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Labor Woes Add to Oshkosh’s Struggles

by: Matthew Potter
October 3, 2011

Category: BAE Systems, Business Line, Canada, Companies, Countries, Department of Defense, Events, logistics, Oshkosh Truck Corp, production program, Proposal, Services, Sikorsky, States, U.S. Army, U.S. Marine Corps, UTC, Wisconsin | RSS 2.0

Further Update – It has been announced the Union has accepted the latest offer from the company and a new five year contract has been signed.

Update – The Union voted on Saturday the 8th on an updated proposal from the company and again turned down the offer. The Union has offered to continue negotiations.

Oshkosh Corp. (OSK) is one of a few, recent stories of success where a company is able to expand its business into defense from its more traditional lines of work. Oshkosh is traditionally a manufacturer of construction and emergency vehicles but was able to win two major defense contracts for support vehicles in the last five years. These have generated a great deal of revenue and some profit for the Wisconsin company when its traditional work was declining due to the global economic downturn.

Oshkosh was able to win the production contract for the U.S. Army’s standard truck, the Family of Medium Tactical Vehicles (FMTV), as well as a new Mine Resistant Ambush Protected (MRAP) for Afghanistan called the MRAP-All Terrain Vehicle (ATV). This was designed to be lighter and more maneuverable for use in Afghanistan’s rougher terrain with its limited roads.

The MRAP contract, though, is winding down as the need for the vehicles declines. The U.S. is planning on leaving both Iraq and Afghanistan in the next few years and is struggling with fitting the MRAP, which is primarily a heavily armored bus, into its tactical Table of Organization and Equipment (TO&E). If the next war includes a different threat then the role of the MRAP will be limited. This means that Oshkosh needs to find new customers or new work for their rapidly built up production capability for the MRAP.

The winning of the FMTV contract from BAE Systems (BAE:LSE) who had purchased the company that had that work for over twenty years was driven by price. Oshkosh bid very aggressively and hoped to make money off of modifications and other work related to the vehicles. Even though the Army and Marine Corps are buying thousands of those vehicles the margin on them is very low.

These two issues have combined to limit Oshkosh’s profit. The company is bidding on Canada’s new contract for an armored vehicle to help its situation but budgetary pressures will probably reduce its options for new contracts and new systems.

Now Oshkosh faces labor issues. Unlike BAE’s Sealy, TX workforce its is unionized. There current contract expired last Friday and the new one was voted down by the United Autoworker’s Union (UAW). As with many current labor negotiations healthcare costs and other issues remain the primary areas of disagreement.

Right now the union workers are not on strike and Oshkosh has not locked them out and the two sides met this weekend for more discussion. If the problems are not resolved in the near term though either could happen disrupting production for the military and affecting Oshkosh’s revenue.

Strikes are uncommon in the defense world as few major contractors are unionized. Sikorsky, part of United Technologies (UTX), had an ugly strike about six years ago that caused issues with UH-60 Black Hawk and CH-53E Sea Stallion helicopter production and took several months to recover from. Oshkosh is not facing that situation but it does add pressure to the company as they are trying to negotiate limited cost growth to maximize the profit from their products.

The next few months could be critical to the company’s defense prospects as the opportunities for new contracts in the U.S. are limited and there may be cuts to existing ones if there is a big decline in defense spending. This means it would be best for the union and the company to resolve their issues quickly and avoid a long term conflict.

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