The Afterguard

19 April 2005

Buy now, pay later Navy

So it came up before Congress. The Navy can't afford to buy ships from US shipbuilders. This morning, the New York Times ran an article ("Navy of Tomorrow, Mired in Yesterday's Politics" by Tim Weiner) which cited critics describing the US shipbuilding industry as "19th-century monopoly capitalism and 20th-century state socialism on top of 21st-century American politics." No kidding!

So the Navy's solution to this problem: change the acquisition strategy for DDX to a winner-take-all procurement contract. Let me get this straight: you can't afford to buy ships from 2 companies because there is no competition, so you are going to buy ships from one source because it is less expensive? Wouldn't you have learned a lesson from buying $13B aircraft carriers and $2B submarines?

Congress' decision will probably have more to do with political payback and revenge than with smart buying. Maine, Connecticut, and California were not very supportive of this administration, so maybe putting the heat on them will change things. The good 'ol boys in the south will be happy with all the work.

The shipyards all claim the problem is the Navy is not building enough ships. They argue that you build more ships and the per-unit cost goes down. Buy two, get one free? Buy now, and mail in the rebate for a discount? What if the customer doesn't need or can't afford your product? Where are the free-market Republicans? Seems to me they'd be right out in front on this one. Oh, they are: let's get that money to the team players.

Wouldn't it make more sense to, say, shop around and buy ships from Germany or Japan? You could limit that acquisition to team players and skip Germany, but buy from Korea, Russia, or Australia.

But wait! Take a look at Paul Allen's mega-yacht Octopus and see what $200 million buys you: 414 feet length over all, 8000 nautical mile range, cruise speed of 20 knots, a permanent crew of 60, two helicopters, seven smaller boats carried aboard, a 10 man submarine with the ability to support 8 people underwater for two weeks. What does $200 million buy you at GD or Northrop Grumman? Maybe an LCS, but if previous overruns are any indication it will be 2-3 times more expensive. Recall the MHC-51 was originally priced at $75 million per ship, but 4 years later was well over $200 million per ship.

Now some might argue that naval vessels are more sophisticated than a mega-yacht even if it has a submarine, 2 helicopters, and a crew of Navy SEALs. But then, serving aboard a mega-yacht might be pretty good duty. You'd have no problem with recruitment with that kind of Navy.
Posted at 14:09:58 by Tom Swift - - link

18 February 2005

Building ships for the sake of building ships

Two articles appeared on NSnet in the last week that caught my attention. The first was "US shipyards unhappy with defense budget," which originally appeared in the Virginian-Pilot. In this article, Cynthia Brown from the American Shipbuilding Association criticized the Bush administration's defense budget for cutting back funds for shipbuilding. She said "We don't advocate building ships for the sake of building ships." But that is exactly what she is advocating.

US blue-water shipbuilders long ago abandoned international commercial work. They focused on the more profitable and secure Jones Act vessels and Navy building. To protect these markets, they have relied on political influence more than meeting the needs of their customers. Just like the American auto industry which makes larger profits on SUVs and luxury cars, US shipbuilders make more money on large programs and projects like nuclear submarines and aircraft carriers.

The American auto industry has managed to lose an opportunity as its customers start to turn away from conventional auto engines to hybrids. The Japanese have come to the market with products and technologies that position them for fundamental changes in the transportation infrastructure, like alternative fuels and fuel cells. The Europeans are taking another tack and looking at more efficient diesel engine technologies. What is the first product to be offered by an American auto manufacturer? Well Ford is offering a hybrid-powered SUV. What are the others doing? Building the same products while trying to hit a hydrogen-powered homerun.

What's this got to do with shipbuilding? Well another article appearing in NSnet should be a wake-up call to shipbuilders: "The new look for the US Navy" (from The State.com). This article describes how the Navy is redefining what it needs in the new defense environment. The Navy wants classes of ships that are smaller, faster, and cheaper. They want them to be able to operate in shallower coastal areas, the green water.

So guess what? The customer has changed what they are looking for. The big cold war ships are more expensive and less effective in a changed defense environment. NG and GD should get a clue: the market has shifted and they're missing it. What's more, I'm also not sure I like the idea of the shipyards telling the Navy what it is going to buy regardless of what the Navy says it needs.

Now smaller shipyards and manufacturing operations are the competition. The Navy will still need a blue water fleet, but as they say, just not as many of the big ships as we have currently. Lots of little ships should help the numbers game: for one $12B aircraft carrier we could build 50 smaller ships. If we do that, then the number of ships in the fleet goes way up. Think of all the communities and districts that would benefit from the construction and home-porting of all those smaller ships. There goes the political support.
Posted at 13:54:51 by Tom Swift - - link

01 February 2005

GD Electric Boat doing commercial work?

I couldn't help reading the article "Sub builder to explore commercial options" with just a little bit of cynicism and a whole lot of skepticism. I have to say that I think it is highly unlikely that EB will be doing "commercial" work.

First, EB doesn't have the commercial work culture. Building nuclear submarines is a bureaucratic, risk averse, conservative process. This is deeply entrenched in the EB culture that evolved to meet the requirements of their customer, the submariner folks in the Navy. This legacy of Admiral Rickover was intended to make US submarines safe and reliable. This is a good thing for nuclear submarines, and the US Navy has not lost a submarine since the Scorpion. That said, one could also argue that Navy submariner and EB cultures have stifled innovation. A culture that is good for building submarines may not be the best for competing in a commercial market.

