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

7/30/2019 How Complexity Has Confounded Competition in Shipbuilding, And Options for the Navy Department

1/16

FURTHER DELAY AND COST ARE LIKELY

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

March 2006

Substantial circumstantial evidence suggests that the largest US naval shipbuildersNorthropGrumman and General Dynamicsare not particularly good at managing complexity in theirproduction programs. Managing programs between yards is not the issue, as the two largeshipbuilders largely manage their individual shipyards as independent enterprises. However, areview of the operating performance over time of four of the large yards suggests that thesescope inefficiencies appear at the shipyard level. Four case studies follow.

JAMES HASIK


2/16

Newport News Shipbuilding and the Double Eagle TankersOr, 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 shipyardperforming primarily nuclear work to one that is broader-based; we temporarily transitioned out

of submarine construction; and we successfully transitioned to an independent, publicly tradedcompany.

William P. Fricks, Chairman and Chief Executive Officer of Newport NewsShipbuilding & Repair, January 1997 [1]

After the end of the Cold War, the US Navy's procurement of submarines droppedprecipitously. 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 alsoended 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 itlaunched the 11,300-ton, nuclear-powered guided missile cruiserUSSArkansas in October 1978.Thus, in the mid-1990s, as it wasabout to be spun out of theindustrial conglomerate Tenneco,Newport News was facing anorder book almost entirelycomposed of work on nuclear-powered aircraft carriers.

Newport News thus resolved tofind new markets for its impressiveshipbuilding talent. The US OilPollution Act (OPA) of 1990provided an outlet. After thegrounding of the tanker ExxonValdez in Prince William Sound,

Alaska in 1989, the US Congress mandated that all crude carriers in US waters after 2015 bedouble-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 positionthan lower-cost rivals to enter this expanding market quickly. The Jones Act of 1920, whichmandates 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:

Further Delay and Cost are Likely

JAMES HASIK www.jameshasik.com 512-299-1269 [email protected]

1 Newport News press release, 31 January 19972 Michael Valenti, 'Double-wrapped: cleaner, safer, greener, twin-hulled tankers keep oil spills off the high seas,'

Mechanical Engineering, January 1999

MV Brenton Reef, the final Double Eagle tanker, on seatrials in the Atlantic


3/16

Newport News delivered the first ship, the 46,000-ton tankerAmerican Progress, to Mobil Oil inSeptember 1997. It was not just the first double-hulled tanker for Newport News, but the firstone built in a US shipyard. At the time, the company had contracts for another fourteen suchvessels. The problem was that it could not deliver them for the prices promised. The primaryissue was Newport News's cost structure. The aforementioned emphasis on nuclear propulsionis 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 ofthe highest labor cost structures of any heavy industrial enterprise in the world. For example, thework 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. Materialprocurement and subcontractor costs also ran higher than expected because Newport Newsneeded to introduce substantial design differences in the international and domestic classes ofthe tanker. [4]

Ordinary EBIT at Newport News Shipbuilding & RepairEffect of the Double-hulled Tanker Program

$0 MM

$10 MM

$20 MM

$30 MM

$40 MM

$50 MM

$60 MM

1996

Q1

1996

Q2

1996

Q3

1996

Q4

1997

Q1

1997

Q2

1997

Q3

1997

Q4

1998

Q1

1998

Q2

1998

Q3

1998

Q4

1999

Q1

1999

Q2

1999

Q3

1999

Q4

2000

Q1

2000

Q2

2000

Q3

2000

Q4

2001

Q1

2001

Q2

2001

Q3

Commercial tanker

program cancelled

Almost immediately, Newport News recognized its missteps, and began extricating itself fromcommercial work in the third quarter of 1997even before the first ship was delivered. InMarch 1998, the company formally announced its exit from the business, and took a pretaxcharge 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

