How Complexity Has Confounded Competition in Shipbuilding, and Options for the Navy Department

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My study from March 2006 of why shipbuilding at Northrop Grumman had gone awry, and the options in government and industry for fixing that.

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How Complexity Has Confounded Competition in Shipbuilding, and Options for the Navy Department

  1. 1. “FURTHER DELAY AND COST ARE LIKELY” How Complexity Has Confounded Competition in Shipbuilding, and Options for the Navy Department March 2006 Substantial circumstantial evidence suggests that the largest US naval shipbuilders—Northrop Grumman and General Dynamics—are not particularly good at managing complexity in their production programs. Managing programs between yards is not the issue, as the two large shipbuilders largely manage their individual shipyards as independent enterprises. However, a review of the operating performance over time of four of the large yards suggests that these scope inefficiencies appear at the shipyard level. Four case studies follow. JAMES HASIK
  2. 2. “Further Delay and Cost are Likely” Newport News Shipbuilding and the Double Eagle Tankers Or, what happens when a submarine builder tries to switch to surface vessels 1996 was a year of transition for Newport News.We continued our transition from a shipyard performing primarily nuclear work to one that is broader-based; we temporarily transitioned out of submarine construction; and we successfully transitioned to an independent, publicly traded company. — William P. Fricks, Chairman and Chief Executive Officer of Newport News Shipbuilding & Repair, January 1997 [1] After the end of the Cold War, the US Navy's procurement of submarines dropped precipitously. With the launch of USS Cheyenne in August 1996, the Los Angeles-class nuclear- powered attack submarine program came to the effective end of its construction. With that also ended the near-term prospects for the submarine business at Newport News Shipbuilding & Repair. Rival Electric Boat had captured the contract for the Navy's Seawolf-class submarines, and Newport News had not built a surface combatant since it launched the 11,300-ton, nuclear- powered guided missile cruiser USS Arkansas in October 1978. Thus, in the mid-1990s, as it was about to be spun out of the industrial conglomerate Tenneco, Newport News was facing an order book almost entirely composed of work on nuclear- powered aircraft carriers. Newport News thus resolved to find new markets for its impressive shipbuilding talent. The US Oil Pollution Act (OPA) of 1990 MV Brenton Reef, the final Double Eagle tanker, on sea provided an outlet. After the trials in the Atlantic grounding of the tanker Exxon Valdez in Prince William Sound, Alaska in 1989, the US Congress mandated that all crude carriers in US waters after 2015 be double-hulled. The trend worldwide was in the same direction, so Newport News saw a market, figuring in particular that as a particularly sophisticated shipbuilder, it was in a better position than lower-cost rivals to enter this expanding market quickly. The Jones Act of 1920, which mandates that US domestic commerce travel on US-built ships, more than helped. [2] The Double Eagle tanker program (named for the famous, gold $20 coin) got underway quickly: 1 Newport News press release, 31 January 1997 2 Michael Valenti, 'Double-wrapped: cleaner, safer, greener, twin-hulled tankers keep oil spills off the high seas,' Mechanical Engineering, January 1999 JAMES HASIK www.jameshasik.com • 512-299-1269 • jhasik@jameshasik.com
  3. 3. Complexity and Competition in Naval Shipbuilding Newport News delivered the first ship, the 46,000-ton tanker American Progress, to Mobil Oil in September 1997. It was not just the first double-hulled tanker for Newport News, but the first one built in a US shipyard. At the time, the company had contracts for another fourteen such vessels. The problem was that it could not deliver them for the prices promised. The primary issue was Newport News's cost structure. The aforementioned emphasis on nuclear propulsion is both striking and important. For any submarine, the production quality requirements are very high, but they are only higher for nuclear-powered ones. As a result, Newport News has one of the highest labor cost structures of any heavy industrial enterprise in the world. For example, the work of welders certified to work on nuclear propulsion