https://www.afr .com/companies/manufacturing/australia-s-only-naval-shipbuilder-reaches-a-fork-in-the-road-20231128-p5engq
Australia’s only naval shipbuilder reaches a fork in the road
Matthew CranstonUnited States correspondent
Nov 29, 2023 – 12.18pm
Mobile, Alabama| Sparks are flying inside the Austal shipyards on the banks of the Mobile River as workers weld metal. They’re also flying about the ASX-listed company’s future and the prospect of a new owner that could change their lives – and Australia’s defence sector – forever.
Perth-headquartered Austal’s business in the United States has boomed since 2004, transforming from a 25-metre boat servicing offshore oilfields into one with an $11 billion order book. Now, as first reported by The Australian Financial Review’s Street Talk column, it is up for sale, and the likelihood of a private equity firm taking over is raising big questions.
A Littoral Combat Ship has been one of the ships being sold to the US Navy by Austal. Getty
Will a new owner focus on the US, where more than 75 per cent of the company’s revenue comes from? Will that leave Australia bereft of the capability and capital to meet its future naval requirements – a review of which has been delayed by the government? After all, Labor last month effectively nationalised military radar manufacturer CEA Technologies.
Austal has plenty of good things going for it – the US government has handed the company $US50 million ($75 million) to upgrade its shipbuilding facilities. And it has a steady pipeline of work including parts of the top secret Virginia class nuclear-powered submarine building program – the sort Australia will get under the proposed AUKUS deal.
It also has a foothold in the growing autonomous boat building sector which many believe is the future of naval warfare and, being based in the US, has the right to bid in the expansion of the naval fleet at a time when China’s aggression in the Pacific is attracting money from Congress.
But Austal is also facing challenges – its US boss just left after a steep fall in profit and investors like Plato Investment Management are betting the company’s share price will fall. It has missed out on a multi-billion US Navy frigate contract, it’s been investigated by the Justice Department with some employees indicted, and it’s being dragged through the mud by members of Congress for its links to a Chinese shipbuilder.
Any new private equity owner – the three frontrunners are Cerberus Capital Management, JF Lehman & Company and South Korea’s Hanwha – would likely cut costs, redrawing contracts and increasing prices.
On the Mobile factory floor, some Australians who came to the US more than 20 years ago say they have begun to wonder about a change of owner.
“The unknown is always scary,” Neil Seddon, Austal’s director of module manufacturing, says. “The thought hadn’t really crossed our mind until the last six months.”
Bill Pfister, one of the company’s first American employees in the US, says he isn’t concerned about a new owner – but understands if others are. “It’s not that employees wouldn’t care, everybody cares who owns us, but generally, it wouldn’t be a bad thing if it was a different owner,” Pfister adds.
‘Begging bowl’
He doubts a new owner would put the US ahead of maintaining the Australian arm and the need for investment in Australia’s naval production.
But others, including former treasurer Joe Hockey, do.
“Just as we went with a begging bowl to offshore pharmaceutical companies during COVID and were thrown to the end of the queue, so too will we be thrown to the back of the queue when it comes to military industrial capacity in the event of conflict unless we build our own capacity,” Hockey, also a former Australian ambassador in Washington DC, says.
“Private equity alone would be unwilling to fund medium or long-term investment in Australia’s national security capacity. Why would American private equity or shipbuilder in another country be interested in funding Australia’s long term military ambitions?”
“I think private equity would hive off the Australian operations and restructure the US – that would be their ambition.”
On the factory floor at Austal’s US operations. Its American business has lucrative contracts with the US Navy. Getty
The three interested private equity firms and JPMorgan, the investment bank running the sale process, declined to comment.
So what are the prospects for Austal in Australia under new ownership?
The current government is a major supporter of the company. Defence Minister Richard Marles calls Austal’s design house in Fremantle “a national asset”. And last week, the government took steps to give Austal the right to build the Army’s Landing Craft Medium and Heavy at its Henderson facility in Western Australia, “subject to successful commercial negotiations”.
