Four Years of Comment on Northrop Grumman

July 2001 through June 2005

   NEW LEADERSHIP AT NGSS.  The new President of Northrop Grumman Ship Systems, Phil Teel, is an aeronautical engineer with a distinguished career in the aerospace industry, first at NAVAIR and more recently at Raytheon and Northrop Grumman.  He is not a shipbuilder, but don't let's hold that against him until we see what he does.  I invite employees of NGSS, its customers and its subcontractors to continue to keep me up to date on developments in Pascagoula and I undertake not to dump on this poor guy for at least six months, and not necessarily then.  And here is a link to a compendium of all my comments and position papers concerning Northrop Grumman over the past four years.  Tim Colton, June 3, 2005.

   THE LPD 17 SAGA CONTINUES.  I'm going to be in trouble with the PR folks at Northrop Grumman again, (ooh, scary), but I'll just have to live with that.  I have been told, by numerous different sources, all of them directly involved in the LPD 17 program but maybe not all of them completely impartial, that (a) the Navy issued over 15,000 trial cards as a result of the LPD 17's recent sea trials; (b) these were "the worst sea trials in the Navy's history"; (c) delivery is not now expected until the fall; and, most amazingly, (d) the problems are so bad that the Navy is seriously considering not commissioning the ship at all, but turning it into some kind of training platform.  I invite informed readers to tell me the real story, in confidence, of course.  Tim Colton, June 3, 2005.

   YOUR TAX DOLLARS AT WORK, PART 3.  The award of a $3-billion contract to Raytheon for design of the DD(X) raises the question of what happened to the $3-billion contract awarded to Northrop Grumman Ship Systems on April 29, 2002, for design of the DD(X).

Ingalls Shipbuilding Inc., Northrop Grumman Ship Systems (NGSS), Pascagoula, Miss., is being awarded a $2,879,347,000 cost-plus-award-fee contract for DD(X) Design Agent activities, including the design, build and test of engineering development models (EDMs) for major subsystems and components for the DD(X) destroyer. DD(X), a multi-mission surface combatant tailored for maritime dominance, will provide independent forward presence and deterrence, and operate as an integral part of joint and combined expeditionary forces. Work will be performed in Pascagoula, Miss. and Bath, Maine (38 percent); Portsmouth, R.I. (16 percent); Minneapolis, (13 percent); Tewksbury, Mass. (nine percent); Reading, Mass. (four percent); Andover, Mass. (four percent); Newport News, Va. (three percent); Fullerton, Calif. (two percent); Fort Wayne, Ind. (two percent); Bethesda, Md. (two percent); Anaheim, Calif. (two percent); Cincinnati, Ohio (two percent); Hudson, Mass. (two percent); and Philadelphia, (one percent) and is to be completed by September 2005. Contract funds will not expire by the end of the current fiscal year. This contract was competitively procured via publication in the Commerce Business Daily and the solicitation was posted to the Navy Electronic Commerce Online (NECO) Internet web page, with two offers received. This contract is incrementally funded; funding in the amount of $273,167,189 has been obligated to the contract. The Naval Sea Systems Command, Washington, D.C. is the contracting activity (N00024-02-C-2302).

How much does it cost to design a destroyer?  Tim Colton, June 3, 2005.

   HOLD DOWN THOSE DDG CONTRACT PRICES.  By now I guess that we all agree that the DD(X) program is going to go the way of the DD-21 program and the Navy will have to order a bunch more DDG 51s while it figures out how to design an affordable ship.  (Don't hold your breath.)  Before it does, however, maybe it should take a look at this chart.  Let's see, inflation has been about 2%, right?  Only in the Alice-in-Wonderland world of naval shipbuilding does the price per ship go up if you order more.  Tim Colton, May 29, 2005.

   YOUR TAX DOLLARS AT WORK.  Any comment on this announcement would be superfluous.