plants at the yard is priced at almost $200 per hour. [3] Product complexity also played a role in the program's problems. Material procurement and subcontractor costs also ran higher than expected because Newport News needed to introduce substantial design differences in the international and domestic classes of the tanker. [4] Ordinary EBIT at Newport News Shipbuilding & Repair $60 MM Effect of the Double-hulled Tanker Program $50 MM Commercial tanker $40 MM program cancelled $30 MM $20 MM $10 MM $0 MM 19 1 19 2 19 3 19 4 19 1 19 2 19 3 19 4 19 1 19 2 19 3 19 4 19 1 19 2 19 3 20 4 20 1 20 2 20 3 20 4 20 1 20 2 3 Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q 96 96 96 96 97 97 97 97 98 98 98 98 99 99 99 99 00 00 00 00 01 01 01 19 Almost immediately, Newport News recognized its missteps, and began extricating itself from commercial work in the third quarter of 1997—even before the first ship was delivered. In March 1998, the company formally announced its exit from the business, and took a pretax charge of US$150 million to cover its losses. Newport News delivered the last vessel, the 46,000-ton Brenton Reef, in June 1999; she was just the sixth of the fourteen once under 3 Interview with US Navy engineering duty officer formerly stationed with the Supervisor of Shipbuilding, Newport News 4 Newport News press release, 18 September 1997 JAMES HASIK www.jameshasik.com • 512-299-1269 • jhasik@jameshasik.com
  4. 4. “Further Delay and Cost are Likely” contract. By all accounts, the ship is very well built, as are all of Newport News's ships. [5] Today at Newport News, none of these things that William Fricks described in his January 1997 message were true. Newport News is no longer independent, having been purchased by Northrop Grumman. The company is once again in the submarine business (if only through an alliance with An overhead view of an aircraft carrier construction General Dynamics's Electric Boat graving dock at Northrop Grumman Newport News. Company), having recently Photograph courtesy of the US Navy launched the 7,800-ton attack boat USS Texas, and working towards the launch of sister ship North Carolina. However, the bulk of Newport News's work today is found in the construction and overhaul of nuclear-powered aircraft carriers. As noted in the chart above [6], Newport News's finances improved after it left the tanker business, as management and staff focused their attention and resources on the yard's business as the monopoly builder of supercarriers. With the largest drydock in the western hemisphere, and a fleet (at the time) of twelve such ships requiring service, Newport USS Virginia under construction at the Electric Boat News was bound to make Company in Groton, Connecticut. The Virginia class ships money. Indeed, while the are a cooperative program between Electric Boat and company delivered only one Newport News. Photographs courtesy of the US Navy warship as an independent company—the carrier USS Harry S Truman in July 1998—it consistently attained ordinary 5 Newport News press release, 27 May 1999 6 Our measure of ordinary EBIT excludes extraordinary items that do not reflect operational productivity, such as a one-time payment from Avondale Shipbuilding after its failed merger with Newport News. JAMES HASIK www.jameshasik.com • 512-299-1269 • jhasik@jameshasik.com
  5. 5. Complexity and Competition in Naval Shipbuilding quarterly earnings before interest and taxes (EBIT) of $40 to $50 million until its acquisition in late 2001. Avondale and the San Antonio Or, how a transport builder can bite off more than it can chew In management's opinion, the primary reason that the expected productivity gains were not realized was the disruptive effects of work on two other shipbuilding contracts. — Avondale's Annual Report for 1992, p. 23 This is not to say that Northrop Grumman cannot build tankers—it just no longer tries to build them at a yard that specializes in submarines and carriers. Northrop Grumman’s Avondale operation has one of the lowest cost-structures of the large construction yards in the US, and today it is building the Millennium class of 125,000-ton OPA-compliant tankers for Polar Tankers, the ocean shipping subsidiary of ConocoPhillips. Established in 1938, Avondale has since the 1970s focused on building cargo ships for commercial customers and amphibious assault vessels for the US Navy. Notably, it was the designer and lead builder of both the Whidbey Island (LSD-41) and Harpers Ferry (LSD-49) classes of dock landing ships. Thus, only a few were USS San Antonio under construction at Avondale Shipbuilding in surprised in December August 2002, prior to her move to the Ingalls yard. Photograph 1996 at the US Navy’s by Spike Thibodeaux, and courtesy of the US Navy decision to award Avondale the contract for the detailed design and construction of the first of its latest class of assault ship, the San Antonio (LPD-17) class. The problem—though not apparent to many—was that the San Antonio represented an entirely different concept than the Harpers Ferry. Previous assault ships had basically been “cans with engines”—basically large cargo spaces that could ballast themselves down to launch displacement or air cushion landing craft laden with troops and equipment. The San Antonio would be expected to serve as a command center for the assault, and would therefore feature much more sophisticated command-and-control systems, defensive weaponry, and sensors than the LSDs and cargo ships that Avondale was accustomed to building. It would also feature an JAMES HASIK www.jameshasik.com • 512-299-1269 • jhasik@jameshasik.com
  6. 6. “Further Delay and Cost are Likely” entirely redesigned and semi-automated damage control system—the most technologically advanced in the US Navy, but also one that presented a considerable systems integration challenge. [7] Timeline of the Construction of USS San Antonio (LPD 17) [8] February 1996 Citing industrial base concerns and the LPD 17’s improved survivability features, Congress authorizes the ship, accelerating the Navy’s schedule by two years December 1996 A cost-plus award fee contract is awarded after a competitive selection of the Avondale Alliance for detailed design and construction of LPD 17. Target cost is set at $644 million for the first ship and $391 million for the second, LPD-18 (appropriately named USS New Orleans) August 1999 Litton purchases Avondale December 1999 Design schedule delays cause a 10-month slip in anticipated delivery August 2000 Construction begins February 2001 The Navy and Litton Alliance reassess the lead ship construction schedule and delay delivery another 14 months to November 2004 April 2001 Northrop Grumman purchases Litton, and becomes prime contractor September 2001 Cost growth leads to renegotiation of the contract, and its conversion a cost-plus incentive fee format. The original award fee was based on the total cost of the ship over its operational lifetime. The incentive fee is now tied to controlling construction costs, shifting the focus of the program from lowering future maintenance costs to delivering the ship November 2001 Cost growth by more than 43 percent triggers a Nunn-McCurdy unit cost breach, causing a new baseline to be established in June 2002 and requiring $1.4 billion in additional funding. December 2004 USS San Antonio, LPD 17, is towed from Avondale to Ingalls Shipbuilding for completion (see below) May 2005 LPD 17 expected delivery date—almost three years behind schedule There were several problems in the construction of the ship, and these became more apparent as time went on. Through the early years of the project, Avondale suffered high staff turnover, particularly amongst its design engineers. Compounding problems, the Navy insisted on redesigning some portions of the ship while construction was underway, which led to a considerable volume of government-mandated rework. In retrospect, a cost overrun of some variety should have been expected: in developing the initial cost estimate, Navy analysts used data from the earlier LHD and LSD amphibious ships, which were considerably less complex technologically. According to the US Government Accountability Office (GAO), thirty-seven percent of the cost overrun was due to an increase in the number of labor hours required to build the ship, and another thirty-nine percent was due to higher materiel and subcontracting 7 Comment by US Navy engineering duty officer previously stationed at Ingalls Shipbuilding in Mississippi 8 US Government Accountability Office, Improved Management Practices Could Help Limit Cost Growth in Navy Shipbuilding Programs, GAO-05-183, February 2005, p. 56; and CRA’s additional research JAMES HASIK www.jameshasik.com • 512-299-1269 • jhasik@jameshasik.com
