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U.S. Shipbuilding Consolidation Did Not Cut Costs

January 20, 2009

Source: Defense News

Consolidation in the shipbuilding industrial base over the past 15 years did not result in cost savings to the government, according to a paper released Jan. 16 by the Office of the Deputy Under Secretary of Defense for Industrial Policy.

The paper, prepared by the Institute for Defense Analysis (IDA), looked for evidence of cuts in shipyard infrastructure and labor due to lower demand for U.S. Navy ships, and whether costs were lowered as a result of the consolidation in the defense industry that began in the early 1990s.

IDA already examined the aircraft and missile sectors of the defense industry to see if reduced cost structures followed the consolidation period, and results were mixed, IDA said. In the missile sector, industry rationalized its cost structures, giving the U.S. government “significant annual savings,” but the aircraft industry did not.

The shipbuilding sector was more like the aircraft sector, IDA said.

“The ship sector followed the behavior and outcome of the aircraft industry more closely than that of the missile industry,” IDA said. “There appears to have been little consolidation-driven rationalization savings to the government in either case.”

The production of aircraft carriers, submarines and surface combatant ships (but not of auxiliary ships) declined from early 1990s’ levels because of Navy reductions in fleet size, but the yards making those ships have seen some production recovery since 2000, according to the paper. Shipyard closings didn’t result from the drop in demand.

The paper noted that the six major shipyards – Electric Boat, Bath Iron Works, National Steel and Shipbuilding, Newport News Shipbuilding, Ingalls Shipbuilding and Avondale Shipbuilding – that existed before the consolidation of the early 1990s still exist today, though they have all been acquired by either General Dynamics or Northrop Grumman.

With the government’s push in the early 1990s for shipbuilding and other defense companies to consolidate, “The government may have viewed the potential desirable mergers as mergers among companies with the same product – e.g., two shipbuilders – leaving less shipbuilding capacity. What actually happened was that large multi-product companies absorbed the shipbuilders, leaving large companies with full product lines,” IDA said.

However, shipyards had done much to cut costs before the series of mergers, IDA said. Also, shipyards couldn’t cut costs by closing plants like the missile sector could, IDA said.

“Unlike missile manufacturing, which could be rerouted into new plants at manageable investment, naval shipyard construction requires shipyards specialized to particular ship types. General Dynamics could not cost effectively move production from one yard to the other and shut down the less utilized yard.”

Shipbuilders have no reason to eliminate capacity now, either, IDA said, since General Dynamics and Northrop Grumman currently have substantial naval backlogs – $12 billion for General Dynamics and $13.6 billion for Northrop Grumman at the end of 2007, IDA said.

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