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Civilian and Navy shipyards need each other to survive. Maintaining a strong Navy has never been cheap, and building tomorrow’s fleet will be costly enough without having to rebuild the shipbuilding industry as well. If President-elect Clinton—here at the NASSCO Shipyard—cuts defense too deeply it will accelerate dangerously the already steady decline of the shipbuilding industrial base.
As the Department of Defense adjusts to the postCold War environment, the Navy, like the other services, will shrink. The popular notion of a 25% reduction applied to the current fleet size yields a future force level of approximately 450 ships—the Base Force. As the size of the fleet decreases, the deceleration in naval ship construction, combined with the loss of virtually all commercial construction work over the past decade, is driving U.S. shipbuilding capacity to dangerously low levels. The tools for dealing with this problem are limited, but they do exist. We must look now toward long-term requirements to ensure that the national assets we call shipyards remain capable of supporting economical construction of tomorrow’s fleet.
The private shipbuilding industry in the United States was already in a state of critical decline when the Cold War ended. This loss of domestic shipbuilding capacity could seriously affect the Navy’s ability to meet future reconstitution requirements, or even sustain the Base Force. There are several factors at work:
>• The loss of commercial construction contracts in the 1980s to foreign competitors has resulted in a smaller, less diverse U.S. shipbuilding industry that is dependent on the Navy as its only customer.
► Dependence on Navy construction makes the shipbuilding industry overly sensitive to naval shipbuilding trends.
y Naval shipbuilding is expected to continue on a downward trend for the foreseeable future. This has distinct implications for our ability to sustain future force levels, and
for our ability to reconstitute.
The following discussion will examine each of these issues, in light of past trends and those projected for the future.
Loss of Commercial Ship Construction
Commercial construction in U.S. shipyards has plummeted in recent years, from 97 ships in 1973 to essentially none since 1988. NASSCO, the last remaining private West Coast shipyard, is building the only commercial ships under contract in the United States. To place this in the perspective of the world market, 1,911 ships are under construction worldwide today, fewer than 1% of which (approximately 0.1% of the total tonnage) are being built in U.S. yards.1
In 1980, the shipbuilding industrial base was relatively healthy and robust, with U.S. competitiveness in the world market dependent on government construction differential subsidies. Some 181 commercial and naval ships were under construction that year in 37 private shipyards along the East and West coasts. The Navy’s share of the total domestic shipbuilding market was a healthy 55% (see Figure 1). Then the Reagan administration eliminated domestic subsidies, causing commercial ship orders to migrate quickly to other countries, such as Japan and Korea. These and other nations continued to use subsidies, keeping foreign prices artificially low and undermining U.S. ability to compete internationally.
A dramatic decline in the U.S. shipbuilding industry followed. Today, according to the Maritime Administration (MarAd), only 16 private U.S. shipyards are still in business. Of the 100 ships under contract in the United States, 96% are being built for the Navy. By 1997 the number of ships under construction is expected to drop below 50.- Among today’s surviving facilities, three—Alabama Shipyard, Halter Marine, and Toledo Shipyard- are listed as active by MarAd even though they currently have no construction contracts. Five of the leading shipyards—Newport News, Ingalls, Bath Iron Works, Electric Boat, and Avondale—now account for about 90% of the total Shipbuilding & Conversion Navy (SCN) appropriation, or more than 86% of the entire shipbuilding business base.
Naval Shipbuilding Trends: Past, Present, and Future
Trends in naval ship construction always have been important to the overall health of the shipbuilding industrial base. Without the buffer of commercial work to carry shipbuilders through the lean times ahead, SCN spending in the near future will have a profound effect on the long-term size and shape of the industry.
In 1962, the Five-Year Defense Program (FYDP) became the display document for near-term and historical budget data in DoD. Coincidentally, at this time the Navy also shifted from a mix of public and private shipbuilding to relying solely on the private sector, ending a long history of in-house design and construction at naval shipyards. Although the FYDP now covers an expanded six-year period, the display continues to provide a homogeneous source of information for comparison of past and present naval shipbuilding trends.
A look at FYDP data since 1962 shows that annual SCN appropriations (in constant fiscal year 1992 dollars) have ranged from a high of $20.2 billion to a low of $4.9 billion, with an overall average of $11.8 billion. In contrast, the current FYDP reduces SCN funding well below the historical average. Figure 2 shows that, under current plans, annual SCN expenditures will average just $8.5 billion over the FYDP years, dropping to a low of $6.7 billion in fiscal year 1994.3 In fact, projected SCN spending for the remainder of the century will be at the lowest sustained level (i.e., trends of at least four years) since FYDP data have been recorded.
Longstanding DoD policy requires that the Navy fully fund shipbuilding programs in the year of appropriation.
Because ship construction spans several years, however, the outlay profile is a better measure of actual business volume. The six-year moving average included in Figure 2 shows the leveling effect that ship construction schedules have on annual SCN outlays. This averaged line more accurately portrays the declining trend as industry sees it, by smoothing peaks such as the nuclear-powered aircraft carrier appropriations in fiscal year 1983 and fiscal year 1988, and valleys such as the brief dip in fiscal year 1968-69.