  7. 7. Complexity and Competition in Naval Shipbuilding costs. [9] Aside from the Navy’s problems with an unsettled design configuration, the leading cause of these problems was Avondale’s inexperience with an integration problem of this size. The yard was an efficient cargo vessel manufacturer, but had had no experience since the 1970s with surface combatants—which would effectively, if not literally, describe the San Antonio. $16,000 Profitability at Avondale Industries 1990–1998 $14,000 $12,000 Comparison to Ingalls Shipbuilding $10,000 Operating profit per employee Avondale is awarded the LPD-17 program $8,000 $6,000 $4,000 $2,000 $0 1990 1991 1992 1993 1994 1995 1996 1997 1998 ($2,000) ($4,000) ($6,000) Despite its difficulties, it is understandable that Avondale wanted the contract, ex ante. While trying in the early 1990s to escape the effects of declining defense budgets, the company was involved in many more programs, building barges, minehunters, and hovercraft, and even running a bus line in Dallas. As the epigraph indicates, Avondale was struggling in this environment to focus enough management attention on multiple, dissimilar construction projects. At the same time, the US Navy had sent most of its contracts for commercial-type vessels (oilers, replenishment ships, etc.) to the rival National Steel & Shipbuilding Company (NASSCO) in San Diego, so a new outlet for its productive capacity had to be found. As shown in the chart above [10], the LPD-17 program brought, at least initially, the higher margins and steady workload that primarily military shipbuilders could attain, and that Ingalls Shipbuilding, its competitor up the Gulf Coast, was experiencing. The growth in Ingalls’s profitability over this time, however, was directly linked its renewed focus on just the types of shipbuilding that it could do best. 9 GAO, op. cit., pp. 55–61 10 he data are drawn from the annual financial reports of Avondale Industries and Litton, 1990–1998. We use T operating profit per employee so that we can measure the economic productivity of the activity at a yard without explicit reference to the yard’s overall size. JAMES HASIK www.jameshasik.com • 512-299-1269 • jhasik@jameshasik.com
  8. 8. “Further Delay and Cost are Likely” Product line complexity and profitability at Ingalls Shipbuilding Or, what happens when a diversified builder focuses its work The more things they have tried to stuff in there, the less well they have done. — US Navy ship procurement official on Ingalls Shipbuilding After Northrop Grumman purchased Avondale and Ingalls from Litton, the new parent company kept the two yards in a single business sector, Northrop Grumman Ship Systems. Like Litton, Northrop hoped to use Ingalls’s arguably stronger management to improve operations at Avondale, while leveraging the Louisiana yard’s lower cost structure. Even at Ingalls, however, there were limits to what management could achieve. 25 Productivity vs. Product Mix Complexity $16,000 at Ingalls Shipbuilding 1990-1999 $14,000 20 $12,000 Number of major hulls under construction Operating profit per employee $10,000 15 $8,000 4 10 major programs underway: CG, Sa'ar V, DDG, LHD $6,000 3 major programs underway: $4,000 5 Sa'ar V, 2 DDG, LHD major programs underway: DDG, LHD $2,000 0 $- 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 Reporting Year As shown in the chart above, [11] Ingalls’s profitability per employee improved considerably during the 1990s as the company progressively reduced the number of individual ships and programs on which it was working at its yard in Mississippi. In the early 1990s, while it finishing vessels that had been ordered prior to the end of the Cold War, Ingalls had arguably encountered site-specific scale and scope diseconomies. In scale, twenty different vessels at various stages of completion were a great deal for any yard to handle. In scope, the different pacing functions of 9,000-ton guided missile cruisers, 1,200-ton guided missile corvettes, 9,000- ton guided missile destroyers, and 40,000-ton helicopter carriers significantly complicated Ingalls’s planning and execution of work. However, towards the end of the decade, Ingalls was 11 ata from Litton’s annual financial reports, 1990–1999 D JAMES HASIK www.jameshasik.com • 512-299-1269 • jhasik@jameshasik.com
