Trouble Ahead as Builder of USCG Heavy Icebreaker Abruptly Changes Leadership
Was the Polar Heavy Icebreaker Underbid?
VT Halter Marine
Is the Coast Guard’s new Heavy Icebreaker Program in trouble?
On June 9, the White House issued a somewhat unusual memo, emphasizing that “the United States requires a ready, capable, and available fleet of polar security icebreakers” by Fiscal Year 2029. Four days later, Ronald Baczkowski, President and CEO of VT Halter Marine, the contracted builder of America’s first new polar security icebreaker, abruptly resigned. Two days after that, ST Engineering North America, VT Halter Marine’s parent company, announced the appointment of a third shipyard president in the space of four years, Robert Merchent.
The Singapore-based company insists via a spokesperson that the “leadership change is not related to recent announcements regard the Coast Guard Heavy Icebreaker Program,” and that VT Halter Marine continues “to execute to our contract requirements for the Polar Security Cutter.” To that end, the leadership change seems to make sense as well. Bob Merchent appears to be the right man for the job — a project manager from the nearby Huntington Ingalls yard. He has deep experience with the U.S. Coast Guard after leading the U.S. Coast Guard’s Legend Class/National Security Cutter program.
But shipyards rarely change leaders when things are going well. Few shipyard bosses leave on their own volition. So the question for observers is this: Did ST Engineering engage in a savvy and foresighted — albeit ruthless — leadership change? Or, as other shipbuilding observers suggest, was the leadership spill an act of desperation by a yard now facing the consequences of winning too many underpriced, low-bid contracts?
A Ruthless Transition:
ST Engineering North America is known to be somewhat rough on VT Halter Marine leaders, offering candidates short performance contracts and wasting no time to replace those that don’t fit. But this change-over seemed particularly ruthless. Baczkowski’s sales team turned VT Halter Marine around, but the press release announcing the change merely thanked the ousted leader “for his contributions to and leadership of Halter Marine”. That was it.
The company, when pressed, offered a little more, saying via email, “we thank Ron for his years of service and recognize his leadership during a period of significant accomplishment that includes awards for the design and construction of one Polar Security Cutter and four APLs (Auxiliary Personnel Lighter-Small, or berthing barges) from the U.S. Department of Navy.”
Baczkowski’s tenure was certainly short; he ran the VT Halter Marine shipyard for less than two years, but while he was there, he got the battered yard an order book that major naval defense contractors could die for — or even potentially purchase. The yard was apparently performing too. According to ST Engineering’s most recent annual report, the Singaporean-based conglomerate’s entire Marine sector revenue was up 13% on “better performance of its U.S. Operations, and Net Profit grew 14% to $51.5” million.
The record of new business brought in under Baczowski was more impressive than the company let on in their emailed statement. In 2018, the U.S. Navy awarded VT Halter a contract to build berthing barges (APL(S)), ultimately granting the company firm, fixed-price options for four berthing barges. It also won a sole-source award for T‑AGS 67, adding to the Navy’s Pathfinder-class oceanographic survey ship fleet.
In 2019, the U.S National Oceanic and Atmospheric Administration granted VT Halter Marine an award for a preliminary design contract for the next Auxiliary General Oceanographic Research (AGOR) variant ocean surveillance vessel as well as an award to support the design of the U.S. Navy’s Common Hull Auxiliary Mission Platform. And then, of course, Baczkowski won the coveted $746-million dollar contract for the detail design and construction of the first of up to three U.S. Coast Guard Polar Security Cutter icebreakers, in a contract potentially worth $1.9 billion overall — one of the biggest shipbuilding contracts in ST Engineering’s history.
This impressive stream of government work was supplemented by a steady drum-beat of commercial business. Only a handful of American yards can successfully manage both commercial and government work.
The question behind these contracts is one that has long-bedeviled VT Halter Marine’s “boom and bust” record — in recent years the yard collapsed after winning contracts it could not, in the end, execute.