Complexity and Competition in Naval Shipbuilding


3 Interview with US Navy engineering duty officer formerly stationed with the Supervisor of Shipbuilding, NewportNews

4 Newport News press release, 18 September 1997


4/16

contract. By all accounts, the shipis very well built, as are all ofNewport News's ships. [5]

Today at Newport News, noneof these things that William

Fricks described in his January1997 message were true.Newport News is no longerindependent, having beenpurchased by NorthropGrumman. The company is onceagain in the submarine business(if only through an alliance withGeneral Dynamics's Electric BoatCompany), having recentlylaunched the 7,800-ton attackboat USS Texas, and workingtowards the launch of sister shipNorth Carolina. However, the bulkof Newport News's work todayis found in the construction andoverhaul of nuclear-poweredaircraft carriers. As noted in thechart above [6], NewportNews's finances improved after itleft the tanker business, asmanagement and staff focusedtheir attention and resources on

the yard's business as themonopoly builder ofsupercarriers. With the largestdrydock in the westernhemisphere, and a fleet (at thetime) of twelve such shipsrequiring service, NewportNews was bound to makemoney. Indeed, while thecompany delivered only onewarship as an independentcompanythe carrier USS Harry

S Truman in July 1998itconsistently attained ordinary



5 Newport News press release, 27 May 19996 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.

An overhead view of an aircraft carrier constructiongraving dock at Northrop Grumman Newport News.

Photograph courtesy of the US Navy

USS Virginia under construction at the Electric BoatCompany in Groton, Connecticut. The Virginia class ships

are a cooperative program between Electric Boat andNewport News. Photographs courtesy of the US Navy


5/16

quarterly earnings before interest and taxes (EBIT) of $40 to $50 million until its acquisition inlate 2001.

Avondale and the San Antonio

Or, how a transport builder can bite off more than it can chewIn management's opinion, the primary reason that the expected productivity gains were notrealized was the disruptive effects of work on two other shipbuilding contracts.

Avondale's Annual Report for 1992, p. 23This is not to say that Northrop Grumman cannot build tankersit just no longer tries

to build them at a yard that specializes in submarines and carriers. Northrop GrummansAvondale operation has one of the lowest cost-structures of the large construction yards in theUS, and today it is building theMillennium class of 125,000-ton OPA-compliant tankers for Polar

Tankers, the ocean

shipping subsidiary ofConocoPhillips.Established in 1938,Avondale has since the1970s focused on buildingcargo ships forcommercial customersand amphibious assaultvessels for the US Navy.Notably, it was thedesigner and lead builderof both the Whidbey Island

(LSD-41) and HarpersFerry(LSD-49) classes ofdock landing ships.

Thus, only a few weresurprised in December1996 at the US Navysdecision to awardAvondale the contract forthe detailed design and

construction of the first of its latest class of assault ship, the San Antonio (LPD-17) class. Theproblemthough not apparent to manywas that the San Antonio represented an entirely

different concept than the Harpers Ferry. Previous assault ships had basically been cans withenginesbasically large cargo spaces that could ballast themselves down to launchdisplacement or air cushion landing craft laden with troops and equipment. The San Antoniowould be expected to serve as a command center for the assault, and would therefore featuremuch more sophisticated command-and-control systems, defensive weaponry, and sensors thanthe LSDs and cargo ships that Avondale was accustomed to building. It would also feature an



USS San Antonio under construction at Avondale Shipbuilding inAugust 2002, prior to her move to the Ingalls yard. Photograph

by Spike Thibodeaux, and courtesy of the US Navy


6/16

entirely redesigned and semi-automated damage control systemthe most technologicallyadvanced in the US Navy, but also one that presented a considerable systems integrationchallenge. [7]

Timeline of the Construction of USS San Antonio (LPD 17) [8]

February 1996 Citing industrial base concerns and the LPD 17s improved survivability features, Congressauthorizes the ship, accelerating the Navys schedule by two years

