Building the behemoths

Return to Virginia Business - May 2001

Cover Story
Hampton Roads: A Special Report
Building the behemoths
In a stunning comeback, Newport News Shipbuilding has used technology to build up an order backlog of $7 billion in submarines and giant carriers

by Peter Galuszka

"Welcome to Reagan Country," reads the bulkhead poster depicting the broadly grinning former president in a cowboy hat. The jaunty countenance brightens the otherwise gloomy scene. Air is misty and acrid from welding and grease. Workers in hardhats and bulky blue coveralls bustle past the clumps of cables looped from door to watertight door. Chalk-scrawled technical notes — broken occasionally by graffiti, usually a drawing of a Corvette or a Ford F-150 pickup — cover the bulkheads to guide the 2,600 workers toiling on America’s newest nuclear-powered aircraft carrier at Newport News Shipbuilding Inc.

"Thank you for this small thing." Nancy Reagan christens CVN-76 on March 4.
Photo courtesy Newport News Shipbuilding

The workers are readying the freshly christened aircraft carrier, CVN-76, the Ronald Reagan, for sea trials next March. Resting dockside in the tan-colored James River, the Reagan incorporates the latest military and civilian technology. "One of the new things we’re doing is putting in a LAN (local area network)," explains Harold Paxton, director of the carrier construction program, who is wearing safety glasses and has sound-baffling Mickey Mouse ears clipped to his belt. "We’re going to have 376 computer drops [now] and 1,800 by the time we deliver the ship. That way crew members will be able to e-mail home when they come off watch." The portals should be a big plus, he adds, since the Reagan will have about 6,000 crew members.

E-mail isn’t the only new thing about the Reagan, which was christened by the former First Lady on March 4. The bulbous prow, which keeps the bow higher in the water, helps launch jet aircraft. Three arresting cables, instead of the usual four, will catch the planes when they return. Also, the Reagan is rigged with 43,000 feet of plastic tubes, which house some 632,000 feet of fiber optic cable. When upgrades are needed, old fiber can be easily stripped out and new fiber blown in by air; no compartment has to be torn apart.

Attention to such details is perhaps the most important reason why $2 billion-a-year Newport News Shipbuilding is enjoying some of the brightest prospects in its 115-year history. It is winning new respect from the Navy for working technology into its designs and making the carrier more productive and cost efficient over its 50-year life cycle. And its earnings are strong — undoubtedly a factor in General Dynamics’ $2.1 billion buyout offer announced April 25.

The shipyard’s workbook is testimony to its comeback. In January the Shipyard, which is Virginia’s largest private employer and the nation’s largest shipyard, won a $3.8 billion contract for CVN-77, the yet-unnamed nuclear carrier that will round out the Nimitz class. Also, the company has developed a novel arrangement with its arch-rival, Electric Boat Division of General Dynamics, to jointly build four advanced Virginia-class attack submarines worth a total of $4.2 billion between the two of them. Contracts for these and another 26 submarines could total $66 billion. And Newport News has just finished with the $1 billion nuclear refueling of the carrier Nimitz and has a lock on a $1 billion contract to refuel the Eisenhower starting this summer.

More big-ticket contracts are in the works. The Reagan and her successor will help set standards for the next generation of aircraft carriers, the so-called CVN-X series. As the nation’s only carrier builder, Newport News Shipbuilding almost certainly will build those vessels, too. The first will have a new propulsion system and the second a radical design that may look unlike the current carriers, which haven’t changed much since World War II. Meanwhile, Newport News has just awarded a $446 million contract to a subsidiary of Lockheed-Martin to help design a new warfare system for the CVN-77. In July, the new, $58 million Virginia Advanced Shipbuilding and Carrier Integration Center, funded by the state, will open in a flashy new building in downtown Newport News. There, a new command and control system will be developed for the next generation of carriers.

All of this makes CEO and President William P. Fricks downright comfortable. "We have $7 billion in backlogs," smiles Fricks as he sits in his office decorated with waterfowl and ship models. "This is the best we’ve had for a long, long time."

Just six years ago, Wall Street considered Newport News Shipbuilding to be trash fish. Analysts applauded when then-owner Tenneco spun it off along with other units including tractor-maker Case Corp. The future looked dim as spending on warship construction slowed to a trickle after the Cold War. Newport News Shipbuilding sliced away thousands of workers — from a high of 30,000 during the mid-80s Reagan defense buildup to 17,000 today. An effort to build large commercial tankers turned into a costly debacle. As dot-com startups took root, the Street tarred the venerable shipyard as hopelessly Old Economy — a tired metal-bender that could survive only if the government did the thinking for it.

Yet, the 56-year-old Fricks, an unassuming company lifer who took the helm after the firm was spun off in 1995, proved quite the contrarian. With his background in finance, he paid special attention to containing costs. Although the new focus contributed to a messy labor strike in 1999, it has yielded tremendous efficiencies.

