Below is an article by The Associated Press about Northrop Grumman’s plans to exit the shipbuilding business. Some of you might recall Bellingham-based Aluminum Chambered Boats had a business partnership with the company in 2006. ACB ceased operations in November.
NEWPORT NEWS, Va. — Just after the closing bell on the New York Stock Exchange on Wednesday afternoon, Northrop Grumman Corp. will officially be out of the shipbuilding business.
That evening following market close, the Los Angeles-based defense contractor will go back to doing what it believes it does best: high-tech systems like electronics, robotic systems and cyber security. Its 10-year experiment with Navy shipbuilding will be over.
Since July, when Northrop first announced it was seeking to exit the capital-intensive and thin-margined business of building military vessels, CEO Wes Bush repeatedly explained that shipbuilding had little synergy with Northrop’s other businesses.
He has said both Northrop and the new stand-alone unit, Huntington Ingalls Industries Inc., will be better off without each other.
Bush is right on all accounts, defense analysts and industry insiders say.
When the giant defense conglomerate bought into the shipbuilding business back in 2001, it was largely by accident, analysts say.
Northrop coveted the advanced electronics business of Litton Industries, which produced navigation, communications and electronic warfare equipment.
But in order to get it, Northrop had to buy the whole company, which included two major shipyards on the Gulf Coast, one in Mississippi and another in Louisiana. The sale closed in early 2001.
Months later, major shipbuilding rival General Dynamics Corp. made a bid for Newport News Shipbuilding, a 20,000-employee giant that serves as the nation’s only builder of nuclear-powered aircraft carriers.
Northrop’s management quickly determined that if the General Dynamics bid was approved, its new shipyards would be at a permanent disadvantage.
So Northrop put in a bid, too. And it won, taking over late that year. In the course of 12 months, Northrop Grumman went from an aerospace company to the biggest shipbuilder in the Western Hemisphere.
“Simply put, they backed into the business, and over the years, they became reluctant owners,” said Loren B. Thompson, an analyst at the Lexington Institute.
That’s not to say Northrop was guilty of wholesale mismanagement. The company made massive reinvestments in its Newport News facilities, ushered the yard through the re-start of its submarine-building program and the design and start of construction on the next generation of nuclear-powered aircraft carrier.
It also reached into new markets, where it leveraged its vast manufacturing and nuclear experience to ink deals with companies like French nuclear firm Areva and Spanish wind-turbine manufacturer Gamesa.
But the shipbuilding unit’s profit margins never impressed, dragged down mostly by problems in the two Gulf Coast shipyards, which were ravaged by Hurricane Katrina and mismanagement prior to the devastating storm that temporarily crippled both facilities.
“We know that Northrop Grumman management is competent; they’ve done very well in aerospace and electronics,” Thompson said. “But for 10 years, they’ve been out of tune with the needs of the shipbuilding sector, and they finally faced up to that fact.”
Thompson and Bob Nugent, a vice president at AMI International, a defense research and strategy consultancy that specializes in the naval industry, said the company managed the Newport News yard well during those years.
The Gulf Coast was another matter. “The reality is, they haven’t invested there as strongly as they could have, and they’ve paid the price,” Nugent said.
With the prolonged problems in the Gulf, it soon became clear that the $6.7 billion-a-year shipbuilding enterprise would be a drag on its bottom line for years to come, a specter that threatened to hurt the company’s earnings indefinitely.
“It’s an old-school business. Shipbuilding is an intensely industrial enterprise, and I’m not quite sure (Northrop) was prepared for that part of it,” Nugent said. “A lot of the reason they’re exiting is for that reason.”
Unlike Northrop’s cash-cow units, shipbuilding is a high-cost, thin-margin, industrial process-driven enterprise that requires a lot of fixed capital and patience, Nugent said.
It’s not highly profitable, and it’s not a growth industry.
Combining those two factors with restless corporate executives in California created a fair amount of friction and frustration, Thompson said.