Few of those who have lamented the nation’s inability to increase the number of Navy combatants recognize the causes of the dramatic contraction of shipbuilding capacity. Subsidies that compensated for escalating costs in domestic production were withdrawn, leading to the collapse of the commercial shipbuilding industry. Rising labor and raw material costs outpriced the domestic shipyards that had built U.S. commercial ships. As a result, the merchant marine virtually disappeared, and the tonnage needed to carry America’s global seagoing commerce is now satisfied by foreign-flagged shipping. The demise of commercial shipbuilding infrastructure has had serious consequences for the Navy and Coast Guard.
Enterprises such as Lockheed Shipbuilding Seattle, Todd Seattle, Todd San Pedro, Defoe, New York Ship, and Bethlehem Quincy that had worked commercial and Navy contracts have simply disappeared. In less than 20 years, between the late 1950s and early 1970s, 11 privately owned shipyards delivered 132 surface combatants comprising 10 classes of frigates, destroyers, and cruisers. Most of these yards were simultaneously building commercial ships. For the past 50 years, just two shipyards—Ingalls and Bath Iron Works—have built most of the Navy’s surface combatants.
The shipbuilding industrial base that remains is dedicated to the Navy and Coast Guard, functionally a single customer—a monopsony, which economic theory holds to be inefficient. The yards operate under legal strictures requiring U.S.-sourced raw materials, components, and labor. While this ensures a dedicated domestic industry and supply chain, it imposes a culture that demands adherence to labyrinthine contract regulations and requirements through an arcane contracting process.
One distinguishing characteristic of this culture is a shared responsibility between shipyards and combat systems integrators in the production of combatants. This requires extensive coordination in design and production, which results in significant overhead spread across all a builder’s contracts, military and commercial. For example, as demand for nuclear-powered aircraft carriers and submarines declined in the 1990s, Newport News built four Double Eagle tankers for a Greek customer, but spreading the overhead resulted in losses of more than $200 million. Avondale and Litton had similar experiences. Predictably, the effects have made U.S. competition for commercial ship contracts virtually impossible.
The most consequential result for naval shipbuilding has been constrained returns on invested capital driven by monopsonistic controls on profit levels. Penurious contracts and volatile building forecasts limit the resources that can be devoted to attracting, training, and retaining stable workforces. Finally, another dysfunction of this culture is the overreach in government oversight of detailed design and execution of major programs. This in turn imposes unforeseen and costly change orders with concomitant delays in program execution.
Industrial Base Consolidation
Contraction of the shipbuilding industry already underway in the 1980s and 1990s was made worse by the consolidation of what survived. Following the first Gulf War and calls for a post–Cold War “peace dividend,” a downturn in shipbuilding contracts resulted in fierce competition for the few programs that remained. At the famous “Last Supper” in 1993, Secretary of Defense Les Aspin and his deputy William Perry directed the defense industry to consolidate.1
Industry responded, and turbulence ensued. For example, in 1997 Litton Ship Systems, which operated the Ingalls yard in Pascagoula, Mississippi, outbid Newport News Shipbuilding to acquire Avondale Industries in Louisiana. In 2001, Northrop Grumman bought Litton Industries thereby acquiring both shipyards. This was followed in 2002 by Northrop Grumman’s acquisition of Newport News, the only shipyard building nuclear-powered aircraft carriers.
One surviving contract was for the LPD-17 (San Antonio–class amphibious transport dock) program, and competition between two teams for its 12-ship buy was heated in 1995–96.
The first team, Newport News and Litton Ship Systems, proposed building the ships in halves and joining them in one shipyard or the other, a method the Navy had mandated for the Virginia-class submarine program. Objective reviews concluded that the cost and risks attached rendered it effectively unworkable for the LPDs. Yet, given the projections in the Navy’s shipbuilding budgets, both partners in this awkward teaming approach had seen the program as vital to their futures.
The second team, Avondale and Bath Iron Works (BIW), proposed to design the ship collaboratively using a new and untested design tool, then build eight ships at Avondale, Louisiana, and four in Bath, Maine.
That approach should have raised several concerns. In the first place, Avondale, the team leader, operated with seriously undercapitalized facilities and was a generation behind competitors in construction and outfitting practices. As the future would soon reveal, the least sophisticated builder would be challenged to build the most complicated amphibious ship ever proposed. Moreover, BIW was still building ships on inclined ways when the bids were tendered. The company was not required to demonstrate how it would build and launch the massive ships from a land-level facility. Given the projected $12 billion magnitude of the program, congressional interest was keen. Louisiana sweetened the deal by building a facility to train engineers and house government monitors. The Avondale team had a champion in the powerful chairman of the House Appropriations Committee. The company was awarded a contract for the first three ships in 1996.
Investing After Contract Award
The case of Northrop Grumman Ship Systems (NGSS) during my 2001–5 tenure as president is instructive. Northrop Grumman acquired Litton in May 2001 through a stock purchase, which—at Litton’s insistence—limited due diligence and obscured some of the company’s deficiencies. Following the purchase, we undertook a prompt assessment of the facilities and equipment at the Avondale and Pascagoula sites, quickly identifying serious problems at Avondale. The shipyard’s dated and worn production facilities needed major renovation and modernization. In addition, attrition in the labor force was extraordinarily high.
