By LOREN B. THOMPSON
Loren Thompson is chief operating
officer of the Lexington Institute and teaches in Georgetown University's National
Security Studies Program.
There is a saying among economists that a
rising tide lifts all boats. With defense spending ex-pected to rise significantly in the
years ahead, the nation's shipbuilders hope that adage also applies to their shipyards.
After a decade of disappointments, they could use a lift. But they are not waiting
passively for the fiscal tide to turn: since Sea Power's last Sea-Air-Space edition
appeared in April of 1998, mergers have reduced the ranks of major naval shipbuilders from
five to three.
The remaining companies also are pursuing
a host of less visible initiatives aimed at bolstering the efficiency and resilience of
their operations. Investments in digital design and engineering tools, adoption of
commercial standards and practices, long-term teaming among yards, and public-private
partnerships all reflect the industry's willingness to do business in new ways.
It hardly has a choice. Employment in the
domestic shipbuilding and ship repair industry has been cut in half since its recent peak
of about 190,000 workers in 1981. That was the same year that the Reagan administration
unilaterally abolished subsidies for the construction of oceangoing commercial vessels,
virtually eliminating demand for such ships from U.S. yards (other nations retained their
subsidies). The buildup to the 600-ship Navy took up much of the resulting slack in
capacity during the mid-1980s, but at the end of the decade the Soviet Union collapsed and
naval shipbuilding went into its own tailspin.
By the beginning of the second Clinton
administration, some observers were beginning to wonder whether the U.S. Navy could afford
to maintain a fleet even half the size of the Reagan-era fleet at its peak. Modern
warships typically have a service life of 30 years, so the Navy needs to build about 10
ships annually to maintain a 300-vessel fleet. The Clinton administration's shipbuilding
program did not begin to do that: the 19982003 naval construction program proposed to
Congress in early 1997 envisioned an annual production rate of six vessels, a pace that if
sustained over the long term would have yielded an active fleet of only about 180 ships.
Heavy Dependence on Navy
Such plans are hugely important to the
shipbuilding industry, because for all its plans to rationalize and diversify, it remains
heavily dependent on Navy funding for its survival. Although the U.S. Maritime
Administration describes the domestic industry as consisting of 18 "major
shipbuilding facilities" and 550 lesser establishments, most of what matters is
concentrated in the so-called "big six" shipyards. Those six yards--now
controlled by three companies--employ more than 90 percent of all the U.S. workers engaged
in construction of oceangoing vessels.
With the near-demise of domestic
construction of large commercial vessels and rampant protectionism in most of the foreign
naval markets, the big six yards have come to rely on the U.S. Navy for about nine out of
every 10 revenue dollars. Most of this money comes from a handful of big
warship-construction programs, but the first-tier yards also build auxiliary and sealift
vessels, and participate in the Navy's $2 billion annual ship repair and maintenance
effort (about a third of which goes to private industry, the rest to the four surviving
public shipyards).
The big six have seen their workforce
decline by nearly a third since the collapse of the Soviet Union, from 82,000
employees in 1990 to 54,000 today. If the Clinton administration had adhered to its
original 19982003 shipbuilding plan, that number probably would have continued to drift
downward in the years ahead. But it reversed course in response to a burgeoning budget
surplus and Republican criticism of depressed military-procurement spending.
New Shipbuilding Plan
The proposed 20002005 naval
shipbuilding plan unveiled in February raises the annual rate of construction to about
eight vessels, still short of the number needed to sustain a 300-ship fleet but a big
improvement over what had been expected. If the plan is implemented as proposed, six ships
would be built in fiscal year 2000 (one more than in the previous plan), and then eight
would be built in each of the following years until 2005, when nine would be built.
In addition to funding a new class of
ACDX dry-cargo auxiliary ships--construction of 12 is scheduled through 2005--the new plan
also adds one more Virginia-class New Attack Submarine (NSSN), allowing for continuous
production at the rate of one per year after 2000.
The plan also envisions construction of
two new LPD-17 San Antonio-class amphibious assault ships per year through 2004 and three
Arleigh Burke-class guided-missile destroyers per year through 2003. The latter program
would then give way to production of the next-generation DD-21 land-attack destroyer, one
of which is funded in 2004 and three in 2005.
The final Nimitz-class aircraft carrier
also is scheduled to commence production in 2001, after which the Navy begins
transitioning to the next-generation CVNX carrier.
Counting two command ships scheduled for
construction later in the plan, the entire 20002005 shipbuilding program adds up to 47
vessels. That is not a substantial number for the world's premier naval power, but each of
the warships in the plan is the most complex and capable vessel of its type ever produced
anywhere. The NSSN, for example, has nine times as many individual parts as a Boeing 777
wide-body airliner and requires 14 times the digital disk capacity (10 gigabytes versus
145) to store its design--notwithstanding the new submarine's extensive use of commercial
products, processes, and standards.