The overall trend is unmistakable: The shipbuilding business base has been declining steadily since about 1980, and will continue on this path through the end of the century. Recent legislation will accelerate the decline. If President George Bush’s proposed cuts of $50 billion over the FYDP years are increased, as both the Senate and House Armed Services Committee chairmen and the new administration advocate, we will be forced to delete or defer ships from the SCN account, below the levels shown in Figure 1.
Force Level Implications
The number of ships put under contract each year is naturally tied to the annual SCN appropriation amounts. Figure 3 shows the trend in naval ship construction orders since 1962, including projections through fiscal year 1997. Sustained force level is a function of these annual shipbuilding quantities, computed as:
Force Level = number of ships funded per year x expected service life
The “expected service life” (ESL) parameter comes from
life expectancy estimates the Navy produces for each class of ship. Taking a weighted average of the established ESLs for all ship classes yields a nominal ship service life of approximately 35 years. For example, to support the 600- ship Navy envisioned in the 1980s would have required an average annual production rate of 17 ships. By contrast, the 9.7-ship-per-year average construction rate projected through fiscal year 1997 corresponds to a steady- state force level of only 340 ships. This is 110 fewer ships than the planned Base Force of 450.
For the Navy to maintain a force of 450 ships in the long run, an average construction rate of 13 ships per year—or an increase of 34% over current projections— will be required. On our present course, the shipbuilding industry is unlikely to possess the reserve capacity necessary to support such an increase—much less a reconstitution surge—when the time comes to resume higher production.
Cost Implications
Naturally, one could argue that whenever there is sufficient demand for certain products, the marketplace will adjust its ability to supply them, and we should allow it to do just that. This argument ignores the cost of production adjustments, which must be borne by future shipbuilding programs. With a fixed or shrinking budget topline, rising program costs can be offset only by downscoping capability or cutting procurement quantities and stretching production. Quantity reductions, in turn, lead to increases in unit cost, as economies in material procurement are lost and fixed costs are reallocated over a smaller base. The resulting “cost spiral” can erode congressional confidence and make even the most vital programs unaffordable. A good example of this cycle is the Air Force’s B-2 bomber program, which is approaching $1 billion per aircraft.
The Navy SCN account is not large enough to shoulder the entire weight of the U.S. shipbuilding industry alone. A case in point is the current situation with submarine construction. The Secretary of the Navy testified last year before the Senate Appropriations Committee that an SSN-21 procurement profile of one ship per year would not provide sufficient work to sustain two submarine construction-capable shipyards.'4 The presidents of both General Dynamics/Electric Boat and Newport News Shipbuilding agreed with that assessment. The termination of the Sea wolf program makes the future of these two shipyards even more uncertain. The loss of either Newport News or Electric Boat would virtually ensure sole- source submarine procurement for the foreseeable future.
Nuclear aircraft carrier construction is already limited to one highly specialized producer. In such a one-cus- tomer/one-producer environment, or bilateral monopoly, price will not necessarily be determined strictly by economic factors. One fact is clear, however: Despite the best efforts of aggressive program management, shipbuilding prices will tend to rise without the yoke (or at least a credible threat) of competition to contain them.
The problem extends to the vendor level, especially in the exacting field of nuclear propulsion component production. In this segment of the industry relatively small, specialized producers are not able to cope with the rise and fall of nuclear component orders, and have virtually no alternative markets for their products. Competition has been especially fierce since commercial nuclear power plant orders, like commercial shipbuilding contracts, no longer supplement Navy business.
Outlook
For the taxpayers, the current situation holds a deceptive promise. As business has become steadily more scarce, extremely competitive bids have resulted in fa-
vorable contract prices on Navy ships. This presents a temptation to continue to reap savings up front, rather than invest scarce resources toward distant and uncertain future needs. We must resist this temptation, however, and look ahead for ways to satisfy long-run shipbuilding requirements commensurate with approved future force levels. Then, we must preserve our ability to sustain those levels.
While the shipbuilders certainly share a common interest in our national security, the profit motive is what keeps them in business. If we simply let “the market” decide the future of the shipbuilding industry based on the relatively meager business of the 1990s, then there will be a short list of winners who were fortunate enough to have the deepest pockets when it mattered. There will be four lasting consequences:
^ An upper limit on U.S. shipbuilding capacity that may not support the Base Force, and probably will not support Wartime surge requirements
^ Increased reliance on sole-source procurements and decreased competition among U.S. producers, meaning higher ship prices in the long run, and limits on future Navy shipbuilding options
^ An economic requirement to consider foreign sources
for the production of naval ships and systems > Continuous pressure on Congress to minimize the number of ships it authorizes for the Navy to fulfill its national defense responsibilities
Unless future prospects for commercial work materialize as the industry downsizes to meet reduced Navy demand, domestic shipbuilding capacity will continue to decline. Restoring the lost capacity at some point in the future will be costly and, under certain circumstances— such as those involving environmental considerations— impossible.