Raytheon Co., Integrated Defense Systems (IDS), Tewksbury, Mass., is being awarded a cost plus award fee letter contract with a not to exceed ceiling of $3,000,000,000 for DD(X) Ship System Integration and Detail Design associated with specific DD(X) Ship Systems.  Work will be performed by Raytheon IDS in Tewksbury, Mass.; Lockheed Martin Maritime Systems and Sensors, Moorestown, N.J.; United Defense LP, Minneapolis, Minn.; Northrop Grumman Mission Systems, King George, Va.; and Ball Aerospace & Technology Corp., Westminster, Colo., and is expected to be completed by December 2009.  Contract funds will not expire at the end of the current fiscal year.  This contract was not competitively procured.  The Naval Sea Systems Command, Washington, D.C., is the contracting activity (N00024-05-C-5346).

Let's hope that, even though the Navy couldn't manage to hold a competitive procurement, they remembered to include a cancellation clause.  Tim Colton, May 23, 2005.

   LPD 17 ON SEA TRIALS AT LAST.  The future USS San Antonio, the first of the Navy's new class of assault ships, left Ingalls' shipyard for its sea trials today, although sources say that a naval ship has rarely been so unready.  All being well, it will now be delivered on May 13, regardless of how long the deficiency list might be, and commissioned in Ingleside TX in June.  The contract for this ship was signed on December 17, 1996 and its original contract delivery date was July 17, 2002, allowing 67 months for detail design and construction.  Actual time required: 101 months, 50% more than planned.  Ah, well, better late than never.

The following photograph was released by Northrop Grumman, for once, thankfully, without a self-congratulatory press release.  But it looks to me like a fake: not only is there no sign of life on this ship, but where are all the porta-potties they loaded on board before sailing?  Tim Colton, April 29, 2005.  I am assured by people who went on the trials that the picture is not a fake: I stand corrected (May 13, 2005).

   WHAT SHOULD NORTHROP GRUMMAN DO?  It has been said that I am hard on Northrop Grumman Ship Systems (NGSS).  This may be so, but I doubt that it’s unjustified.  In addition, the number of critical e-mails that I receive is tiny compared to the number of supportive ones, most of which come from NGSS employees.  And I just went back and reviewed all my comments on NGSS since I started this column four years ago and can’t see any reason to modify any of them.  Sure, there are a few snide remarks here and there but they are intended more as attention-getters (Did you see what Colton wrote on his web site?) than anything else.  Nobody should ever take it personally.  If you can’t take the heat, get out of the shipyard.

So what would I do if I were in charge at NGSS (though heaven protect us all from such a dire situation)?  Read on.

If Northrop Grumman is a professionally managed company, it has a strategic plan, and each of its business units, including NGSS, also has a strategic plan.  Strategic plans usually (not necessarily but usually) look five years ahead and are updated annually, according to defined procedures.  I have not seen NGSS’ strategic plan, but here are some thoughts about what it might include.

The key question is, what business is NGSS in?  If all they want to do is build new ships for the U.S. Navy and the U.S. Coast Guard, they had better start downsizing today.  If, on the other hand, they are going to be bold, and not limit themselves to two customers, they had better have a plan not only for penetrating but also for making money in other markets.  Here’s how to do both of these.

First, some ideas for a downsizing strategy:

(1)   Move all the LPD work being done at Avondale to Ingalls.  All of it.  Transfer partial hulls and hull blocks onto barges and tow them out.

(2)   Put the last Polar Tanker in the water as soon as possible and either move it to Ingalls or subcontract its completion.

(3)   Then close Avondale.  Sell the off-site facilities/operations.  Don’t try to sell the main yard: nobody wants it.  Transfer it to the State of Louisiana, in return for the debt, and let the State split it up and lease it out.

(4)   Consolidation of the LPD program should improve facility utilization at Ingalls.  Restructure the yard’s construction schedule by product line to optimize resource utilization and productivity.  Get tough with the Navy on this and on changes.  No more changes. 

