DTIC ADA519520: Globalization of Navy Shipbuilding: A Key to Affordability for a New Maritime Strategy

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GLOBALIZATION OF NAVY SHIPBUILDING
A Key to Affordability for a New Maritime Strategy
Robert J.White
T
heNavystatesthat313shipsarenecessarytosupportU.S.nationalsecurity
requirements.To build this fleet,the service is requesting a significant in-
crease in its shipbuilding budget.Both the Government Accountability Office
andtheCongressionalBudgetOfficecontendthattheNavyrequestunder-
estimatestrueshipbuildingcosts.Worseyet,currentbudgetpressuresandhis-
toricalbudgettrendsleaveeventhelowestbudgetfigureinjeopardy.Howthen
can the Navy make its plan affordable? To meet shipbuilding requirements it
mustlookbeyonddomesticindustrialsourcesandfullyexploitthecomparative
advantagesofglobalization.
Globalization exploits the advantages of multiple
Mr. White is a senior engineer in the Ranges, Engi-
neering, and Analysis Department at the Naval Sea countriesthroughnotonlylaborandtechnologybut
Systems Command (NAVSEA) Division Newport,
also“trade,finance,production,andeventherulesof
Newport,RhodeIsland,wherehepreviouslyservedas
division manager for Prototyping and Development national economies and how they relate to each
andasbranchmanagerforMicroelectronicsTechnology. other.”1Itsimpactonmanufacturedgoodsiscomplex
HehasbeenaNavyStaffactionofficerformodelingand
and widespread.Today the meaning of an American
simulationforweaponsystemtestandevaluation,and
anadvanceddevelopmentleadattheNAVSEAWash- or Japanese label on a computer or automobile is
ingtonNavyYardheadquartersforcombatsystemship- problematic, in that over two dozen components
boardtraining.Mr.Whiteearnedamasterofscience
come from more than half a dozen countries.2 A
degreeincomputersciencefromRensselaerPolytechnic
Institute.HewrotethisarticleasastudentintheNaval “madeintheUnitedStates”securityrequirementhas
WarCollege’sCollegeofNavalWarfare,attendingun-
becomeanarcanevestigeoftheindustrialage.Atbest,
dertheauspicesoftheDefenseLeadershipandManage-
itisacomfortablefantasy.Atworst,itisawasteofna-
mentProgramandgraduatinginJune2007.Mr.White
iscurrentlyondetailtotheChiefofNavalOperations tionalresources.Inpractice,infact,itisalreadyafic-
Strategic Studies Group.
tion. One needs to look no farther than the HARM,
NavalWarCollegeReview,Autumn 2007, Vol. 60, No. 4 Patriot,andTomahawkmissilesorthe“MarineOne”
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Globalization of Navy Shipbuilding: A Key to Affordability for a New
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Maritime Strategy
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60 NAVALWARCOLLEGEREVIEW
presidentialhelicoptertorealizethatforeignsourcingisalreadywellunderway
inmilitarysystems.
CanglobalproductionreducetheNavy’sshipbuildingcostrisk?Thisarticle
examinessuchastrategytorationalizethebudgetarymeanswiththeshipbuild-
inggoalsoftheU.S.Navy.3Theserviceneedstoexploittheefficienciesofforeign
shipyardstomeetitsforceplanninggoals.Globalizationshouldbeembracedas
an affordability measure within the new maritime strategy now being
formulated.
