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March 3, 2010

Shipbuilders testify on Navy 30 year plan

The Seapower and Expeditionary Forces Subcommittee of the House Armed Services Committee today heard testimony from the two largest shipbuilders on how the latest version of the Navy's 30 year shipbuilding plan will affect industrial base capacity, workforce stability, and economies of scale.

First up was David K. Heebner Executive VP Marine Systems, General Dynamics. He was followed by C. Michael Petters Corporate VP, Northrop Grumman, and President, Northrop Grumman Shipbuilding, Inc. Following are some highlights from their testimony.

In his prepared testimony Mr. Heebner said that it was clear that in the new 30 year plan the Navy had worked hard to balance available resources among a broad and diverse set of competing demands. "Stability of requirements is implicit in this plan and predictability is enhanced because the plan is based on reasonable assumptions and can be executed," he said. "With regard to these two aspects, the plan promotes our ability to provide quality ships at the best possible value."

"However," he continued, "the most challenging aspect of the plan is volume ... the new plan is funded at levels that build 13 fewer surface ships in the near term when compared to the FY09 shipbuilding plan. Internal to our shipyards, this volume challenge will likely trigger shipyard workforce resizing. External to our shipyards, the volume issue will affect thousands of suppliers who provide the components and commodities essential to ship construction, resulting in reduced economic order quantity and reduced vendor performance. In the end, less volume will inevitably lead to higher shipbuilding costs - not the best possible value for the taxpayer."

Looking at how GD's shipyard would be impacted Mr. Heebner said that at Electric Boat funding for advanced production and acceleration of the procurement rate of VIRGINIA Class submarines to two per year starting in FY 2011, this had made the program "clearly a model for defense acquisition." He noted that Electric Boat had delivered the fifth ship of the class for 25% fewer manhours than the lead ship,

"Nonetheless, in the longer term," said Mr. Heebner, "the Navy's 30 Year Shipbuilding Plan potentially has a significant negative impact on the industrial base by reducing attack submarines by 10 ships when compared to the FY09 Plan - a 20% reduction. From our perspective, maintaining the VIRGINIA Class Submarine program at a two per year procurement rate will allow us to capture the production and costs efficiencies that are now well within reach.

Ar Bath Iron Works, he said, consolidation of the DDG 1000 Class construction at BIW will maintain an efficient level of volume for the near term. However, the FY2011 30-Year Shipbuilding Plan would sustain procurement at a rate of only 1.5 DDG 51's per year, representing a 50% reduction in volume for the large surface combatant industrial base. For the majority of the DDG 51 program, ships were procured from two surface combatant shipyards at a sustained rate of at least 3-ships per year. This level of volume represented a balance point where the overhead cost of the significant infrastructure required to efficiently build surface combatants could be reasonably spread across the ships and result in affordable cost. This, coupled with the enhanced stability provided to the shipyards and suppliers by multi-year procurements beginning in FY1998, provided a solid foundation for affordability. The program described in the new 30-year shipbuilding plan reduces the ability to distribute overhead infrastructure costs and will result in increased cost, meaning fewer destroyers will ultimately cost more per ship."

He warned that as a flat or declining volume limits the ability to hire and train the next generation of shipbuilders, "apprenticeship programs will decline - an adverse impact that will be felt by the shipbuilding industry and the Navy for years to come."

At NASSCO, the 30 year plan transitions the shipyard from building T-AKEs to building Mobile Landing Platform (MLP) ships. However, the plan represents a change from two ships per year to half a ship per year, resulting in gaps in production between each of the three planned ships. These gaps will result in cyclical workforce resizing involving a significant portion of NASSCO's production personnel during each production gap.

"Moreover," he said," initiating the T-AO(X) program some five years after the termination of the T-AKE, where the potential exists for using a hull with considerable commonality, will likely sacrifice many efficiencies which might have been realized. The inherent inefficiencies generated by cyclical workforce resizing, coupled with the fact that each ship will have to absorb the entirety of the shipyard's overhead during its lengthened period of construction, will lead to significantly higher costs to the taxpayer for each MLP."

PETTERS TESTIMONY

Northrop Grumman's C. Michael Petters called the 30 year plan "courageous, but perhaps optimistic."

