April 2, 2020 | International, Naval
By PAUL MCLEARY
WASHINGTON: The Navy is rushing to award several major shipbuilding contracts several months early to keep shipbuilders on the job and save smaller suppliers in danger of going out of business amid the wider manufacturing halt cause by the coronavirus crisis.
The biggest is a contract to build the next San Antonio-class amphibious transport dock ship, (LPD 31) which serves as a jumping-off point for Marines heading ashore.
The push to accelerate work is part of a wide-ranging effort to buttress the shipbuilding industry and the thousands of small suppliers that make parts for the Navy. The Navy's top acquisition official, James Geurts, told reporters Wednesday morning the Navy is worried about the effect the state and local shutdowns could have on its shipbuilding and repair efforts. “It's a national emergency and this is critical national infrastructure,” so the issue is, “how do we orient quickly to get at this aggressively and try not to be reactive in nature.”
Ingalls Shipbuilding in Mississippi is currently building the USS Richard M. McCool (LPD 29) and Harrisburg (LPD 30), and would be in line to start work on the next ship in the class. The Navy is also pushing to move forward the award for a landing craft program that was slated to kick off later this year. Funding for the new LPD was approved in the 2020 NDAA defense policy bill which authorized $525 million for the LPD Flight II program.
Any breaks in the build and repair schedule would throw the Navy's planned deployments out of whack but also could be devastating to the thousands of small businesses across the country that literally provide the nuts and bolts that make the complex machinery that powers the fleet.
“Nobody right now is in the position to float gaps,” Geurts said. His staff has done a detailed analysis of the Navy's industrial base. They are looking for ways to help the smaller companies not only through moving forward orders, but also finding money for research and development that would help small, innovative companies.
“I hear stories of second-, third- and fourth-tier suppliers that were worried about going out of business, worried about how they would keep paying their salaries, and our ability to move and accelerate work into the defense base and then have that be pushed out to the suppliers is absolutely critical, because if they're not there it won't matter when we're ready to recover,” Geurts said.
Geurts is gathering all of the large shipbuilders and shipyard owners several times a week to check on the status of the workforce and what problems they see coming if the current crisis continues.
At the center of these worries is the nation's largest shipbuilder, Huntington Ingalls, which is the only company that builds both Nimitz and Ford-class aircraft carriers, in addition to sharing work on Virginia-class submarines with Electric Boat.
The company has taken steps to attempt to apply social distancing at its shipyards, and has staggered shifts to accommodate workers who might now need to work different hours, company officials say.
In an interview earlier this week, several Huntington executives told me they've reached out to over 2,000 suppliers in 48 of the 50 US states, and are working to speed up and push contracts as far down the supply chain as possible to keep these small businesses running.
“We're gonna have to brave the storm together and especially some of the smaller suppliers,” said Lucas Hicks, vice president of new construction aircraft carrier programs.
“We need their products today, but we also need them in 90 days, so we want to help them brave the storm,” he added. “We've actually changed some payment terms on some of our supplier contracts to try to make sure that we can front them what they need to stay afloat. We're doing some creative stuff to try and help them be able to weather the storm.”
The company hasn't seen any reduction in parts received yet, but acknowledges that the situation changes on a daily basis, as different parts of the country feel the pain of local shutdowns in different ways.
Lucas said Huntington does not anticipate it will stop work, but is allowing employees the option of working from home and providing liberal leave to others.
Eventually all of this “will have an impact,” especially if the shutdowns are prolonged. “At some point, if it extends for months and months at the rate we're on, it would have an impact but it's too early to tell.”
Geurts appears to see things the same way. The crisis and its downstream effects is “going to have both a time dimension and geography dimension, and so it will remain a fluid situation,” when it comes to how much the defense industry, and the navy, are affected, Geurts said.