THE 313-SHIP NAVY
The United States is a maritime nation.“More than 80 percent of the world’s
tradetravelsbywaterandforgesaglobalmaritimelink.”4Asaresult,American
economicprosperityiscontingentuponthefreedomoftheseas,andU.S.Navy
primacyistheonlyreliableguarantorofthatfreedomfortheUnitedStatesand
the international community.To maintain that primacy,in February 2006 the
Navylaidoutthedetailsofanewplanfora313-shipnavy.5Duringcongressio-
naltestimonytheChiefofNavalOperations,AdmiralMichaelMullen,stated:
The 2007 Annual Long Range Plan for Construction of Naval Vessels is an invest-
ment plan that is both executable and affordable based on balancing several factors:
naval force operational capability, risk, and the ability of the shipbuilding industrial
base to execute the plan. . . . Full funding and support for execution of this plan is
crucial to transforming the Navy to a force tuned to the 21st Century and built upon
the foundation of Sea Power 21 and FORCEnet. . . . As part of the QDR [Quadren-
nial Defense Review] process, the Navy used a capability-based approach to calculate
the size and composition of the future force. . . . The analysis concluded that a fleet of
about313shipsistheforcenecessarytomeetallofthedemandsandtopacethemostad-
vancedtechnologicalchallengerswellintothefuture,withanacceptablelevelofrisk.6
If we accept at face value the figure of 313 ships as representing the tools re-
quiredtoexecutetheNavy’sportionof grandstrategy—thatis,tosupportna-
tionalgoalswithacceptableriskintheenvisionedsecurityenvironment—what
remainsistorationalizeresourceconstraints.Unfortunately,whiletheNavybe-
lievestheplanisexecutableandaffordable,theGovernmentAccountabilityOf-
fice(GAO)sumsuptherealityof thesituation:“TheNavyplanrequiresmore
fundsthanmayreasonablybeexpected.”7
TheCostRiskofthe313-ShipNavy
InpressreportsevenbeforeAdmiralMullen’scomments,theNavyannounced
thatitwouldrequireanaverageof$14.4billionannuallyfornewshipconstruc-
tionoverthenextthirtyyears.8Thisrepresenteda37percentincreaseoverthe
2000–2005averageof$10.5billioninannualnewship-constructionfunding.9
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A2006GAOreportquestionedtheaccuracyoftheNavyestimate.Itanalyzed
thecostgrowthintheconstructionoffourships,eachthe“leadship”ofanew
class,overtheperiodfromfiscalyear(FY)1996to2006.Thisanalysisrevealed
an average increase of 27 percent over initial budget estimates.10 According to
the report, the Navy plan scheduled nine new lead ships for construction be-
tweenfiscalyears2006and2016.11TheCongressionalBudgetOffice(CBO)is
evenlessconfidentthanGAOintheNavy’snumbers.Becauseofsignificantcost
growthinrecentNavyshipbuildingprograms,theCBOprojectstheactualre-
quirementtobe$19.5billion,a35percentincreaseovertheNavyestimate—and
anearly100percentincreaseoverrecentbudgets.12AddonaCBOestimateof
supportshipsmissingfromtheNavyplan,andtheannualcostsreach$21.7bil-
lion(seefigure1).
FIGURE1
AVERAGEANNUALSHIPBUILDINGCOSTS
(BILLIONSOFCONSTANTFY2007DOLLARSPERYEAR)
NewConstructionOnly
Navyshipbuildingbudgetinrecentyears 10.5
Navyestimateofcostof30-yearplan 14.4
CBOestimateofcostof30-yearplan 19.5
CBOestimateofcostof30-yearplanplusadditionalshipsneededto
21.7
fullysupportallelementsof313-shipfleetconsistentlyoverthelongrun
Source:AdaptedfromO’Rourke,NavyForceStructureandShipbuildingPlans,p.17.
FundingRisk
OperationsinAfghanistanandIraqhaveincreasedtheneedtoreplenishandre-
place existing weapon systems. For this purpose the Department of Defense
doubleditsplannedinvestmentsinongoingmajorweaponsprogramsoverthe
Future Years Defense Plan for 2001 to 2006,from $700 billion to $1.4 trillion,
and increased its annual procurement budget 33 percent, from $75 billion in
2006to$100billionin2010.13Theseincreaseswillcoverpresentweaponsystem
procurement but little more. On top of this, the new Navy shipbuilding plan
doublesrequiredfundingfrom$8.7billionin2007to$17.2billionin2011and
maintainsitatthatlevel.14Worseyet,theNavyplan,theArmy’sFutureCombat
System,andtheAirForce’sF-22ARaptorandJointStrikeFighterprogramswill
be competing for increased procurement funds simultaneously.15 In this envi-
ronment can the Navy truly expect to receive 17 percent of the 2011 Defense
procurementbudgetfornewshipconstructionalone,whenitreceivesaround
10percenttoday?16
Further,NavyandDefenseDepartmentrequirementsarenottheonlypres-
suresondiscretionaryfunding.Risingcostsforhealthcare,education,veterans
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62 NAVALWARCOLLEGEREVIEW
affairs,transportation,naturalresources,andtheenvironmentallmakerising
claimsonthissamepotofmoney.Thefiscalrealitybecomesevenbleakerwhen
three facts are considered.First,the administration took on the global war on
terrorandthewarsinAfghanistanandIraqwhilecuttingtaxes.Second,Defense
Department funding is historically cyclical,and a downturn is now likely (see
figure2).Finally,Defense
FIGURE2
NATIONALDEFENSEBUDGETAUTHORITY,FY1946–2011 funding is shrinking as a
percentageofgrossdomes-
tic product (or GDP—see
figure 3). In fact, the de-
fense budget is to be cut
from 3 percent of GDP in
2011 to 2.4 percent in
2024.17 Realistically,anin-
crease in neither the Navy
“topline”(totalallocation)
nor the Defense Depart-
ment budget should be
Source:StevenKosiak,HistoricalandProjectedFundingforDefense:PresentationoftheFY2007RequestinTa-
blesandCharts(Washington,D.C.:CenterforStrategicandBudgetaryAssessments,7April2006),p.4. expected.