When Fricks took over, the Shipyard’s data processing systems were redundant, grossly outdated and expensive to overhaul. The Shipyard has invested $1 billion over the past decade to upgrade its information technology. Just as important, Fricks changed the way the company buys technology. The company relies upon ready-made software and computer gear that can be easily upgraded without ripping out entire systems. "We are doing a much better job today of laying the foundation for new technology," says Fricks. "One of the things we are trying to do is offer as much off-the-shelf technology as we can. We buy Microsoft, IBM, Cisco and use them." Previously, the Navy would specify the software in its more costly special orders, which virtually guaranteed obsolescence. "You can’t contract for the Reagan in December 1994 and deliver the ship in 2003 with 1994 technology," says D. Scott Stabler II, vice president for aircraft construction. The new method ensures that the software programs and hardware are the latest.

The Shipyard also learned from a money-losing experience building double-hulled tankers in the mid-1990s. That episode was useful for introducing cost-containment and advanced manufacturing techniques the company hadn’t employed before. But it also forced the company to refine its core competency, even if it meant abandoning a proud tradition of commercial work such as the ultra-fast cruise liner United States that set standards for American sophistication and style in the 1950s. Says Fricks: "We decided to focus entirely on the military and our future with the Navy."

Fricks’ emphasis on cost containment is winning kudos from Congress and the Navy, which itself faces budget restrictions and needs to stretch its dollars. "The Navy looks to Fricks to see what they should be doing as far as outsourcing and cost cuts," says one observer. Indeed, on April 4, Fricks told a Senate subcommittee that he expects to build the CVN-77 with 10 percent fewer man-hours than were needed for the Reagan.

Once skeptical, Wall Street has taken notice. Newport News Ship’s shares rose from about $17 per share two years ago to about $50 per share a week ago, just before General Dynamics offered $67.50 per share, a 23 percent premium. The price of NNS stock promptly jumped to $63 per share in wake of the takeover bid, which was approved by the Shipyard board. There is no guarantee that the deal will go forward, however. The Clinton Administration nixed a previous acquisition attempt in 1999 on anti-trust grounds, and the Bush Administration also might be reluctant to create a monopoly builder of nuclear submarines.

That stock performance can’t match the rocket-like gains of hot-shot New Economy stocks in years past, but it beats the crash that followed. Ironically, one of the biggest beneficiaries of a merger would be Microsoft maven Bill Gates. His 12 percent position in the company made him the largest single shareholder. Standard & Poor’s recently rated Newport News Shipbuilding as No. 22 of the top 50 best-performing companies in the mid-cap (market capitalization of from $1 billion to $5 billion) range.

Stock analysts note a curious turn of history. "It’s an amazing irony of Tenneco," says James L. Winchester, an analyst with Lazard Frères & Co. in New York, "that the one piece that no one in the investment community liked has been the best-performing investment of all."

Newport News Shipbuilding is a maverick, clinging stubbornly to its independence while the rest of the defense industry is consolidating. Ship and aircraft makers whose names are immortalized in the history books have formed linkups to survive. Lockheed got Martin, Grumman aligned with Northrup and Boeing snared McDonnell-Douglas. Among the shipmakers, only two others have any serious dealings with the Navy — General Dynamics, which owns sub-maker Electric Boat, and Litton, which owns Ingalls Ship. In the past three years, Newport News Ship has fought off merger attempts by both companies.

One reason the Yard can afford to go it alone is its unique capability to build nuclear aircraft carriers. Longer than the Empire State Building is tall, these floating airports are among the most complicated pieces of machinery ever built. "When you’re building a jumbo jet, you’re looking at a few million parts," says John Shephard Jr., vice president for manufacturing and materials. "But with a carrier you are looking at 500 million parts." Not only does the ship house a small, self-contained city of 6,000 with all necessary amenities and 80 combat aircraft, the entire city can move at about 35 knots, nearly double the speed of the average cruise ship.

Plans for the Reagan begin as digital images on computer screens. Taking advantage of three-dimensional modeling, engineers piece together everything they can on the ship, from the 24-story-tall island tower where the bridge and air boss sit to tucked-away compartments down below where sailors do laundry. Collaborating closely with the Navy, the engineers plan for every wire and bolt in the ship. The Shipyard is buying an increasing amount of supplies via the Internet, and then is tracking it closely through a company-wide Intranet. Newport News Ship is one of the world’s largest users of SAP manufacturing software.

The Yard uses just-in-time inventory methods to make sure that sheet metal and parts don’t lie around unused, although time isn’t as critical as it is with other metal benders such as automakers. High-performance warships require metals of special grades, especially submarines which are designed to handle tremendous depth pressures. "Our ships are Mazerattis in comparison to tankers," says Shephard. Even so, the Yard streamlined the types of metals it uses. When the Harry S. Truman was built, Shephard says, it needed 7,000 different plate categories, sizes and weight grades of metal. The CVN 77 will need only 700.