"The plan is courageous in that it sets in motion solutions to many of the issues impacting the industrial base," said. "It is optimistic in that resources will always be an issue in the out years of the plan."

Good news in the 30 year plan included that "two nuclear submarines per year and aircraft carriers on five-year centers will go a long way to stabilize these two facets of the shipbuilding industrial base. Similarly, the industrial base for large-deck amphibious ships, also to be built on five-year centers, will be stabilized by this plan. Finally, the acceleration of the LCS and JHSV programs, as well as the restructuring of the Maritime Landing Platform (MLP) program to a less complex ship, will all have positive effects."

"However,' said Mr. Petters, "it is clear to me that the Navy's plan assumes an industrial base rationalization from its current state to a future state where ships are more affordable, and the industry can attract and retain skilled shipbuilders and obtain a solid return on investment for the shareholders who provide the capital. That is a bold assumption. In order to make that happen, the industry, the Navy, and Congress all would have a lot of work to do to make this transformation of the shipbuilding industrial base a success. Many challenges and hard choices would have to be made. We would need a creative partnership between industry, the Navy and Congress if rationalization were to happen".

Mr. Petters saw three challenges to the plan: two near-term and one longer-term. "The first near-term challenge is the number of major surface combatants. In years past, the Navy has procured three destroyers per year, which allowed it to maintain dual sources for destroyers ... However, the current plan cuts this rate in half."

"Will one and a half ships be enough to keep two yards in competition, will it be enough to attract and retain the skills needed to cost-efficiently build these ships, and will it be enough for the shareholders so that they put their capital in our shipyards?" asked Mr. Petters. "Especially in the future, when not just price but technological innovation will be required?"

He cited the lack of a bridge to LSD(X) as a second near term challenge. "LCC(R) 1 and 2 both now have been removed from the plan, producing a five-year gap between start of LPD 27 and start of the LSD(X)," he noted."My sense is that the efficiency of the shipyards will be affected and that the Navy will incur non-recurring engineering costs for a new class of ships that might otherwise been avoided."

More long-term. Mr. Petters is concerned about "the looming bill for the Ohio Replacement Program in the mid-term of the plan. While the 30-year shipbuilding plan addresses this challenge, it is also clear that many of the later years in the plan will require SCN budget of approximately $20B (FY10$). If that goal is not attained, there will not be enough money to continue building all classes of ships. The surface combatant and amphibious assault challenges cited above will be greatly exacerbated, which could lead to conditions resulting in shipyard closures. As a result, the ability of Congress to uphold its constitutional mandate to 'maintain a Navy' will be significantly diminished. I strongly encourage this committee to consider alternate funding plans for Ohio Replacement Program, taking it off budget, and fund it in addition to normal SCN."

"In summary, the plan implicitly assumes a rationalization of the industrial base, which includes craftsmen, engineers, facilities, and the entire supply chain that extends across the 50 states," said Mr. Petters. "When any industry goes through this kind of rationalization, the transition will be turbulent with turmoil and uncertainty. However, the Navy's plan does not address these issues."

Mr. Petters said the shipbuilding industry must find ways to get to the right level in capacity and capabilities to create a healthy industrial base that fits the plan. In doing so, industry would need to develop strategies to redeploy its workforce while maintaining the skill base, consolidate or close facilities to maximize utility and to reduce unnecessary investments, and deploy "smart-buy" procurement strategies to maintain key suppliers in the supply chain.

Mr. Petters noted that expected build-up of domestic energy infrastructure could drive a talent drain from the shipbuilding workforce.

"The shipbuilding skills required to work with heavy steel, large component fabrication and assembly, as well as nuclear knowledge, are the same skills necessary to support the energy infrastructure. This threat to shipbuilding however, could become an opportunity for our shipyards and shipbuilders with the help of Congress. Outside the U.S., shipyards are becoming stronger and are remaining viable by taking on energy infrastructure work. Such work allows these shipbuilders to maintain their skilled workforce so the skills are there in sufficient numbers to take on shipbuilding when the need arises. This could not happen without foreign governments that support this redeployment of facilities and skilled workforce."

You can access the full text of Mr.Heebner's and Mr. Petters' statements HERE


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