(This article was written by H. B. Meyers and published in Fortune, November 1969.)
Everything went wrong when the venerable boilermakers turned to building pressure vessels for atomic reactors. The whole electric-power industry felt the consequences.
The long-awaited transition for the U.S. electric-power industry into the nuclear age has been slowed by a number of factors, including technological difficulties and public resistance. But a specific and unexpected cause for delay has been one company's crucial failure to deliver a single vital component of nuclear power plants. The failure, basically, was a management failure, and on a scale that would be cause for concern even in a fly-by-night newcomer to the nuclear industry. The company, however, was no newcomer. It was proud old Babcock & Wilcox Co., a pioneer of the steam generating business, whose boilers were used in one of the first central power plants ever built (in Philadelphia, in 1881). Babcock & Wilcox had an impressive $648 million in sales last year, making it 157th on Fortune's list of 500 largest industrials, and it has been engaged in nuclear work in a major way for 15 years, producing, among other things, atomic power systems for Navy submarines.
Moreover, the corporation is one of only five that are engaged in building nuclear power plants in the United States. With consumption of electricity growing by nearly 10 percent a year, the utilities are counting heavily on the new nuclear stations to avoid brownouts and power failures in the years ahead. Poor performance at Babcock & Wilcox is thus one of those problems that could send ripples through the whole economy.
All of B & W's troubles involve a single product: nuclear pressure vessels. These are the huge steel pots -- some are more than 70-feet long and weigh more than 700 tons -- that contain atomic reactions. They must meet rigid specifications set by the Atomic Energy Commission, and B & W built a $25 million plant at Mount Vernon, Indiana, just to fabricate them. Cockily sure that the Mount Vernon plant would operate as planned, B & W sold its entire projected output of pressure vessels for years ahead. But nothing seemed to go right at Mount Vernon. Plagued by labor shortages and malfunctioning machines, the plant produced just three pressure vessels in its first three years of operation. Late 1968, after the production snarl reached horrendous proportions, a vice president responsible for the Mount Vernon operation committed suicide in a bizarre fashion.
Last May, B & W was forced to make a humiliating disclosure. Every one of the 28 nuclear pressure vessels then in the Mount Vernon Works was behind schedule, by as much as 17 months. For the utility industry, the news from B & W meant intolerable delays in bringing 28 badly needed nuclear plants into service, with all the added expense and problems that would be entailed. Philadelphia Electric Co. estimated that it would have to spend an extra $50,000 a day just to provide from other sources, such as high-cost gas turbines, the power that it had counted on getting from its delayed nuclear units.
With so much at stake, B & W's customers could not well afford to be patient. Twenty-one of the pressure vessels tied up in Mount Vernon Works were there on subcontracts from the two giants of the nuclear industry, General Electric and Westinghouse Electric. Both companies swiftly took the almost unprecedented step of forcing B & W to turn most of their partially completed vessels over to other manufacturers. When B & W, in an ill-conceived gambit, tried to hang onto two of the transferred vessels, Westinghouse took the case to court and won. In all, 14 G.E. and Westinghouse vessels -- perhaps $40 million worth -- were taken out of B & W's shops. Some of the firms that got the business had never made a pressure vessel before for use in a U.S. reactor; B & W had managed to create hungry new competitors in its own line of work. Only four G.E. and three Westinghouse vessels remain at Mount Vernon.
The company itself has barely begun to pay the high price of failure. Its earnings last year were still a robust $2.04 a share. In the first six months of this year, losses associated with nuclear work pushed earnings down to 22 cents a share -- not even enough to cover the 34-cent quarterly dividend. From a 1969 high of 40.5 last January, Babcock & Wilcox stock has sagged into the low 20s. At that price, the stock is hovering around book value.
The man in the middle of all these troubles is President George G. Zipf (pronounced Ziff), 49, a low-key executive who started with B & W in 1942 as a metallurgical engineer. But the man who bears the main onus of responsibility is Zipf's predecessor, Chairman Morris Neilson, 65, who chose Zipf for his present job a year ago, and handed him his present problem.