(5)   Don’t oppose sole-sourcing the DD(X): NGSS doesn’t owe the folks in Maine anything.  Propose a multi-year sole-source funding of DD(X).  At a minimum, this should be similar to that for the SSN 774 program, but something like the 30-ship DD 963 contract would be better. 

(6)   Get rid of all the non-shipbuilders in Production and hire some professionals.  Steal them from BIW if necessary.

(7)   Stop pursuing other markets and concentrate on the ones that are already locked up: if NGSS is going to be the sole source for both amphibs and surface combatants, there is no excuse for not being damn good at it. 

(8)   Attack the overhead: cut everything that’s not the minimum required.  Act like it’s your own money that’s being spent and cut back ferociously.  The yard’s too big: consolidate operations and mothball the parts that aren’t really needed.

(9)   Do more make-buy analyses and don’t hesitate to sub-contract anything that others can do for less.  There’s nothing wrong with subcontracting if it saves money, even though the unions don’t like it.

Second, some ideas for a growth strategy:

(1)   Move the LPD program to Ingalls, as in the downsizing strategy.

(2)   Reverse the Ingalls-Avondale integration and spin Avondale off into a separate company, with its own cost structure and with outside investors.  Turn it into a low-budget commercial ship factory, run by commercial shipbuilders. 

(3)   Step into the containership void left by Kvaerner Philadelphia switching to product carriers.  Buy a design and set up an assembly-line operation – one ship a year for Matson and one a year for Horizon.  Get Daewoo or somebody like that to help.  At the same time, step into the short-sea shipping void and propose a series of low-cost coastal trailerships.

(4)   NGSS expanded the Ingalls waterfront and lengthened the dry-dock to get into the offshore business.  Now carve out a chunk of the waterfront, including the dry-dock and possibly the East Bank yard too, and create a repair/conversion operation, also, like Avondale, as a separate company, with its own cost structure and with outside investors and professional managers.  There’s a lot of repair and conversion work out there.

(5)   The overhead still needs to be cut and the yard’s still too big: lease parts of it out.

(6)   Subcontracting is difficult if you’re downsizing but easy if you’re growing.  Do more of it: it’ll save millions.

(7)   Buy Halter from the Singaporeans: it has tremendous potential, which the Singaporeans are failing to take advantage of.  Again, structure it as a separate company, with outside investors and professional managers.  (No admirals!)  Shift the Deepwater Program to Halter: it’ll save more millions, many of them.

(8)   Go after the foreign military sales business vigorously, with simple, affordable designs, jointly marketing Ingalls’ frigates and Halter’s patrol vessels, and offering financing.  Finance the learning curve, if necessary and to the extent practical.  Use political muscle to get the Navy and the State Department to do what they are supposed to do but don’t do, i.e., help.

Downsizing would be painful, but it’s less risky than growth.  Personally, I think NGSS should go for the growth strategy, but I’m an optimist by nature and it’s not my money.  Of course, GD Marine Systems should probably go for a growth strategy too, especially as they could be downsized right out of business.  But NGSS has a whole bunch of advantages over GDMS: better facilities, better productivity, lower wages, bigger labor pools, more business-friendly locations, more political clout, and so on.

I could go on like this almost indefinitely but this is probably more than enough for the time being.  Tim Colton, April 22, 2005.

   HOW MUCH WORSE CAN IT GET?  The Government Accountability Office (GAO) recently published a report entitled "Improved Management Practices Could Help Minimize Cost Growth in Navy Shipbuilding Programs".  If you haven't read it, you can find it here.  I was going to comment on it but there's so much to comment on that it would take a week.  Read it for yourselves and weep, or, better, yell at your senators and representatives.  What the GAO euphemistically refers to as "improved management practices" might help, but I think shooting an admiral would be more effective.  You know, as Voltaire said of the execution of Admiral Byng, "pour encourager les autres".