There is also $365 billion worth of AUKUS-related submarine industrial basework that the government will award over the next few decades – something that would greatly benefit Austal. A nationalisation is a possibility, as is a buy-out from Andrew Forrest, the iron ore and energy billionaire who is the company’s largest shareholder.
“The Austal team has done a great job to refill the order book in both Australia and the US,” Forrest says. “I’m not surprised the private equity funds are sitting up and taking notice. We are a long-term, supportive shareholder.”
Vulnerable to private equity
Adam Leslie, the Australian Strategic Policy Institute’s Washington-based director, says the sale of Austal could have significant impacts on Australia’s national security depending on the owner’s motivation.
“In terms of potential damage to Australia’s national security, as well as the impact on Australia’s shipbuilding industry, it depends on a combination of context and profit,” he says.
“There is an opportunity for the Austal Board and/or the prospective buyer/investor to attempt to calculate and articulate the value proposition, in a monetary sense, of Australia’s national security, or for the US, or AUKUS, or even in the context of countering Chinese BRI initiatives. How much this would be considered over the bottom-line, however, is unknown.”
The company does seem vulnerable to private equity. Shares are trading at a lower valuation than its peers, and a listing in the US after a few years under private equity ownership might be appealing.
There is room for private equity to move on the production floor too.
Joe Hockey says Austal will face a global skills shortage regardless of who ends up owning the company. AFR
At the Mobile shipyards the current workforce is all non-unionised, working four-day shifts – 10-hour from Monday through Thursday – per week.
“That was a request from the production workforce. It’s also a bit of a retention tool. Something different. The employees love it. You could add three 12-hour or 13-hour shifts on Friday, Sunday, Sunday,” says Chris Young, Austal’s vice president of production.
Hockey says that regardless of who ends up owning or buying it – whether it’s an Australian bidder, private equity or the government – Austal will have to face an issue confronting many companies, a global skills shortage.
That shortage is the reason for the US running behind its production and maintenance schedule – only 67 per cent of the US fleet is deployable, with a goal is to get to 80 per cent by 2027. In the United Kingdom, BAE Systems has 2000 vacancies at its maritime and land division.
“It’s going to take a workforce of thousands in WA to meet the government’s planned surface ship investments,” Hockey says, “You can’t just take out 1000 welders and electrical engineers from the subcontinent and put them in WA and expect them to maintain naval warships.”
Leaning more towards the US
Mike Wysong, Austal’s head of capture management, admits the sector has problems with production levels and that the US is looking to allies like Korea. “We have shipbuilding and resource problems in the country, specifically with engineering. We have a bit of a labor shortage but also even an engineering shortage,” Wysong says. “Working with Australia, working with South Korea working, with a number of alliances can be a great opportunity for us to leverage all those resources for national defence.”
Austal says it intends to grow its workforce by one-third as it opens a new facility devoted entirely to producing nuclear submarine components.
But the prospects for an Australian-owned shipbuilder prioritising Australia’s naval production demands over the US is looking shaky.
Bryan Clark, a Washington-based naval operations researcher at the Hudson Institute, says Austal’s future is starting to look obvious. “Austal has shrinking business in Australia today, centred on the Cape class patrol boats. Austal-USA, in contrast, has a full order book … In a lot of ways, Austal is now much more of a US company than an Australian one,” he says.
With non-Australian shipbuilders constructing the Royal Australian Navy’s new air defence destroyer and frigate, Austal in Australia may need to turn to unmanned vessels as its new focus, Clark says.
“In that line of business, it could support both the USN and RAN under AUKUS. However, if it is American-owned, Austal’s products could get caught up in export controls and Austal may be less attractive as an unmanned vessel supplier to the RAN compared to an Australian company.”
The future of Austal and the Australian navy will be heavily determined by decisions made in the next six months. It’s all hands on deck.
(20min delay)