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My single chart showing a simplified history of the US Navyʼs capital structure. In the twenty years after the end of the Cold War, the fleet shrank from 570 to 284 ships, though tonnage held up somewhat better, as the supercarrier fleet shrank from just fifteen to eleven. The Navyʼs portfolio of federal shipyards shrank through the BRAC process from eight to four, though a large contingent of commercial shipyards continued supplying roughly half its repair needs. But the number of shipyards building ships for the Navy declined from seven to six, then rose later to eight, and only now appears poised to shrink back to seven.
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Hasik Analytic LLCInevitable RestructuringShipbuilding and Repair Twenty Years After the Cold WarDefense-Industrial Research Memorandum #2011-10, 7 October 2011
A VERY BRIEF INDUSTRIAL HISTORY OF THE POST-COLD WAR NAVY
Call my chart below a simplified history of the US Navyʼs capital structure. In the twenty years after the end of the Cold War, the fleet shrank from 570 to 284 ships, though tonnage held up somewhat better, as the supercarrier fleet shrank from just fifteen to eleven. The Navyʼs portfolio of federal shipyards shrank through the BRAC process from eight to four, though a large contingent of commercial shipyards continued supplying roughly half its repair needs. But the number of shipyards building ships for the Navy declined from seven to six, then rose later to eight, and only now appears poised to shrink back to seven.
US Navy Fleet Strength and Industrial Restructuring, 1990–2010
My chart is admittedly simplified. I have not shown any demand for military ships from the US Coast Guard or the US Army, I have not included the USCGʼs shipyard at Hawkins Point, and
most notably, I have made no reference to those aforementioned commercial ship repair facilities that service the Navy. The fate of these has broadly followed the Navyʼs basing plans—Charleston once had a thriving business, but now somewhat less so. But the bulk of domestic demand (from the Navy) and the bulk of that supply is shown clearly: the fleet that needs to be sustained has dropped by half, but capacity was, at best, initially trimmed, then actually added to. The pending closure (in 2013) of HIIʼs Avondale yard will reduce capacity, but after years of quality problems, that was the easy kill. The game is not over.
SOME BRIEF THOUGHTS ABOUT THE INEVITABLE INDUSTRIAL RESTRUCTURING
Without thinking about the particulars of what Austal and Marinette have been trying to accomplish, this recent entry into an overall shrinking market seems remarkable. Actually thinking about it suggests some nuance. After all, in the long run, there is a small and discrete set of possibilities for the evolution of demand. My list is not quite MECE, but I offer it with some very rough and preliminary judgments of probability. I can foresee that the Navy may
1. resume buying a lot of all kinds of ships (highly unlikely)2. defend the supercarrier fleet as its perceived raison dʼêtre (possible)3. relatively favor small surface ships to bolster fleet size (possible)4. relatively favor large surface ships for oceanic defense against missiles and subs (possible)5. relatively favor amphibious ships for humanitarian and expeditionary purposes (unlikely)6. relatively favor nuclear submarines as a sea denial force in the Pacific (possible)
With that list in mind, I can paraphrase the situation as a frustrated job-seeker once did: this aggression will not stand. If the Navy pursues option (3), it is quite likely that Austalʼs entry and Marinetteʼs reentry will together succeed in knocking one of the remaining larger five yards out of business. If the Navy pursues option (4) or (5), one or both of those recent entrants could eventually exit itself. Other options portend more complicated outcomes.
Those competitive interactions are indeed complicated, and I will cover them next week in a brief discussion of the game theory that lies behind this market today.
James Hasik • +1-512-299-1269 • www.hasikanalytic.com
THE USUAL BOILERPLATE—This memorandum is for private circulation and distribution, and is provided for information only. Hasik Analytic LLC makes every effort to use reliable, comprehensive information, but does not represent and cannot warrant that it is necessarily accurate or complete. The views in this publication are those of Hasik Analytic LLC and are subject to change without notice. At the same time, Hasik Analytic LLC undertakes no obligation to update its opinions or the information in this publication. Neither Hasik Analytic LLC nor any respective officers, employees, or affiliates accepts any liability whatsoever for any direct or consequential loss arising from any use of this publication or its contents. Analysts may own securities of the issuers discussed herein. © Copyright Hasik Analytic LLC 2011, all rights reserved. No part of this publication may be reproduced, sold, or redistributed without the prior permission of Hasik Analytic LLC.
Defense-Industrial Research Memorandum 2011-10 Hasik Analytic LLC
page 2 of 2 7 October 2011