Now if that's insufficiently discouraging, read last week's testimony on Navy shipbuilding and industrial base status to the Senate Armed Services Committee's Sea Power Subcommittee.  You can find it here.   Lawdy, lawdy.  The CNO doesn't say much.  Mike Toner reveals that he understands shipbuilding, which we knew.  Phil Dur reveals that he doesn't, which we also knew: his testimony is all misleading boasts, clichés and incomplete sentences.  And Ron O'Rourke has it right, as usual, and tackles head-on all the painful questions that the others either ignored or glossed over, such as the inevitability of BIW closing if the DD(X) program is single-sourced.  Tim Colton, April 16, 2005.

   GD NO LONGER OUTPERFORMING NOC.  The "big two" both published their results for 2004 recently.  The figures for their shipbuilding operations for the past four years are summarized below.  Not much comment is needed.  General Dynamics (NYSE:GD) is no longer doing better than Northrop Grumman (NYSE:NOC) - they both had the same operating profit margin, although GD has higher revenue per employee, lower assets per employee and higher asset turnover, indicating that NOC's shipyards are under-utilized compared to GD's.  Tim Colton, April 16, 2005.

   WHY CAN'T WE SELL FRIGATES TO PAKISTAN?  Only a week after it was announced that the Pakistani Air Force is to buy a coupla dozen F-16s from Lockheed Martin, we learn that the Pakistani Navy is to buy four frigates from China.  Am I missing something here?  If they can afford to buy Lockheed Martin's phenomenally expensive fighters, why can't they afford to buy Northrop Grumman's or General Dynamics' phenomenally expensive frigates?  After all, it's the U.S. taxpayers' money, isn't it?  And we are looking for a way to keep both Bath and Ingalls in business, aren't we?  Or aren't we?  Tim Colton, April 8, 2005.

   IT TAKES AT LEAST TWO TO TANGO.  It appears that the Navy is planning to cut the number of gray shipbuilders from six to three.  It will do this (a) by making Bath and Ingalls compete for the DD(X) construction contract on a winner-takes-all basis, a competition that Ingalls will win; (b) by making Electric Boat and Newport News do likewise for future SSNs, a competition that Newport News will win; and (c) by going along with Northrop Grumman's phasing out of Avondale as a shipbuilder.  It is, of course, purely coincidental that Maine, Connecticut and Louisiana are states whose congressional delegations can safely be ignored, however loudly they might scream.

Is this a good idea?  Hell no, but first let me explain why Ingalls and Newport News will win the winner-takes-all competitions. 

First, Ingalls has lower labor costs than Bath, not so much because it pays less but because its productivity is much better: this is partly because it has a much more efficient facility, even though General Dynamics has spent over $300mm on Bath's facility, and partly because it doesn't snow in Pascagoula.  In addition, Ingalls has lower overhead costs than Bath, primarily because it can spread its fixed overhead over a direct labor base that is about twice the size of Bath's.  As a result, the total cost of a destroyer built by Ingalls is quite a few percentage points lower than that of one built by Bath: unless GD decides to take a dive, therefore, and the probability of that is negligible, Ingalls will win a winner-takes-all competition.

Some of this logic applies to a Newport News-Electric Boat face-off.  EB is probably more efficient than Newport News but Newport News has much lower overhead costs.  In addition, Newport News makes such enormous amounts of money on its other programs that it can well afford to take at least a small dive.

This consolidation of the industry is not a good thing, for at least two reasons.

(1) Although building all the ships of a program in a single shipyard should result in lower unit costs than dividing it between two shipyards, it won't, because, after the initial competition, there will be no controls over future costs.  The winning shipbuilder will have the Navy over the proverbial barrel and the Navy will be unable to hold costs down.  We have seen this phenomenon over and over again but the Navy has apparently never understood it.

