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Loss of FMTV Contract Hangs Over BAE Systems and Sealy, Texas

by: Matthew Potter
August 6, 2010

Category: BAE Systems, Business Line, Companies, Congress, Contract Awards, Department of Defense, Events, Federal Budget Process, logistics, Oshkosh Truck Corp, production program, Proposal, Protest, Restructuring, Services, States, Texas, U.S. Army, Wisconsin | RSS 2.0

Over a year ago the U.S. Army awarded the latest contract to manufacture their standard truck and trailer combination, the Family of Medium Tactical Vehicles (FMTV), to Oshkosh Corporation (OSK). The Wisconsin based manufacturer of fire engines, construction vehicles and heavy transport vehicles for the U.S. military won a contract valued over $3 billion as the U.S. moves to replenish its truck fleet from the long years of fighting in Iraq and Afghanistan.

Previous to this contract award the FMTV line had been made in Sealy, Texas by BAE Systems (BAE:LSE), who had acquired the company making them in a deal in 2007. That company, Armor Holdings, was doing well with the current combat operations providing armor and other support to the U.S. forces but one of their key product lines was the FMTV production. The original FMTV contract was awarded to Stewart and Stevenson Services, Inc. in 1991. Over the years that company and factory produced thousands of the ubiquitous trucks.

BAE protested the award to Oshkosh when it was announced in 2009, and the Government Accountability Office (GAO) did uphold their protest in December directing the Army to review how the contract was awarded. It did not overturn the award to Oshkosh. While all this was going on the Texas and Wisconsin Congressional delegations were fighting in support of the contract and their state’s companies as the number of jobs related to this contract were in the thousands. With the loss of the contract Sealy would be devastated as Oshkosh intended to use their existing plants to handle the work.

In February the Army reaffirmed the award to Oshkosh and the process of winding down the production line in Texas began.

Now BAE Systems has announced that the first 1,300 jobs will be eliminated with almost all of them at the Sealy plant. The town of just over 5,000 people is about to see its primary employer and economic engine disappear. With the U.S. remaining in an economic downturn the chances of a major contract or work being started at the plant is minimal in the short term. Without the contract BAE does not have any funds to keep the work going and the workforce will have to be reduced.

Because of the loss of this contract as well as paying a fine over charges relating to accurate records regarding a contract with Tanzania the BAE suffered a loss for 2009. The charge related to the Armor Holdings contract was over $1 billion. Oshkosh on the other hand due to this win as well as getting the contract to build the new, lighter MRAP-AT for use in Afghanistan was able to offset the performance of its commercial lines in 2009 and while it saw a decline in earnings of over twenty-five percent without these two contracts it would have been much worse.

The U.S. Defense Department usually buys equipment in discrete amounts. This is especially true in times of peace. While building the required quantity of the system the services develop its replacements. Then these go into production. This means that a company with a contract knows at some time it will end. Plants built just for that production will find themselves without work and must be shuttered or converted to a new product. The situation with the FMTV was different in that the military chose a new supplier for an existing item, but it amounts to the same. BAE Systems without a new product to make at the Sealy plant will have to close it or find a buyer who has something to make there. The U.S. has many plants like this where the military moved to a new company or source.

That Oshkosh is employing thousands in Wisconsin many who are newly hired to build the FMTV is little comfort to those in Texas losing their jobs, but often the defense budget is boom-or-bust for companies, towns and states. The defense budget only goes so far and the military only needs so much of a given system.

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