As the millions of parts come in, they are arrayed according to the sequence in which they will be assembled. Generally, preparation and assembly starts at the southern part of the yard and moves northward until large modular sections, called "superlifts," can be put together. Automated robots weld the metal chunks used for the hull. Some sections are fabricated in enclosed buildings where the roofs keep out the rain and the prying eyes of foreign satellites. Finally, superlifts are taken to a staging area near Dock 12, a massive drydock where the ship keels are laid. A 900-ton crane, the largest in this hemisphere, gingerly lifts the superlifts into place like a giant jigsaw puzzle. Welders swarm ant-like over the lifts as they fit the parts together. All in all, the Reagan required 163 superlifts. Building in modules in an enclosed shop requires more planning, but assembly is just one-eighth the cost of traditional methods.

Not satisfied just improving its internal processes, Newport News Shipbuilding is pushing for reforms to the Navy contracting system. Previously, contracts were a top-down affair: The Navy bought the equipment and told the shipyard where to put it. Now, Newport News Shipbuilding is taking charge. "They are taking over much more of the management role that had been done by the Navy at a much higher cost," says Winchester of Lazard-Frères. A prime example is the $446 million contract with Lockheed-Martin to develop the warfare systems for the CVN-77 carrier. The shipyard, not the Navy, will oversee Lockheed-Martin in its design of systems to handle a range of duties from coordinating combat air strikes to defending the ship from cruise missiles. "The warfare system will be the future of all warfare systems for the next class of carriers," says Irwin F. Edenzon, vice president for technology development and carrier fleet support.

The submarine deal with General Dynamics is another new twist. For years, General Dynamics’ Electric-Boat Division, based in Groton, Conn., battled Newport News for contracts to build nuclear-powered subs. As the defense industry shrank, the Navy confronted a conundrum. Only Electric Boat and Newport News had the facilities to build nuclear submarines. Allowing one to shut down could hurt national security.

The solution keeps both yards in business by splitting up contracts for the new Virginia class submarine. Electric Boat will build the center section, while Newport News will fabricate the bow, stern and sail; then they’ll alternate. The final sections will be combined in either Connecticut or Virginia. So far, cooperation between the two rivals has been surprisingly good, says Fricks. "We thought it would work reasonably well, but it has worked exceptionally well."

The submarine plan is advancing the practice of "virtual manufacturing." Electric Boat and Newport News are setting up what they claim is one of the largest private business-to-business electronic commerce networks in the country. Using the Internet, the two firms are connected instantly with the Navy and myriad subcontractors and parts suppliers. "Visionaries used to talk about virtual shipyards," says vice president Shephard. "Now, we’re doing it."

Could anything go wrong for Newport News Shipbuilding? The next decade looks very good. Fricks notes that he’s hiring up to 1,000 more workers this years and sees an optimal work force of about 22,000, up from 17,000 now. But, continual cost-cutting and virtual shipbuilding could meet opposition from the powerful United Steel Workers of America, which struck the yard for four months in 1999. The next contract expires in 2004 and already Local 8888 of the steelworkers union is bristling from Fricks’ zeal to hold down costs. Local President Arnold P. Outlaw says that the Shipyard has been too abrupt in retiring experienced workers and he was annoyed at Fricks’ Senate testimony that he’ll shave 10 percent of the man-hours from the construction of the next carrier. "I wish he’d had the decency to talk to us about this," he says.

Evolving weaponry also could make aircraft carriers obsolete. With technology moving so quickly, carriers could become vulnerable to conventional weapons, not just tactical nuclear devices. As smart weapons gain power and accuracy, a well-placed missile or laser could turn the Reagan to toast.

Even conservative think tanks raise such a possibility. The Project for the New American Century in Washington, for instance, recently advised against building a new class of aircraft carrier until potential threats in 10 to 20 years are better known. Money would be better spent building other types of ships, such as smaller carriers. A chief concern "down the road," says Gary Schmidtt, executive director of the group, is the late-model, Russian-made Sunburn type cruise missile. That weapon is accurate, supersonic and can fly very low, making it hard to detect on radar, he says, and the Russians are selling its missile to the Chinese. (Shipyard officials support the Navy’s view that it is still very difficult for an enemy to hit and damage a carrier.)

If there is a decision to eliminate the next generation of carrier, Newport News Shipbuilding’s fu-ture would be uncertain. For now, though, the Shipyard is basking in the majesty — and profits — of the giant aircraft carriers and stealthy submarines. Says vice president Shephard, with considerable modesty: "We design and build here the biggest, most awesome, most-technically complicated mach-ines ever conceived by human beings and that’s pretty cool. Subs, pound for pound, are the most technically sophisticated machines ever. You get to christen these things, there’s a name attached to them and they’re going to be out there for 50 years. The last captain of the Reagan hasn’t even been born yet."

Return to Virginia Business - May 2001