To keep U.S. shipbuilders afloat, lawmakers look to foreign example

As the shipbuilding industry is bucking up for some trying times for the foreseeable future, several lawmakers are exploring how to make U.S. shipbuilding more competitive worldwide.

It could end up being a Herculean effort to make this expensive industry, which is almost entirely dependent on Navy contracts, compete with countries such as South Korea, Japan and China without significant government subsidies, according to industry officials. Those countries dominate the commercial shipbuilding market.

Rep. Roscoe Bartlett (R-Md.), chairman of the House Armed Services Projection Forces Subcommittee, and ranking member Rep. Gene Taylor (D-Miss.) are planning a trip to four Asian shipyards during the August recess.

“We want to see how to build ships competitively,” Bartlett told The Hill. “If you do not have competition, you do not have the results of competition.”

Bartlett said he believes that global competition is a way to revitalize the industry. “We have barely enough work for shipyards to stay alive,” Bartlett said. “We [make up] 25 percent of the world’s economy. If we built 10 percent of the world’s ships, we would be in hog heaven.”

The United States has 1 percent of the commercial shipbuilding market.

“Any country that has a commercial shipbuilding industry heavily subsidizes its industry,” said Cynthia Brown, president of the American Shipbuilding Association. Starting out, shipyards sold their products below cost to fill their order books, she said.

U.S. commercial shipbuilding collapsed when subsidies ended. At the same time, “all the other countries increased their subsidies,” Brown added.

South Korean shipbuilder Hyundai, for example, delivers about 60 ships per year. “We are fortunate if we deliver two ships a year,” and those are military ships, Brown said.

“There is a concern that part of the reason that Navy ships cost as much as they do is because they are not involved in building commercial ships,” a Capitol Hill aide said.

However, Brown said, “We’ll never get into the commercial side.”

What the industry thinks would keep the industrial base afloat is some semblance of certainty in the number of ships that the Navy requires. The service has revised its plans numerous times in the past couple of years and each time has reduced the numbers of ships that it says it needs.

“Stability has not been a characteristic from the Department of the Navy because they have less money to spend,” a Northrop Grumman spokesperson said.

As shipbuilding projections are reduced and moved into the future, the return on capital investments declines, said Philip Teel, the new Northrop Grumman ship-systems president. “As fewer ships in each program are built, the cost per ship goes up considerably,” he said.

Adding fuel to the fire for the two U.S. shipbuilders, Northrop Grumman and General Dynamics’ Bath Iron Works (together with all the other technology suppliers), is the Navy’s next generation destroyer, the DD(X). In just a year, the Navy program shrunk from 18-24 ships to eight-12, Teel said in prepared statements for a subcommittee hearing yesterday on DD(X).

Initially projected to cost $1 billion per ship, the cost now is estimated to reach close to $4 billion. Concerned lawmakers in the House voted to put on a cost cap of $1.7 billion per ship, which effectively kills the program.

The language in the House version of the 2006 defense authorization bill, however, leaves open the possibility of starting a new, more affordable destroyer program.

Originally, the Navy planned to split construction of the first six ships between Northrop Grumman and the Bath Iron Works, with annual buys after that subject to competition.

The Navy now is planning to have both Northrop Grumman and General Dynamics concurrently design two lead vessels, thus setting the stage for the Navy’s decision on awarding contracts for the follow-on ships.  Earlier this year, the Navy had wanted to award a winner-takes-all contract for the DD(X) construction , but faced strong resistance from Congress who outlawed that plan in the FY 2005 supplemental defense appropriations bill. Congress feared the impact that decision could have had on the industrial base.  If Bath Iron Works loses DD(X) work, that could spell serious trouble for the shipyard that specializes solely in building destroyers and it could go out of business, the congressional staff member said.

The House voted to add $2.5 billion to the shipbuilding budget to buy two additional DDG Arleigh Burke-class destroyers in fiscal year 2006.

“Unfortunately, there are limits on how much we can achieve in future savings, given the low production rates currently projected by our customer,” Teel said.

“This dramatic decrease in the future rate of construction over the past six months, coupled with the lack of shipbuilding predictability and stability, will substantially increase costs,” he warned.

“We recognize that the Navy does not exist to keep us in business,” he added. But the industry feels the effects of a waning business immediately in a declining labor force, a reduced ability to attract capital and a shrinking vendor industrial base “that may not be there in the future when we need it.”