With three nuclear-powered aircraft carriers and 18 nuclear-powered submarines—the heart of America’s future Navy—either under construction or authorized for construction, America’s shipbuilding industrial base is facing enormous strain. It doesn’t make big headlines, but the naval race for additional shipyard throughput is so dire that the U.S. government, over the past five years, has expended some $2.3 billion to bring new manufacturers—both proven and unproven—into the tough business of building nuclear submarines and aircraft carriers. Some of these companies are struggling.
While well-managed and proven outsourcing partners—like the submarine-oriented focus factories run by shipbuilder Austal USA or maritime manufacturer Rhodes Industries—are demonstrating their value to the shipbuilding industrial base, better vetting, stronger oversight and tougher partner management tools can help other new and unproven manufacturers succeed, avoiding catastrophic missteps.
In dispersed manufacturing, quality and dependability are critical. Just one or two bad or delayed hull units, buried deep in a ship or submarine, can spark enormous, cascading scheduling challenges or cause persistent problems over the life of the platform.
Some small hiccups are inevitable, and America’s nuclear submarine and aircraft carrier programs have multiple levels of quality controls in place. But, as the industry catches quality issues or works around production delays, some of these new and innovative members of the shipyard supply chain—which may been entrusted with tens of millions of taxpayer dollars—are proving to be incapable, unprepared, or, possibly, untrustworthy.
Though the U.S. Government and the Navy like to play matchmaker, sometimes forcing innovative partnering solutions onto industry, they also tend to move too slowly when things go irrevocably wrong. The shipbuilding industrial base needs better tools to either quickly unwind partnering relationships when things go awry, or, in the face of political pressure, stronger authorities to try and recover sunk costs from any derailed outsourcing venture.
The Navy’s historic demand for new ships and submarines creates tremendous opportunities throughout America’s shipbuilding industrial base. But it also creates equal and opposing pressures that, if left undetected and unresolved, threaten to degrade the entire enterprise, inflicting great harm on America’s nuclear aircraft carrier and nuclear submarine fleet. And, with more funds on the way to support innovative, disaggregated and outsourced approaches to shipbuilding, both industry and the U.S. Government must start converting failures into teachable moments.
Navy’s Outsourcing Performance Has Varied:
In late 2022, Vice Admiral James Downey, the present commander of the Navy’s shipbuilders at the Naval Sea Systems Command (NAVSEA), sketched out the Navy’s first shipyard outsourcing efforts for Defense News, detailing how, for the future nuclear-powered super-carrier USS Enterprise, “companies like W International in South Carolina and Fairlead Structures in Virginia” were “building some 189 hull units” for the new carrier. He continued, “two dozen-ish have come in so far from various suppliers; so far, quality is OK.”
The Admiral’s upbeat sentiment apparently glossed over what must have been some ugly performance issues with the 89 “large” modules awarded W International in the Enterprise contract.
Today, W International’s shipbuilding business has almost entirely collapsed. The company, the first of America’s innovative submarine-oriented “Focus Factories”, and once widely portrayed as an innovator and a potential major contributor to both America’s nuclear aircraft carrier and submarine programs, is in real trouble.
Shipbuilders are voting with their feet. Executives, speaking on background, stated that aircraft carrier builder HII
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Prospects for the upstart manufacturing company seem grim. And, with the Department of Justice also apparently eying the company’s business practices, the entire enterprise may end up as little more than an ugly court case.
For the normally stolid, slow-moving defense industrial base, W International’s arc from a triumphant, in-demand defense manufacturing start-up into something of a cautionary tale has been rapid.
Even worse, the taxpayer is on the hook for this failure. Millions of dollars in equipment and government support—used to give the manufacturing start-up a shot at handling complex shipbuilding contracts—may be lost. Internal documents suggest some $150 million has gone into making W International a viable site for complex manufacturing. W International’s industry partners have provided infrastructure investments, employee development aid, favorable payment terms and ongoing onsite support. The company has received millions in submarine supplier reconstitution funds, and, in 2020, the Pentagon awarded W International $55 million in Defense Production Act funding to aid COVID-19 recovery efforts. State and local grant money has flowed in. And, if W International collapses, it may all be unrecoverable, lost to capital investments, salaries and overhead.
W International’s distressing situation was avoidable. A quick review of the company’s origins suggests that W International was set to be troubled from the start, and that W International’s founding leadership never should have been offered an opportunity to engage in the critical government business of building nuclear submarines and aircraft carriers.
W International As A Cautionary Business Case:
While W International opened for business within the last decade, W International really got started years ago, as a humble company called W Industries. Detroit-based W Industries started out in 1981 as an automotive supply company, making wooden crates to ship car windshields and windows. Edward Walker, the founder’s son, took over in 1996. The younger Walker quickly diversified, pushing the company into the defense market, and, ultimately, won contracts to supply armored vehicle components for the likes of General Dynamics and AM General.
