For Navy Shipbuilders, It’s Invest-or-Die Time

Before it won a contract to build the Navy’s new hovercraft, Textron poured $45 million worth of manufacturing robots and other upgrades into its Louisiana shipyard.

“We spent our own funds in order to ensure we put ourselves in a position to win,” said Bill Kisiah, vice president of Textron Systems Marine & Land Systems.

This is increasingly how it works in the military shipbuilding industry. To remain viable players in this market, shipyards are expected to assume more financial risks. Although shipbuilders are private corporations, they depend on the Navy for most of their business, and the Navy is demanding that they put more skin in the game.

Textron’s investment in its New Orleans yard was probably a safe bet as there is a strong chance the company will continue to build the “ship to shore connectors” that the Navy is buying to replace the fleet of 73 landing craft air cushion vehicles. LCACs shuttle Marines from amphibious warships to the beach.

After a string of massive cost overruns in several ship programs during the past decade, the Navy has shifted to a new business model where the risks are shared by buyers and sellers. This means more private investment, but also a commitment by the Navy to not change ship specs midstream and to curtail admirals’ appetite for exquisite technology.

“There is increased focus on involving industry at the beginning of the design,” said Rear Adm. David Gale, who oversees a $76 billion portfolio of six ship programs. With greater insights into the Navy’s requirements, he said, shipyards can estimate technical risks and predict costs more accurately.

Gale commended Textron’s capital investments. “They’ll bring some pretty neat robotic automation to craft production that we didn’t have in that world before,” Gale told reporters last week. The insertion of robots saves thousands of man-hours. “It’s going to bring us a better product at a better price.”

Many ship construction contracts now are awarded under fixed-price deals that compel manufacturers to absorb cost overruns. All amphibious and combat logistics ship contracts are now fixed price, Gale said.

As the industry’s only customer, the Navy can afford to drive a hard bargain. But only to a certain point, as the industry has shrunk and is now dominated by monopolies. Only eight shipyards build the vast majority of the fleet.

The Navy is now discussing possible shipyard upgrades with Huntington Ingalls Industries, the only yard capable of building nuclear-powered aircraft carriers, and also a key manufacturer of amphibious ships and destroyers. The Defense Department would like to see the company step up investments to lower the cost of the new Ford class aircraft carrier. Even in a sole-source situation, the Navy can motivate suppliers to become more efficient, Pentagon procurement chief Frank Kendall said.

Brian Cuccias, corporate vice president of HII and president of Ingalls Shipbuilding, said the company is planning a number of shipyard improvements that would be jointly funded by the company, the Navy and the state of Mississippi. Among the upgrades will be automation technologies, mechanisms to increase worker efficiency and construction of covered assembly areas so work isn’t interrupted by rain. HII also might consider additional investments to accommodate future work on a new submarine that will replace the Ohio class. “We’ll go make whatever investments are necessary to support the Navy,” Cuccias told reporters April 14 at the Navy League’s annual conference.

Marinette Marine Corp., one of the shipyards that is building the Navy’s littoral combat ship with Lockheed Martin Corp., spent about $100 million to upgrade the Wisconsin-based yard so it could assemble two ships a year. Now the Navy plans to arm the LCS with heavy weapons and convert it to a frigate. That could require additional investments in testing facilities, said Jeanine Matthews, Lockheed’s director of ship and aviation systems business development.

The pressure on shipyards to stay competitive is exacerbated by the fact that each yard specializes in one or two types of ships, which exposes them to big gaps in production as the Navy buys only eight to nine ships a year. “I believe specialization in the shipbuilding industry has made it more fragile and drives inefficient procurement choices by the Navy,” said naval analyst Bryan Clark, of the Center for Strategic and Budgetary Assessments. “Instead of buying a large number of platforms in a short time the Navy has to stretch out purchases to keep yards operating continuously.”

Under a new acquisition strategy, the Navy plans to bundle the procurement of the LHA-8 big-deck amphibious ships, the design of a new amphibious ship called LX-R, and construction of the T-AO (X) logistics ship under a single solicitation. The Navy would divvy up the work between General Dynamics’ NASSCO — a traditional support ship builder — and HII, which specializes in amphibious ships. The intent is to make sure both stay in business, officials said. The contract would guarantee each yard a similar amount of work, regardless of who wins which parts of the contracts.

Clark said this approach could help to address the specialization problem by giving NASSCO the amphibious ship construction contract and Ingalls the supply ship construction contract. “That would be good for the Navy by making the industrial base more resilient,” he said.

The Navy should worry about the health of the industry, Clark added. “Shipbuilders used to cross over into different types of ships. Today they just build one type of ships. So the Navy gives them barely enough work to stay in business. Instead of buying four destroyers a year, they buy two a year and stretch it out.”

In this environment, yards have to invest in “design affordability,” Clark said. The Navy expects industry to spend big on improvements. The concern for privately funded yards is that shareholders will demand assurances that the investment will pay off.

Shipyards are willing to commit corporate funds to Navy programs, but there is a limit, said Textron’s Kisiah. “That works well in some instances as long as the pendulum doesn’t swing so far to the right that they want industry to do everything on our own nickel,” he told National Defense. “As long there’s enough engagement upfront, it works just fine.”

Topics: Procurement, Shipbuilding