  9. 9. Complexity and Competition in Naval Shipbuilding building only Arleigh Burke- class guided missile destroyers (DDGs) and Wasp-class helicopter carriers (LHDs), and its efficiency rose sharply. This is not to say that Northrop Grumman treated Ingalls delicately. In October 2004, the company ordered the uncompleted San Antonio towed out of Avondale, and sent up the coast to Ingalls for completion. Long tired of USS San Antonio after her move to Ingalls. The other focus of the problems that the construction at the yard is immediately astern—an Arleigh Louisiana yard had Burke-class destroyer in a floating drydock. Photograph experience in the program, courtesy of the US Navy Northrop’s management wanted to ensure that the ship would be ready for delivery to the Navy on time. Shortly after the move, the ship’s captain, Commander Jonathan Padfield, sent a message to Washington updating the admiralty on the status of his ship, in part expressing his relief at the move, but also noting the work that remained. The relevant excerpt follows: [12] 16. COMMANDING OFFICER COMMENTS: A. HULL MOVE TO INGALLS SHIPYARD, PASCAGOULA, MS COMPLETED 23 OCT. B. THE MOVE TO INGALLS HAS RESULTED IN GREATLY IMPROVED SHIP CLEANLINESS, EQUIPMENT CARE AND PROTECTION. INCREASED SUPERVISOR INTERACTION AND WORKFORCE ATTITUDES HAVE IMPROVED DRASTICALLY. EFFORTS ARE NOTEWORTHY. THE MARKED IMPROVEMENTS NOTED WILL PAY DIVIDENDS IN THE FUTURE. C. AS NOTED ABOVE, EQUIPMENT TESTING, COMPARTMENT AND TANK COMPLETION ARE STILL FAR BELOW EXPECTATIONS. IN SPITE OF GREAT IMPROVEMENTS BY MOVING THE SHIP TO INGALLS, A CONSIDERABLE AMOUNT OF WORK AND REWORK IS REQUIRED. INITIAL INDICATIONS APPEAR THAT FURTHER DELAY AND COST ARE LIKELY. D. THE CONTRACTOR HAS NOT PROVIDED NAVY THE REVISED PRODUCTION AND COMPLETION SCHEDULE LEADING TO DELIVERY. A REALISTIC, ATTAINABLE SCHEDULE IS CRUCIAL TO LOAD-OUT, MOVE-ABOARD, CERTIFICATION AND SAIL-AWAY PLAN DEVELOPMENT... 12 copy of the radio message was provided by a US Navy engineering duty officer familiar with the problems of the A San Antonio class JAMES HASIK www.jameshasik.com • 512-299-1269 • jhasik@jameshasik.com
  10. 10. “Further Delay and Cost are Likely” The move was understandable, as Ingalls is one of the more cost-effective naval shipbuilders of its size in the US. As indicated above, a submarine builder might not have the cost structure to handle a destroyer, and a cargo ship builder might not have the expertise to handle a combatant, but an experienced builder of surface combatants could be entrusted with the completion of a sophisticated assault ship. The LPD-DDG Swap Or, why a destroyer-builder might have chosen to build, well, destroyers It wasn’t that they couldn’t do the work—they didn’t want it. — US Navy ship procurement official on the Bath Iron Works at the LPD-17s Whether in Ingalls or Avondale, Northrop Grumman had attained by late 2001 some confidence in its ability to build San Antonio-class LPDs, at least to the Navy’s revised cost and schedule expectations. At the time, however, Northrop Grumman was not the only company building the ships. Construction of LPD-19, USS Mesa Verde, had begun at General Dynamics's Bath Iron Works in July 2001. Bath had been part of the original Avondale Alliance team that had bid for the design and construction contract for the entire class in 1996. Bath had an agreement with Avondale to construct every third ship of the class—the yard in Louisiana had outsourced some of the work to Maine not just to broaden its political support, but because management realized just how much workload was involved with the construction of twelve 25,000-ton warships. The cost overruns and The guided missile destroyer USS Winston Churchill slipping schedule delays, however, down the ways during her christening at the Bath Iron had led the Navy to seek Works. Photograph courtesy of the US Navy opportunities for streamlining the program. Consolidating construction on the Gulf Coast with Northrop Grumman, it was thought, would stretch two learning curves, one of eight ships and one of four, into a single, better integrated, twelve-ship single-sourced program. So, around the time that the San Antonio's keel was laid at Avondale, Navy Secretary Gordon England and his Assistant Secretary for Acquisition, John Young, proposed to Ron Sugar JAMES HASIK www.jameshasik.com • 512-299-1269 • jhasik@jameshasik.com