December 1996 A cost-plus award fee contract is awarded after a competitive selection of the AvondaleAlliance for detailed design and construction of LPD 17. Target cost is set at $644 millionfor the first ship and $391 million for the second, LPD-18 (appropriately named USS NewOrleans)

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 delaydelivery 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-plusincentive fee format. The original award fee was based on the total cost of the ship overits operational lifetime. The incentive fee is now tied to controlling construction costs,shifting the focus of the program from lowering future maintenance costs to deliveringthe ship

November 2001 Cost growth by more than 43 percent triggers a Nunn-McCurdy unit cost breach, causinga new baseline to be established in June 2002 and requiring $1.4 billion in additionalfunding.

December 2004 USS San Antonio, LPD 17, is towed from Avondale to Ingalls Shipbuilding for completion(see below)

May 2005 LPD 17 expected delivery datealmost three years behind schedule

There were several problems in the construction of the ship, and these became more apparentas 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 onredesigning some portions of the ship while construction was underway, which led to aconsiderable volume of government-mandated rework. In retrospect, a cost overrun of somevariety should have been expected: in developing the initial cost estimate, Navy analysts useddata from the earlier LHD and LSD amphibious ships, which were considerably less complextechnologically. According to the US Government Accountability Office (GAO), thirty-sevenpercent 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 Mississippi8 US Government Accountability Office, Improved Management Practices Could Help Limit Cost Growth in Navy

ShipbuildingPrograms, GAO-05-183, February 2005, p. 56; and CRAs additional research


7/16

costs. [9] Aside from the Navys problems with an unsettled design configuration, the leadingcause of these problems was Avondales inexperience with an integration problem of this size.The yard was an efficient cargo vessel manufacturer, but had had no experience since the 1970swith surface combatantswhich would effectively, if not literally, describe the San Antonio.

Profitability at Avondale Industries

19901998

($6,000)

($4,000)

($2,000)

$0

$2,000

$4,000

$6,000

$8,000

$10,000

$12,000

$14,000

$16,000

199819971996199519941993199219911990

Operating

profitperemployee

Comparison to Ingalls Shipbuilding

Avondale is awarded

the LPD-17 program

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 wasinvolved in many more programs, building barges, minehunters, and hovercraft, and even runninga bus line in Dallas. As the epigraph indicates, Avondale was struggling in this environment tofocus enough management attention on multiple, dissimilar construction projects. At the sametime, 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 SanDiego, 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 thatprimarily military shipbuilders could attain, and that Ingalls Shipbuilding, its competitor up theGulf Coast, was experiencing. The growth in Ingallss profitability over this time, however, wasdirectly linked its renewed focus on just the types of shipbuilding that it could do best.



9 GAO, op. cit., pp. 556110 The data are drawn from the annual financial reports of Avondale Industries and Litton, 19901998. We use

operating profit per employee so that we can measure the economic productivity of the activity at a yard withoutexplicit reference to the yards overall size.


8/16

Product line complexity and profitability at Ingalls ShipbuildingOr, 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 parentcompany kept the two yards in a single business sector, Northrop Grumman Ship Systems. LikeLitton, Northrop hoped to use Ingallss arguably stronger management to improve operations atAvondale, while leveraging the Louisiana yards lower cost structure. Even at Ingalls, however,there were limits to what management could achieve.

Productivity vs. Product Mix Complexityat Ingalls Shipbuilding

1990-1999

$-

$2,000

$4,000

$6,000

$8,000

$10,000

$12,000

$14,000

$16,000

1999199819971996199519941993199219911990

Reporting Year

Operatingprofitperemployee

0

5

10

15

20

25

Numberofmajorhullsunderconstruction

4major programs underway:CG, Sa'ar V, DDG, LHD

2

major programs underway:DDG, LHD

3major

programsunderway:

Sa'ar V,

DDG, LHD

As shown in the chart above, [11] Ingallss profitability per employee improved considerablyduring the 1990s as the company progressively reduced the number of individual ships andprograms on which it was working at its yard in Mississippi. In the early 1990s, while it finishingvessels that had been ordered prior to the end of the Cold War, Ingalls had arguablyencountered 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 differentpacing 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 complicatedIngallss planning and execution of work. However, towards the end of the decade, Ingalls was



11 Data from Littons annual financial reports, 19901999


9/16

building onlyArleigh Burke-class guided missiledestroyers (DDGs) andWasp-class helicoptercarriers (LHDs), and itsefficiency rose sharply.

