Week of September 6, 1999
  Blockbuster Deal of the Week
   from Site Selection's exclusive New Plant database

Sinking or Swimming? Ingalls Signs $1.4 Billion
AMCV Deal, but U.S. Shipbuilding Still Listing

Ostensibly, at least, it was a red-letter day for U.S. shipbuilding, as Ingalls Shipbuilding (www.ingalls.com) signed a US$1.4 billion contract with American Classic Voyages (AMCV at www.amcv.com) to construct the first cruise ships built in the United States in 40 years.

"Ostensibly," though, only floats so far atop the far-from-forgiving waters of international business. Beneath the optimistic wave that the ballyhooed Ingalls-AMCV deal has created, sharks continue to circle the ailing U.S. shipbuilding industry, many analysts insist.

Nonetheless, the deal has some decidedly sunny sides. Obviously, one of the sunnier ones shines on Ingalls. AMCV's three 1,900-passenger vessels will be the largest cruise ships ever built in the U.S. (Ingalls has signed to build the first two ships and has an option for the third.)

"This contract is a vital element of Ingalls' integrated strategic business plan," said Jerry St. Pe', president of Ingalls and senior vice president of Litton Industries (www.littoncorp.com), Ingalls' parent.

"Of all the commercial ship projects available, cruise ships require a level of complexity and a mix of skills, most closely matched to those inherent in the building of complex naval vessels, [which are] already available at Ingalls," St. Pe' added.

Along with other current and planned commercial U.S. Navy work, the new contract will "significantly stabilize Ingalls' work force into the 21st century," company officials said. Some 2,300 of Ingalls' 11,300 employees, say company officials, will be involved during peak periods in the AMCV cruise ship work, which will begin next year.

In a separate move that coincided with the announcement of the AMCV deal, Ingalls announced plans to invest $130 million over the next two years in major facilities upgrades at its shipbuilding and marine production operations.


A 'Project America' Contract

The Ingalls-AMCV deal is also a so-called "Project America" contract, an outgrowth of the U.S.-Flag Cruise Ship Pilot Project program that the U.S. Congress passed in 1997. The legislation's backers have asserted that the statute will revitalize, sustain and modernize the oceangoing cruise ship fleet that flies under the U.S. flag. The U.S.-Flag Cruise Ship Pilot Project program, they say, will create more than 5,000 American jobs over the long term.

Accordingly, waxing eloquent was the order of the day among the host of bigwigs who showed up for the contract inking, with dignitaries attending the Capital Hill signing including Secretary of the Navy Richard Danzig and U.S. Maritime Administration Administrator Clyde Hart Jr., plus a bevy of U.S. senators and representatives.

"The signing of the Project America contract is an historic step for both the U.S.-flag cruise industry and our nation's shipbuilding industrial base," Phil Calian, AMCV president and CEO, said at the signing. "Today, we are showing that American shipyards can compete in the construction of U.S.-flag oceangoing cruise ships, and that the U.S.-flag cruise industry has an exciting future."


Broader Implications?

As for U.S. shipbuilding's future, Ingalls President St. Pe' hinted at broader implications in the AMCV deal.

"This contract, while important as a stand-alone element of our business base, will significantly enhance Ingalls' competitive posture for future Navy and commercial programs," he said at the agreement's announcement in Washington.

"This is a unique opportunity available to our shipyard and U.S. shipbuilding to implement practices and processes required for this and other commercial programs that will also be a direct benefit to Navy programs for which Ingalls will be competing in the future," St. Pe' commented.

Most analysts, however, see U.S. commercial shipbuilding's future in a far different, and decidedly fading, light. Currently, U.S. commercial shipbuilders hold a meager 1 percent of the world market. America's expertise in commercial shipbuilding began to wane in the 1980s, analysts say. That's when President Ronald Reagan's never-completed plan to mount a 600-ship Navy dominated the focus of U.S. shipbuilders. And with the U.S. industry preoccupied, overseas rivals leaped ahead in commercial technology and management, industry analysts agree.

In addition, the Cold War's meltdown capsized many U.S. firms, including Newport News (Va.) Shipbuilding, the biggest U.S. yard, which has dumped its commercial ship construction business after $300 million in losses.

What's left is a U.S. shipbuilding industry that's both heavily protected and fast consolidating. In fact, most analysts see U.S. shipbuilders' once substantial ranks thinning in the next few years to only two players, General Dynamics and Litton Industries.


Partnering with a Phantom?

Ingalls will implement the ACV contract in a teaming agreement with Kvaerner Masa Shipyards of Turku, Finland. Kvaerner (www.kvaerner.com) will provide design and planning expertise and advise Ingalls on commercial manufacturing techniques.

"Through our industrial relationships," said St. Pe', "we are working together to implement exciting new approaches to commercial shipbuilding, including major improvements . . . that will enhance our processes and bring increased efficiencies to every ship we build - including ships for the U.S. Navy."

However, Ingalls will be working with Kvaerner under a fixed-price contract that was formalized before the Anglo-Norwegian firm crashed against the shoals of tough business times - a crackup so substantial that using the words "Kvaerner" and "commercial shipbuilding" together today evokes enough irony to fill most of Davey Jones' locker.

While it's the world's biggest engineering and construction operation, outstripping better-known names like Bechtel and Fluor, Kvaerner is waterlogged with debt. For the first time since 1967, it's dipped into the red as its share price has plunged like a torpedoed sub.

A similarly sinking fate struck Kvaerner's shipbuilding business, where the company had become the acknowledged world leader in value-added vessels like cruise liners, container ships, liquefied gas carriers, cable-laying ships and icebreakers. That value-added, though, dipped dangerously as Asian shipbuilders dramatically undercut European rivals.

Finally, the business line hit bottom: Kvaerner this year announced that it's abandoning shipbuilding, unloading existing yards in Britain, Finland, Germany and Norway and slashing 25,000 jobs - almost one-third of the company's total work force. Kvaerner's existing shipyards will either be sold outright, spun off to Kvaerner shareholders or transferred into joint-ventures, from which Kvaerner would progressively withdraw, says Vice President for Corporate Communications Paul Emberley.

Kvaerner's abandoning ship with its historic shipbuilding sector also meant the end of another highly touted project: Kvaerner Philadelphia Shipyard, a project that won $430 million in federal, state and local incentives and was considered a major plank in Al Gore's U.S. presidential run.

Late last year, Pennsylvania Gov. Tom Ridge said of the Kvaerner venture, "We hope to generate the rebirth of U.S. commercial shipbuilding."

The Ingalls deal offers yet another glimmer of rebirth. Nonetheless, for the moment - and perhaps much, much longer - an enduring rebirth for U.S. shipbuilding remains as elusive as the wreck of the Titanic.


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