  11. 11. Complexity and Competition in Naval Shipbuilding and Nicholas Chabraja, the chief executives of Northrop Grumman and General Dynamics, that the former trade the construction contracts for four of the last Arleigh Burke-class guided missile destroyers for the contracts on the four LPDs planned to be built at Bath. 40,000 Deliveries of tonnage from the Bath Iron Works Actual and Planned 35,000 1990–2010 30,000 25,000 20,000 15,000 10,000 5,000 - 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Northrop had two incentives for agreeing to the deal. To begin, the LPDs were over twice as large. While the combat systems work associated with the assault ships was not a great as that associated with the destroyers, the shipyards were more concerned with assembly and integration. Hence, the tonnage of the ships roughly described the amount of work (and thus fee) involved in the contracts. The structure of the contracts to which Avondale had agreed, however, was also a problem. Avondale's arrangements with its primary subcontractors, including Bath, were pass-throughs without management fees. Avondale was thus constantly trying to in- source work from the suppliers, and the suppliers deeply resented this. Further, the Navy's contract with Avondale was build-to-specification, but Avondale's contract with Bath was build- to-print. If a problem were to arise with the design of a ship built in Maine, Avondale would thus have to pay to resolve the problem, but the yard lacked the money to do so since it was not earning fees on its subcontractors' activities. Avondale also had, as per the original contract, no way to pass this cost onto the government. That left the question of why General Dynamics would agree to surrender the work on four large ships for the work on four rather smaller ones. Bath could certainly have handled the work technically—the skills of its staff are very well regarded in the US. Instead, the issue was workload. Because an LPD represents over twice the cutting, welding, and shipfitting of a destroyer, the yard's construction workload would have resembled a sine wave preceding every JAMES HASIK www.jameshasik.com • 512-299-1269 • jhasik@jameshasik.com
  12. 12. “Further Delay and Cost are Likely” delivery of an LPD. This meant that Bath would need to hire, train, and subsequently discharge a great many skilled industrial workers in southern Maine, where the labor force was already rather constrained. At the time, Bath also believed that it would land lucrative contracts for the construction of the 12,000-ton DDX series of destroyers (the ships that would succeed the Burkes), and the yard wanted to keep the ways clear for those. So, in June 2002, General Dynamics, the Navy, and Northrop Grumman agreed to the swap. As shown in the chart on the preceding page, Bath's workload would still rise in the short-run. [The hatched bars indicate the loss of two LPD contracts during the time horizon; the light-colored solid bars represent the addition of several The guided missile destroyer USS Chafee under destroyer contracts.] On the other construction at the Bath Iron Works. Photograph hand, the workload would smooth courtesy of the US Navy out considerably, and would consist of but one type of ship. As the left side of the chart suggests, Bath rather built its reputation to deliver destroyers to cost and schedule expectations on its ability to manage the workload on a type with which it was intimately familiar. Today, Bath is concerned about the Navy's interest in consolidating the DDX program at a single yard, but it has a backlog of some fourteen Arleigh Burkes on its books, and it is the only yard in the US building guided missile ships. [13] The significance for the Navy Department To summarize, at the end of the Cold War, to compensate for changes in their core markets, four leading US shipyards retreated from diversification efforts: ✦ Faced with an exit for the then-foreseeable future from the submarine construction business, Newport News attempted to enter the oil tanker business with a nuclear- powered cost structure 13 RA’s research is primarily based on conversations with US Navy procurement officials based at the Supervisor of C Shipbuilding, Bath; the Supervisor of Shipbuilding, Pascagoula, and the Pentagon JAMES HASIK www.jameshasik.com • 512-299-1269 • jhasik@jameshasik.com
