As the United States enters what could be a second cold war, one senses a renewed emphasis on sea power, with Congress and the Department of Defense (DoD) aligned on the need to rebuild the nation’s naval capabilities. At the same time, the shipbuilding industrial base is falling short: Programs are delayed, ships and submarines are not being delivered on time, and production capacity fails to meet needs. Navy customers are frustrated. Congress is furious.
How can this be when, not so long ago, the prodigious production capability of the shipbuilding industrial base helped the United States prevail in the first Cold War? Here is the ugly reality: The industrial base that helped win that war is gone. The industry today bears little resemblance to the one that supported the Cold War, not only in its structure, but also in what motivates its owners.
Many have offered explanations for production shortfalls. The lingering challenges of COVID-19, labor shortages, and inflation certainly are relevant. But one dimension remains relatively unexplored: the underlying objectives of the shipbuilding industrial base’s current owners—the shareholders. Have their objectives evolved since the Cold War? Are they aligned with those of the Navy and Congress? If not, can the shareholders’ priorities be shifted? And, if not, can the owners themselves be replaced? What are the options?
How We Got Here
The end of the Cold War led to a drastic reshaping of the shipbuilding industrial base. One consequence is well known: supplier consolidation. The seven builders of nuclear submarines in the 1960s and 1970s winnowed down to just two today. The dozen yards producing major surface combatants during the Cold War declined to three (with one other added in recent decades). This reduction was inevitable given the decline in the number of ships and submarines being purchased, but it was difficult to sustain even this reduced capacity after 1990.
The naval shipbuilding industry also became divorced from the overall economy, part of a broader trend across the defense industrial base. In the 1980s, more than 70 percent of major defense programs originated from large, diversified commercial enterprises that also served defense. That number is less than 10 percent today.1 As late as the 1980s, about 30 of the Fortune 100 companies had large defense industrial units. Now only four do. The United States entered the novel age of the stand-alone defense specialist.
In the 1980s, only one of the major naval shipbuilders—Electric Boat—was part of a publicly traded company focused on defense. Bath Iron Works and Marinette Marine were privately owned.2 NASSCO and Avondale Shipbuilding were owned by their employees.3 Ingalls was part of Litton, whose diversified portfolio stretched as far as typewriters and frozen meals. Newport News was one of six major businesses in Tenneco, alongside farm tractors, packaging, and natural-gas pipelines. Even Electric Boat, part of defense specialist General Dynamics, sat alongside multiple other portfolio units. These diversified, private or employee-owned enterprises could elect to take long-term risks without pressure to meet Wall Street’s quarterly cash-flow targets. In the case of Electric Boat, the parent company could potentially syndicate risk across a broad defense and commercial portfolio.
After 2000, however, these shipbuilders had all been reorganized into defense specialists traded on public stock exchanges. NASSCO and Bath Iron Works were acquired by General Dynamics. Northrop Grumman acquired Newport News and Ingalls (which itself had acquired Avondale) and then spun them off as Huntington Ingalls (HII). Marinette Marine was consolidated into Italian shipbuilder Fincantieri.
This restructuring was significant, but the ultimate effect was felt after 2008, when the post-9/11 defense-market boom became a bust. Public investors interested in long-term growth and willing to accept high risks in return for potential high rewards abandoned defense company stocks in favor of opportunities in Silicon Valley. New shareholders took their place and directed management to abandon risky growth, instead emphasizing reliable cash generation. They then took that cash to invest in growth sectors elsewhere in the economy. The appetite for risk in defense declined. Capital spending was seen as a negative. In short, investors wanted to treat the legacy U.S. defense industry as an ATM to fund their tech investments.
What Current Owners Want
This is not theoretical. Shareholder motivations are discernible by examining which mutual funds hold shares in naval shipbuilding companies. Excluding index funds, which buy shares automatically to mimic a broader market index, each strategy-oriented mutual fund can be rated as to its primary mission, since this mission is broadcast to those investing in the fund. Today, most shares in large defense industrial businesses are held by investors looking for dividends, income generation, minimal risk, and value preservation. Few shares are held by mutual funds seeking high-risk, high-reward scenarios.