(2) Neither Bath nor EB has any other business opportunities that it can pursue.  Not even a sniff of an opportunity.  This means that both will go out of business and, as we know well from history, a dead shipyard cannot be resurrected.  In addition, as each shipyard works off its orderbook and lays off its workforce, it will incur progressively higher costs and delays on its remaining work, and the Navy will have to pay for this.

What should the Navy do?  Well, it's too late, unfortunately, to go back to real competition, which we haven't had since John Lehman was Secretary, because real competition requires not only two contractors but also at least three competitors for those two contracts.  In the absence of true competition, we must stay with the limited form of competition that we have had for the past 20 years but make it more effective.  This can be done in at least three ways:

(1) Rebuild the number of ships in the fleet by specifying ships that are intrinsically less expensive than the ludicrously gold-plated monsters that the Navy is specifying now.

(2) Restructure the standard shipbuilding contract to provide incentives to the contractor to cut costs and to reduce construction times, and incentives to the program manager to refrain from making design changes.  The Navy leadership goes on and on about the need for lower costs and shorter construction times but it's not going to happen as long as the contract encourages both the program managers and the shipbuilders to spend money rather than to save it.

(3) Continue and expand the process, started by the LCS and other programs, of increasing the amount of ship construction funding that flows to second-tier shipbuilders, such as Alabama, Austal, Bender, Bollinger, Halter, Signal and Marinette, whether directly or indirectly.  This will not only reduce total costs now but it will also stimulate the development of a new defense industrial base, capable of providing true competition for major procurements at some future time.

Does anyone think that any of this might happen?  No?  Nor do I.  Tim Colton, February 26, 2005.

   LPD 17 LEAVING AVONDALE.  Just in case you didn't believe me, here is a picture of LPD 17 passing the New Orleans Central Business District as she is towed from Avondale to Ingalls for completion.  Is this it for Avondale?  Will they ever again build a complete ship?  Tim Colton, December 3, 2004.

   IS NORTHROP GRUMMAN BETTER AT P.R. THAN AT BUILDING SHIPS?  An hilarious article in the New Orleans Times-Picayune recently trumpets alleged improvements in performance at Northrop Grumman's once-great but now pitiful Avondale operation.  I can't give you a link to the article because the Times-Picayune is one of the few newspapers that won't let you read it on-line.  Not that you're missing much.

The headline is "TROUBLES PASSED" and yes they are talking about Avondale.  Its most startling claim is that they built the fourth Polar tanker in half the time they took to build the third one.  Needless to say, this is not true.  Most of the remainder of the article concerns improvements in safety and housekeeping, with no explanation of how the yard's "troubles" might have been "passed".

The table below tells the Polar Tankers story.  The first of the five ships was delivered 15 months late, requiring about 50% more time than had been planned.  The second ship was 21 months late, also requiring about 50% more time than was originally planned and about four times as much time as would be needed in a Korean shipyard.  The second ship was 21 months late, the third ship was "only" 13 months late, and the fourth ship was a positive triumph, being only 12 months late.  A startling improvement in performance on the third and fourth ships, you say?  Not really, considering that they were both delivered with huge deficiency lists and taken to Grand Bahama Shipyard for their pre-delivery dry-docking and bottom painting.  The Polar Adventure, which was "delivered" on August 13, is now out of dry-dock but still has several weeks of shipyard work to do before she can make the long voyage round Cape Horn and go to work.

Avondale's LPD story is no more inspiring.  The first of the four ships under contract at Avondale is now expected to be delivered this December, (don't bet on it), an astonishing 8 years after it was contracted and two-and-a-half years late.  The second ship is expected to be a mere 22 months late and the third only 20 months late.

Depressing stuff.  Tim Colton, September 3, 2004.