  13. 13. Complexity and Competition in Naval Shipbuilding ✦ Faced with a decline in its traditional business of building relatively cargo ships and LSDs, Avondale attempted to design and build a very sophisticated LPD ✦ With a diverse product mix consuming management attention and complicating scheduling, Ingalls improved its profitability by reducing the number of hulls and types on which it was working ✦ Faced with an unsustainable surge in its workload, the Bath Iron Works willingly surrendered four (seemingly profitable) contracts on assault ships to concentrate on its core business of building destroyers. These facts lead to two general observations: ✦ The difficulties these shipbuilders faced were not inter-yard, but rather intra-yard inefficiencies. That is, their scope and scale diseconomies were primarily found at the level of the individual yard. ✦ The consolidation of these yards into two corporate parents—Northrop Grumman and General Dynamics—has not provided the benefits that the Defense Department had hoped to attain when it approved the acquisitions in the 1990s. The cost structures, planning capabilities, engineering labor requirements, and material management systems required are quite thoroughly different, and as noted, the companies had continued to manage the yards largely as stand--along enterprises. This suggests that some of the inter- yard efficiencies have also thus far proved elusive. The implications for the government would appear grim. The Navy Department is sufficiently serious about expanding the fleet that it is cutting staff in order to pay for more ships. This depends, however, on reasonable costs in shipbuilding, and cost performance from the large yards has been lacking. The problem is that problems with complexity at the yard level will limit the Navy’s USNS Red Cloud during during her christening at the ability to force the yards of National Steel and Shipbuilding Company (NASSCO) in San the two large shipbuilders to Diego. Photograph courtesy of the US Navy compete to cut their cost structures. Northrop Grumman today is a shipbuilder with three large yards, but each is focused on a different task: Newport News handles nuclear-powered vessels, Ingalls handles helicopter carriers, and Avondale handles assault ships. At one time, Newport News built surface combatants as well, and Ingalls submarines, but JAMES HASIK www.jameshasik.com • 512-299-1269 • jhasik@jameshasik.com
  14. 14. “Further Delay and Cost are Likely” neither does any longer. With General Dynamics, the division of labor is just as striking: the Bath Iron Works builds only destroyers, Electric Boat builds only submarines, and NASSCO builds cargo and auxiliary ships. It is most notable that none of these yards derive a large fraction of their revenues from ship repair—and that the largest US firm in this business, BAE Systems Ship Repair, has no construction contracts whatsoever. [14] In this context, consolidating work at fewer shipyards may not be the answer. This has been proposed as a means for removing excess capacity from the domestic shipbuilding industry, but decreases in capital costs could be largely offset by increases in process and staffing costs related to the complexity of dissimilar operations. Encouraging competition amongst the large and established shipyards may also not be the answer. The six yards are so specialized at this point that tactic collusion is relatively easy to maintain. Moves to reenter abandoned lines of business could be easily detected by the competition—so much as competition exists. The way forward, rather, may require expanding the solution space to accommodate more, not fewer, shipyards. This, however, would necessitate a change in requirements. Utilizing more yards means building more ships, but building more ships without A view of the Littoral Surface Craft Sea Fighter under an increase in funding means construction on Whidbey Island. Photograph courtesy of the building smaller ships. The US Navy Littoral Combat Ship (LCS) program is an excellent example of this, assuming that it emerges unscathed from its recent run-in with higher materials and engineering costs. [15] Neither the LCS nor the Joint High Speed Vessel (HSV) are appropriate platforms for air and missile defense, but a wide range of other tasks, from submarine-hunting to surface fire support (using missiles) could be accomplished with smaller ships, particularly given the Navy’s reorientation towards littoral warfare. Should the Navy tire of the lack of competition in the industry, and adopt a solution this radical, then Northrop Grumman and General Dynamics should be prepared to radically overhaul their cost structures. For one, General Dynamics (GD) appears to understand this issue quite clearly. 14 Electric Boat has recently taken a significant line of overhaul work on Los Angeles-class submarines, but this has been taken to be a consolation prize from the Navy to keep the shipyard afloat. Sources inside the service have indicated to CRA that this decision may be regrettable 15 ‘CNO Says LCS Cost Increase Doesn't Breach Lawmakers' Cap,’ Defense Today, 2 March 2006 JAMES HASIK www.jameshasik.com • 512-299-1269 • jhasik@jameshasik.com