"All areas of the company were profitable in 1968 with the exception of atomic energy.'' President George P. Zipf told Babcock & Wilcox stockholders, after taking over as chief executive officer from Chairman Morris Neilson in September 1968. Up to then, losses on nuclear work had never seemed particularly troublesome. They were regarded simply as the price of B & W's ticket into the atomic age -- and B & W had been getting into, and prospering in, new technologies for a hundred years.
But one segment of its nuclear venture has driven B & W into deep trouble. The plant that it built along the Ohio River at Mount Vernon, Indiana, to produce huge steel pressure vessels for atomic reactors, failed to function as expected, with all kinds of dire results. One especially unhappy result was that B & W had to give up some partially completed pressure vessels to competitors.
Neilson is a flamboyant leader, a big bluff man with bright blue eyes and a full head of gray-blond hair, who has a gift for salty language. More than one secretary quit "Doc'' Neilson's employ because of his profanity, and more than one executive suffered a colorful tongue-lashing in the chairman's office.
Neilson got his nickname by virtue of being a doctor's son in Blair, Nebraska, where he was known as "Young Doc.'' That was as close to earning an academic degree as Neilson came. As a boy, he himself has said, he was "incorrigible'' and was kicked out of school "for being a bad influence on the rest of the students.'' He then enrolled in a Lincoln, Nebraska, high school and worked part-time as an embalmer. "I got into trouble in Lincoln, too,'' Neilson told an interviewer a few years ago. "One night, I came home with my nose over and under my eye. I'd been in a fight and got hit with a pair of pliers. I woke up my old man and he looked at my nose, and said, 'You're going to look like a goddamn syphilitic the rest of your life.' My old man used to tell me that there were two steps ahead of me -- first reform school and then the pen.''
Instead, Young Doc became a steeplejack and ironworker and in 1924 joined the corporation he was later to head. "I came to B & W by accident,'' Neilson has recalled. "I was working at American Bridge as an ironmonger on a job in Chicago, and another fellow and I got drunk. We got on the train and got off at Des Moines. We were walking past this construction job, and a fellow slid down a column and said, `You looking for work?' We figured we were.'' It was a B & W job, erecting boilers for central station power plants, and from the start Doc Neilson felt at home in the two-fisted company. "Those construction workers were goddamn rough people. They were hard drinkers, fighters, and lived by their wits.''
By the time World War II came along, Neilson was superintendent of marine erection. He supervised the installation of B & W boilers in 4,100 Navy and merchant-marine ships during the war. Later he headed the entire boiler division, including manufacturing, and in 1957 became president and chief executive officer.
When Neilson took charge of B & W the company was already deeply involved in nuclear work. Neilson's predecessor, Alfred Iddles, had recognized early that B & W would have to prepare for the day when the atom would challenge fossil fuels as a source of energy for central generating plants. Under Iddles, B & W attracted an outstanding stable of nuclear scientists and engineers and, in 1956, set up an extensive research facility at Lynchburg, Virginia. One of B & W's first important nuclear jobs was to build Consolidated Edison's Indian Point Plant. Another project was the reactor for the nuclear ship Savannah. B & W lost money on these jobs, but it gained experience needed to secure a corporate toehold in the nuclear era.
Nuclear losses continued under Neilson, but he improved B & W's overall profitability dramatically. Iddles had run the company as a loose-knit grouping of semiautonomous subsidiaries. Neilson centralized and systematized management. Every executive's areas of responsibility and authority were carefully spelled out in manuals that defined company policies and aims in all sectors of the business. Although sales stayed near or below the 1958 figure of $366 million until 1963 -- this was a low period in the utility buying cycle -- earnings climbed year by year. Profits went from $13 million in 1958 to $22 million in 1963. At that point, sales also began to go up, rising 71 percent in the next five years. Profits peaked in 1967 at $33 million, at $2.69 a share (compared to $1.05 a share in Neilson's first full year).
In view of his critics, who have lately become numerous, the seeds of B & W's present problems were planted in the years of Neilson's rich harvests. It can be seen, in retrospect, that he may have been too successful in keeping B & W lean. His determination to keep down the fat sometimes "had the effect of cutting into good red meat" says a former B & W executive. Experienced managers found themselves stretched too thin to cover all their areas of responsibility. Worse, they did not always feel that their authority matched their responsibility, (i.e., men in the field were held responsible for results they did not have the power to bring about).