Paradoxical Nature
Such statistics underscore the
paradoxical nature of the U.S. shipbuilding industry. Although it claims barely one
percent of the global market for oceangoing commercial vessels, it is nonetheless the most
technologically proficient in the world. No other nation has demonstrated the capacity to
build warships comparable in versatility or sophistication to a Nimitz-class carrier or an
Aegis guided-missile destroyer.
Indeed, it is precisely the complexity
and uniqueness of these ships that helps explain why the U.S. industry has not fared well
in the international rivalry to produce big, empty commercial vessels like tankers.
According to former Bath Iron Works president Duane Fitzgerald, "The business of
building complex surface combatants is very different from any commercial shipbuilding
enterprise. As long as the government customer drives the domestic industry, it will
probably never be competitive in the global commercial market."
Thus, while construction of modern
warships is likely to remain a labor-intensive activity, it is wildly inaccurate to view
the shipbuilding industry as a throwback to an earlier age. Not only in terms of the
integrated systems it produces but also in terms of the processes and skills it employs,
few other sectors of the American industrial economy are as technologically demanding.
Within the context of the domestic
defense industry, there is another paradoxical quality to the shipbuilding sector. The
U.S. defense industry today is dominated by big aerospace and electronics firms that view
themselves as global technology leaders. The managers of those enterprises tend to be
unimpressed with the common practice of allocating ship construction programs among states
as a way of satisfying several contending political constituencies. They see the practice
as an intrusion of nonmarket forces into what ideally should be a competitive, merit-based
process.
But a funny thing is happening to the
rest of the defense industry on the way to the millennium. Because of limited demand,
industry consolidations, and a dearth of new program starts, it too seems to be moving in
the direction of production allocation and long-term teaming among contractors as a way of
spreading diminishing workloads among the remaining players. Production of the Air Force's
new F-22 fighter will be split on a 21 ratio between Lockheed and Boeing. Production of
the Navy's F/A-18E/F Super Hornet will be split 60/40 between Boeing and Northrop. Boeing
and Lockheed also will divide production of the military's next-generation expendable
space launcher, and some foresee a similar outcome in the two companies' rivalry to build
the Joint Strike Fighter.
So, at least when it comes to the subject
of work apportionment, the shipbuilding industry looks increasingly like a harbinger of
the future rather than a throwback to the past.
A Dissenting Voice
Which is not to say that everyone thinks
that is such a good thing. One vocal critic is B. Edward Ewing, chief executive officer of
U.S. Ship Repair and Maintenance, the nation's largest dedicated ship repair,
modernization, and conversion company. Ewing has partnered with a Washington, D.C.-based
investment firm, The Carlyle Group, to merge several major repair yards into a $400
million national consortium that will challenge the traditional way of doing business.
"I view myself as a value
creator," says Ewing. "What I'm trying to do in this business is advance the
idea of full-service strategic shipyards that are not limited to a narrow range of
services or ship types." Ewing contends that the big six shipyards are excessively
specialized in terms of the spectrum of services they provide and ships they produce. He
plans to participate vigorously in future industry consolidation, with the aim of
redefining the industry's culture and market focus.
Executives at the big six yards say they
are more bemused than threatened by this strategy. They argue that the industry's current
structure is dictated by economic, technological, and political forces that make a
different approach either impractical or unprofitable. They expect the big six yards to
receive the lion's share of ship design, construction, repair, and conversion funding
provided in Navy long-term budget plans, especially given the sea service's growing
preference for integrated life-cycle management of major systems.
Competitive Structure
Because the structure of the industry is
so heavily influenced by secular economic and political influences, few observers believe
that the recent wave of mergers will result in a shutdown of any of the big six yards.
Each major yard has special competencies and constituencies that militate against the sort
of draconian cutbacks seen in the military aerospace sector. Moreover, with the
competitive field for most ship-types narrowed to a series of duopolies encompassing all
of the big-six yards, it is not so clear that the Navy customer's long-term interests
would be served by shutdowns in any case.
It is not hard to see which yard is best
positioned within this competitive structure. The sprawling 550-acre Newport News
Shipbuilding yard in Virginia clearly is the most imposing player, owing to its unique
range of skills and competencies. In the company's own words, "Newport News is the
only shipyard with both the physical capacity and the technical capability to design,
integrate, build, repair, overhaul, refuel, and deactivate every type of ship in the U.S.
Navy fleet."
First established in 1886, Newport News
today is the largest shipyard in the Western Hemisphere, with more than 18,000 employees,
annual sales of $1.9 billion, and a $5 billion backlog of work. The core of its business
is the construction and life-cycle support of nuclear-powered naval vessels. It has built
every ship in the current Nimitz class of large-deck nuclear-powered aircraft carriers,
and is the only credible candidate to construct the successor CVNX class. It also designed
and built 29 Los Angeles-class nuclear-powered attack submarines, and is teamed with
General Dynamics' Electric Boat to build up to 30 Virginia-class New Attack
Submarines--the only new submarine construction the Navy will fund for the foreseeable
future.
