter of intent to build two 46,000-ton tankers, with an option for two more, for a Greek shipping company.
``There's no reason Newport News can't get into the commercial shipbuilding business in a big way,'' said shipbuilding consultant McCaul.
``It will be a growth market at least for the next five years,'' he said.
Newport News hopes foreign military sales will be too. In addition to courting the United Arab Emirates, the yard is talking to Saudi Arabia, Turkey and several Asian nations about its nonnuclear frigate design. The UAE contract, which may be awarded early next year, could be worth up to $2 billion if it builds four ships and exercises an option for four more.
Newport News Shipbuilding projects that such foreign military sales could account for more than $500 million in annual sales by 1999.
``There's a lot of people chasing that market,'' McCaul said. ``The U.S. has a lot of the best technology, but I find it a less comfortable market. . .
``If I were Newport News, I'd be looking more closely at the commercial market. It's a much, much bigger market.''
International military sales could amount to a couple of ships every few years, while the commercial market could demand hundreds of oil tankers, container vessels and other ships used for commerce, McCaul said.
The yard hopes to get a piece of that. It projects commercial shipbuilding and repair work could contribute more than $500 million a year to its sales by 1999.
The Peninsula yard hopes its ``Double Eagle'' double-hull oil-product tanker design, such as those ordered by the Greek company, will lead its way back into commercial shipbuilding. The yard built tankers as recently as 1979 when it delivered two huge supertankers to Shell Oil. Commercial shipbuilding was a major business for the yard in the 1950s and '60s.
Tanker construction peaked before the oil shocks of the mid-1970s, McCaul said. All those tankers are up for either major overhauls or replacement.
Newport News hopes to be building five or more product tankers a year by 1999. If that works, it hopes to start branching out into the more lucrative liquified natural gas carrier and cruise ship markets, Shephard said.
The shipyard plans to use its experience with nuclear reactors to gain nonshipbuilding work. For example, it's leading a group of companies that submitted a bid to the Department of Energy to design and build universal storage casks for spent nuclear fuel.
While that contract amounts to only about $100 million, there will be a demand for thousands of the casks. Subsequent cask-building contracts could be worth billions of dollars.
``It's important to be on the design team and to build the first casks because it puts you in position to be the efficient provider to build those follow-on casks,'' Schievelbein said.
Such efficiency and low-cost structures are crucial to the shipyard's strategy. It must continue and even accelerate its cost-reduction programs, Shephard said.
Besides cutting payroll, the yard has taken several steps to reduce its overhead, including process re-engineering, paring layers of management, changing its materials purchasing and engaging in strategic partnerships to help it reduce research and development costs, Shephard said.
It has also taken steps to reduce costs associated with inspections, training and, most importantly, product failures that must be corrected. That program has saved nearly $500 million since it was introduced in 1991, Shephard said.
With such programs and continued support from its parent company, Tenneco, in terms of capital investments, Newport News should be able to make its strategy work, analysts say.
The most important thing for successful conversion from defense contracting is money, the Defense Budget Project's Lessure said. After that, Lessure said, it's management.
Tenneco appears to be committed to the shipyard. It's investing $30 million to extend the yard's big dry dock so it can construct a carrier and another ship there at the same time. It's also investing about $20 million for the nuclear refueling facility.
Newport News Shipbuilding has also asked Tenneco to invest roughly $50 million to modernize and automate its steel fabrication shop, which will make it better able to handle the demands of serial production of commercial ships.
So far the Houston-based parent has been willing to make the necessary capital improvements. The steel shop modernization will test its continued resolve. ``Tenneco has been very positive so far,'' Shephard said.
But Tenneco is a very diversified holding company, with interests in natural gas pipelines, farm and construction equipment, and other things. The shipyard accounted for 14 percent of Tenneco's revenues in 1993, $1.86 billion of $13.3 billion, down from 17.2 percent of its 1992 revenues, $2.27 billion of $13.1 billion.
Despite being a declining contributor to sales, the yard generated 19.2 percent of the company's profits last year, $225 million of $1.17 billion.
Tenneco will have to make a decision that commercial shipbuilding will be profitable, McCaul said. ``I think it will be.''