The message from these owners is clear: Do not over-invest in defense; minimize risk; do not increase capacity to meet market surges (put demand into backlog instead); focus on generating cash; and return that cash to shareholders—so they can invest it elsewhere. These shareholder demands are enforced by activist investors: hedge funds that buy up shares in any company deviating from this script. These activist investors will demand seats on the board, often fire management, and then redirect the company’s strategy back to what shareholders wanted.
Investment analysts reinforce this philosophy. For example, in early 2024, the investment site Seeking Alpha (with 20 million followers) reviewed the prospects for HII. It downgraded its opinion of the stock, and the author made it clear this decision “was driven by increased CapEx levels for the foreseeable future,” because that “would lead to slower growth in shareholder returns.”4 In October 2024, HII disappointed its risk-averse shareholders with lowered cash-flow expectations, even though the long-term prospects for naval shipbuilding remain exceptionally strong. Investors punished the stock, cutting 26 percent of the company’s value in one day. As explained in a Barron’s report, HII’s “latest quarter teaches investors a lot about risk and what happens when a company fails to live up to the expectations it set.”5
In the end, the owners get what they want. Corporate managers have no option but to follow the dictates of shareholders. This can be seen in naval shipbuilding. Over the past six years, only about a quarter of net cash generated from operations at General Dynamics and HII has been reinvested in capital spending. Most of it has been used to pay dividends, buy back shares, or invest in business acquisitions outside naval shipbuilding.
The data here even understate the nature of share repurchases. They exclude HII’s early 2024 announcement that it would allocate another $600 million for share repurchases, bringing its total buyback plan to $3.8 billion.6 That is more than one-third of the current market capitalization of HII shares. It is conceivable, given extensive share buybacks over time, that the number of shareholders will become consolidated to the point at which a private-equity company may be induced to attempt a takeover.
Management Aligns With the Shareholders
The direction to management seems clear, and it is reinforced by how shareholders, through their boards of directors, reward the executives in these companies. To use the leader of GD Marine Systems as an example, in 2023, three-quarters of the compensation package (which totaled $6.1 million) was in the form of company stock or stock options. The amount of stock awarded was based on corporate financial targets such as return on invested capital (which discourages additions to the capital base), earnings per share (which are boosted by share buybacks), free-cash flow (needed to support dividends and buybacks), and corporate-level operating margin. Only a small portion of incentive pay was oriented toward “Strategic and Operational” performance in the shipyards themselves, and for this criterion, the board rated the executive as having achieved 180 percent of target.7 One suspects the Navy’s rating of this business unit’s performance might have been significantly lower.
It is notable how disconnected these criteria are from the aspects of performance so critical to the Navy: building capacity, meeting deadlines, delivering on budget, reducing schedule risks, achieving high quality, building the required workforce, reducing workforce turnover, actively managing the supply chain, etc.
Does the Navy Have Options?
Is it possible to change the motivation of naval shipbuilders’ shareholders? It will be tough. The traditional way a customer might motivate shareholders is by threatening to take away business. But given the monopoly for nuclear carriers and the duopoly in other naval shipbuilding sectors, there is little the Navy can do by the threat of competition, at least for the foreseeable future.
Perhaps the Navy might instead try to change stockholder motivations by putting the continued generation of cash—what current investors seek—at risk through revisions to progress-payment schedules. The last time this was suggested, in 2018, the defense industry howled and the matter went nowhere.8
In the end, if the Navy cannot change shareholder incentives, then it might have to look at changing the shareholders. Is this possible? There are several theoretical options.
Go Private
It is not required that a major defense business be owned by shareholders via a publicly traded stock. Some of the most innovative defense suppliers—think SpaceX, Anduril, General Atomics, or Sierra Nevada—are closely held private companies. Privately held companies are not subject to the pressures of Wall Street’s quarterly targets for free-cash flow. They can choose to take a longer-term perspective with more risk (and presumed rewards).
The Navy has begun to take steps in this direction. It recently created a public-private partnership to acquire Alabama Shipyard. This was done via the United Submarine Alliance fund managed by CapZone Impact Investments, a private-equity firm. This action, establishing the newly designated Mobile Naval Yard, is designed to augment the submarine industrial base and was done in coordination with Team Submarines (a joint effort of Program Executive Office [PEO] Strategic Submarines and PEO Attack Submarines) and its major contractors.
