OSHKOSH, Wis. — Just as the recession was threatening the Oshkosh Corp. with ruin, after builders stopped ordering drywall lifters and cement mixers, and cities stopped buying fire engines and garbage trucks, the little-known specialty truck company went after a long-shot Pentagon contract.
Its bid to build a 24,700-pound armored truck for the front lines of Afghanistan pitted Oshkosh against much bigger and betterknown contractors. But Oshkosh engineers went hard after the deal, designing a suspension system that allows each wheel to slide up or down by as much as 16 inches as the truck drives through ruts or over rocks, carrying five soldiers up inclines of 60 percent in forward and reverse. Not only that, Oshkosh had so much idle capacity at its factoriesthat it could get to work immediately and deliver trucks to Afghanistan speedily.
Oshkosh won the $3.2 billion deal this summer and hired 600 workers, helping to lower the city’s unemployment rate to 7.6 percent this fall from a high of 9.5 percent. And after taking a $1 billion loss in fiscal 2009, the company is onthe mend. It landed several other military deals as well, most recently for 400 more armored trucks, and in November reported its first profit from continuing operations after three quarterly losses. It says it expects to be “solidly profitable” next year.
Oshkosh is among a number of manufacturers trying to figure out how to retooltheir assembly lines in an effort to survive changes wrought by the recession. Many see the quarter-trillion dollars a year that the Pentagon spends with defense contractors as a potential lifeline, which has made always sought-after defense contracts even more hotly contested.
That appeal has put Osh-kosh in the middle of a fight to hold onto a different contract, worth up to $3 billion, to make more than 23,000 medium-sized trucks and trailers for the Army. In August, Oshkosh beat out two heavyweights in the defense industry - Navistar and BAE, which is Europe’s biggest weapons maker and has been producing a line of the trucks for 17 years. The losers, who had also competed for the Afghanistan armored trucks, protested the decision with the Government Accountability Office.
Last week, the GAO said the Army’s evaluation of part of Oshkosh’s proposal for that contract was “flawed,” and it advised the Army to re-examine the bids. The Army has 60 days to respond.
The competition has launched a debate about whether jobs should be considered in awarding contracts. The Air Force’s effort to build a new aerial-refueling tanker offers another example. Some congressional leaders and economic development officials argue that the number of jobs created or cut should be a factor, especially given the country’s poor economy and rising unemployment.
“This is the only country in the world where major weapons contracts are awarded without any thought to their economic impact,” said Loren Thompson, a defense industry consultant at the Lexington Institute.
While the Pentagon does consider questions of price, technology, quality and other factors on a weapons program, it doesn’t consider job creation specifically, and some say that it shouldn’t.
“The [Department of Defense] is not a social-service organization,” said Jacques Gansler, who served as thePentagon’s top weapons buyer in the Clinton administration. “Its mission is providing national security for the nation. Its mission is not to provide subsidies for jobs. The [agency] is not in the business of employing people for the sake of employing them.”
In the Houston area, where BAE builds its medium-sized trucks, politicians and economic development leaders say losing the contract could mean the end of more than 3,300 jobs and cost the economy an estimated $1.8 billion annually. For Oshkosh, defense industry analysts say losing the contract could mean job reductions and a loss of up to $800 million a year in sales.
Oshkosh has been more agile than many in becoming more of a player in the defense industry, military analysts say, increasing its Pentagon business in the past year to $2.5 billion, or nearly 50 percent of its annual sales from 27 percent of its total sales.
“The Army’s truck contracts were a godsend for Oshkosh because the meltdown of the private-sector construction had left their commercial-truck business in dire straits,” Thompson said. “What the Oshkosh case demonstrates is that defense spending not only protects the country from attack but also bolsters the manufacturing base against ups and downs in the economy.
“At precisely the time that Oshkosh’s commercial business got into trouble, military contracts were the one thing that enabled it to maintain its plants and work force without suffering any damage,” Thompson said. “If we can buy military systems we need and preserve the country’s industrial capabilities, it is a win-win situation for the nation.”
Many Americans knowthe city of Oshkosh, which sits roughly 80 miles northeast of Milwaukee on Lake Winnebago, for the children’s clothes once made there. Oshkosh B’Gosh started in the late 1890s making men’s overalls and became a major employer. Over the past two decades it stopped manufacturing in Oshkosh, and in 2005 it was bought by Carter’s. Manufacturing jobs in the region have dropped in the past decade to 44,200 in October, from 60,200 in October 1999.
Today, the center of economic life for the city of 63,600 is the Oshkosh Corp., which one employee dubbed “the golden goose.” The number of jobs in the Oshkosh area has risen 3 percent in the past decade, compared with the nation’s 1 percent job-growth gain, according to the Bureau of Labor Statistics.
Oshkosh Corp.’s biggest plant, which is making the armored trucks for Afghanistan, sits a few blocks off Main Street, near the railroad tracks and across from a venison butcher.
Inside, scores of workers stand along assembly lines in two shifts, drilling, pounding, mounting and screwing together parts on what the Pentagon says is one of its most needed pieces of equipment in Afghanistan - armored trucks known as M-ATVs, or mine-resistant, ambush-protected all-terrain vehicles.
Founded in 1917, Oshkosh Corp. was best-known for making all-wheel-drive vehicles for snow-plowing and milk and mail delivery. It hit it big in the 1980s when it won a contract with the military to build cargo trucks.
When Robert Bohn, a manufacturing executive for Johnson Controls, a major auto supplier, became chief executive in 1997, he led the company on an aggressive acquisition spree, buying 15companies in a decade and building to 14,000 employees worldwide. But when the housing market tanked, so did Oshkosh. Sales of some of its commercial equipment plunged as much as 90 percent. “It was the worst we’ve seen it in 70 years,” Bohn said.
That forced the company to lay off 2,500 people, about 16 percent of its work force. It cut $200 million in costs. Managers took 10 percent to 15 percent pay cuts. Gone were the company cars and cell phones, and the countryclub memberships for top executives. Its debt piled up to roughly $2 billion, forcing it to renegotiate with lenders. For fiscal year 2009, it reported a $1 billion loss, which included a $1.2 billion noncash writedown of good will and other intangible assets.
Enter the Pentagon.
Not only did Oshkosh offer a good price - about $440,000 each - for the armored trucks, military analysts said, but its idle capacity in Wisconsin and McConnellsburg, Pa., allowed it to ramp up quickly.
“It is a game changer for Oshkosh,” Bohn said. “We’re no longer a small, Midwest company that makes just specialty vehicles.”
The company expects to deliver the last batch of the M-ATVs by spring and its employees, many of whom had been laid off from other jobs, are hopeful that President Barack Obama’s decision to send another 30,000 troops to Afghanistan means more contracts to bid on -and win.
“I hope it means more job security for us,” said Shawn Koepke, 31. He took a $10-anhour pay cut when he started at Oshkosh more than a year ago, and now he and his wife are expecting their first child. “I’d like to wish for the best, but I don’t know.”
Business, Pages 49 on 12/27/2009