The most biting criticism of Neilson's regime comes from men charged with nuclear assignments. In their eyes, Neilson's lack of formal education proved a serious handicap. Explains one former B & W executive: "Neilson created an atmosphere in which engineers and technical people just didn't feel at home. Their ideas were not treated with respect. They felt that top management didn't understand technical problems, and didn't trust those who could understand them.''
From the start, B & W had foreseen a long wait before its nuclear work became profitable. Developing the necessary skills and technologies to compete in the nuclear industry has proved to be a slow and expensive process for every company that has tried it, including G.E. and Westinghouse. But what B & W had not expected was to lose money on its Mount Vernon Works. When the plant was planned in the early 1960s, Neilson appeared to believe that he had found a niche in the nuclear industry that offered a quick return. A nuclear pressure vessel, though huge and manufactured to demanding technical standards, is essentially just the kind of heavy steel unit that B & W was accustomed to fabricating with ease.
While the Mount Vernon plant was under construction, U.S. utilities went on a nuclear-plant buying spree, starting in 1965. At the time, the surge in orders seemed like a lucky break for B & W. The Mount Vernon plant was designed to produce one completed pressure vessel a month, once it was in full operation, and there had been considerable doubt during the planning stages "if we'd ever get enough work to fill the place,'' a former B & W executive recalls. Orders for pressure vessels poured in, faster than anyone had predicted, and the Mount Vernon plant soon got loaded up with work. It is now clear that management made too little provision for the time it would take to get the new plant operating at full capacity. Says one B & W customer: "I think you have to say that corporate arrogance was involved.''
The first delays at Mount Vernon were caused by suppliers falling far behind schedule in providing vital equipment. A linear accelerator, used to detect welding flaws, was not delivered until August 1966, 11 months late. Even worse, a highly automated, tape-controlled machine center -- the heart of the plant as originally conceived -- arrived a full year behind schedule, in September 1967.
By then, the plant had been operating on a makeshift basis for almost two years. And it had already become apparent that B & W's century of demonstrated competence in the fabrication of heavy steel products had not protected the company from grievous error. A principal one was the site itself -- a cornfield near the little farm town of Mount Vernon (population: 6,200) in southwestern Indiana. The location had been chosen mainly because of its position on the Ohio River, safely above any known flood level, and yet reliably accessible for deep-water barges. This was an important advantage because nuclear pressure vessels are so immense that they can best be transported by water. B & W had owned the land for a number of years, and had set up a small plant there for making boiler parts.
What Mount Vernon did not have was a pool of skilled labor. This was a serious drawback because the AEC, for safety reasons, sets rigid standards for machine work and welding on nuclear projects. Late last year, a company memorandum reviewing the Mount Vernon fiasco observed: "Production workers required a new level of knowledge, intelligence, and judgment to operate the machinery, perform operations, and maintain the very high quality standards.'' At the outset, however, B & W took an optimistic view of its prospects -- choosing, according to that 1968 memorandum, to regard Mount Vernon as "an unspoiled labor market.'' Presumably, the company expected to find a more tractable group of workers there than it had at Barberton, Ohio, where B & W's power generator division had had its headquarters and principal manufacturing facilities for many years.
The company planned to overcome the obvious shortcomings of Mount Vernon's labor pool in two ways. First, through automation -- using that sophisticated machining center -- and second, through a massive training program that would entice farmers away from their cornfields and quickly turn them into skilled welders and machinists. In one year, B & W spent $1 million just to train welders. But almost as fast as men reached the levels of skill required, they left B & W for jobs elsewhere. On September 30, 1968, only 514 of the 1,060 hourly employees hired in the preceding three years were still working for B & W; in other words, the company had hired three men for each one it trained. "Turnover of the Mount Vernon workforce has been a particularly frustrating problem, and a major reason B & W has been unable to bring its full manufacturing capabilities to bear on the situation,'' the 1968 memorandum concluded. Some potential workers proved to be untrainable, others had a "general negative attitude'' toward heavy industry, and "some were not able to adjust, and therefore returned to their farms.''