After a disappointing foray into
commercial shipbuilding, Newport News managers have focused their business strategy on
getting the most mileage out of their shipyard's unique nuclear skills. They estimate that
a Nimitz carrier costs about $28 billion over its 50-year life, but about 80 percent of
its costs are incurred after it becomes operational. By targeting ship overhaul,
maintenance, repair, and refueling, Newport News plans to tap into that lucrative
post-production revenue flow. It recently began the three-year $1 billion refueling of the
USS Nimitz, and expects to receive follow-on contracts for every carrier in the
class. In 1998, the yard derived 39 percent of its sales and operating earnings from
overhaul and repair.
The only other nuclear shipbuilding
enterprise in the nation, General Dynamics' Electric Boat, is a distinct contrast to
Newport News. Whereas the Virginia yard can build and maintain just about any seagoing
vessel, Electric Boat has focused solely on submarine construction since World War II. It
delivered the Navy's first submarine in 1900 and today is widely considered the most
proficient designer and builder of undersea warships in the world. The yard employs about
8,000 personnel at its main facility in Groton, Conn., and a satellite manufacturing
center at Quonset Point, R.I. It is currently completing construction of the Seawolf-class
of nuclear attack submarines, and has begun a partnership with Newport News to build the
follow-on Virginia class.
Electric Boat was the historic foundation
of General Dynamics Corporation, a former defense conglomerate that in recent years has
refocused its business on a handful of core franchises--most notably shipbuilding. In 1995
it bought Bath Iron Works in Maine, and in 1998 it bought National Steel and Shipbuilding
Company (NASSCO) in California--making it the owner of three of the "big six"
shipyards. Most of its $5 billion in 1998 revenues were derived from various aspects of
marine design, construction, and support. With the biggest backlog in the business, and a
well-respected management team, it is obvious that GD would like to get even bigger in
ship work: In February, it proposed to buy Newport News for $1.4 billion.
GD has embarked on a major
capital-investment program to enhance engineering and construction capabilities at all
three of its yards. Its two surface-vessel yards in Maine and California are
well-positioned to benefit from any upturn in naval business. Bath Iron Works is the lead
designer and co-producer of Aegis destroyers, and it is guaranteed a share of the
next-generation DD-21 land-attack destroyer (Bath actually has built more naval surface
combatants than any other U.S. yard). It also is teamed with Avondale Industries on the $9
billion LPD-17 amphibious assault ship production program. NASSCO is the sole West Coast
yard engaged in naval shipbuilding, and also the biggest yard in the Navy's homeport of
San Diego--an advantage in pursuing naval repair and modification work.
But the most formidable U.S. builder of
conventional warships is neither Newport News nor one of the GD yards. It is the Ingalls
Shipbuilding division of Litton Industries, located in Pascagoula, Miss. Ingalls was
founded in 1938, but 30 years later it built a completely new 650-acre modular
construction facility across the Pascagoula River from its original site. That yard is
today the most advanced conventional shipbuilding facility in the United States, thanks to
the company's continuous investment in new design, reengineering, and construction tools.
Its principal naval shipbuilding programs currently are the Aegis destroyer--it will build
about half of the ships in the Arleigh Burke class--and the LHD multipurpose amphibious
assault ship.
With 11,000 employees, Ingalls is the
biggest private employer in Mississippi--a status it is likely to retain as it transitions
in the next decade to working on the DD-21 destroyer. But unlike the other big six yards,
Ingalls has not been a player in recent industry consolidation, raising questions about
its future. "We view the recent wave of mergers in a broader context," says Dr.
Lawrence Cavaiola, Ingalls' Washington vice president for government relations and
strategic development. "We're always under pressure to perform, but we have the most
modern shipyard in the industry, we have a great location, we have a very competitive wage
and benefits structure, and we have a Navy customer that understands and values us."
Cavaiola argues that "nobody else in the business enjoys all those advantages."
The last of the big six yards is Avondale
Industries on the Mississippi River near New Orleans. Avondale traditionally has focused
on naval amphibious, auxiliary, and sealift ships, and on commercial vessels. In 1996 an
Avondale-Bath Iron Works team won the competition to build 12 next-generation LPD-17
amphibious assault ships (eight will be built at Avondale, four at Bath). This victory
underscored Avondale's ability to combine innovative technology with a highly competitive
cost structure.
Avondale's versatility and efficiency
have made it a hot property. In January Newport News agreed to combine with it in a new
corporate entity that would be the only Navy shipbuilder with operations on the East,
West, and Gulf Coasts. That transaction was later put in doubt by General Dynamics'
unexpected bid for Newport News. But whatever the outcome, it is clear that the domestic
shipbuilding and ship repair industry is changing fundamentally. With the funding tide
beginning to turn, a smaller number of more efficient, resilient companies look
well-equipped to weather any future storms. |