At the moment there is an overabundance of shipbuilding capacity in the world. But there's a bow wave of tanker replacement orders coming in the world market, and Newport News is positioning itself to catch it.
``Shipbuilding within two years could become a scarce commodity,'' McCaul said. ``That's what happens in this market. It goes very quickly from a lot of docks looking for work to a lot of work looking for docks.''
Newport News Shipbuilding got a glimpse of the future on Monday, and quite possibly its salvation.
Representatives of the United Arab Emirates visited the massive Peninsula shipyard Aug. 22 as part of a mission to decide where to build ships for its navy.
Newport News Shipbuilding is one of five finalists - and the only U.S. shipyard - competing for a contract to provide at least four fast frigates for the oil-rich Persian Gulf state.
The sale would help push the shipyard toward its goal of becoming less dependent on the Navy for work. The Peninsula yard's once flush backlog of orders to build warships has thinned in the wake of the country's massive defense drawdown.
Its once huge work force is being pared down. Meanwhile, the shipyard's Texas-based parent, Tenneco Inc., is watching closely to see how the yard adjusts and whether its multimillion-dollar investments to keep the yard competitive will pay off.
Just how the shipyard will survive and prosper is laid out in a five-year plan, ``Toward Newport News Shipbuilding 2000.'' This blueprint for the future weaves together the threads of programs and projects that have developed at the yard in recent years under a common strategy to seize more commercial work.
Newport News Shipbuilding intends to re-enter old markets and find new ones as it looks for work in the post-Cold War world. Even as it tries to protect its nuclear shipbuilding business, the yard wants to develop markets for its fast frigate design and get involved in nonship projects where it can use its nuclear expertise.
The shipyard hopes to cut its reliance on Navy work to a little more than 50 percent of its workload by 1999. That's a far cry from 1989, when Navy contracts accounted for 96 percent of the yard's sales.
``We're not trying to downsize the Navy side of our business,'' said Thomas C. Schievelbein, the yard's vice president of strategy and naval program development. ``We're trying to grow the other sides of the business. We're still trying to get all the Navy work we can.''
To execute its plan, the yard must overcome a corporate culture that has grown accustomed to the rigors, paperwork and specifications of being a defense contractor. It must also become competitive with other shipyards worldwide, many of which operate with the luxury of huge governmental subsidies.
``I personally think Newport News among U.S. shipyards has the best chance to become both a commercial and military shipyard,'' said James R. McCaul, president of IMA AssociatesInc., a Washington-based shipyard consulting firm. ``They've got tremendous assets, both in people and physically.''
The yard may have the potential to integrate commercial and military work, but getting there could prove difficult and painful to workers facing the specter of layoffs or cutbacks in overtime.
This year 94 percent of its revenue is directly or indirectly from the Navy.
Commercial ship work of any kind amounted to just $25 million of the shipyard's $867 million of revenue in the first half of the year.
``There's some difficulty in switching from Navy shipbuilding, which is totally custom shipbuilding, to far simpler series-built commercial ships,'' said a Shipbuilders Council of America spokesperson. ``It's not going to be easy, but that doesn't make it impossible.''
With less work to do, the yard's employment has tumbled to under 21,000 today from a high above 30,000 in 1986. And with even less work on the horizon, the yard has said it will continue to reduce the payroll to about 14,000 by the end of 1996.
The yard's backlog has dropped by nearly half in two years to $3.7 billion at the end of 1993 from $6.6 billion at the end of 1991.
The shipyard's plans presume it wins a contract to build a new aircraft carrier for the Navy, designated CVN-76. The carrier, budgeted at $4.6 billion, would resolve the falling backlog. And oddly enough, it's the linchpin to the yard's plan to become a diversified commercial shipyard again.
``The centerpiece of the strategy is you have to have CVN-76 to do everything else,'' Schievelbein said.
McCaul said, ``If they don't get that aircraft carrier, it's curtains. It will be hard to implement any strategy without the aircraft carrier.''
Indeed, the yard has said it would lose the ability to build carriers if it doesn't win the contract. Sought by the Pentagon, the carrier has overcome most hurdles in Congress and is awaiting final votes in both the House and Senate and President Clinton's signature.
