Competition & Consolidation: The Realities Of Nuclear Shipbuilding
Nuclear-powered warships are uniquely suited to America's global maritime role, because they have unlimited range and are less dependent on overseas logistics support than warships powered by fossil fuels. However, the special skills required to design and build such vessels are concentrated in a handful of public and private locations that the Navy must carefully nurture to assure industrial preparedness. In many cases there is only one supplier of vital parts, and that supplier could disappear if Navy demand slackens. So when Northrop Grumman announced last week that it was putting its naval shipbuilding operations on the block -- including the big nuclear yard at Newport News, Virginia -- policymakers were wary about what such a move might mean for the nuclear shipbuilding industrial base.
The initial government response, articulated in an exchange between Pentagon spokesperson Geoff Morrell and veteran Bloomberg Business News defense reporter Tony Capaccio, was that (1) the government respects Northrop's right to manage its business, (2) the government welcomes steps to improve the affordability of warships, and (3) the government wants to preserve competition in shipbuilding. The latter point presumably was a reference to the fact that Northrop's Ingalls yard in Mississippi splits construction of surface combatants with the General Dynamics Bath Iron Works unit in Maine. It probably wasn't a reference to the nuclear shipbuilding complex, because there is no competition in nuclear shipbuilding. All the nuclear-powered carriers are built at Newport News -- at the rate of one every five years -- and all the nuclear-powered submarines are built under a division-of-labor arrangement between Newport News and GD's Electric Boat shipyards in New England. Because each yard specializes in specific pieces of the Virginia-class submarine, there is insufficient industrial capacity for a true competition between builders.
However, there is competition of another sort in nuclear shipbuilding. The Electric Boat-Newport News submarine team competes against its own past performance under an incentive structure that generates big savings for the Navy. As a result of this novel arrangement, the number of man-hours required to build each Virginia-class vessel fell from 15 million on the first pair of subs to 13 million on the second pair to 11 million on the third pair. The steady reduction in labor inputs as manufacturing processes were refined cut the cost of each sub by half a billion dollars over a ten-year period, and now the two yards are saying they can cut production costs and time even further if the Navy sticks with its enlightened approach of stable production rates, multiyear funding, and incentive fees.
Thus, construction of nuclear submarines may be the single most successful example of applying the cost-reduction measures being pushed by Pentagon acquisition chief Ashton Carter. Applying the same framework to other kinds of weapons presumably could generate similar savings. But there is another interesting lesson in the submarine experience that applies to the future disposition of Northrop Grumman's shipyards. If the government can get steady cost and productivity improvements from an industrial team without engaging in classic competition, then why should it care whether all the assets of the team are owned by one company? In other words, what's the real objection to letting General Dynamics buy the Newport News shipbuilding complex? GD is renowned for refining shipbuilding processes to take out costs, and everybody knows it is the world leader in undersea-warfare technology. Since classic competition is long gone in the nuclear shipbuilding business and the division-of-labor approach is providing an alternative way of generating sizable savings, isn't it just common sense to let the most efficient supplier absorb the operations of its team-mate?
Northrop Grumman says it wants to dispose of its shipbuilding operations as a single unit, but that approach doesn't seem likely to maximize shareholder value. Bidders that could credibly take over the conventional shipyards on the Gulf Coast might not be trusted to buy the nuclear shipyard at Newport News, and buyers who appreciate the extraordinary proficiency of Newport News enough to buy it might not want to take the less-capable Gulf Coast shipyards in the bargain. By unbundling the shipbuilding unit, Northrop could increase the universe of prospective bidders while reducing antitrust and security objections to any particular bid. Of course, GD may not be interested in getting deeper into the metal-bending side of the defense sector. But if it is, the government would be foolish not to support a bid from the defense industry's most accomplished cost-cutter.