Capt. Tom Vecchiola, USN Ret., the CEO of VT Systems — an ST Engineering company — and Brig. Gen. Ron Baczkowski, USMC Ret., the president of VT Halter Marine, discuss the company’s $750 million contract to build three heavy icebreakers for the US Coast Guard, it’s strategy to grow its US footprint and its impending name change with Defense & Aerospace Report Editor Vago Muradian. The interview was conducted at the Navy League’s 2019 Sea Air Space conference and traddeshow near Washington where our coverage was sponsored by GE Marine, Huntington Ingalls Industries and Leonardo DRS.
Vago Muradian: Welcome to the Defense and Aerospace Report. I’m Vago Muradian here at the Navy League’s Annual Sea Air Space Conference and Trade Show, the number one gathering of U.S. Navy leaders from around the world along with their international counterparts to discuss strategy, budgets, technology, and more. Our coverage here is sponsored by GE Marine, Huntington Ingalls Industries and Leonardo DRS.
We’re over here at the ST Engineering stand to talk to Tom Vecchiola who is the President and CEO of VT Systems which is the U.S. subsidiary company of ST Engineering which is Singapore Technology Engineering, who is a retired United States Navy Captain and the parent company of VT Halter Marine represented by Brigadier General Ron Baczkowski who is the President and CEO of VT Halter Marine. Guys, I want to say congratulations on winning the big heavy icebreaker contract for the United States Coast Guard. Three ships, $750 million which is good work if you can get it, which will be built, Ron, in your yard down there in sunny Pascagoula, Mississippi.
But first, Tom, let me start with you. Give us kind of an overview on ST Engineering but also VT Systems. That’s Vosper Thornycroft which is a legendary name; Halter another legendary marine name that the company has acquired. You guys also have made Middle River, which is an aircraft company which you guys have recently acquired also, so it looks like you’re on a growth spurt. But give the audience a sense on VT Systems and ST Engineering and what you guys bring to the market.
Tom Vecchiola: Vago, first off, it’s a pleasure to be here and we’re delighted to have been awarded the Polar Security Cutter for the United States Coast Guard out of the Joint Program Office of the Navy and the Coast Guard. So thanks for the congratulations.
VT Systems is the wholly owned subsidiary, as you mentioned, of ST Engineering, a global engineering company with three major verticals, marine being one of the major verticals.
Here in the U.S. we have 15 subsidiary companies of which Halter Marine is one of our major subsidiaries. And we do everything from aviation maintenance repair and overhaul work in the commercial aviation world to satellite communications to shipbuilding. So we have three major verticals along the lines of marine, aerospace, land systems and electronics.
Mr. Muradian: And it’s also a company with extraordinary global reach given that ST Engineering has branches, divisions, and operations globally.
Mr. Vecchiola: Truly a global company, and here in the U.S. we have over 5000 employees, about $1.6 billion in annual revenue. And you mentioned ST Engineering, our parent, continues to invest in the United States. We’ve recently closed on a major acquisition with Middle River Aircraft Systems. And of course we’re significantly leveraging and invested in the shipyard in Pascagoula, our two shipyards in Pascagoula.
Mr. Muradian: Ron, that’s where you and your business come in.
So first, let me ask you, what do you think were the attributes of your ship and your design that beat out the competition at the end of the day? Hard fought. Folks wanted that contract as well. Bollinger and Fincantieri obviously, the other competitors in it. Talk to us about what gave you guys the edge.
Ron Baczkowski: We don’t know for sure, but we think we had the best value for the government. And it didn’t just start with the RFP, but we did a two-year study, a competitive study with all of the competitors, five different teams, and we put a lot of thought into how we’re going to make this, design this icebreaker. I think that’s the good news story. Because of the Navy and the Coast Guard’s industry study, they’re going to get a great ship because they really did it the smart way, reaching out to industry to see what was possible and what was best.
