Wednesday, March 28, 2007

The Shipyard Problem...

Murdoc touches on something in this post that is extremely important.

The fact that an entity called "Northrop Grumman Newport News" even exists is maybe part of the problem in the first place, but because of the massive slowdown in shipbuilding that's where we are and we need to maintain what we have left.

One of the reasons big government is bad is that in the absence of competition things break down.

This also holds true for private enterprise. We don't have just one shipyard of course, but we have so few that fear that one will go out of business and result in near or total monopoly that there is insufficient sanction available against them for incompetence, overpricing or fraud.

According to Global ....

As of 2001, there were eight active shipbuilding yards in the United States. Six of those shipyards, referred to as the Big Six, were the primary builders of large U.S. Navy and commercial vessels. Those shipyards are Avondale Industries in New Orleans, Louisiana; Bath Iron Works in Bath, Maine; Electric Boat in Groton, Connecticut; Ingalls Shipbuilding in Pascagoula, Mississippi; National Steel & Shipbuilding Company in San Diego, California; and Newport News Shipbuilding in Newport News, Virginia. In 1998, the Big Six accounted for two-thirds of the industry's total revenue (over $6.7 billion), and performed nearly 90 percent of all military work. Ninety-five percent of the revenues of these shipyards were defense-related. The Big Six also accounted for about 11 percent of the industry's commercial revenues from 1996 to 2000.

By 2005 two companies owned the Big Six shipyards. In 2001, Northrop Grumman purchased Newport News Shipbuilding and Litton Industries, which included the Avondale and Ingalls shipbuilding yards. General Dynamics owns Electric Boat, Bath Iron Works, and National Steel & Shipbuilding Company.

With respect to commercial vessels that must be constructed by a US shipyard under the Jones Act, there are approximately 20 private US shipyards that can accommodate the construction of vessels up to 400 feet in length. Because of the current overcapacity at US shipyards, the current small volume of commercial work available, and the fact that most contracts are awarded on the basis of competitive bidding, price competition is particularly intense. Since 1977, the number of privately owned major shipbuilding yards in the United States has fluctuated between 17 and 32. This includes combined statistics for active shipbuilders and shipyards with build positions. As of 2001 a total of 17 of the shipyards reported on had not constructed a major ocean-going vessel in the previous 2 years.

.....which is more than worrisome.

There is only ONE US shipyard that can make nuclear aircraft carriers, Newport News., which is just another feather in the cap of Northrop Grumman as a result of the massive consolidations of the early to mid 90's. There are only 2 other nuclear capable shipyards, one on each coast and I don't think Pearl Harbor has built anything in a long time.

Most of the shipbuilding capacity is held by two main companies Northrop Grumman, and General Dynamics, neither has a good reputation for ethical conduct in defense contracting, partly as a result of the idiotic cost-plus procurement system which is more concerned with how much a percentage profit a company makes than the bottom line.

For example....

If a company can produce a good quality product, cheaper than anyone else and turn a 90% profit....more power to them, but the cost plus system sets a fixed profit margin....requires a legion of (expensive) lawyers and accountants that, in the big two, exceed the total employment of several of the smaller shipyards (one reason they don't do govt contracts). It gets worse. Since the profit margin is fixed this gives as the only way to increase revenues....cost overruns. It's simple math and is largely responsible for spiraling defense costs, but simple math, it seems, is beyond our legislators.

This and the near monopoly environment that has come about in all the heavy industries after the cold war has seriously undermined all aspects of our procurement, not just in shipyards but in EVERYTHING from aviation to vehicles. This is, IMHO, one of the bigger long term problems facing the US military.

Nothing short of getting rid of the idiotic cost plus system and a full on balls-out Teddy Rosevelt style "trust busting" campaign is going to resolve this. But I don't see this happening. The Dems are all about concentration of power, the Republicans did nothing about it when they were in office and the big two have been moving their assets between shipyards to ensure that most of them are fairly non-viable commercially (that is non-diverse, overspecialized)in the event they aere cut loose....this makes good business sense as it reduces redundancy...but it is also, no doubt, insurance against needed reforms.

I'm not optimistic....

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