https://breakingdefense.com/2020/04/navy-rushes-shipbuilding-deals-to-keep-yards-going-in-panddemic
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August 19, 2020 | International, Aerospace, Naval, Land, C4ISR, Security
By: Doug Berenson and Chris Higgins This year's Defense News Top 100 list of global defense companies coincides with a steep economic downturn created by COVID-19. Although the defense sector has faced pandemic-related business disruptions, it remains a safe haven, with most defense-oriented firms reporting only modest impact on revenues and profits. Seeing how diversified players rely on their defense units is of particular interest at a time when the commercial aviation market has all but collapsed. While many defense firms are bracing for stagnation in defense-spending growth, other markets could experience an extended downturn. Avascent drew on the Top 100 list to examine the broader mix of market exposure among firms comprising the global defense industrial base. We segmented company revenues across more than two dozen defense and commercial end markets. This analysis provides insight into how companies with defense business leverage exposure to other markets, either as a complement or as a hedge to their defense activities. One can think of defense companies in three categories: Defense/government pure-plays: Companies that focus overwhelmingly on military markets generate about 23 percent of the defense-oriented revenue on this year's list. To the extent these companies have revenue outside defense, it comes from close adjacencies in intelligence, civil space or others. Indeed, the top ranks of the Defense News Top 100 list includes numerous firms for whom defense and government comprise 85 percent or more of total revenue. Lockheed Martin, Northrop Grumman, BAE Systems, LIG Nex1, and Huntington Ingalls Industries and many others fall in this category. BAE Systems and L3Harris maintain significant positions in the commercial aviation supply chain, but these activities represent a small portion of their total revenues. The unique demands of military and government markets — complex acquisition processes, challenging sales channels, burdensome regulatory compliance — has led many leading defense players to maximize their position across the defense product range. These frustratingly unique features of government customers have deterred many commercial technology firms from pursuing this space, a fact that the U.S. Department of Defense is struggling to reverse. Firms in this category have optimized their financial management, business development and other processes to the particular demands of government customers. Within government markets, the different economics that characterize the sale of products and services has increasingly led to the separation between these two distinct segments. Many of the market leaders in U.S. government services, including Leidos, Booz Allen Hamilton, CACI International, SAIC and others, feature a near-exclusive focus on government customers. A range of firms providing such services continue to find business with both the government and commercial clients, to be sure, including Bechtel, Jacobs, Babcock International and KBR, to list just a few on this year's Top 100 list. But companies with a significant focus on mission-oriented requirements have increasingly focused solely on government customers. Commercial and defense sectors: Nearly 60 percent of the defense revenue tracked in the Top 100 list comes from firms that compete in sectors that cross the defense-commercial divide. These include shipbuilders and automotive manufacturers, but the vast majority of firms serving both defense and commercial customers are focused on commercial aerospace. A range of firms recognize the unique complementarity between military and commercial aerospace technology in their business mix. Airframe primes like Boeing and Airbus are chief among these, sitting atop vast aerospace supply chains. But many other household names have sought opportunity in commercial aviation, either as airframe primes (General Dynamics via Gulfstream, Textron via Cessna) or as suppliers of avionics, structures, and other content. Because it calculates 2019 revenue, this year's Defense News list does not count Raytheon Technologies, which was created with the merger of Raytheon Company and United Technologies Corp. in April 2020. The new “RTX” would have pro forma 2019 revenue of about $43.4 billion in defense and $33.7 billion in commercial markets; this excludes Otis (elevators) and Carrier (air conditioners), which were spun off concomitant with the Raytheon-UTC merger. Many firms with heavy commercial market exposure now face unprecedented economic headwinds. Between March 1 and Aug. 1, 2020, stock prices for firms spanning defense and commercial aerospace declined by 33 percent, as global air travel nearly ground to a halt amid the coronavirus pandemic. By contrast, an index representing defense/government pure-plays has dropped by just 5 percent over the same period. Conglomerates were in the middle, declining about 16 percent. The silver lining, however, may be the ability of some companies to draw on defense-related cash flows to sustain commercial aerospace investment in preparation for an eventual upturn. Industrial conglomerates: Finally, there are firms with a foot squarely in defense but which also pursue markets far afield, in terms of customer types and market economics. About 18 percent of the defense revenue tracked in the Top 100 list is earned by firms with interests that have almost no technical or customer link with defense. Large Asian conglomerates — including China North Industries Group Corporation Limited, also known as NORINCO; Japan's Mitsubishi Heavy Industries; and South Korea's Hanwha — top this category in total revenue. But several Western firms also follow this approach to varying degrees: Textron, Ball Corporation, Diehl Group and others combine widely disparate product lines in a holding company structure. With defense versus commercial valuations relatively high, there may be competing instincts in the boardrooms of these giants. On one hand, these companies may decide to reorient their portfolio more toward defense activities by exiting underperforming industrial businesses. On the other hand, firms could elect to use defense cashflows to support the broader corporation and position the company for an economic rebound. Trends to monitor While defense budgets could face downward pressure in much of the world, many U.S. contractors have good predictability through 2021 because of DoD outlays already in process. It is the wider commercial economy where the real uncertainty lies. This makes it hard to predict how many firms active in defense markets will fare over the next year, given the variety of other markets they serve. Over half the revenue earned by the Defense News Top 100 is generated from commercial sectors. Commercial aviation markets are likely to languish at pre-2019 levels through 2022 or later. The outlook for other commercial markets is more heterogeneous, but challenges exist across areas like shipbuilding, automotive, industrial equipment and energy. To the extent that countries pursue infrastructure-led stimulus, some of the more diversified companies may find pockets of sunshine amid the gloom. Doug Berenson is a managing director at Avascent, where Chris Higgins is a principal. https://www.defensenews.com/opinion/commentary/2020/08/17/market-exposure-in-the-top-100-defense-commercial-aviation-and-much-more/