On our design, I think we read the RFP very closely and carefully, and we strategized. We talked to engineers, we talked to the experts in polar icebreaker construction. We even talked to the operators. We took all the lessons they’ve learned and all of their advice, rolled it into our design, allowed us to meet or exceed, in all cases exceed the minimum requirements that the Coast Guard and the Navy put out. So I think the design is what really put us over the top. We had a great design agent with a company called Technology Associates, Incorporated, or TAI, out of New Orleans.
Mr. Muradian: Talk to us a little bit about the investment that has to go into the yard. Because folks as they look at it say look, you guys, on the metallurgical side you have to roll very thick but also very, very hard steel, which is polar hardened steel. You’re building a ship that’s much larger than any ship that’s been built in your yard before.
Talk to us about the kind of investment that you and you’ve got to look to Tom in order to help try to underwrite, and he may have to look to Singapore to say hey, we might also need some resources.
Mr.Baczkowski: There’s definitely going to be some investment there, but we built that into our bid, and we’ve also built that into our current location. The State of Mississippi, for example, is going to provide some grants to help us with workforce development and infrastructure improvement. It just makes the Gulf Coast a much better place and more competitive place to do shipbuilding.
As far as the investment, most of our investments are going to be done to increase productivity and deal with the specialized construction of an icebreaker. Very deep and thick shells, very deep frames, very difficult to get in. So we’re going to have a lot of automated welding, robotics welding into places where a man cannot get inside. It will not only result in higher quality welds, but it will deal with welds that would be very difficult to do by hand. So we are shortening and improving production and bringing in productivity that way.
Mr. Vecchiola: I’d just add on that ST Engineering Marine is a global marine shipbuilder and we’re certainly leveraging the technologies that they’ve developed and actually positioning the company from an investment perspective and capital expense just to actually reinforce the commitment that ST Engineering has to the U.S. market.
Mr. Muradian: You answered exactly the question I was going to ask you, which is what is some of the technology that ST is bringing to the party, given that Singapore is a high labor cost nation, but it still is an exporter, for example, of ships in part because of robotized technology.
So Ron, how do you respond to some of the folks here who say hey, for the amount of money that you guys bid and won this for, it’s going to be very, very tough to execute. How do you respond to that kind of criticism? And it didn’t come from your direct competitors, by the way. It was just an observation some folks were making.
Mr. Baczkowski: I’m sure everybody is wondering how are we going to do this. There hasn’t been a heavy icebreaker made in the U.S. for over 40 years. That’s why we reached out to people that do it all the time. The Fins and the Germans. And we captured best practices. We’ve actually had a Finnish company come in, look at our yard, tell us what we’re doing right now that will meet the requirement, giving us ideas on how we can do capital improvements that will take us to the next step. And we’ve done a lot of study on this, not just on the design, but how we construct this vessel. I think we should be all right.
Mr. Muradian: Tom, do you think this give you a leg up on the other three medium icebreakers? Are you guys going to be pursuing that as well?
Mr. Vecchiola: Certainly our performance on this will I think assist us in the future. It’s certainly going to be a Coast Guard decision on how it goes, but I think that we’d like to prove ourselves to the Coast Guard. They’re a new customer for us so we’re extraordinarily pleased that they’ve selected us and we are putting our best foot forward to ensure that we can deliver the customer what the customer contracted for us to deliver.
Mr. Muradian: Ron, have you guys sketched out what that medium icebreaker looks like and already talking to the Coast Guard about what it is they want out of that medium Polar Security Cutter?
Mr. Baczkowski: We’re focusing on the task at hand, but we think that our design probably could lend itself very well to what they want to achieve with the medium cutter as well. In the process of designing the heavy cutter, heavy polar icebreaker, we looked at how would we power differently? Or if they wanted the same hull design, a lot of the cost is in design. So if they use the same design and put that on top of our learning curve, the government could save a lot of money possibly, and that might be a good move in itself.