Workers who remained with B & W did not prove to be as unspoiled as the company had hoped. Even before the pressure vessel plant opened, it was organized by the Boilermakers Union (which also represents B & W workers at Barberton) amid charges of unfair labor practices against the management. The plant was closed by labor disputes on several occasions. The most serious occurred when the three-year contract expired in 1967, while equipment was still being installed. The Boilermakers went on strike over wages and work rules, and the plant was down for 40 days -- unnecessarily long, in the view of President Thomas Ayers of Chicago's Commonwealth Edison, who had pressure vessels tied up at Mount Vernon.
From the standpoint of production, Neilson won a victory that amounted to overkill. Under the new contract, wages remained too low to stem the flow of workers away from B & W or to attract qualified workers from other areas. The B & W memo cites the "noncompetitiveness of our wage scale'' as a reason for the high turnover rate in the Mount Vernon work force. Even for experienced workers, welding two pieces of eight-inch steel together is a demanding task, particularly in nuclear work, in which each weld is examined by X ray. When an imperfection is found, the weld must be "mined out'' and done over again. In most plants, less than 10 percent of the welds must be reworked, and a rework of less than 1 percent is sometimes achieved. But at Mount Vernon 70 percent or more of the welds were rejected on being inspected. "It drove us out of our damned minds,'' recalls Ayers. "So costly! So time-consuming!'' Ayers and other B & W customers say that they urged the company to increase the supervisory force -- which regularly worked one and a half to two shifts daily -- so that a closer watch could be kept on the welds as they were built up.
In addition to its problems, B & W ran into unexpected trouble with equipment. The linear accelerator for X-raying welds was installed in mid-1966 but did not go into full operation until a year later. The tape-controlled machining center was even more of a headache, and began functioning as planned only a few months ago. In this center, huge vessel segments are positioned on optically aligned ways, and then moved a distance of 250 feet, while a series of precise machining operations are performed simultaneously, controlled by computer-prepared tape. The concept was a good one, since nuclear pressure vessels are custom jobs, each tailored to a customer's specifications. But "debugging'' of the machinery proved unexpectedly difficult. One problem was that the plant was not air-conditioned, and temperature changes threw off the many delicate adjustments that had to be made. In addition, an earthquake -- fairly rare in Indiana -- shook up the plant last year and it took nearly a week to reset the machine tools. Other start-up difficulties were simply incomprehensible. For example, a vital boring mill was put out of operation for several weeks when a tool broke. There was no spare on hand.
The man directly responsible for the Mount Vernon plant was John Paul Craven, vice president in charge of the power generation division at Barberton. As head of B & W's largest division, Craven was number three man in the company, and was paid $87,000 a year. At one time, there was speculation in the company that Craven might someday become president. A gentle, upright bachelor of 60, Craven was tall and distinguished looking. An engineer by training, he had been with B & W all his working life, and he had no interests outside his job. For a while, Craven had raised roses as a hobby, but after he was made vice president he gave up roses in order to devote himself more fully to B & W. "His work was his whole life,'' says an old friend.
As the bottleneck at Mount Vernon grew worse, Craven came to feel that neither his customers nor corporate headquarters in New York fully appreciated the difficulties of Mount Vernon's advanced machine tools. Nor did he believe that he was given the authority, the budget, or the personnel that he needed to fulfill the plant's commitments. Says another of Craven's old friends: "Paul couldn't bear to sit in Barberton and have all the shots called from New York -- and then be expected to take responsibility for not producing.''
In September 1968, before the seriousness of the pressure-vessel crisis at Mount Vernon became generally known, Neilson stepped aside as chief executive in favor of George Zipf. For a man destined for the top at B & W, Zipf had an unusual background. All of his predecessors had been identified with boilers, but Zipf came from B & W's tubular-products division at Beaver Falls, Pennsylvania, near Pittsburgh. This division, whose work is more akin to steel manufacturing than boilermaking, produces tubing for B & W's own use and for sale to other industrial customers; it accounts for roughly 30 percent of B & W's total sales, and more than half its profits. When he transferred to New York as executive vice president in 1966, Zipf had been at Beaver Falls for 20 years, ever since graduating from Lehigh University. He was a stranger to the problems of the power generation division, and to that division's big corporate customers.
