Navy’s Shipbuilding Challenges Loom Large in the 2020s

By Grace V. Jean
Builders of U.S. Navy ships are attempting to rein in costs that have doubled over the last 20 years. They are pursuing capital improvements, streamlining construction methods and lowering overhead expenses. But whether their efforts are enough to help close the $3 billion gap between the Navy’s projected budgets and estimated ship costs remains to be seen.

Congressional watchdogs predict growing shortfalls in the Navy’s fleet numbers as defense budgets tighten. The Navy projects an annual shipbuilding budget of about $16 billion, but analysts at the Congressional Budget Office report that the sea service needs to average closer to $19 billion to afford all the new vessels naval leaders want to buy in the next 30 years.

Shipyard officials on the other hand remain confident that their cost-cutting measures will help the Navy boost the fleet size to 313 ships from 287 ships.

The Navy, for its part, is keeping a watchful eye on the industrial base.

“The biggest issue is the decade of the ‘20s,” says Chief of Naval Operations Adm. Gary Roughead.

Ships that were constructed during the Reagan-era weapons build-up in the 1980s — including many submarines and surface combatants — will begin reaching the end of their service lives in the next decade. The Ohio-class ballistic missile submarine fleet is due to be replaced, so the nation will be building several multi-billion-dollar replacement boats throughout the decade. At costs estimated to be nearly $6 billion per ship, it will be a “significant piece of the shipbuilding plan,” Roughead pointed out.

The 2020s also will mark the first time the Navy will be decommissioning nuclear aircraft carriers. Nimitz-class flat tops will begin hitting the end of their 50-year service lives. To decommission those carriers will cost the Navy a couple billion dollars, Roughead said.

“We add all those up in the ‘20s, and the nation is looking at a challenge to shipbuilding that I believe we need to start thinking about now. We need to start working on ways to address that,” he told reporters.

The Navy’s shipbuilding enterprise still faces a series of challenges, said David J. Berteau, senior adviser and director of the Defense-Industrial Initiatives Group at the Center for Strategic and International Studies. Those hurdles include uncertain force structure requirements, unpredictable future missions, disconnects between shipyard capacity and funded programs and potentially declining budgets.

“We face a drawdown of indefinite length and unspecified proportions,” Berteau said. The Navy has contended with economic downturns and defense draw downs before. But in previous situations, its efforts to expand the fleet yielded many ships before the decline occurred. This time around, the latest cycle of defense expenditures has not produced a remarkably larger Navy, so “we actually start with a weak spot,” he pointed out at a defense industry conference.

That means the Navy must climb the proverbial slippery slope to boost its fleet numbers on fewer dollars than before. Its limited purchasing power will relegate industry to shoulder more of the burden.

“If the budgets are going to go down and you have lower volume, then you have to learn how to be as efficient as you can at that low volume,” Ronald O’Rourke, specialist in national defense at the Congressional Research Service, told industry representatives at the same conference. The Virginia-class submarine program demonstrates how that can be done, he added. Two shipyards are constructing the fast-attack boat: General Dynamics Electric Boat in Groton, Conn., and Huntington Ingalls Industries, formerly Northrop Grumman Shipbuilding, in Newport News, Va. That teaming arrangement is aimed at preserving two yards in submarine construction even though the volume is relatively low, O’Rourke said.  

The Navy is moving out of a decade where it pursued new warship designs and built a number of first-of-class ships. This decade the service will commence serial production of those maturing designs. Yards are angling to capture that business.

At Huntington Ingalls’ Gulf Coast operation in Pascagoula, Miss., the focus is shifting back to serial production, said Mike Petters, the company’s president and CEO. “That’s a different mindset than building lead ships. That requires different management processes and different management techniques,” he said.

At Pascagoula, where many of the production facilities were replaced and recapitalized after Hurricane Katrina flooded the yard with 10 feet of water in 2005, company officials made several key decisions to reset the business.  

“I don’t think in 2006 or 2007 anybody fully appreciated how much the baseline of the business had changed because of Katrina,” said Petters. “When you lose 15 percent of your work force and they all have 25 years of experience, that’s a pretty substantial change in the cost baseline of business. You’re bidding the business to say those folks are there, and they’re not.”

Before Katrina happened, 20 percent of the shipyard’s work force had 25 years of experience. Afterwards, less than 5 percent of the corps possessed that expertise.

“We realized we needed to go back to reset that culture, reset that fabric,” Petters said.

The longtime Navy contractor also experienced an internal shake-up when former parent company Northrop Grumman divested the ship construction business and its corresponding yards in Newport News, Pascagoula and Avondale, La. The business commenced operations under its new name in April.

Officials there examined the Navy’s 30-year shipbuilding plan and realized that the programs they wanted to pursue for their Gulf Coast operations could be executed within Pascagoula’s facilities. They made a decision to wind down Navy operations at the Avondale shipyard to remove that cost from the company’s government programs.

In Avondale, two ships currently are under construction: the San Antonio-class amphibious transport dock ships LPD-23 and LPD-25. When LPD-25 delivers in 2013, officials will proceed to shut down the shipyard.

“We’re closing Avondale because the 30-year footprint does not require that capacity to execute that work,” said Petters.

Officials will remain open-minded about credible business alternatives for the yard that would give the company a better chance for success, he said. But lacking those options, the plan remains to shutter the facility.

Petters told reporters that he expected Huntington Ingalls to garner contracts to work on the LPD-27, the DDG-113 and DDG-114 Arleigh-Burke destroyers and the LHA-7 amphibious assault ship. The Pascagoula yard can be reconfigured to create serial production lanes for any of those vessels, he said.