Part of the yard's strategy to protect its core nuclear Navy work includes making sure it gets the job of refueling the carriers it has built since 1961. The Nimitz-class aircraft carriers have a life span of 40 to 50 years, but the fuel in their nuclear reactors need to be replaced halfway through that life, said John E. Shephard Jr., the shipyard's director of strategic planning.
Such refueling is very time-consuming and lucrative. The yard is finishing a four-year, $1.8 billion overhaul and refueling of the Enterprise. The Nimitz is scheduled for overhaul and refueling in a few years.
While no other shipyards in the nation - public or private - are outfitted to do such work, the Navy could shift the work to its Puget Sound Naval Shipyard in Bremerton, Wash., with some retooling, if it wanted to, Shephard said.
To make sure it remains the Navy's yard of choice, Newport News is building a state-of-the-art nuclear refueling facility. Estimated to cost about $20 million, the facility would allow the yard to refuel warships as efficiently as possible.
``Newport News is probably in a pretty good position because they're the only big platform producer, aircraft carriers in other words,'' in the country, said Carol Lessure, analyst with the Defense Budget Project, a Washington-based nonpartisan think tank.
The yard also hopes to get a piece of the only major new Navy shipbuilding project in the works. It wants to build the LPD-17 class of nonnuclear powered amphibious assault ships, which will be awarded later in the decade. The Navy says it plans to build between nine and 12 of the ships.
``The tough thing there is breaking the perception that we're the Navy's nuclear yard,'' Shephard said.
Besides breaking the Navy's perception, the yard must convince the world it is capable of building more than U.S. Navy warships.
Foreign shipyards are nearly two decades ahead of their U.S. competitors in what is known as modern serial shipbuilding. That involves manufacturing ships in a series so such costs as design and engineering are paid for quickly and many parts can be standardized.
Despite being a relative newcomer to the serial shipbuilding, U.S. yards like Newport News Shipbuilding may have the competitive upper hand in some areas, according to the Shipbuilders Council. For example, wage rates and steel costs here are competitive with other major shipbuilding nations, and a weak dollar makes U.S. purchases relatively attractive.
U.S. yards also have the infrastructure to build just about anything. And the federal government recently introduced a program to guarantee long-term loans to buyers of ships built in U.S. yards.
No sooner were the final regulations introduced on that program than Newport News Shipbuilding announced it had a letter of intent to build two 46,000-ton tankers, with an option for two more, for a Greek shipping company.
``There's no reason Newport News can't get into the commercial shipbuilding business in a big way,'' said shipbuilding consultant McCaul.
``It will be a growth market at least for the next five years,'' he said.
Newport News hopes foreign military sales will be too. In addition to courting the United Arab Emirates, the yard is talking to Saudi Arabia, Turkey and several Asian nations about its nonnuclear frigate design. The UAE contract, which may be awarded early next year, could be worth up to $2 billion if it builds four ships and exercises an option for four more.
Newport News Shipbuilding projects that such foreign military sales could account for more than $500 million in annual sales by 1999.
``There's a lot of people chasing that market,'' McCaul said. ``The U.S. has a lot of the best technology, but I find it a less comfortable market. . .
``If I were Newport News, I'd be looking more closely at the commercial market. It's a much, much bigger market.''
International military sales could amount to a couple of ships every few years, while the commercial market could demand hundreds of oil tankers, container vessels and other ships used for commerce, McCaul said.
The yard hopes to get a piece of that. It projects commercial shipbuilding and repair work could contribute more than $500 million a year to its sales by 1999.
The Peninsula yard hopes its ``Double Eagle'' double-hull oil-product tanker design, such as those ordered by the Greek company, will lead its way back into commercial shipbuilding. The yard built tankers as recently as 1979 when it delivered two huge supertankers to Shell Oil. Commercial shipbuilding was a major business for the yard in the 1950s and '60s.
Tanker construction peaked before the oil shocks of the mid-1970s, McCaul said. All those tankers are up for either major overhauls or replacement.
Newport News hopes to be building five or more product tankers a year by 1999. If that works, it hopes to start branching out into the more lucrative liquified natural gas carrier and cruise ship markets, Shephard said.
The shipyard plans to use its experience with nuclear reactors to gain nonshipbuilding work. For example, it's leading a group of companies that submitted a bid to the Department of Energy to design and build universal storage casks for spent nuclear fuel.
