The Afterguard

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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 on 04/19/05 by Tom Swift

Comments

Kazimierz Staropolskich wrote:

I love the logic of if there is insufficient competition from two shipyards go to a single source! They cannot be serious. This has to be satire, right?
posted at 18:49:34 on 04/24/05

T. Swift wrote:

Sorry, this is not satire. It is the state of Navy vessel acqusition. Congress, the Navy, and the yards have historically allocated contracts and shared the work. This meant that there were two separate overhead and administration structures to support. Buying all DDX from one source eliminates the redundant overhead, but could put the losing yard out of business.

The problem not being addressed is that the US shipbuilding market is a controlled economy, not a free market. Costs are out of control, fueled by Congress' policies that make it hard for the Navy to do its job.
posted at 07:08:00 on 04/25/05

Tom Wright wrote:

I participated in the construction of 8 MHC 51 class Minehunters at Intermarine USA. Regrettably, the first will be decommissioned in two months. I recall that MHC 51's price was $81M, not $75M, and none of our ships ever approached $200M, GFE included.
posted at 19:34:33 on 04/14/06

Erik the Boatbuilder wrote:

Actually, $300 million buys you a T-AKE from NASSCO (part of GD): 689 ft (not just 414 ft), 20 knot cruise speed (same as Octopus), 14000 nautical mile range (not just 8000, plus T-AKE can be refueled and reprovisioned at sea), accommodations for 172 (plus 25 spares) instead of 60, several small boats, 2 helicopters, and it's a heck of a lot more useful... And imagine how much fun Paul Allen would have had outfiting all that cargo space with the latest toys!
More info at http://www.nassco.com
posted at 21:33:14 on 04/24/06

T. Swift wrote:

Responding to Tom Wright's comment:

According to DoD's acquisition cost summary dated June 30, 1998 the base cost of the 12 MHC-51s was US$1.67B, with a final cost estimate of US$1.755B. This works out to US$140M base and $146M estimated cost per ship. An analysis done for OSD showed that the first of class MHC-51 had a cost growth of 160% of the original price making its price US$195M (assuming a $75M original price), or $210M (assuming $81M original price). As with other programs, many of the true costs of acquisition were absorbed or funded from other budget allocations within the Navy. This is being reflected to some extent in the LCS program (the reason that the MHC-51s are being retired) and DD(X) program, which are being funded as R&D programs, and not as vessel acquistions. So the ultimate cost of the first MHC-51 was over US$200M.

There are legitimate reasons for Naval vessels to cost what they do. The problem is how much they do cost, and how to achieve the best force mix for the Navy at a fair price.
posted at 08:49:04 on 04/25/06

T. Swift wrote:

Responding to Erik the Boatbuilder:

Actually, the recent budget passed by Congress has US$380M allocated for acquisition of one T-AKE. Given the history of other ship acquisition programs, it is unlikely that this will be its final cost.

I have seen the Octopus and have been aboard ships similar to the T-AKE, and there is no comparison in terms of the luxury. I'm not sure how a yacht version of the T-AKE would look at Cannes. I would be very interested to hear if NASSCO has been approached to build any super yachts.
posted at 10:11:33 on 04/25/06

Erik the Boatbuilder wrote:

T-AKE 9 was contracted to GD-Nassco at $317 million (see NASSCO's news release) January 31, 2006. I'm assuming that the extra $63 million is for the government's extra goodies (just like Octopus' price probably didn't include the helicopter, since most shipyards don't build helos).

As far as this being the final cost: keep in mind that there's a difference between NASSCO and (for example) Avondale. LPD 17 might be over budget by 60% (and growing rapidly), that's not been the case with NASSCO in quite a while. Look at the LMSR contract:
Avondale was late and over budget on every one of their SeaLift ships, NASSCO was under budget and on schedule.

I doubt that NASSCO will be asked to build superyachts (not their specialty), but it seems to me that T-AKE and Octopus have about the same price per foot. Sure, Octopus has nicer wood panelling, but for less than a third of T-AKE's max crew. And of course Octopus doesn't have Underway Replenishment stations, cargo elevators, forklifts, 7000 metric tons of dry cargo & ammo etc
posted at 21:27:29 on 04/27/06

T. Swift wrote:

There are two points I was trying to make in the original article. First, it is difficult to determine the actual cost to the taxpayer of a shipbuilding program. The initial pricing is seldom, if ever, the final price tag for the ship. "On budget" and "on schedule" have little meaning when the budgets and schedules shift and change. For example, the T-AKE had the published price of US$317M. The increased cost accepted and budgeted by Congress became US$380M justifying the change as the cost associated with stretching out the acquisition program. So the budget and schedule changed, and Erik can claim being on-budget and on-schedule.

In its reports to Congress, the Congressional Budget Office (CBO) faulted all 3 shipyards involved in the LMRS program for delays, overruns, and deficiencies. The earlier AOE program at NASSCO also incurred significant delays and overruns, and more recently NASSCO recognized cost control problems on its BP tankers. The overruns on the BP tankers were reported to be over US$50M on an original price of about US$170M, and attributed by GD management in the company's annual report to "performance problems." Moreover, these were Jone's Act ships intended for the Alaska trade. A similar ship built overseas would cost around US$50M, but with NASSCO being one of the few US yards engaged in this kind of work, the customer was limited as to where they could get their ships built.

This brings me to my second point: it is a problem when the ship is so expensive, the Navy can only afford to buy from one builder. The dilemma becomes buying from one yard in the short term, but living with a monopoly in the long term. The industry appears to be moving in the direction of monopoly, but I am glad to see that there is a sense of competition between GD NASSCO and NG Avondale.
posted at 08:42:31 on 04/28/06

Daniel Garrow wrote:

GD/NASSCO has built some outstanding ships in the past few years and continues to improve on its product, productivity and safety regulations.
The workers are dedicated to their jobs and the job at hand. We should give thanks to the men and women that put their lives on the line every day to bring us to the forefront of this new technology.
The new T-AKE II & III that are in the works now have been improved upon thank to the changes GD has brought to NASSCO.
Hopefully more changes for the better are in order.
posted at 02:53:41 on 10/27/06

T. Swift wrote:

Mr. Garrow,

GD and NASSCO have built some very good products over the years, and the people that work for these enterprises are capable, intelligent, and committed. But these are not the issues that I have been discussing. As Edward Deming pointed out, it is about the systems and not the people.

There are problems throughout the naval vessel acquisition process that cause budgets to be overrun, schedules to be missed, and delivers products that don't meet requirements. A fundamental question is, as a shipbuilder, who do you work for? Do you work for the shareholders? If you work at GD/NASSCO, you do work for the shareholders, and your goal should be to maximize shareholder benefit. If you work for the Navy, then you have different goals than GD/NASSCO shareholders, but are good for the country, national security, etc.

We need to consider the systems and processes, not the people. (By the way, if people are putting their lives on the line, is there a safety problem?)
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