This is not to say thatNorthrop Grumman treatedIngalls delicately. In October2004, the company orderedthe uncompleted San Antoniotowed out of Avondale, andsent up the coast to Ingallsfor completion. Long tired ofthe problems that theLouisiana yard hadexperience in the program,Northrops managementwanted to ensure that theship would be ready for

delivery to the Navy on time. Shortly after the move, the ships captain, Commander JonathanPadfield, sent a message to Washington updating the admiralty on the status of his ship, in partexpressing his relief at the move, but also noting the work that remained. The relevant excerptfollows: [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 A copy of the radio message was provided by a US Navy engineering duty officer familiar with the problems of theSan Antonio class

USS San Antonio after her move to Ingalls. The other focus ofconstruction at the yard is immediately asternanArleigh

Burke-class destroyer in a floating drydock. Photographcourtesy of the US Navy


10/16

The move was understandable, as Ingalls is one of the more cost-effective naval shipbuilders ofits size in the US. As indicated above, a submarine builder might not have the cost structure tohandle 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 asophisticated assault ship.

The LPD-DDG SwapOr, why a destroyer-builder might have chosen to build, well, destroyers

It wasnt that they couldnt do the workthey didnt 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 someconfidence in its ability to build San Antonio-class LPDs, at least to the Navys revised cost and

schedule expectations. At the time, however, Northrop Grumman was not the only companybuilding the ships. Construction of LPD-19, USSMesa Verde, had begun at General Dynamics'sBath Iron Works in July 2001. Bath had been part of the original Avondale Alliance team that had

bid for the design andconstruction contract forthe entire class in 1996. Bathhad an agreement withAvondale to construct everythird ship of the classtheyard in Louisiana hadoutsourced some of thework to Maine not just to

broaden its politicalsupport, but becausemanagement realized justhow much workload wasinvolved with theconstruction of twelve25,000-ton warships.

The cost overruns andschedule delays, however,had led the Navy to seekopportunities 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-sourcedprogram. So, around the time that the San Antonio's keel was laid at Avondale, Navy SecretaryGordon England and his Assistant Secretary for Acquisition, John Young, proposed to Ron Sugar



The guided missile destroyer USS Winston Churchillslippingdown the ways during her christening at the Bath Iron

Works. Photograph courtesy of the US Navy


11/16

and Nicholas Chabraja, the chief executives of Northrop Grumman and General Dynamics, thatthe former trade the construction contracts for four of the lastArleigh Burke-class guided missiledestroyers for the contracts on the four LPDs planned to be built at Bath.

Deliveries of tonnage from the Bath Iron Works

Actual and Planned

19902010

-

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

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 thatassociated with the destroyers, the shipyards were more concerned with assembly andintegration. Hence, the tonnage of the ships roughly described the amount of work (and thusfee) 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, includingBath, 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'scontract 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 thushave to pay to resolve the problem, but the yard lacked the money to do so since it was notearning fees on its subcontractors' activities. Avondale also had, as per the original contract, noway to pass this cost onto the government.

That left the question of why General Dynamics would agree to surrender the work on fourlarge ships for the work on four rather smaller ones. Bath could certainly have handled the worktechnicallythe skills of its staff are very well regarded in the US. Instead, the issue wasworkload. Because an LPD represents over twice the cutting, welding, and shipfitting of adestroyer, the yard's construction workload would have resembled a sine wave preceding every




12/16

delivery of an LPD. This meant thatBath would need to hire, train, andsubsequently discharge a great manyskilled industrial workers insouthern Maine, where the laborforce was already rather

constrained. At the time, Bath alsobelieved that it would land lucrativecontracts for the construction ofthe 12,000-ton DDX series ofdestroyers (the ships that wouldsucceed the Burkes), and the yardwanted to keep the ways clear forthose.