   IS THE HIGH COST OF NAVAL SHIPBUILDING FINALLY CATCHING UP WITH THE NAVY LEADERSHIP?  The authoritative Washington newsletter "Inside the Navy" reports that the Navy's budget request for FY06 will include only four new ships and will still cost $6 billion.  The four ships are: one SSN at a budget-busting $2.5 billion; one DD(X) at a mind-boggling $1.5 billion; one LPD at a ludicrous $1.0 billion; and one T-AKE at a relatively modest $0.4 billion.

This is no real surprise.  Naval shipbuilding costs have  been out of control for about 15 years now and the Navy has brought it on itself.  First, it essentially eliminated competition by forcing more than half the shipbuilding industrial base, including critical suppliers, out of business.  Then it created a contracting environment in which the few remaining shipbuilders not only have no incentive to reduce costs but are actively encouraged to increase costs.  Finally, it has driven per-ship costs up even further by specifying ever more complex ship designs: there is no bell or whistle that the Navy doesn't want to have at least three of on every one of its new ships.  There are other factors at play here but these are the most significant ones.  The net result is that we now have a big-ship shipbuilding industry that is the most expensive and the most incompetently managed in the world and we have now, not coincidentally, almost completely lost our ability to build deep-draft merchant ships. 

I have to keep reinforcing this broad allegation with a fundamental fact: in the 1970s, productivity in U.S. big-ship shipbuilding was measured to be about half that in Japanese shipbuilding; today it is around a quarter.  (So much for the National Shipbuilding Research Program.) 

I also have to keep pointing out that the problem isn't with U.S. shipyard workers: our successful small yards demonstrate that.  The problem also isn't with U.S. shipyard facilities: they are all just as good as the older European and Japanese yards.  The problem in the yards is with U.S. shipyard management.  There's way too much of it and it doesn't seem to have a clue what it's doing.

But the real problem is the Navy itself.  The Navy dug this hole and can't find its way out.  It talks about "acquisition reform" but what it means by this is spreading the appropriation of funds for individual ships over multiple years.  This would not, of course, have any impact whatever on the high cost of ships: it would merely obfuscate the accounting of that high cost.  We do, indeed, need acquisition reform: we need rigorous cost-benefit analysis of every new ship system; we need elimination of all but the most critical change orders; we need firm-fixed-price contracts, with incentives for cost reduction and schedule acceleration and penalties for cost over-runs and delays; we need to reintroduce competition by requiring prime contractors to competitively procure x% of each contract from the second-tier shipbuilders; we need detailed audits of indirect costs and non-allowance of about half of them.  And much more besides.

Will it happen?  Not a chance.  It's only the taxpayers' money.  Tim Colton, August 20, 2004.

   IS THE WMSL TOO BIG AND TOO EXPENSIVE?  Ingalls Shipbuilding has announced that it has received $250mm in advanced funding for the first of the Coast Guard's new generation of high-endurance cutters, which are not designated WHECs, as would be traditional, but WMSLs, for Maritime Security Cutter, Large.  Large is the right word: at 4,200 tons, this vessel is about 60% larger than the "Hamilton" class of WHECs and about 13% larger than it was supposed to be.  In addition, the $250mm is only for advance production and procurement, i.e., the total contract value will be substantially more than this.  This sort of thing is, I suppose, what we have come to expect from the world's most expensive shipbuilder, but how is the Deep Water Project's budget going to be able to afford this kind of inflation, especially given Northrop Grumman's long track record of ever-growing costs and ever-slipping delivery dates?  Tim Colton, July 5, 2004.

   DD(X) SHOULD BE CANCELLED NOW.  The Navy's craven capitulation to Northrop Grumman on the need for competition on the DD(X) program makes it clear who's really running naval shipbuilding.  When was the cost of conducting a competitive procurement ever greater than the extra cost of not having any competition?  Good grief, has nobody in the Navy noticed how expensive the DDGs have got since they capitulated to Northrop Grumman on how the program should be divided up?  In case you haven't, look at the chart on the right.  In constant dollars, (i.e., adjusted for inflation) the current prices for DDGs are more than double those at the beginning of the program.  Are the newest DDGs more than twice as effective as the early ones?  Admiral the Right Honorable Doctor Dur may be known as "God" in Pascagoula, (although not because anyone thinks he's omnipotent), but that doesn't mean that the Navy has to do everything he says.