THE NAVY CONTINGENCY PLAN
AdmiralMullenacknowledgesthatfundingforhisplanmustcomeoutof the
existingNavybudgettopline.18TheNavycontingencyplanthereforerelies,ac-
cordingtotheCenterforStrategicandBudgetaryAssessments,ontheconflu-
ence of five factors: limiting increases in personnel costs, prioritizing
shipbuilding budgets and construction rates, limiting increases in operations
and maintenance (O&M) costs, reducing research-and-development (R&D)
funding,andpreventingupward“requirementscreep”andcostgrowthinship-
building programs.19 Unfortunately, these factors are not completely within
Navycontrol.
Thefirstofthesefactors,personnelcosts,currentlyaccountsfor65percentof
theNavybudget.Theserviceisreviewingpersonnelrequirementswithaviewto
reducingthisfigure.MilitarypersonnelneedswerestudiedinFY2006,whileci-
vilianpersonnelandcontractorservicespersonnelwillbestudiedinfiscal2007
and2008,respectively.Buttheeffectivenessofreducingpersonnelcoststohold
orreducethebudgetlinemaybelimitedbycongressionallymandatedraisesin
pay(i.e.,military/civilianpay-parityactionsineveryyearoftheBushadminis-
trationexcept2007)orendstrength,astheArmyexperiencedin2006.Thesec-
ond factor, prioritizing shipbuilding, means lowering funding in other
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FIGURE3 procurement accounts
NATIONALDEFENSEOUTLAYSASASHAREOFGDP,FY1910–2011
(aircraft, weapons, etc.).
This is not practical,
giventheinfluenceofavi-
ation in a carrier-based
Navy and the need for
smart standoff weapons
(cruise missiles, extended-
range munitions, etc.) for
the high-priority “strike”
mission.Of what use is a
carrierstrikegroupwith-
Source:Kosiak,HistoricalandProjectedFundingforDefense,p.12.
outaircraftandweapons?
Third, the Navy’s plan to
limitO&Mcostsiscontingentuponkeepingsurfaceshipsonlinefortheirfull
thirty-five-yearservice-lifeexpectancy;infact,however,shipsremaininservice
forsignificantlylesstime.20
Fourth,reducingR&Dcostsisproblematic.Arguably,theU.S.Navy’sfunda-
mentaladvantageisintechnology.Itisnotpossibletobuild“uponthefounda-
tion of Sea Power 21 and FORCEnet” without innovative research and the
developmentaltechnologiesitgenerates.EveniftheNavywereinthefutureto
useonlycommercialoff the-shelf (COTS)technology,R&Dfundingwouldbe
requiredtoruggedizeequipmentforshipboarduseandintegrateitwithexisting
systems. Further, Defense acquisition training stresses that the cost of fixing
problemsinanewsystemescalatesbyordersofmagnitudeasitmaturesfroman
idea through design to production and deployment. Thoroughness in the re-
searchanddevelopmentphaseisthekeytoavoidingtheseproblems.Howthen
willareductioninNavyR&Dfundinglimitcostgrowthinaship’sconstruction
oritslogisticalandmaintenancesupportonceinservice?Experienceshowsjust
the opposite. The fifth and final factor, limiting upward pressure on require-
mentsandthereforecost,maybeabridgetoofar,asevidencedbytheGAOand
CBO studies.Moreover,aside from mission,it is the rapid pace of technology
that drives requirements creep.21 So if holding the line on requirements may
limitcostgrowth,itwillalsodiminishthetechnologyadvantagethatshipstake
tosea.