So, in June 2002, General Dynamics,the Navy, and Northrop Grummanagreed to the swap. As shown in thechart on the preceding page, Bath'sworkload would still rise in theshort-run. [The hatched barsindicate the loss of two LPDcontracts during the time horizon;the light-colored solid barsrepresent the addition of severaldestroyer contracts.] On the otherhand, the workload would smoothout considerably, and would consistof but one type of ship. As the left

side of the chart suggests, Bath rather built its reputation to deliver destroyers to cost andschedule expectations on its ability to manage the workload on a type with which it wasintimately familiar. Today, Bath is concerned about the Navy's interest in consolidating the DDXprogram at a single yard, but it has a backlog of some fourteenArleigh Burkes on its books, and itis 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 coremarkets, four leading US shipyards retreated from diversification efforts:

Faced with an exit for the then-foreseeable future from the submarine constructionbusiness, Newport News attempted to enter the oil tanker business with a nuclear-powered cost structure



13 CRAs research is primarily based on conversations with US Navy procurement officials based at the Supervisor ofShipbuilding, Bath; the Supervisor of Shipbuilding, Pascagoula, and the Pentagon

The guided missile destroyer USS Chafee underconstruction at the Bath Iron Works. Photograph

courtesy of the US Navy


13/16

Faced with a decline in its traditional business of building relatively cargo ships andLSDs, Avondale attempted to design and build a very sophisticated LPD

With a diverse product mix consuming management attention and complicatingscheduling, Ingalls improved its profitability by reducing the number of hulls and types onwhich it was working

Faced with an unsustainable surge in its workload, the Bath Iron Works willinglysurrendered four (seemingly profitable) contracts on assault ships to concentrate on itscore business of building destroyers.

These facts lead to two general observations:

The difficulties these shipbuilders faced were not inter-yard, but rather intra-yardinefficiencies. That is, their scope and scale diseconomies were primarily found at thelevel of the individual yard.

The consolidation of these yards into two corporate parentsNorthrop Grumman and

General Dynamicshas not provided the benefits that the Defense Department hadhoped to attain when it approved the acquisitions in the 1990s. The cost structures,planning capabilities, engineering labor requirements, and material management systemsrequired are quite thoroughly different, and as noted, the companies had continued tomanage 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 thegovernment would appeargrim. The Navy Departmentis sufficiently serious aboutexpanding the fleet that it is

cutting staff in order to payfor more ships. Thisdepends, however, onreasonable costs inshipbuilding, and costperformance from the largeyards has been lacking. Theproblem is that problemswith complexity at the yardlevel will limit the Navysability to force the yards of

the two large shipbuilders tocompete to cut their coststructures. NorthropGrumman today is a

shipbuilder with three large yards, but each is focused on a different task: Newport Newshandles nuclear-powered vessels, Ingalls handles helicopter carriers, and Avondale handles assaultships. At one time, Newport News built surface combatants as well, and Ingalls submarines, but



USNS Red Cloudduring during her christening at the

National Steel and Shipbuilding Company (NASSCO) in SanDiego. Photograph courtesy of the US Navy


14/16

neither does any longer. With General Dynamics, the division of labor is just as striking: the BathIron Works builds only destroyers, Electric Boat builds only submarines, and NASSCO buildscargo and auxiliary ships. It is most notable that none of these yards derive a large fraction oftheir revenues from ship repairand that the largest US firm in this business, BAE Systems ShipRepair, has no construction contracts whatsoever. [14]

In this context, consolidating work at fewer shipyards may not be the answer. This has beenproposed as a means for removing excess capacity from the domestic shipbuilding industry, butdecreases in capital costs could be largely offset by increases in process and staffing costs relatedto the complexity of dissimilar operations. Encouraging competition amongst the large andestablished shipyards may also not be the answer. The six yards are so specialized at this point

that tactic collusion isrelatively easy to maintain.Moves to reenter abandonedlines of business could beeasily detected by thecompetitionso much ascompetition exists.