Could an existing yard in the defense industrial base go private? Obviously, any such action would need to be approved by company shareholders. It seems clear that, if given the option, the Navy should encourage such actions if the right private-equity buyer appears.
Bring Back Commercial Players
Not all public companies are risk averse. The U.S. economy has nurtured a wide array of huge, profitable, and risk-tolerant companies. For example, the current stock-market value, individually, of Microsoft, Apple, Facebook (Meta), Google (Alphabet), and Nvidia vastly exceeds the combined market value of all U.S. defense companies. Could one of these be enticed to take on the challenge of naval shipbuilding?
This seems highly unlikely. Once a commercial company becomes a major defense contractor, it becomes subject to the alphabet soup of administrative processes (NISPOM, DCAA, DFARS, CAS, etc.). In addition, a large number of presidential executive orders apply only to federal contractors. For many commercial giants, the small DoD market is just not worth the effort to twist their business model to comply with these requirements. On the contrary, there is a continuing departure from defense markets of major U.S. industrial and service companies, including in the past few years Ball Corporation, Jacobs Corporation, Griffon Corporation, and Gulf Island Fabrication. In each case, the parent company divested the business operating in defense, which was then absorbed into an existing defense supplier.9
Compounding the situation is the paucity of major commercial shipbuilders in the United States. There is only one, Philly Shipyard, and while that yard is willing to pursue Navy work, it will do so only without major changes to its processes. As the company stated in its 2023 annual report: “We continue to follow potential solicitations for [government] vessels that would be compatible with our shipyard and processes [emphasis added].”10
Exploit Foreign Production Expertise
The Navy has gone a long way to exploit foreign technologies in recent years. Its newest warship design originated in Italy. The newest antiship missile was engineered in Norway. The new Navy training helicopter was designed by European engineers. Many of the weapons recently acquired for the Marine Corps were devised in Germany or Sweden.
Foreign companies also have deep expertise in manufacturing and often a willingness to invest in U.S.-based manufacturing capabilities. Hanwha, a Korean shipbuilder ranked among the world’s best, recently acquired Philly Shipyard and is keen to enter the U.S. shipbuilding market.11 Finnish companies are assisting U.S. suppliers in the production of icebreakers.12 Nammo, a Norwegian/Finnish company, is expanding its U.S. solid-rocket-motor operations.13 Saab has announced plans to build a new weapons factory in Grayling, Michigan.14
Notably, foreign companies often take a long-term strategic perspective when it comes to the U.S. market. In naval shipbuilding, for example, the two foreign participants (Austal and Fincantieri) have a vastly different strategic emphasis compared with their U.S. peers. Both Austal and Fincantieri (owner of Marinette Marine) have been investing heavily in their U.S. businesses and are focused on long-term gains. Neither has been using cash for large share buybacks. Perhaps the Navy should seek other opportunities to exploit foreign manufacturing expertise and long-term investor priorities.
However, it is hard for foreign companies to bring their manufacturing expertise—and their investment capital—to the United States. Foreign companies must run a gauntlet of approvals by up to six executive branch cabinet departments, including perhaps seven units just within DoD.15 Each of these bureaucracies has an important role to play, but each has an effective veto, and this list excludes the ultimate customers—the Navy program offices—who desperately want to bring in new competition. All in all, it can take years to even win approval to invest in a new facility, and the process and delays can be very costly, and discouraging, to potential investors.
Just Do It Yourself
One strategy in the modern industrial world in cases of supply-chain failure is for the customer to “vertically integrate”—to take over a supplier’s assets and run the business directly or to invest and create an internal capability. Is this practical for the Navy in shipbuilding?
For sure, the Navy is already deeply invested in industrial capabilities. It operates maintenance and overhaul operations at four naval shipyards. Naval Sea Systems Command maintains highly specialized manufacturing capabilities in its Indian Head and Philadelphia divisions. It also has taken action to offset failures in the supply chain, albeit on a small scale. The 2005 Base Realignment and Closure Commission forced a relocation of the manufacturing line for 5-inch deep-drawn steel cartridge cases, used for naval guns. The contractor responsible for that operation then walked away from the business. To fill this critical supply-chain gap, the Navy set up its own Quad City Cartridge Case Facility, a Navy-run production line within the Army’s Rock Island Arsenal.