Options
The simple answer for the industry is to build more
ships. Here are some options that could help the U.S. shipbuilding industry maintain its strength and recover a much- needed share of the international market. While some of these measures represent a departure from tradition, they illustrate the range of alternatives available to policymakers:
► Protect the SCN account as much as possible. At a minimum, maintain the SCN share of Navy total obliga- tional authority at or above the historical average of about 12%.
Funding for SCN cost growth, which was requested in 1991 for the first time since 1986, should be appropriated separately in the budget, to avoid paying for cost growth with funds earmarked for other ships (as was the case last year with the AOE-9). Fund CVN and CGN overhauls and refuelings out of the Operations &
Maintenance account, rather than SCN.
>■ Promote increased U.S. construction of surface combatants for foreign navies. This may also require limiting the number of decommissioned U.S. ships offered for foreign military sales (FMS), which compete directly with such programs as Ingalls’ Israeli corvette, the Saar 5.
► Expedite domestic construction of the fast sealift ships that have been mandated by Congress and funded at $1,875 billion. Minimize foreign procurement and conversion of these ships.
► Press foreign governments to eliminate ship construction subsidies. This would help U.S. shipbuilders compete more equitably in the international market. The House version of the fiscal year 1992 defense authorization bill directed DoD to take “a more active role” with the Commerce Department and the Office of the Trade Representative in efforts to eliminate foreign subsidy practices.5
► U.S. shipbuilders must prepare to tap the emerging market for double-bottomed tankers. The Oil Pollution Act of 1990 requires that all tankers calling on U.S. ports be double-bottomed by the year 2010.6 Meeting this objective will require the replacement of large numbers of singlehull vessels currently operated by U.S. and foreign shippers. This will provide an opportunity for U.S. shipbuilders to obtain significant commercial construction work, particularly if the subsidy issue is resolved.
► Reexamine the 70%/30% allocation ratio of Navy repair work between public and private sector facilities. This ratio was established in the 1960s, when commercial and naval repair contracts were plentiful. While the Navy has a clear requirement to maintain a credible in-house shipbuilding and repair capability, repair work that reasonably can be redirected to the private sector would help sustain the industry.
Conclusion
In a climate of declining defense budgets and a shrinking fleet, the Navy’s SCN topline hardly can be expected to grow. The requirement to replace large portions of the naval aircraft inventory in the decades ahead will not make the distribution of scarce procurement funds any easier. Given that the Navy SCN budget alone cannot support a healthy domestic shipbuilding industry, private U.S. shipyards must attract other sources of stable business—preferably shipbuilding business.
In the past, some shipyards have resorted to producing alternative commodities, such as railroad cars, to supplement sparse ship construction work. Alternative manufacturing, however, does little to protect the important perishable skills of the welders, ship fitters, production machinists, marine electricians, and pipe fitters, to name a lew.—and nothing to sustain the fragile vendor base. Only by building more ships can the industry maintain the capacity required to support the nation’s maritime needs—needs that have remained relatively unchanged over the years, despite a revolution in transportation. Roughly 95% of the lift required to support Operations Desert Shield and Desert Storm moved by ship.
This discussion examines just one facet of the larger predicament facing the nation as it struggles to “rightsize” the military. It makes better economic sense to preserve an adequate minimum shipbuilding capacity today than to pay to rebuild tomorrow.
'"Ship Construction Surge to Continue into the 1990s," Maritime Reporter/Engi- neering News, 1991 World Yearbook (1991), pp. 26-28.
■Private communications, Shipbuilders Council of America, June 1991.
'The Future Years Defense Program, Summary and Program Element Detail Fiscal Years 1992 and 1993 Budget, 4 February 1991, Part 1, p. 3.
4SSN-2] Submarine, Hearing before the Defense Subcommittee of the Senate Committee on Appropriations, 102:1 (19 March 1991).
'National Defense Authorization Act for fiscal years 1992 and 1993. House Committee on Armed Services, House Report 102-60 (13 May 1991), pp. 57-58. ‘Oil Pollution Act of 1990, P.L. 101:2 (1990).
Lieutenant Commander Carr is the precommissioning executive officer of the Vella Gulf (CG-72). He recently completed a tour as a Navy program analyst in the Office of the Secretary of Defense. He has served in the USS King (DDG-41), USS McCandless (FF-1084), and USS Thomas S. Gates (CG-51). Commander Carr has a bachelor’s degree in naval architecture from the U.S. Naval Academy and a master’s degree in operations research from the Naval Postgraduate School. Lieutenant Commander Seglem is currently executive officer of the USS Monterey (CG-61). He served as operations officer in the USS York- town (CG-48) and as resource analyst in the Office of the Secretary of Defense. Commander Seglem is a 1979 graduate of the Wharton School of Finance and Commerce at the University of Pennsylvania, and holds a master of science in management degree from the Naval Postgraduate School.