While that contract amounts to only about $100 million, there will be a demand for thousands of the casks. Subsequent cask-building contracts could be worth billions of dollars.
``It's important to be on the design team and to build the first casks because it puts you in position to be the efficient provider to build those follow-on casks,'' Schievelbein said.
Such efficiency and low-cost structures are crucial to the shipyard's strategy. It must continue and even accelerate its cost-reduction programs, Shephard said.
Besides cutting payroll, the yard has taken several steps to reduce its overhead, including process re-engineering, paring layers of management, changing its materials purchasing and engaging in strategic partnerships to help it reduce research and development costs, Shephard said.
It has also taken steps to reduce costs associated with inspections, training and, most importantly, product failures that must be corrected. That program has saved nearly $500 million since it was introduced in 1991, Shephard said.
With such programs and continued support from its parent company, Tenneco, in terms of capital investments, Newport News should be able to make its strategy work, analysts say.
The most important thing for successful conversion from defense contracting is money, the Defense Budget Project's Lessure said. After that, Lessure said, it's management.
Tenneco appears to be committed to the shipyard. It's investing $30 million to extend the yard's big dry dock so it can construct a carrier and another ship there at the same time. It's also investing about $20 million for the nuclear refueling facility.
Newport News Shipbuilding has also asked Tenneco to invest roughly $50 million to modernize and automate its steel fabrication shop, which will make it better able to handle the demands of serial production of commercial ships.
So far the Houston-based parent has been willing to make the necessary capital improvements. The steel shop modernization will test its continued resolve. ``Tenneco has been very positive so far,'' Shephard said.
But Tenneco is a very diversified holding company, with interests in natural gas pipelines, farm and construction equipment, and other things. The shipyard accounted for 14 percent of Tenneco's revenues in 1993, $1.86 billion of $13.3 billion, down from 17.2 percent of its 1992 revenues, $2.27 billion of $13.1 billion.
Despite being a declining contributor to sales, the yard generated 19.2 percent of the company's profits last year, $225 million of $1.17 billion.
Tenneco will have to make a decision that commercial shipbuilding will be profitable, McCaul said. ``I think it will be.''
At the moment there is an overabundance of shipbuilding capacity in the world. But there's a bow wave of tanker replacement orders coming in the world market, and Newport News is positioning itself to catch it.
``Shipbuilding within two years could become a scarce commodity,'' McCaul said. ``That's what happens in this market. It goes very quickly from a lot of docks looking for work to a lot of work looking for docks.'' ILLUSTRATION: Staff color file photo
Graphics
STAFF
NEWPORT NEWS' DRIVE TO DIVERSITY
SOURCE: Newport News Shipbuilding
[For complete graphic, please see microfilm]
NEWPORT NEWS SHIPBUILDING'S WISH LIST
The top 10 markets and projects that the Newport News shipyard
wants to be involved in as part of its strategy to find new areas
for growth in the next five years.
1. Carrier overhaul and refueling - remain the shipyard of choice
for refueling and overhauling Navy aircraft carriers.
2. FF-21 - the shipyard's fast-frigate design that it hopes to
sell to foreign militaries.
3. LPD-17 - a new class of amphibious assault ships, the only
major new Navy shipbuilding contract that has yet to be ordered.
4. Incremental Maintenance Program - make sure it gets a share
of the Navy's planned switch from infrequent complex overhauls of
aircraft carriers to more frequent shorter overhauls.
5. Product tankers - get in on the coming boom of new tanker
building to replace the world's aging fleet by selling its ``Double
Eagle'' double-hull tanker to commercial buyers.
6. Conversions - get involved in an emerging market for cruise
ship overhauls and construction that is required by new
international marine safety standards, as well as convert
single-hull ships to double-hull and convert old Navy ships to new
uses.
7. Idaho reactor - help defuel the Navy's prototype reactor at
the Idaho National Engineering Laboratory.
8. DOE projects - take advantage of the yard's nuclear expertise
to get involved in Department of Energy projects to defuel,
decontaminate and handle fuel from commercial reactors.
9. Electric drive - the shipyard is developing an efficient
advanced electric drive propulsion system that could have both
military and commercial applications.
10. Industrial products - market the yard's steel working
capability and other manufacturing resources.
by CNB