Innovativethinking,then,willberequirediftheNavyistobuildthe313-ship
fleet.WhatkeepstheNavyfrombuildingaffordablewarships?
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64 NAVALWARCOLLEGEREVIEW
DOMESTIC SHIPBUILDING
ThecommercialAmericanshipbuildingindustryisvirtuallynonexistent.What
remains today is wholly dependent on a domestic market guaranteed by the
MerchantMarineActof1920(knownastheJonesAct).22Thoughoncecompet-
itiveintheworldmarket,U.S.industrynolongerexportsanyvessels.23Today,
commercialvesselscanbebuiltinSouthKoreaforathirdofthepriceofcompa-
rableshipsbuiltintheUnitedStates.24Infact,aKoreanshipyardcandelivera
newshipforwhatanAmericanshipyardpaysforsteelalone.25
TheAmericanmilitaryshipbuildingindustryisconcentratedinsixshipyards
runbytwoprimecontractors.26TheirsolecustomeristheU.S.Navy.AstheNavy
shrank from the eight-hundred-ship fleet of World War II to the roughly
280-shipfleetof today,theshipbuildingindustryconsolidated.Unfortunately,
however,whiletheNavymodernized,industryfellbehind.Facingnocompeti-
tion,U.S.shipyardsbecameinefficientandoutdated.Today’sU.S.Navycombat-
antsarehighlysophisticatedandmorelethalthanever,yettheyareconstructed
inessentiallythesamemannerastheyweresixtyyearsago.Insteadofreinvent-
ingprocessestoremaincompetitiveasforeignshipyardsdid,U.S.yardsreliedon
“BuyAmerican”legislation.Analysiscompletedin2005showedthatNavyand
industry initiatives are closing the productivity gap with foreign shipyards;27
nonetheless,Americanshipyardsremainfifteenyearsbehindforeignpeers.28
Industry blames low and unstable production rates for high material costs
andlowproductivity.Butthosefactorshaveexistedforsixtyyears.Moreover,to-
wardtheendoftheColdWartheDefenseDepartmentrecognizedthatmilitary
demand would no longer generate the economies of scale required for afford-
able production. The present emphasis on dual-use technology, relaxation of
formerrequirementstousemilitary-specificationcomponentswhereindustry
specificationsaresufficient,andthepreferenceforCOTSitemswhereverpossi-
blehaveallbeenoutgrowthsof thatrealization.Unfortunately,theireffective-
ness has been limited by the segregation of U.S. shipbuilding between the
commercialandmilitarysectors.Fewshipyardsworkinboth.29
Commercialshipbuilding,then,dependssolelyonprotectionistlegislation,
and military shipbuilding hides conveniently behind national-security claims.
