Austal is in real trouble.
Naval shipbuilder Austal USA is on the razor’s edge. After expanding into steel shipbuilding and, over the space of a year, creating a massive, $11.6 billion backlog, the mood at Austal’s high-tech Alabama shipyard is far from celebratory.
Instead, the yard has plunged a gloomy existential crisis. Austal USA’s first contract for its first steel ships is underwater, the shipyard’s leadership team is experiencing a rapid, unscheduled disassembly, and a cash crunch looms ahead.
Austal’s shipyard leadership is in a difficult transition. Austal announced the abrupt resignation of Austal USA’s president, Rusty Murdaugh, on the final day of August, hours before Austal Limited’s Australia-based executives were to discuss earnings.
Though the company had telegraphed bad news in late July—a blowout of between $69 to $75 million on their $385 million five-ship Navajo-class Towing, Salvage and Rescue Ship (T-ATS) contract, things evidently haven’t gotten any better. With Murdaugh out, the shipyard appears to be following a path trodden by other U.S. shipyards that, when desperate for new work, bid for more business than they could easily handle.
Austal’s ongoing disarray reaches deep into the company’s leadership team. Sources say Austal’s Vice President of Human Resources, Michelle Alcathie, also left the company after Murdaugh’s sudden departure. Other senior shipyard leaders are interviewing or plotting exits over the next 24 months.
Nobody is racing to join Austal’s executive ranks. According to Austal’s recruiting website, the shipyard is still looking for a Vice President of Engineering—a position that has seemingly gone unfilled for about a year—and, as of September 13, the shipyard began hunting for both a new Vice President of Human Resources and a Vice President of Supply Management.
With Michelle Kruger, Austal USA’s Vice President of Global Services and Support, tapped to serve as the company’s interim caretaker, and at least three key executive spots now vacant, Austal will struggle to manage the dysfunctional shipyard.
The leadership vacuum is ill-timed. With Austal the lead contractor on six naval shipbuilding contracts and supporting several more—including about $100 million in recently awarded submarine and landing craft contracts—Austal USA desperately needs an engineering leader. Lacking a human resources boss, the yard will struggle to meet their goal of hiring 2000 new workers over the next two years. And with no supply manager, the company will likely have a hard time recovering from the estimating and materiel purchasing problems that threaten to break the shipyard’s T-ATS contract.
The fiscal clock is ticking. Austal’s shift from aluminum to steel shipbuilding is not done, and the yard’s major Offshore Patrol Cutter and T-AGOS surveillance ship contracts require significant capital investments to move forward. But, with the T-ATS losses continuing to stack up, a cash crunch looms.
It is time for Austal shareholders—of which I am one—to step in and make some changes.
Mr. John Rothwell in happier times.
To fix things, Austal shareholders might be smart to urge Austal’s aging founder and “non-executive” chairman, the octogenarian John Rothwell, to retire, replacing the iconic shipbuilder with a more modern leader.
Rothwell has had a good run. A scrappy ferry-boat builder, Rothwell managed Austal for two decades. And, though he ostensibly stepped down from day-t0-day operations in 2008, saying he preferred to work on the “bigger picture,” the entire enterprise still largely reflects Rothwell’s often-pugilistic approach to business.
As a founder, owner and leader of both the Austal USA and Austal Limited corporate boards, Rothwell wields a disproportionate sway upon company leadership, direction and culture. Complicating matters, Austal Limited’s leading executives are often poorly positioned to push back on Rothwell’s influence.
This arrangement has not gone well.
While Rothwell has approved a relentless expansion, the company has made several self-inflected missteps and failed to live up to its full potential. Dividends aside, shareholders who bought into Austal in 2008 have suffered a loss of almost 19%.
Had shareholders known that Rothwell’s “bigger picture” would involve a 2012 liquidity crisis, poor shareholder returns, a disruptive international fraud scandal and what appears to be, right now, an existential crisis in Austal’s American subsidiary, shareholders would have likely exited Rothwell from his post long ago.
The time is right for a change at the top. Rothwell’s gruff, old-timey ferry-boat builder esthetic was useful when Austal’s business centered around ferries. Today, Austal, as a global defense contractor, needs more sophisticated, politically deft leadership at the helm.
Under Rothwell’s guidance, Austal seems to simply be looking to replace the ousted Murdaugh with an in-house shipbuilder that Rothwell is comfortable with. Austal, of course, announced a global search, but Paddy Gregg, Austal Limited’s CEO, promptly torpedoed the effort by telling analysts, “We have an internal person who we are very happy with operationally that we’ll have a look at.” With Austal already focusing on executives “with ship building execution and delivery experience,” a shallow pool of viable U.S. candidates gets even shallower.
Put bluntly, forcing a home-grown shipbuilder into the top spot of Austal’s U.S. yard is a recipe for disaster. The last thing Austal’s top cadre of shipbuilders need right now is to be distracted from the tasks at hand. As a group, they must be laser-focused on managing Austal USA’s evolution from two stable production lines to multiple projects spanning multiple facilities. Outside of shipbuilding, they must concentrate on fully commissioning Austal’s San Diego repair yard and building out a healthy pipeline of repair work. If they can survive the next few years, Austal’s U.S.-based executive shipbuilders will be a formidable, tested bunch, ready for wider leadership opportunities.
Austal’s U.S. subsidiary certainly does need a leader who knows Austal and can track the pulse of the shipyard, meting out accountability where needed. But, to handle the array of new work, the shipyard desperately needs somebody who can help Austal USA break with the past, shredding the yard’s top-down, insular, and often fear-driven management style—a workplace culture extensively detailed in federal indictments targeting previous, Rothwell-sanctioned shipyard leaders for fraud.
Over the next few years, Austal needs a leader capable of securing money for Austal’s capital expansion requirements. Rather than a gruff shipbuilder, Austal’s corporate leader must have the ability to sweet-talk local, state and federal stakeholders into supporting Austal’s shipyard investments, worker recruitment efforts and workforce training needs.
Austal requires an international operator—somebody who can help shape the remaining open pieces of the Australia/U.S./UK accords, getting Austal positioned to support submarine maintenance and fabrication in both America and in Australia. Austal’s U.S. leader must help build Navy demand for Austal’s existing platforms, halting U.S. Navy efforts to prematurely sideline their fleet of Austal-built Littoral Combat Ships and Expeditionary Fast Transports.
Austal’s U.S. and Australian executives should be working together on influencing defense policy in the U.S., Australia, the Philippines, and Vietnam—the places where Austal has manufacturing facilities. By positioning the company as a test case in U.S. arms trafficking regulatory reform, Austal has an opportunity to propose and pursue joint fabrication of landing craft and other critical platforms in both the U.S. and Australia.
These measures would unlock far more value than a retreat to an old-school strategy and an obsolete and often toxic management style.
It is sad to see. Rather than watching Austal exploit the World’s sudden interest in securing Indo-Pacific seas and evolving Austal into a “go-to” shipyard for a modern, secure maritime, Austal is, once again, flailing, struggling to reconcile Rothwell’s ferry-salesman impulses with the more stolid world of modern-day global defense contracting. It is time for Austal to evolve, and that evolution must start at the top.
A smart play for both Australia and America is to join with Austal’s fed up stockholders and help urge Rothwell to gracefully accept, on his own, an opportunity for a well-deserved—and somewhat overdue—rest.
Dr. Craig Hooper, a former Austal executive, left Austal USA in mid 2013.