The way forward, rather, mayrequire expanding thesolution space toaccommodate more, notfewer, shipyards. This,however, would necessitate achange in requirements.Utilizing more yards meansbuilding more ships, butbuilding more ships without

an increase in funding meansbuilding smaller ships. TheLittoral Combat Ship (LCS)program is an excellent

example of this, assuming that it emerges unscathed from its recent run-in with higher materialsand engineering costs. [15] Neither the LCS nor the Joint High Speed Vessel (HSV) areappropriate platforms for air and missile defense, but a wide range of other tasks, fromsubmarine-hunting to surface fire support (using missiles) could be accomplished with smallerships, particularly given the Navys 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.



14Electric Boat has recently taken a significant line of overhaul work on Los Angeles-class submarines, but this hasbeen taken to be a consolation prize from the Navy to keep the shipyard afloat. Sources inside the service haveindicated to CRA that this decision may be regrettable

15 CNO Says LCS Cost Increase Doesn't Breach Lawmakers' Cap, Defense Today, 2 March 2006

A view of the Littoral Surface Craft Sea Fighterunder

construction on Whidbey Island. Photograph courtesy of theUS Navy


15/16

GD asked Austal (Australian Aluminum Shipbuilding) to build its entries in the LCS program, notjust 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 USyards that can build a ship of that type. If the Navy did embrace the 2,500-ton frigateand notthe 12,000-ton battlecruiser, or DDXas the way forward, it might find its shipbuilding costsper ton dropping nicely. That, however, would mean introducing industrial strategy into the

requirements setting processa step that the Pentagon has been loathe to take.

GDs decision about Austal indicates just how little sentimentalityand how much businesssensethe companys leadership has, at least vis--vis Bath. For its part, Northrop decided lastyear to team up with VT Halter to bid to build the Armys forthcoming fleet of Theater SupportVessels (TSVs). According to VTs 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 aslead systems integrator.

One might ask, then, whether Northrop really sees itself as a shipbuilder or a systemsintegrator. The answer is either, as it benefits the shareholders. Northrop has deliberately

chosen to pursue a degreeof vertical integration tomaintain subsystemcompetencies within thecorporation, [16] but not toseek to do all things equallywell. However, as the TSVconcept now shares aprogram office with that ofthe Navys High Speed Vessel

(HSV) concept, Northrop (aswell as its competitors) maybe looking at a fairly sizableprogram, particularly if theDDX continues to attractingcost-cutting scrutiny.

Finally, there are thosesmaller yards: operations likethe aforementioned VTHalter 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:



16James 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

The fisheries survey vessel Henry B. Bigelowis launched at VTHalter Marine. Photograph courtesy of the National

Oceanographic and Atmospheric Administration (NOAA)


16/16

How much control over their fortunes would prime contractors like NorthropGrumman, Lockheed Martin, and General Dynamics hold? At what pointif at allcould they displace them from those positions?

Could comparable relationships be developed with systems integrators like Raytheonand 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) beduplicated at another (Austal USA in Alabama)?

Can the yards and firms increase their scale of operations with sufficient speed to meetthe Army and Navys procurement schedules, if they were executed more aggressively?

At what point do the skills of ship construction and ship repair diverge sufficiently that asingle yard is unlikely to master both cost-effectively? Could a smaller yard with moreflexible 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 theship 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 artic le is based on a studyundertaken in conjunction with the consultancy CRA International for a state government interested inanalyzing the opportunities available and problems inherent in attracting ship construction programs.



Documents

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