Economy

Austal’s innovative manoeuvres

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How Austal’s executive chairman John Rothwell saved his business from the twin terrors of the oil price and the dollar. By TIM TREADGOLD

By Tim Treadgold

Austal John Rothwell

How Austal’s executive chairman John Rothwell saved his business from the twin terrors of the oil price and the dollar.

Harry Houdini has nothing on John Rothwell. All the world’s greatest escape artist ever did was unlock handcuffs underwater and hang upside down from tall buildings in a straitjacket. Rothwell (pictured) has guided Australia’s biggest boat-making business through the twin terrors of soaring oil prices and a rising dollar.

While other transport companies have been trashed by the oil price, and most export-focused manufacturers stung by the dollar, Rothwell’s company, Austal, has survived, prospered, and is emerging as a significant winner from rising worldwide spending on defence.

Two key moves have saved Austal. As the Australian dollar has risen it has been busy growing a US boat-building centre, while to combat the higher oil price Austal switched focus from its traditional commercial ferry work to defence contracts.

In effect, Rothwell has expanded Austal into military business where fuel prices are a secondary factor, and expanded manufacturing in the US, which has switched from being a country with a high-value currency into a cheap-currency country.

“I would love to think that it was a clever move on my part, that I could see the deterioration of the US dollar, but in essence we went there because I believed there would be a future in defence contracts,” Rothwell says.

He is, of course, being modest. Getting it right, repeatedly, in tough trading conditions is what business management is all about, and that’s what Rothwell has been able to do with Austal since it listed on the stock exchange in 1988.

First, he carved out a niche manufacturing operation in WA, a state where most manufacturers fail, and second, he has been able to adapt to changing business conditions – the true mark of an innovator.

Mining, oil and farming are the backbones of the WA economy. Shipbuilding, with a specialist focus on aluminium, is an anomaly that grew from the roots laid down in the 1970s by a Dutch marine engineer, Dick Verboon, and expanded thanks to Australian Government grants and high-quality workmanship. Today, Austal ferries are found as far afield as China, Turkey and Hawaii.

But, as every Australian exporter of manufactured goods has discovered over the past decade, the rise of the dollar has devastated profit margins. More recently, anyone selling a product that consumes oil, from aviation to vehicles, has watched sales plummet.

Rothwell’s fortuitous twin switch is showing up in Austal’s accounts. In the latest reporting period (the half year to 31 December) revenue rose 33% to $333.7 million and after tax profit was 54% higher at $29.9 million.

The growing importance of the US to Austal is evident in two ways. More than half of the company’s revenue is expected to come from there next year, versus 35% two years ago, and Rothwell’s successor, when he moves up to the role of non-executive chairman, will be an American.

Bob Browning, better known for his time as chief executive of the gas and electricity utility Alinta, takes the Austal reins on 22 August after serving his apprenticeship running the US operations out of Mobile, Alabama.

Investors are treating the re-focus of Austal with caution. Over the past 12 months the company’s share price has slipped from $3.40 to $2.50, partly in reaction to uncertainties associated with the US defence push, and also because of a possible change ahead in Australia with Austal bidding for the Adelaide-based Australian Submarine Corporation (ASC).

“There are two major issues affecting our business,” Rothwell says. “One is the increasing focus, as a global business, on defence related orders which offsets, to a certain extent, a substantial knee-jerk reaction to the fuel crisis. The US work also means we’re less exposed to the Australian dollar.”

However, the real message lies in Rothwell’s succinct summation of why defence is good business: “Defence will buy when it wants to buy.”

Commercial ferries and “gold-plated” cruise vessels for rich people, including a monster for golfer Greg Norman, will remain offerings from Austal, but Rothwell admits that demand and profit margins in the commercial sector are being squeezed.

“We might, one day, build more commercial vessels in the US, but the defence programs in the US are huge and we’re looking very good for a big chunk of that.

“It’s also very difficult to mix defence and commercial in the one shipyard. It’s an entirely different culture with intense security requirements. The ships we’re building are fitted with complex combat systems.”

The big potential winner for Austal is a new class of warship known as a Littoral Combat Ship (LCS). The US navy is experimenting with a number of designs, with Austal’s being a 127-metre twin-hulled vessel which can carry two helicopters and operate in zones up to 1000 kilometres from the coast. Current US Navy planning is for a fleet of 55 LCS vessels, each costing several hundred million dollars.

“Our opportunities are so big in the US that I think we’ll avoid doing commercial work there,” Rothwell says. “One day we might look for a new commercial yard, but it’s really very difficult to run the two businesses from the same location.”

Rothwell says that even if Austal fails to buy ASC, it is still likely that it will be split into a defence and commercial operation.

“We have a very large chunk of the global ferry business and while one side of me says planes will continue to fly with high fuel prices, and high-speed ferries will continue to run, it is unlikely to grow and might even contract a little.

“For Austal to get its growth we need to go down the defence road because there will always be fuel for warships.”

 

Read more on fuel issues and innovation

 

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