For example, while the US has been building nuclear submarines at $1B - $2B each, other countries like Germany have been building boats with air-independent propulsion (AIP) systems (see "Air-independent Propulsion"), selling them for about $300M. These quiet boats operate in littoral waters, the US Navy's current strategic and tactical focus. They are relatively inexpensive, quiet, faster to produce, and — when armed with newer, high technology undersea weapons — pose a threat to US surface and submarine operations in those littoral waters. (So this should tell you where to start spending some time and money: shallow water detection and undersea weapon countermeasures.)

Looking at these AIP boats, one can also see the commercial potential in production of electric power: fuel cells come to mind. Nuclear propulsion gave us the US (ahem) nuclear industry. There was once a US commercial fuel cell power industry, but that was generally shelved in favor of "clean" coal fired power generation. Lou Chirillo probably remembers a paper at the 1991 NSRP Ship Production Symposium where the topic of shipyards diversifying into other industries such as fuel cells was presented.

So will GD EB be able to play in the commercial world? An earlier foray in the 60's was to build LNG tanker submarines to serve the gas fields in Alaska and the east coast via the then iced-over Northwest Passage. But global warming seems to have solved that problem, and, besides, the Navy was unhappy with GD thinking commercial. I'm also not too sure that the market for tourist submarines is all that large.

Maybe EB isn't too late to the AIP party. Howaldtswerke-Deutsche Werft AG (HDW) which builds the Class 212, an AIP submarine, is owned by Chicago-based One Equity Partners, a Bank One Corp investment firm. Northrop Grumman, which at one time was in the nuclear submarine business before it bought Newport News, was interested in buying a 70% interest in HDW (see GlobalSecurity.org's story on HDW). This would give them access to AIP technologies which in turn would have a commercialization potential. Oh, and it would position NG to compete with EB in the unlikely event the Navy decided to buy those smaller submarines (a littoral class submarine to go with the LCS?). Could GD EB beat them to it?
Posted at 14:53:40 by Tom Swift - - link

25 January 2005

"Lean" is not a survival strategy

Let's talk about "lean" manufacturing, or rather the re-branding of "new" technology which was itself a re-branding of "good" management. It should be compared to the highly profitable diet industry. There is the South Beach diet, the Atkins diet, Weight Watchers, and on. But the fundamental fact of losing weight is "don't eat more calories than you expend." But these fads sell books and programs making a few folks rich.

Those involved in "new" technology should see through "lean" as a jargon-laced fashion in management consulting. How many other fads were there? John Micklethwait and Adrian Wooldridge in their 1996 book The Witch Doctors debunked and exposed earlier management fads like "lean." (Is it time for another debunking and exposé?)

"Lean" shipbuilding (or any other manufacturing) is not a new silver bullet for improved profitability. It is an old silver bullet called market driven competition. How do you successfully survive in competitive markets? You compete by giving your customer the best perceived value for his dollar. How do you do that? You manage your business well.

Look at the Koreans again. They are responding to their customer's demands by building ships using an inefficient process. But they needed the capacity. This is hardly "lean" as described by the gurus of lean.

Now I'm not saying that shipbuilding management is gullible or stupid. On the contrary, I think that, in general they are pretty smart and incredibly clever. I believe in the evolutionary nature of business: competition results in species suited for survival in a particular environment.

Look at NG and GD: they are well adapted to the protected market created and maintained by their customers. The Navy, Congress, NG and GD stockholders, and other political entities have a strong desire to build ships in the US. This does not create a competitive market, rather a controlled economy. The resulting products have a perceived value to all of the stakeholders. The products are not just the ships delivered, but the jobs, votes, and profits.

Now if I were the customer and truly believed in free market concepts, I'd be looking to an open market. I'd be thinking about buying ships from anybody that could build them, not just from domestic sources. If this were the case, then I'd have changed the environment and shipbuilding management would either adapt to survive or become extinct.

But then, sometimes, like when food is scarce, being lean is not a survival strategy.
Posted at 12:48:31 by Tom Swift - - link

13 January 2005

Ground launch - big deal

The article was "First ship built using "on-ground build" method." The details appear to be that Hyundai Heavy Industries (HHI) has invented a new way of building ships by building them on a flat patch of ground, then sliding them to a barge and floating them out. Big deal. Been done (as Lou Chirillo pointed out, Brunel's Great Eastern was launched this way, albeit unintentionally). GD-BIW and NG-Ingalls do essentially the same thing.

What is more significant is that HHI's order book is so full they don't have the traditional facilities to handle the throughput. Moreover, China is getting ready to eat Korea's shipbuilding lunch (see "World shipbuilding production"). Patenting building on land may be a pre-emptive strike to slow the competition through legal means. This is interesting since Korea and China have a terrible record on protecting intellectual property and routinely violate intellectual property rights.

In the meantime, Kvaerner has figured out how to access the protected US market (that Jones Act thing) and get paid to do it (see "Kvaerner Philadelphia Shipyard remains afloat"). I'm surprised the Japanese didn't figure that one out and open a couple of yards. They did it in the auto industry and heaven knows there are a few US facilities available.

How about Massachusetts Heavy Industries (MHI)? I'm sure MARAD might give Mitsubishi Heavy Industries (the other MHI) a pretty good price and terms. Or how about GD selling NASSCO to IHI? Let's make it a two-fer and a Japanese builder could buy both? Who knows? Maybe the Koreans would be interested? HHI could buy MHI (the Massachusetts one), GD-NASSCO, and NG-Avondale?
Posted at 15:12:42 by Tom Swift - - link