Shipyards, like all military contractors, have been directed to cut costs.

“Everyone is going to be under that pressure,” said Petters. “The people that are able to successfully do that are going to be successful, and I like our chances.”

Thomas Schievelbein, who serves on the company’s board of directors, said there has been some question about whether the consolidation of the shipyards would compromise the nation’s capacity to construct Navy ships. “It’s not so much whether the yards will be there, but how affordable they will be for the U.S. Navy,” said Schievelbein, a former president of Northrop Grumman Shipbuilding-Newport News.

In order to be more affordable, yards must become more automated and every process needs to be “leaned out,” said Fred P. Moosally, president and CEO of Fincantieri Marine Group, a subsidiary of the eponymous Italian shipbuilding company that oversees four yards in the Great Lakes region. “The biggest cost factor going forward is manpower,” he said. “Our culture must embrace the fact that we must do more with less people.” Low-value, labor-intensive work can be subcontracted to minimize the “standing army” in the shipyard, he said.

“What we’ve done in the past is not going to get us to the future,” he acknowledged. “Those who embrace change and respond to customer priorities and make smart people and investment decisions will survive and thrive in a highly shrinking industrial base. Those that don’t will disappear,” he added.

Shipyards have no choice but to modernize and increase automation in their facilities, said Gene Taylor, a former congressman who is now director of corporate development for E.N. Bisso & Son, Inc., a privately held New Orleans-based tugboat operator.

“There’s a whole generation of people who don’t want to hold a stick welder, but those people will turn a knob on a computer to do that same job,” he said.

When it comes to modernized yards, the international community is setting the bar high with automation and other production tools. Taylor, who visited several Korean shipyards in the summer of 2006 as a U.S. representative of Mississippi, said one of the yards was building an entire 1,000-foot ship weekly. In 2009, that same yard was constructing two ships per week.

“That target is constantly moving. That is where you need to be,” he told shipbuilding officials.

“There’s been some hesitancy to modernize in the yards because there’s a misconception that a large work force of 6,000 people, 10,000 people, get the attention of lawmakers,” who will rally to appropriate more money for shipbuilding budgets to keep the yard chugging along. “I think you need to get past that,” he said.

Shipyards lack programmatic vision to invest as heavily as they ought to in improving facilities, said Donald “Boysie” Bollinger, president and CEO of Bollinger Shipyards Inc., headquartered in Lockport, La. His ship construction facilities are small compared to other U.S. yards. But when he tours the “big boys,” he often finds that his modest-sized yard boasts automation that exceeds their capabilities.

“Why? Because we invest in tooling for programmatic demands that we have,” he said. For example, in preparation to build the Coast Guard’s fast response cutter fleet of 33 ships, the yard planned accordingly with modernization efforts. “With that knowledge, we can invest in tooling that makes it a very efficient program,” he said.

U.S. shipyards have the capability to produce quality products at competitive prices, he added.

“We can be as efficient as any shipbuilder in the world. I know it. I compete every day in the world shipbuilding community,” he said. “If you do the discipline of engineering and if you do the discipline of scheduling and you have discipline on changes, we can be competitive. That’s what the rest of the world does, and does it in spades.”

But experts often question why U.S. shipyards cannot build vessels as efficiently as Korean yards do. “The Koreans don’t start building a ship until they design it. And they don’t just build one. They follow the Henry Ford model: Any color you want, but nothing else will change,” said Bollinger.

Shipyards all have strengths and weaknesses, and the Navy needs to leverage those unique strengths, said John F. “Dugan” Shipway, former president of Bath Iron Works in Maine. “Timely decisions over the next couple years of what we’ll build will provide ability to build ships affordably in the next decade,” he advised.

As budgets flatten and shipyards learn to live within that situation, the Navy may want to look at making greater use of multi-year procurement or block buy contracts, said O’Rourke. Navy officials also have to learn to manage programs better, he added.

As for industrial base issues, it is important to recognize that the shipbuilding base extends beyond the shipyards and includes combat system makers, components suppliers, research and development teams, designers and engineers, he said.   

“A shipyard can only control a certain fraction of a ship’s total cost. So as we try to work toward shipbuilding affordability and to constrain shipbuilding costs, we need to focus beyond yards,” said O’Rourke. He suggested that naval shipbuilders institute a method to maintain constant visibility on suppliers’ status.  

In many segments of the shipbuilding business, the industry is heading toward a monopoly of suppliers.

“You need to find ways to use competition where you can, and smartly, in this industrial situation,” O’Rourke said. One way is to compete shipbuilding contracts at higher or lower levels than at the yard. At the mission level, for example, the Defense Department could pitch ships against other forms of military platforms for performing certain missions. Or the Navy could compete at the supplier level for components, he suggested.

“Everybody knows where ships are going to go because there’s only enough [shipbuilding] capacity to absorb that load. So we need to ensure there’s slack in capacity to preserve that uncertainty in their contract award decisions,” said O’Rourke.

Overcapacity in the shipbuilding industrial base is a hedge against an uncertain future, said Taylor.

“We have not lost a ship to combat in decades. We haven’t lost a shipyard in probably half a century. Let’s not think it can’t happen,” he cautioned. Earthquakes, hurricanes and other natural or man-made disasters could wipe out that capability. “I think we need that overcapacity because quite frankly we can’t count on a future enemy not taking out several, if not all, our shipyards. … We may be counting on Newport News one day to build our destroyers. We may be counting on the folks in Connecticut to build our aircraft carriers.”                                           

Topics: Shipbuilding

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