The USS Coronado, one of the Navy’s controversial and troubled littoral combat ships, was commissioned in 2014 and suffered an engineering breakdown only two months into its first deployment. Other problems have affected the ship.
Who you gonna call? Often the answer is Vigor Industrial, headquartered in Portland and the Northwest’s remaining major shipbuilder and marine repair company. The Coronado entered dry-dock in Portland this spring for up to $60 million worth of work.
But the calls may be different soon. Vigor, which also owns a 27-acre facility on Seattle’s Harbor Island for new construction and repair of mid-sized vessels (what’s left of the famed Todd Shipyards here), answers to a new master.
Private-equity giant Carlyle Group is acquiring Vigor and combining it with a Virginia shipyard.
Although Vigor said no changes were anticipated in Washington, its 2,300 employees (410 in Seattle) and everyone who understands the importance of the maritime economy here can’t help but be anxious. They’re already accustomed to change. For example, earlier this year Vigor closed a Ballard plant that made aluminum work boats. It also took over the former home of Christensen Yachts in Vancouver, Washington, to build new landing craft for the Army, a $1 billion contract. But private equity is different.
Founded in 1987, Carlyle is the nation’s second-largest private equity firm (behind Blackstone), with $223 billion in assets under management. It boasts more than 2,000 investors from 91 countries. Among them are wealthy individuals and families, pension funds, sovereign wealth funds and other institutional investors.
A 2012 Washington Post profile called Carlyle “a paragon of private equity, an industry that puts investment money behind companies, revamps their operations and tries to sell at a profit.”
But when it comes to vulnerable companies from old industries, private equity outfits are “hard-core, unsentimental capitalists. They might quickly fix the business and flip it for a fast profit. They might break it up and sell off the pieces. A third strategy is to turn it around and expand it for a big home run down the road.”
For Frank Foti, Vigor’s chief executive, the sale can be interpreted many ways. Either his bag of tricks — turning around moribund facilities, acquiring shipyards and diversifying since 1995 — has emptied out, or.it’s been refilled with new capital, potentially for growth (albeit by an owner whose patience is unknown).
A new CEO will be hired for the combined companies, although Foti will retain an ownership stake. Optimistic as always, Foti said in a prepared statement, “This evolution takes us where we want to go, growing sustainable jobs into the future.”
Even if Carlyle finds Vigor relatively shipshape, this is an old, vulnerable and declining industry.
Between 1953 and 2016, the number of major U.S. shipyards declined from 30 to six. This astounding collapse was years in the making, but a seminal moment came when President Ronald Reagan removed a decades-old program of direct construction subsidies in 1981. Reagan didn’t demand that Asia and Europe drop their extensive shipbuilding subsidies.
As a result, tens of thousands of good American jobs were lost. U.S. commercial shipbuilders, once the world’s leaders, now account for only 1 percent of the global market. Meanwhile, new mergers in South Korea and China will create two giants that control 46 percent of the global market.
Ships built in America today are for the military, for ferries such as those in Washington state, or for vessels operating between U.S. ports, which are protected by the 1920 Jones Act. Heedless of the Reagan experience, critics constantly push to repeal the Jones Act.
Naval shipyards have also closed. Of the dozen public yards operating in the mid-20th century, only four remain, including the Puget Sound Naval Shipyard in Bremerton.
This has consequences not only for American jobs and world trade, but also for national security.
As defense analyst Loren Thompson wrote in Forbes magazine, “Washington might not have the time to build up its merchant marine before decisive battles are fought in a future conflict. Worse, the U.S. might have to resort to the use of nuclear weapons to compensate for a lack of conventional forces in places like Eastern Europe or South Korea. Lack of logistics can have lethal consequences in a fast-moving military campaign.”
As the old saying goes, “Amateurs study tactics but professionals study logistics.”
By contrast, in World War II the “arsenal of democracy” included shipyards in the Puget Sound region that built numerous merchant ships, escort carriers, destroyers and other vessels. In Seattle alone, 46 destroyers and three tenders were built along with other ships, while more were repaired and serviced by 22,000 employees.
Five of the battleships damaged in the Japanese attack on Pearl Harbor came to Bremerton for repairs. The importance of the yard was so great that in 1944 President Franklin Roosevelt arrived aboard the cruiser USS Indianapolis to thank workers.
That capacity is largely gone here and elsewhere. Meanwhile, the industry has trouble attracting new workers to replace an aging workforce — despite good wages — because of uncertain orders and maritime’s fading profile in the U.S. industrial base. Vigor has teamed up with South Seattle College on a welding program aimed at young workers.
Interestingly, President Donald Trump’s trade wars haven’t addressed shipbuilding, where American interests and workers have been mauled for decades. As a result, whatever “concessions” the president wins from China, the goods will still travel on ships built outside the United States.
Private equity can’t fix this. At its worst, the business model is rip, strip and flip. At best, it patiently invests and adds executive and operational expertise to improve the company. We can only hope the latter happens to Vigor until a more constructive national policy comes along.
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