The assessment showed that these were the root causes of the losses incurred by the Polar Tanker, roll-on/roll-off T-AKR ships, and LPD programs. When NGSS assumed responsibility in 2001, the remaining Military Sealift Command T-AKRs were building at a loss pursuant to a renegotiated fixed-price contract, and the lead LPD-17 was already delayed by rework issues that affected performance fees.
Program performance at Ingalls was much better in the surface combatant segment. The DDG-51 destroyer program was well managed and distinguished by relatively profitable, multiyear, fixed-price (incentive fee) contracts. In 2001, it was the only active government program at Ingalls. The LHD amphibious assault ship line was in a suspended state because of a long gap between delivery of the USS Iwo Jima (LHD-7) in 2000 and the expected award of a contract for the Makin Island (LHD-8) in 2004. Anticipating this delay and to avoid the layoff of more than 1,000 skilled workers, the company obtained a contract to build two modern cruise ships for American Cruise Lines, a critical development that led it to invest more than $180 million in optimizing the shipyard for cruise ship construction. In the aftermath of the terrorist attacks in September 2001, American abruptly canceled the ships, forcing NGSS to write off almost $200 million. This sensitized the leaders of Northrop Grumman’s defense conglomerate to the risks attending large capital investments in shipyards.
Prior to its acquisition, Litton Ship Systems entered the competition for two contracts that, if won, would have taxed Ingalls’ shipbuilding capacity. The first was a partnership with Raytheon to design and build the proposed futuristic destroyer—DD(X). The other team, led by BIW, included the Navy’s premier combat systems builder/integrator, Lockheed Martin. The Litton (now NGSS)/Raytheon team was selected in March 2002 to the chagrin of many.
In June 2002, the Coast Guard’s Deepwater program—designed to replace the entire Coast Guard fleet and upgrade most of the Coast Guard’s aviation assets—was awarded. A joint venture between the Ingalls unit of Litton/Northrop Grumman and Lockheed Martin was awarded the contract.2
After analyzing future requirements against capacity, NGSS concluded that significant capital investments would be needed—and soon. To that end, in July 2002, NGSS outlined to parent company leaders the pressing need for approximately $150 million in facilities improvements at Avondale, including $46 million for the Avondale-owned Gulfport Composite facility. In addition to the extensive renovation of the panel construction lines and the building that housed them at Avondale, there was a crying need to replace three waterfront cranes that were in disrepair and chronically unavailable. Anticipating a requirement to construct a large carbon-fiber composite deckhouse for what would become the Zumwalt (DDG-1000) while continuing to build the composite mast shrouds for the LPDs, the Gulfport facility needed expansion. Based mainly on expected future contracts for these programs, the calculated return on investments proposed for Avondale was only 8.3 percent.
After addressing requirements for the Ingalls facility to build DD(X), NGSS requested $96 million from Northrop Grumman corporate. The principal needs were enlargement of the ship erection areas, extended track beds for the Goliath crane, modernization to allow computer-aided fabrication, replacement of unreliable single-lift-point cranes, and construction of a climate-controlled outfitting hall. The estimated capital return ranged between 8 and 10.5 percent. Calculations were based on varying assumptions regarding the number of DDG-1000 ships that would be built in Pascagoula. Corporate leaders undertook more analysis.
The issue was addressed at a Northrop Grumman board meeting held in Pascagoula in early autumn. The large write-off and poor returns on capital in the wake of the cruise ship cancellations weighed heavily on senior leaders and members of the board. The estimated returns compared poorly with projected double-digit returns for the air and electronics sectors. Hoping to forestall board disapproval or significant reductions to the capital plan, we argued that the returns might be greatly improved were the shipyards’ home states—Louisiana and Mississippi—willing to contribute.
Louisiana Governor Mike Foster was interested in raising revenue with a bond to be approved by the Louisiana legislature, provided that the Northrop Grumman Corporation would commit to operating the Avondale facility for the life of the bond. Soon thereafter, I met with Mississippi Governor Ronnie Musgrove, who asserted, “Mississippi will not be outdone by Louisiana when it comes to shipbuilding.” Subsequent meetings with Mississippi State Senate leaders confirmed there was bipartisan support for a bond issue that would fund some of the improvements in Pascagoula. Complications resulting from state ownership of some of the land involved resulted in NGSS proposing to match the state’s bond by committing an equal amount to relocatable projects (cranes, compressors, etc.) at Ingalls. NGSS also committed to expand and improve the composite facility in Gulfport.
Thanks to the states’ bond-financed contributions, the combined projects now exceeded the minimum rate of return Northrop Grumman required, and improvements at the three shipyards began in the summer of 2003. Efficiency and productivity improved gradually, although personnel turnover continued to negatively affect programs at Avondale. Louisiana subsequently invested in an expanded apprentice training program. By the end of 2003, Avondale was building only LPDs, with concurrent work underway on LPD-17, -18, and -20.
