By Geoff Fein
While the decision by Northrop Grumman [NOC] to consolidate almost all of its Gulf Coast shipbuilding work in Pascagoula, Miss., left a lot of unanswered questions, the company is positive about the shipyard’s future, according to a company official.
“I think this move certainly brightens the future for Pascagoula, no question about that,” Mike Petters, president of Northrop Grumman Shipbuilding, told Defense Daily yesterday.
Moving much of the company’s Gulf Coast shipbuilding efforts to Pascagoula clearly helps Northrop Grumman achieve some of the affordability targets it has set, he added.
Shifting work from Avondale, La., to Pascagoula will enable the company to move forward on a number of programs from the restart of the Navy’s DDG-51-class destroyers to the Coast Guard’s National Security Cutter (NSC), Petters noted. “I see it as a critical step forward in that process.”
While Wes Bush, CEO and president, Northrop Grumman, told investors yesterday there is little synergy between shipbuilding and other sectors within the company, Petters noted there is another issue–how to improve the performance of the shipbuilding industry so that it is on par with the other parts of the aerospace and defense industry.
“That’s what we have been working on for the last couple of years,” Petters said. “Those things that we have been doing, particularly on the Gulf Coast but across the whole sector, really have been aimed at reducing the risk that we have in our programs and improving our performance.”
Looking at the Navy’s future shipbuilding plans, Petters said the company sees a challenge relative to how affordable that plan is and how Northrop Grumman can align itself to be even more affordable to support the ships the Navy wants to buy.
“That’s really what I was testifying to back in March. How do we get ourselves in a place where these ships are more affordable? Because if we are not able to do that, the 313- ship Navy starts to shrink,” he said. “So that led us to an incredibly difficult decision to consolidate our operations on the Gulf Coast into Pascagoula.”
On March 3, Petters testified about the Navy’s shipbuilding acquisition program before the House Armed Services Committee Seapower and Expeditionary Forces Subcommittee.
The Navy said it is too early to assess the impact of the Northrop Grumman’s decision.
“When it comes to the Navy, we are focused on executing the shipbuilding plan,” Cmdr. Victor Chen, a Navy spokesman, told Defense Daily.
The Navy wants to make sure the industrial abase has capacity, remains competitive, is flexible, and can adopt new processes and build the fleet it needs, he added.
“We will evaluate what happens in our ability to affordably execute the shipbuilding plan,” Chen said.
During yesterday’s investor call, Northrop Grumman officials noted the decision to consolidate work would add $210 million to the cost to complete LPD-23 and -25.
As work progressed on both the Anchorage (LPD-23) and Somerset (LPD-25), company officials examined how that work was going to be impacted if the shipyard was going to be shut down, Petters said.
“We tried to account for the disruption that we think will occur, so we made an estimate as to what that would be and that’s how we arrive at that number,” he said of the $210 million charge.
Of that number, $113 million is a charge to earnings and the remainder will be reduced earnings going forward, Petters added.
With the plan now to move all shipbuilding to Pascagoula, one question is whether the shipyard will be able to handle the capacity. If all contracts were to work out, Pascagoula could see work coming its way for the DDG0-51 restart program, a multi-year for the remaining four to five NSCs, LPD-22, -24 and any follow-ons to that program, as well as planned big deck amphibious efforts such as the Multipurpose Amphibious Assault Ships PCU America (LHA-6) and LHA-7, for which the company was recently awarded a $175 million advanced procurement contract.
If all of these things happen, then the overall affordability of the Navy’s programs improves, Petters said.
“The reality is this move we are making is designed to reduce the overall cost of the portfolio of ships,” he said. “The critical factor there is that by consolidating you are able to more effectively and efficiently allocate some of your fixed costs to each of those programs and it would be a reduced cost.”
But the thing about shipbuilding, Petters added, is that when the conversation turns to a program where ships are missing, the cost of all the other ships in the program goes up because of the ships that didn’t get built.
“Shipbuilders are able to capture great efficiency when they can set up and drive for serial production. And when you are not able to do that or you don’t drive for it, you don’t do the things you need to do to capture those efficiencies, costs stay up,” he said. “This is clearly an effort on our part to drive that message home even more. We want to be in serial production across all of our product lines.”