Would it be practical for the Navy to take over the assets of a commercial shipbuilder? It seems implausible, but perhaps the idea should not be dismissed too quickly. One scenario would be for the Navy to acquire the assets but then engage a management team to run the operation as a government-owned, contractor-operated facility. Or the Navy could participate alongside private equity to become an investor in a shipyard, with seats on the board of directors and thus the ability to shape the company’s strategic priorities.
Bold Times Require Bold Thinking
All these scenarios might seem radical. On the other hand, the current industrial base is falling short in many areas, and the demands of shareholders often misalign with the interests of customers and taxpayers. More investment in workforce training, supply-chain clarity, and manufacturing technology is certainly part of the solution. The question is whether it is enough. Perhaps it is time to consider “bold action with confidence” to build the right industrial base for the new cold war.16
1. Gregory C. Allen and Doug Berenson, “Why Is the U.S. Defense Industrial Base So Isolated from the U.S. Economy,” Center for Strategic and International Studies, 20 August 2024. This paper is based on extensive historical analysis of major program spending patterns conducted by this author.
2. Bath Iron Works had been part of the conglomerate Congoleum and was sold to private-equity interests in 1986. Marinette Marine was privately owned and would be sold to the industrial conglomerate Manitowoc in 2000.
3. NASSCO was owned by Morrison-Knudsen until it was spun off with an employee stock ownership plan (ESOP) in 1989. Avondale Shipyards was part of the diversified Ogden Corporation until sold to employees via an ESOP in 1985.
4. “Why I Downgraded Huntington Ingalls Industries,” Seeking Alpha, 2 May 2024.
5. Al Root, “The World Is a Dangerous Place. Why This Defense Stock Dropped 26%,” Barron’s, 4 November 2024.
6. HII, “HII Authorizes a $600 Million Increase in Its Share Repurchase Program to $3.8 Billion,” news release, 31 January 2024.
7. See the DEF 14A proxy statement for General Dynamics, issued by the company on 22 March 2024.
8. DoD proposed to restructure progress payments to put more at risk. See “Performance-Based Payments and Progress Payments (DFARS Case 2017-D019),” Federal Register, 24 August 2018. Industry pushback stopped this initiative. See “NDIA Applauds Pentagon Rollback of Progress Payments Rule,” National Defense Industry Association, 2 October 2018.
9. Ball Corporation sold its defense and space unit, Ball Aerospace, to BAE Systems. Jacobs sold its national security business to Amentum. Griffon sold its defense electronics unit, Telephonics, to TTM Technologies. Gulf Island Fabrication sold its naval (and other) shipbuilding interests to Bollinger Shipyards.
10. Steinar Nerbøvik, “Letter from the President,” Philly Shipyard Annual Report 2023, 12 March 2024, 15.
11. Hanwha, “Hanwha Acquires Philly Shipyard, Expanding Its Footprint in Global Shipbuilding and Deployment of Naval Systems,” press release, 21 June 2024.
12. The White House, “Biden-Harris Administration Announces New Polar Partnership ‘ICE Pact’ Alongside Finland and Canada,” press release, 11 July 2024.
13. Dylan Malyasov, “Nammo, Raytheon Ramps Up Rocket Motor Production,” Defence Blog, 14 May 2024.
14. Saab AB, “Saab Announces New Munitions Factory in Grayling, Michigan,” press release, 24 September 2024.
15. At DoD, they must seek approval from the Defense Counterintelligence and Security Agency, Defense Information Systems Agency, Defense Contract Audit Agency, Defense Security-Cooperation Agency, Defense Threat Reduction Agency, Industrial Base Policy, International Security Affairs, and (for the Navy) International Program Office. If there is to be an exchange of technical information, approval by the Directorate of Defense Trade Controls (State) and Bureau of Industrial Security (Commerce) is required. If direct investment is proposed, this might involve the Committee on Foreign Investment in the United States (led by Treasury). If the foreign suppliers want to relocate staff to help start up a U.S. facility, they need approval from Office of Foreign Labor Certification (Labor) and Customs and Immigration Service (Homeland Security).
16. The phrase “bold action with confidence” is from Chief of Naval Operations Admiral Lisa Franchetti’s remarks to the Surface Navy Association’s National Symposium, 9 January 2024. In this case, she was referring to warfighting strategy, not the industrial base.