TheDepartmentof Commercestatesthisclaimsuccinctly:“Itisessentialthat
thecapabilityandinfrastructureneededtobuildthese[military]shipsisresi-
dentintheUnitedStatesbecauseitprovidesaddedassurancethattheycanbe
built,repaired,and maintained during times of conflict.”30 The problem with
maintainingsucha“surge”capabilityistwofold.First,astheCommerceDepart-
mentfreelyadmits,maintainingexcessindustrialcapacitydrivesupcostandde-
gradescompetitiveness.Between1997and2002thecostofasurfacecombatant
rose30percentaboveinflation;31incomparison,competitionandovercapacity
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WHITE 65
in shipyards on the world market drove the price of a new commercial vessel
down 19 percent.32 Second, the complexity of modern combatants renders a
World War II–style mobilization entirely infeasible.33 In fact, a three-to-five-
yearconstructioncyclemeansthatawarshiporderedatthebeginningofacon-
flictisnotlikelytobeavailablebeforetheend.34Further,itisplainlyunrealistic
to believe that all foreign shipyards in friendly and allied countries “would si-
multaneously turn down revenues and deny access.”35 Finally,as early as 1988
thenationalsecuritystrategyrecognizedthatdefenseindustrialmobilizationis
notaunilateralmatterbutrequirescoordinationbetweentheUnitedStatesand
itsallies.InthewordsofPresidentRonaldReagan,“FortressAmericaisanobso-
leteconcept.”36
GLOBALIZATION OF PRODUCTION
Globalization is not new. Certainly the increasing rate of globalization since
World War II is significant, but as Stephen Brooks contends in his book Pro-
ducingSecurity,therealdifferenceinthelatterhalfofthetwentiethcenturywas
theintroductionofgeographicallydistributedproduction.37Inthis“globaliza-
tionofproduction”anitemmaycrossinternationalbordersrepeatedlyinvari-
ousstagesofmanufacture.Finishedproductscanrepresent“workdoneinten,
twenty,oreventhirtycountries.”38Cheaptransportandthefreeflowofcapital
allowcompaniestocombinetheadvantages(e.g.,inlaborcosts,technological
prowess,heavyindustry,banking,governmentsubsidies,etc.)ofanynumberof
countriesinasingleproduct.Suchcost-benefitanalysisiscontinual:whenthe
advantageshifts,sotoodoescapital,alwaysseekingthepathofleastresistance.
UnlikeSirNormanAngellinhisfamousbookTheGreatIllusion(1912),Brooks
doesnotguaranteepeaceorforecasttheendofwar.Instead,heconcludesthatthe
globalizationofproductionisaneweconomicforceforincreasinginternationalse-
curity.He adds it to the list of other great-power stabilizers,such as “democratic
peace”(the presumed disinclination of democratic states to go to war), nuclear
weapons,and international institutions.39 He draws a second conclusion as well:
“Nostate,includinggreatpowers,cannoweffectivelyremainonthecuttingedgeof
militarytechnologyifitdoesnotpursuesignificantinternationalizationinthepro-
ductionof weaponry.”40Theopportunitycostof autarkyistoohigh:itwastesre-
sourcesreplicatinggoodsandservicesavailablecompetitivelyabroad;worsestill,it
deniestheseresourcestotheexploitationofdomesticadvantages.
Military shipbuilding requires a combination of heavy manufacturing and
high-techsystemsintegration.Foreignshipyardshavetheheavymanufacturing
advantageinbuildingshipsoflowtomediumcomplexityforthebulktransport
andcruiseindustries.Foritspart,theUnitedStatesdesignsandbuildsthemost
advancedwarshipsintheworld.TheAmericanshipbuildingadvantageresides
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66 NAVALWARCOLLEGEREVIEW
in the area of complex combat systems that integrate shipboard,and increas-
inglyoffboard,weaponsfirecontrol,sensor,andnavigationalsystems.Integra-
tionisthevalueaddedbyU.S.industry.
AssumeforthemomentthatU.S.Navy,federal,andstategovernmentfunds
were available to bridge the fifteen-year gap between American and foreign
shipyards.ThereisnodoubttheUnitedStatescouldeventuallybecomecompet-
itiveontheworldmarket.Butwhatistheopportunitycostofspendingthesere-
sources to develop heavy manufacturing? Is internationally competitive
shipbuildingthe“valueproposition”oftheNavyafternext?No.TheNavysays
thefutureresidesinFORCEnetsystemsthatintegratetoday’splatform-centric
combatsystemswithtomorrow’soff-boardmannedandunmannedsensorsand
systems.Thatplacesthefocusondevelopingandbuildingthesenetwork-centric
technologies.Thisistheindigenoustechnologynecessaryfornationalsecurity,
not heavy industry. Globalization of warship production would allow the
UnitedStatestofocusonitsstrengthstodayandtomorrow.
GlobalizationinU.S.MilitarySystems
Globalproductionof militarysystems,likeglobalizationitself,isnothingnew.