  15. 15. Complexity and Competition in Naval Shipbuilding GD asked Austal (Australian Aluminum Shipbuilding) to build its entries in the LCS program, not just because Austal has excellent process technology for building relatively large-scale aluminum- hulled ships, but because GD knows that Bath cannot compete on cost with the wider set of US yards that can build a ship of that type. If the Navy did embrace the 2,500-ton frigate—and not the 12,000-ton battlecruiser, or DDX—as the way forward, it might find its shipbuilding costs per ton dropping nicely. That, however, would mean introducing industrial strategy into the requirements setting process—a step that the Pentagon has been loathe to take. GD’s decision about Austal indicates just how little sentimentality—and how much business sense—the company’s leadership has, at least vis-à-vis Bath. For its part, Northrop decided last year to team up with VT Halter to bid to build the Army’s forthcoming fleet of Theater Support Vessels (TSVs). According to VT’s press release, Prime contractor VT Halter Marine will lead the TSV proposal development and perform hull, electrical and mechanical design and fabrication of the ships, while Northrop Grumman will serve as lead systems integrator. One might ask, then, whether Northrop really sees itself as a shipbuilder or a systems integrator. The answer is ‘either,’ as it benefits the shareholders. Northrop has deliberately chosen to pursue a degree of vertical integration to maintain subsystem competencies within the corporation, [16] but not to seek to do all things equally well. However, as the TSV concept now shares a program office with that of the Navy’s High Speed Vessel (HSV) concept, Northrop (as well as its competitors) may be looking at a fairly sizable program, particularly if the DDX continues to attracting cost-cutting scrutiny. The fisheries survey vessel Henry B. Bigelow is launched at VT Halter Marine. Photograph courtesy of the National Finally, there are those Oceanographic and Atmospheric Administration (NOAA) smaller yards: operations like the aforementioned VT Halter and Austal USA, as well as Bollinger (including Bollinger-Incat), Marinette, and Nichols Brothers. A shift towards smaller vessels could be a bonanza for them, but it would also involve some profound questions: 16 James Hasik, ‘Dream teams and Brilliant Eyes: the SBIRS Low program, Northrop Grumman's acquisition of TRW, and the implications for the structure of the military space industry,’ Defense & Security Analysis, January 2004 JAMES HASIK www.jameshasik.com • 512-299-1269 • jhasik@jameshasik.com
  16. 16. “Further Delay and Cost are Likely” ✦ How much control over their fortunes would prime contractors like Northrop Grumman, Lockheed Martin, and General Dynamics hold? At what point—if at all— could they displace them from those positions? ✦ Could comparable relationships be developed with systems integrators like Raytheon and EADS, which lack shipyards, but are keen to gain access to the surface ship business? ✦ How well can the the economics of one yard (say, Austal in Western Australia) be duplicated at another (Austal USA in Alabama)? ✦ Can the yards and firms increase their scale of operations with sufficient speed to meet the Army and Navy’s procurement schedules, if they were executed more aggressively? ✦ At what point do the skills of ship construction and ship repair diverge sufficiently that a single yard is unlikely to master both cost-effectively? Could a smaller yard with more flexible work rules manage both, at least asynchronously? With programs like TSV, HSV, and LCS ramping up, the smaller yards may have plenty of work, but they will also have plenty of strategic planning to do to capture the economic benefits of the ship construction competencies that they have spent decades developing. —————— James Hasik is a business economist who works frequently with military suppliers. Information on his work is available at http://www.jameshasik.com.This article is based on a study undertaken in conjunction with the consultancy CRA International for a state government interested in analyzing the opportunities available and problems inherent in attracting ship construction programs. JAMES HASIK www.jameshasik.com • 512-299-1269 • jhasik@jameshasik.com

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