On the surface, everything went well under the young Mr. Walker’s leadership. A Midwestern echo of the now-disgraced Silicon Valley entrepreneur Elizabeth Holmes, the New York Times
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To outside observers, the company was a success story. And it was—for a while. After posting $150 million in revenue in 2009, sales at W Industries, according to Walker, were growing at a torrid 30 percent. The company expanded into three campuses with a total of 600,000 square feet of facility space. By 2010, the New York Times reported Walker expected the company to make “at least $150 million” and to double the company’s work force to 500.
It didn’t happen.
Walker’s rosy projections were overstated by half, and, after generating only approximately $65 million and employing just 250 workers in 2010, the company unraveled.
The demise was surprisingly quick. By 2011, W Industries was bankrupt, in what observers called a “classic case of a family-owned business that assumed too much risk too quickly in pursuit of higher revenue and profits.”
Subsequent legal action revealed that W Industries wasn’t just a single company, but a nest of interrelated, hard-to-trace subsidiaries and shell companies, including Metal and Welding Industries, Inc., W Industries Inc., W Aerospace, Inc., and M&W Industries.
The demise of W Industries didn’t stop Edward Walker. He relocated his “W” brand business model to South Carolina, and, by December 2018, W International had assumed control of a barren, former liquified natural gas tank manufacturing facility on the Cooper River, 25 miles north of Charleston. Declaring that the 45-acre site with 480,000 square feet of indoor manufacturing space was ready to take on shipbuilding business, Walker, ever the marketer, told reporters that the new facility would cost $60 million, and relayed a plan to grow to 1,000 employees by late 2023.
It all looked and sounded great, but, to a seasoned observer, Walker hadn’t changed his operational style one bit. While W International has converted a largely-abandoned shell into a functional manufacturing center, Walker’s optimistic growth projections from 2018 have yet to be realized.
W International, like W Industries, is also clearly involved with other entwined LLCs that are controlled by Walker. Vivid Empire—an LLC associated with Walker—assumed control of the manufacturing facility for what appears to be $13.85 million. Assuming Vivid Empire (Or, variously, seemingly related entities like Vivid Empire SC
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Of course, multiple LLCs are nothing sinister in themselves. To help limit liability and risk, nesting LLCs are a common feature of many companies and many shipbuilders. The owners of Eastern Shipbuilding—builders of the Offshore Patrol Cutter—and other members of the shipbuilding community maintain complex, interlinked LLC networks, and it is normal business practice.
But this organizational complexity, if overlooked and unwatched, breeds opportunity for malfeasance.
In any nested LLC enterprise, stressed and overtasked outside evaluators will struggle to understand the complex relationships between ostensibly independent-but-secretly-intertwined enterprises. It’s a daunting accounting challenge for even the best forensic auditor to quickly detect overly favorable business dealings between ostensibly unrelated subsidiaries. Suspicion, followed by a courtroom investigation are often the only ways to get a definitive answer.
For W International, things don’t look good. Currently, the U.S. Department of Justice, according to a Civil Investigative Demand, is exploring the potential misappropriation of Supplier Development Funds and Defense Production Act Funds, and demanding—in part—information on W International’s relationship with Precision Material Handling Equipment, LLC, a company easily traced back to Edward Walker.
With lax oversight, the temptation, for example, for companies to award an overly high bid for, say, welding materials, to their own “unrelated” enterprises can be tough for some entrepreneurs to overcome. These types of sweetheart deals are often hard to detect, and they can look perfectly normal to all but the most experienced and tenacious of auditors.
In the wrong hands, LLCs are powerful tools to avoid accountability. In the event a contract goes bad, bankruptcy adjudicators have a tough time identifying a viable responsible party or retracing asset flows. A contract made to a vaporware LLC—while company “assets” are protected in a different LLC— is not worth the paper it is printed upon.
Another challenge with Matryoshka Doll LLCs is that Navy guidance and taxpayer largesse can be tough to recover. It is hard to claw back funds and training expenditures if they have been siphoned away, lost amongst a myriad of different, seemingly independent and unrelated enterprises.
The apparent fiasco at W International was avoidable. Any basic analysis of the company’s origins should have indicated, at best, a tendency towards overreach. The array of nested companies associated with Ed Walker was another warning that asset accounting and financial tracking was likely to be a challenge. Given the red flags, any U.S. government or corporate support to this troubled South Carolina focus factory should have come with strict claw-back rules, or, at a minimum, a means to compel the departure of the current owner, allowing the government and industry another opportunity to recover costs via a new start under a more transparent, responsive and credible leadership team.
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