Less than a month after taking over as chief executive from Neilson, Zipf scheduled a meeting at the Mount Vernon plant with Craven and Austin Fragomen, vice president for manufacturing. The meeting was set for a Monday morning. During the preceding weekend Craven told friends that for the first time in his life he thought his job was getting beyond him. Sometime on the Sunday afternoon or evening before his scheduled meeting with Zipf, Craven took off his clothes and climbed into a dry bathtub in his $250-a-month apartment at Akron's luxurious Carlton House. Then he slashed his ankles, cut his throat, and stabbed himself in the heart with the serrated eight-inch blade of a butcher's knife.
After Craven's death, George Zipf took personal charge of the power generation division, and of the Mount Vernon works in particular. Before long, both Austin Fragomen and the Mount Vernon plant manager, Norman Wagner, resigned. That left Zipf free to put a whole new team to work on the company's pressure-vessel debacle.
Beginning in 1967, both GE and Westinghouse, along with many of the utilities that were the ultimate customers for B & W pressure vessels, repeatedly expressed worry over the Mount Vernon plant's faltering operations. In the fall of 1968, B & W pacified GE to some extent by setting up a temporary welding shop on barges anchored at Madison, Indiana, where expert welders from Louisville, Kentucky, labor pool could be obtained. But for the most part, B & W brushed aside its customers' worries with assurances that things at Mount Vernon were not really as bad as they seemed. Even after Craven's death, the B & W management continued to maintain that its optimistic scheduling, with some minor changes, would prove to be realistic.
Some utility executives who met with Zipf to express their concern left with the conviction that he did not appreciate just how serious the pressure-vessel delays had become. On some occasions, he seemed to regard his callers as bothersome intruders. "He just sat there like a damned Budha,'' reported one customer after such a meeting.
Faced with such frustrations, GE and Westinghouse began to consider the drastic step of pulling some of their delayed pressure vessels out of the overloaded Mount Vernon shops. Both companies assigned teams to scout for other manufacturers that might be able to take over B & W vessels and complete them. There were not many potential candidates. Up to then, B & W and Combustion Engineering, Inc. had pretty much divided the U.S. pressure-vessel business between them. Combustion Engineering had managed to keep close to schedule on its deliveries, and had been expanding its Chattanooga machine shops. It had unused capacity. In addition, Chicago Bridge & Iron Co., which had previously done only on-site fabrication, was setting up a pressure-vessel plant in Memphis. (On-site fabrication is a more expensive method of constructing pressure vessels, used only when it is extremely difficult to transport the massive units to a site intact.) The GE and Westinghouse teams also looked abroad for companies that might be able to take over some of the work.
In April, while B & W's biggest customers were searching for other suppliers, Doc Neilson -- who was retiring on May 1 as an officer of the company, but keeping the title of chairman -- quietly sold 15,000 of his 20,000 shares of B & W stock. The price at the time was about $33 a share. A couple of weeks later B & W stockholders got their first official hint of serious trouble ahead. George Zipf revealed at the annual meeting that he expected earnings to drop by 20 to 30 percent in 1969 because of the company's losses on nuclear business. (The actual decline, of course, has since proved to be much greater than Zipf predicted.) Before long, the price of B & W's stock sank into the 20s.
On May 14, less than a month after the annual meeting, B & W sent out telegrams brusquely letting customers know that the situation at Mount Vernon was even worse than they had suspected. Zipf and his new team had completed a gloomy reevaluation of the plant's capabilities, and B & W was adding 2 to 12 months to earlier delivery schedules, some of which had already been stretched past the dates called for in B & W's original contracts.