Infactitisafirmlyestablishedtrend,evenwithintheU.S.military.Thepresi-
dentialhelicopter(actuallyasquadronof them),knownas“MarineOne,”isa
case in point.Presidents have been flying in Sikorsky helicopters since 1957.41
Sikorsky is a U.S. company and a subsidiary of United Technologies, another
American company.Yet today’s Sikorsky Marine One variant of Sea King air-
craft,theVH-3D,containsacockpitmadeinTaiwan,afuelsystemandlanding
gear made in Brazil, a tail fin and stabilizer made in the People’s Republic of
China,and a main cabin made in Japan.42 The VH-71,which will become the
MarineOneaircraftin2009,willbeaforeigndesignbuiltbyLockheedMartin
fronting for Agusta Westland, a joint British and Italian firm.43 Is the Marine
Oneoftodayortomorrowtruly“madeintheUnitedStates”?
In 1992 the Commerce Department studied subcontracting in three Navy
weapons systems: the Mark 48 Advanced Capability (ADCAP) Torpedo, the
AGM-88High-SpeedAnti-Radiation(HARM)Missile,andtheVLFDigitalIn-
formation Network (VERDIN) communications system.It found that 13 per-
centofsubcontractingwenttoforeignfirms.44A2006Defensestudyfoundthat
2percentofallweaponssystemprocurementwenttoforeignprimecontractors.
Infact,adetailedanalysisoftwelveweaponssystems,includingthePatriotAd-
vanced Capability (PAC3) Missile,the Predator unmanned aerial vehicle,and
theTacticalTomahawkMissile,indicatedthat10percentof subcontractswent
to foreign vendors.45 In contrast, only 4 percent of the material purchased by
militaryshipbuildersisofforeignorigin.46
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AQuickCalculation:GlobalWarshipProduction
GlobalwarshipproductionwouldallowtheNavytocombinetheadvantagesof
heavy manufacturing in foreign shipyards and systems integration in the U.S.
defense industry.47 Assume that the cost of a domestically manufactured war-
ship without its combat system is $200 million. Since, as evidence suggests,
high-techcombatsystemsaccountforroughlyone-thirdthetotalcostofaship,
completingthevesseladds$100million,foratotalof$300million.48ButaSouth
Koreanyardcouldbuildthesameship,lessitscombatsystem,for$67million.
AddbackintheU.S.-builtcombatsystem,andthetotaloutlayis$167million—
thegloballymanufacturedwarshipisjustoverhalfasexpensiveasthedomesti-
cally produced vessel. Granted, this is an oversimplified comparison; for in-
stance, the additional outfitting costs of integrating the hull with the combat
systemwouldbesubstantial.Yetthereisplentyofroomtopayforoutfittingata
domesticshipyard,aswellasfor“unknowns”likerequirementsgrowth,andstill
savemoney.
A THOUSAND-SHIPYARD NAVY
Likeallnewinitiatives,globalproductionofwarshipsisnotwithoutrisk.First,
ownership of resources means that shipyards are available when needed; reli-
anceonforeignyardsweakensthisguaranteedavailability.Whateverthefinan-
cial incentives of foreign industry to deliver, politics creates a whole different
calculusforforeigngovernments.Butthisriskcanbe“boughtdown,”byspread-
ingitacrossmultipleinternationalpartners—a“thousand-shipyardNavy.”The
visionisilluminating.Itconnotesanetworkofinternationalpartners,informa-
tion sharing, and interoperability like that underlying the “thousand-ship
Navy.”Friends,allies,andpartnersfindwaysofworkingtogether.Arecentcase
involvingthedeliveryof aGerman-builtMEKO-typefrigatetoAustraliaillus-
tratesthisflexibility:theGermangovernmentrefusedtosendthevesseldirectly
tothePersianGulf,becauseof policydisputesoverIraq,butitwasmorethan
willingtoallowdeliveryinAustraliaitself.49
Domesticresistancecaneasilybeenvisionedaswell.Congress,industry,and
unionsarecertainlystakeholdersandmustbeincludedinthestrategydevelop-
ment process. Objections to foreign sourcing are well known. They revolve
aroundlossofjobs,industrialfacilities,and,consequently,politicalclout.
CertainlytheriskoflosingU.S.jobsissignificant.Theaircraftandautomo-
bile industries are examples by which to gauge the potential impact.Yes,jobs
were lost,and industry was threatened as foreign sources were introduced.To
mitigate the risk to domestic shipbuilding,then,start small with a single new
class.Use Northrop Grumman or General Dynamics,owners of the six major
domesticnavalshipyards,asthesystemintegratorandfinaloutfitter(ordivide
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