We’ll make that, do that study and make that recommendation as we go along, but I think that will bear out to be true.
Mr. Muradian: Tom, how do you want to grow the business? Something like this is always a great win, assuming you guys execute it well, that opens doors. Where do you want to see the company in five years? And I want to ask you, Ron, the same thing in terms of the shipyard growth. What are the other kinds of business you guys want to grow into when it comes to U.S. government work on the marine side of things?
But I want to start macro company with you. You guys have drone-busting technology, command and control. The amount of capability in the company is considerable.
Mr. Vecchiola: I think I mentioned, Vago, that we’re along four verticals right now. Marine, aviation, electronics, and land systems. So we actually have two focus areas of our continued growth. One is in the area of defense. So obviously the PSE Award fits right into that strategy of growing our defense market here in the U.S. We have four other companies in the U.S. that do defense specific solutions. We’re looking for the opportunity to bring capabilities and technologies that were developed off-shore in Singapore and other places in the world, and bring them into the U.S. through our U.S. footprint.
The other area that we’re leveraging is in the area of smart cities. If you’ve ever been to Singapore or folks that are observing this have been to Singapore, know that they are the tier one country that has implemented smart technologies. So now we’re looking for opportunities to bring those technologies into the U.S. as well.
So those are our two major focus areas, and of course we want to focus on our core businesses and grow them as well.
Mr. Muradian: Ron, how are you going to expand and grow your naval business on the back of this tremendous win?
Mr. Baczkowski:I think that we have an edge that we can build a relatively large ship, but we can customize it for the exact requirements of the customer. As an engineering company, if they need to break ice, we can do that. If they need to carry liquid natural gas with a very low temperature, we can do the engineering that would design the tanks to carry that.
So I think this puts us up well for specialized ships, ones that aren’t production runs but we’re willing to build and we can do the precise engineering to make it fit the customer’s needs.
Mr. Muradian: And the Navy is looking for shipyards to try to help alleviate some of its maintenance burden. Is that something you guys are going to be pursuing as well?
Mr.Baczkowski: Sure, we also have in our adjacent yard a repair capability with a drydock. In fact we prepare Navy auxiliaries right now and we could expand, certainly look to expand that.
Mr. Muradian: Tom, any last thoughts from both of you guys?
Mr. Vecchiola: No, it’s a great show and we’re glad to be here and we really appreciate the confidence that the Navy and Coast Guard have exhibited in the award.
Mr. Baczkowski:We’re absolutely thrilled to be selected, and we know the hard part is ahead, but we’re equally thrilled and ready to buckle down and get ready for the production.
Mr. Muradian: Retired United States Marine Corps Brigadier General Ron Baczkowski who is the President and CEO of VT Halter Marine; and Tom Vecchiola, the President and CEO of VT Systems, that’s the parent company. Guys, congratulations. I look forward to visiting the yard one of these days and eventually getting underway on the new Polar Security Cutter.
Mr.Baczkowski: Come on down. You’ll like it.
Mr. Muradian: Are you pretty confident there’s going to be no protest? Do you have any word yet on how that’s coming out?
Mr. Baczkowski: We’ll have to wait and see. Right now it’s figuring out what we have to do. If there’s a protest, we will look at it. We have no indication right now that there is one. We’ll just wait and see and continue to get ready.
Mr. Muradian: Tom, should we read anything into the fact that it says ST Engineering here in terms of a branding?
Mr. Vecchiola: We’re actually here, June 30thwe’re going to introduce VT Systems, soon to be renamed as ST Engineering North America.
Mr. Muradian: That makes it a little bit easier for people who are trying to follow along the ST story.
Mr. Vecchiola: And it’s consistent with our global branding initiative.
Mr. Muradian: Tom, thanks very much. Ron, fair winds, following seas to the both of you, and I look forward to staying in touch.
Mr. Baczkowski: Thanks, Vago.
Mr. Vecchiola: Thanks, Vago.