On receiving this news, both GE and Westinghouse sought B & W's cooperation in transferring vessels to the other shops that they had scouted out. B & W agreed to subcontract some of its work to these plants. But an unexpected difficulty soon arose. Westinghouse had determined that Rotterdam Dockyard Co., a major shipbuilding and steel fabricating firm in the Netherlands could take two vessels and improve on the B & W schedule -- provided that the vessels were transferred promptly. Westinghouse located space on a ship that would be calling at New Orleans on the desired date and, by paying a premium, was able to arrange for the ship to cancel calls at other ports and proceed directly to the Netherlands. B & W agreed to put the two pressure vessels on barges and start them on their way to New Orleans, while it negotiated a subcontract with Rotterdam dockyard. But negotiations broke down when B & W and Rotterdam could not come to terms. To the horror of Westinghouse officials, B & W ordered the barges back to Mount Vernon.
Westinghouse then decided to pay B & W for the work it had already done, and take over the vessels itself. But speed was required. If the barges did not continue down the river while these new arrangements were made they would miss the ship to Rotterdam. Now Westinghouse found itself at a strange impasse -- it could not reach anyone at B & W who could rescind the order for the barges to return to Mount Vernon. Neilson was "not available.'' Zipf was "out of the country.'' Frustrated in its efforts to reach top management and work out an amicable settlement, Westinghouse reluctantly went into U.S. district court in Pittsburgh, and won a temporary restraining order to prevent B & W from taking the vessels back to Mount Vernon.
During the hearing, Federal Judge Wallace S. Gourley had a revealing exchange with John T. Black, B & W's manager for commercial nuclear components.
After Westinghouse won possession of the two pressure vessels and sent them off to Rotterdam, B & W raised no further objections to transferring work out of its shop. Indeed, it actively cooperated with its customers to get the job done. Westinghouse sent five vessels to Combustion Engineering's Chattanooga shops and two to a French firm, Societe des Forges et Ateliers du Creusot. General Electric turned three vessels over to Chicago Bridge & Iron and had B & W send two others to Japan's Ishikawajima-Harima Heavy Industries. In every case, these firms are expected to equal or better the delivery dates set in May by B & W.
With the load at Mount Vernon lightened, prospects look better for the 14 pressure vessels that remain there, including 7 for nuclear plants that B & W itself is building. For example, the Sacramento Municipal Utility District has been notified that the vessel for its Rancho Seco nuclear plant, a B & W project, will be only a couple of months late, instead of the year that seemed likely in May. That means that the vessel for Sacramento is essentially on schedule again, since the delays now expected are no more than could be accounted for by the labor disputes and earthquake that Mount Vernon suffered.
To his utility customers, George Zipf remains very much a man on trial. But now that their pressure vessels are moving along again, some utility executives are convinced that he has quietly managed to put B & W back on the track. One move that has met their approval was the appointment in September of an experienced Westinghouse man as vice president in charge of the power generation division -- John Paul Craven's old job. Bringing in an outsider at such a level is something new for B & W, and one B & W customer believes that he knows what it means: "I think George Zipf is really in command now.'' If this is so, he will have a lot to do to restore the honored old name of Babcock & Wilcox to its former luster.
In fossil fuel boiler manufacturing operations, the work stations are usually arranged in proper sequence to allow materials to enter one end of the shop, and flow sequentially to completion. The normal work mix means that some work be performed at each work station, but seldom requires the product to pass over any of the work stations more than once. All jobs follow, essentially, the same path from one work station to another. Consequentially, it is relatively easy to "line-up'' or "load'' each shop with a high degree of certainty as to work content, schedule requirements, and completion capabilities. Over the years, certain rules of thumb were developed, which allowed relatively accurate manufacturing planning decisions to be made for fossil manufacturing operations.
A shipping unit for a large fossil-fired boiler, such as used in power plants, differs greatly from a shipping unit for a nuclear plant. Fossil boilers are shipped as a large number of parts, which are assembled, erected at the job site. Nuclear equipment is mostly shop assembled, whereby a small number of large, assembled components are shipped to the site for installation. Complex planning is, therefore, required for the nuclear shop operations, which produce all detail parts fabricated into various levels of subassembled, and finally into large components.
Source: E. D. Thomas and D. P Covelski. "Planning Nuclear Equipment Manufacturing." Interfaces 9, no. 3 (May 1975), pp. 18-29.