The Power of Monopsony
LPD-19 was to have been built in Maine at Bath Iron Works. But in June 2002, the Navy requested that NGSS build the four LPDs that were to have been built at BIW under the joint contract. In addition, the Navy asked NGSS to accept a modification to its profitable multiyear contract for destroyers, transferring one to BIW. The Navy also promised three future NGSS DDGs to BIW in compensation for the lost LPDs.
NGSS was reluctant to accept these changes, given the profitability of the DDG program and the risks that would attend new LPD construction in Pascagoula. Under strong pressure from corporate headquarters and with an informal commitment from the Navy affirming that NGSS would remain a “premier supplier” of surface combatants, NGSS agreed to sign the memorandum of understanding.
By the end of 2003, the capital plan was implemented, and the Ingalls yard was working on three DDG-51s, completing the updated design for LHD-8, and building its first LPD. NGSS also was leading a multi-company team to design DD(X) and demonstrating the viability of its novel architecture, hull form, and other unique systems. At the same time, NGSS was in detailed design of the Coast Guard’s National Security Cutter.
Hurricane Katrina and its 24-foot tidal surge on Mississippi’s Gulf Coast in August 2005 wreaked havoc on the three shipyards, delaying all shipbuilding activity for several months. Many of the recent investments were compromised. Although insurance settlements were negotiated and government subsidies partially offset the cost of repairs and delays in production, losses were significant.
In view of the resulting storm damage at Ingalls and Gulfport—including to the newly built and updated facilities—and the delays that would have resulted, Navy leaders and congressional critics collaborated to truncate the DDG-1000 class from 31 ships to 9 and eventually just 3. Extraordinary cost growth was the stated logic, but the amortization of the billions in sunk costs across the remaining ships was a major factor in that growth. Construction of the remaining ships, still in detailed design, moved to BIW. After ordering a redesign of the composite superstructure, the Navy required NGSS to sell the recently repaired Gulfport composite facility, for which it received a paltry $45 million. The closure demonstrated anew the risks that attend investments based on forecasts.
Volatility and Unpredictability
In defense conglomerates, shipbuilding divisions manage programs with relatively low operating margins that compete with other divisions that generate higher rates of return on capital. The volatility and general unpredictability that characterize shipbuilding budgets render accurate estimates of return on invested capital almost impossible. Moreover, imposed ceilings on fees and penurious returns on sales negatively affect the flow of investments in shipyards.3 The decision by Northrop Grumman to spin off its Ingalls and Newport News shipyards in the wake of Hurricane Katrina confirmed what was already obvious. The comparative costs of capital for shipyards were prohibitive, and prospects for increased revenue and earnings problematic, given the vagaries of congressional appropriations and budgeting priorities.
The NGSS example has implications for accelerating build rates for surface combatants today. Increasing the number of warships that may be built in the near term will require major government investments in shuttered shipyards. The private sector needs incentives to make the investments that will improve the productivity and capacity of existing shipyards. Alongside financial ones, these might include removal of burdensome regulations and requirements to improve operating margins.
For the long term, without a restoration of subsidies to support domestic production of ships in the commercial trade, the industrial base will not support a significant increase in the production of warships.
Finally, even if technology and automation improve the productivity of U.S. shipyards, a pressing need to attract and retain workers will remain. A national program to subsidize and revitalize apprentice training modeled after the Job Corps is in order.
These are tall orders in an environment that sees disproportionate investments to benefit one service’s programs as “too hard”—regardless of merit.
The post–Cold War clamor for a “peace dividend” led to reductions in shipbuilding budgets and the size of the combat fleet and a degraded maritime posture more generally. The unrivaled quality of the Navy’s overworked warships and air wings and the sailors who man them cannot compensate for the lack of numbers or declining transoceanic reach. The emergence of a peer competitor in the Pacific and a Sino-Russian axis at sea make the continuing decline ever more problematic. And yet the champions of American sea power in Congress are few, and their valiant efforts alone will not stem the ebbing tide.
What has been noted in many places bears repeating: Article 1 of the Constitution directs that Congress must “provide and maintain a Navy” while empowering it only to “raise armies” when necessary. In 2022, Chairman of the Joint Chiefs of Staff General Mark Milley predicted the likelihood of “lots of bloodletting” among the services to fund the growth of the Navy to meet the challenge China is creating in the western Pacific. Perhaps the time has come to resurrect Congress’s historical Naval Affairs Committees and for Congress to authorize budget shares for defense that will ensure the nation can meet today’s challenges.
1. Jonathan Chang and Meghna Chakrabarti, “‘The Last Supper’: How a 1993 Pentagon Dinner Reshaped the Defense Industry,” WBUR, 1 March 2023.
2. Bollinger Shipyards was a third teammate included to work on the modernization of the aging Island-class ships of the Coast Guard pending delivery of the new fast response cutters planned for the Deepwater program.
3. At a meeting of major contractors with Navy acquisition leaders in 2003, the participants were asked to anonymously convey what they believed were “fair” margins on major contracts. Shipbuilding executives posited that 10–12 percent returns seemed appropriate. Government representatives thought that a range of 6–8 percent was adequate. A review of recent earnings performance at Ingalls demonstrates that government estimates have prevailed.