Can VT Halter Marine execute today?
The recruitment of Robert Merchent seems to indicate VT Halter Marine is setting up to do just that. But if the previous shipyard boss pushed too hard to win contracts, bidding for too much work at too low a cost, VT Halter Marine and all the contracts the yard holds are in real peril of poor performance.
Act Of Desperation — Or Strength?
Fourteen months ago I wrote that “VT Halter Marine will need steady hands in the shipyard to complete their ambitiously-priced contracts,” and suggested that, if VT Halter Marine “hires like it does business development,” they could poach senior leaders from nearby yards that are seeing their production lines close. In hiring Robert Merchent, ST Engineering North America has followed that playbook, poaching a longtime project manager from nearby Huntington Ingalls, a veteran leader from the soon-to-close Legend Class Cutter production line.
It is exactly the type of leader VT Halter may need right now.
But no program manager — no matter how good — can dig out of a hole that is too deep. If Baczowski padded his sales record by underbidding, Merchent will have a terrible time ahead of him. Add in the unprecedented performance challenges shipyards already face given the threat of COVID-19, and then factor in a potentially busy hurricane season, the channel ahead for Bob Merchent will be rocky.
An early indicator of the yard’s performance is approaching. The yard is set to deliver two new berthing barges to the U.S. Navy in the Fall of 2020. As Baczowski said in a May 18, 2020 press release, “by this time next year, the women and men of the U.S. Navy will be able to bunk on the first two barges.” While the shipyard, by email, confirmed that the first two APL(S) are on schedule, ST Engineering did not comment on the project’s bottom line. If the first two APL(S) are delivered at a loss, the prospects for the rest of the order book may not be too bright.
With the Polar Security Cutter, the Congressional Research Service’s shipbuilding expert Ronald O’Rourke is already flagging the risks posed by “a lot of modifications” to the parent icebreaker design by VT Halter Marine’s design partner, Technology Associates, Inc.. If the Coast Guard’s design diverges significantly from the parent design — a mature German icebreaker called “Polarstern II”— then those changes may introduce added technical, schedule and cost challenges.
The White House seems eager for change as well, and has requested an assessment of “expanded operational capabilities” that would include, “unmanned aviation, surface, and undersea systems; space systems; sensors and other systems to achieve and maintain maritime domain awareness; command and control systems; secure communications and data transfer systems; and intelligence-collection systems.” The White House also wants to “evaluate defensive armament adequate to defend against threats by near-peer competitors and the potential for nuclear-powered propulsion.”
Aside from the daunting challenge of adding nuclear propulsion, adding significant-and likely classified national-security features may well stress Technology Associates, Inc., as increased national security-related content will force the company, with significant facilities in India, to keep much of the design work secure in the United States. The shipyard confirmed that they were “not in position to make any comment on security features of the vessels,” but were “prepared to accommodate customer requirements for the full range of requirements for contracts we are awarded.”
Even more worrisome for the shipyard is the implicit threat that the United States may rent commercial icebreakers, or even look for foreign shipbuilding options, announcing that, “Further, and in advance of any bid solicitation for future polar security icebreaker acquisitions, the Secretary of State shall coordinate with the Secretary of Homeland Security to identify partner nations with proven foreign shipbuilding capability and expertise in icebreaker construction.” In effect, VT Halter must perform or face immediate competition.
With business safely in hand, VT Halter Marine is either doing what it needs to do to execute, (firming up their designs, hiring and training staff, and continuing to build-out resilient shipbuilding infrastructure in a disaster-prone region) or it is scrambling to survive the consequences of overly-aggressive of low-price contracts. Only time will tell if VT Halter Marine has put their “boom and bust” ways behind, demonstrating that it is ready to successfully execute its enormous backlog of government contracts safely, on time, and on budget.
If Merchent can profitably execute the enormous VT Halter backlog, then no U.S. Government contract will be safe from what will be a swashbuckling new entrant into the elite club of large U.S Government shipbuilders.