My sources tell me that the DD(X) is now so out of control that it's going to cost $1.7 billion, not the $1.45 billion budgeted.  A destroyer that costs $1.7 billion.  A destroyer that costs $1.7 billion.  A destroyer that costs $1.7 billion.  Nope, how ever many times you say it, it just isn't believable.  This is insanity: it's time for DoD to step in and stop it, as they just did with the Army's Comanche program.  Now.  Expensive as they are, it would be better to build some more DDGs and to get rolling on the LCS program, while someone rethinks the next generation of surface combatants.  Tim Colton, March 28, 2004.

   LPDs GETTING PRETTY EXPENSIVE.   The fifth of the "San Antonio" class of LPDs, the contract for which was announced today, will cost over 70% more than the fourth in the series.  I know that the nation needs these ships and, goodness knows it would be nice if we could keep Avondale in business as well, but this is a tad excessive, even for Northrop Grumman.  Tim Colton, November 25, 2003.

   HOW MUCH WORSE CAN AVONDALE GET?  The news that Avondale has finally delivers its seventh and final sealift ship, the USNS Benavidez (T-AKR 306) is startling.  I had thought that they had delivered her back in June, but apparently not.  You read all the good words in Northrop Grumman's press release and you would never guess that the original contract delivery date for this, the seventh in a series of supposedly identical ships, was July 21, 2001.  That's right, July 21, 2001.  Let me see, now, that would have been, er, more than two years ago. Goodness!  The contract was awarded on December 18, 1998, so they signed up to build this ship in 31 months and it actually took them 57 months, 84% longer than planned.  And they launched her in July 2001, so she's been in the water, fitting out, for over two years!  Tim Colton, September 19, 2003.

   AVONDALE LAUNCHES LPD 17.  The first of the new class of LPDs, San Antonio, was finally launched this week and will be christened on Saturday.  And a strikingly good-looking ship it is, as you can see from the photograph below, copied from Northrop Grumman's press release.  Although about 27 months behind the original contract schedule and goodness knows how many hundreds of millions of dollars over the original budget, this event is nevertheless very good news.  Now, maybe, all the design problems are in the past and the shipyard will be allowed to get on with the job of building 12 ships as systematically and cost-effectively as possible.  Will this happen?  Probably not, but not through any particular fault of Northrop Grumman's, desperately bad at managing shipyards though they are.  No, the LPD program will continue to be ludicrously expensive, possibly even progressively more expensive, ship by ship - only in modern-day naval shipbuilding do we see negative learning curves - because the Navy will continue to mess with the design and the Congress will continue to stretch out the funding.  When will they ever learn?  Again and again, we tell them, (not just me, we all tell them): if you want cheaper ships, (1) design a cheaper ship, (2) design the ship completely before you start building it and (3) fund the whole program in advance, not ship by ship.  But they don't listen, probably never will.  Never mind.  Tim Colton, July 17, 2003.

   GD CONTINUED TO OUTPERFORM NG IN 2002.  The "big two" both published their results for 2002 on March 24.  The figures for their shipbuilding operations are summarized below.  The reason for the big jump in the NG figures in 2002 is that 2001 didn't include the full value of the acquisition of either Litton or Newport News.  There are no new surprises in the management discussion: GD was unhappy with the TOTE contract, NG with the Polar Tankers contract.  No revelations concerning the outcome of the American Classic Voyages fiasco, either: I guess we're never going to be told the full story.

Not much comment is needed.  GD is clearly doing better than NG - higher profit margin, higher revenue per employee, higher asset turnover.  It's interesting that NG has almost twice the assets per employee that GD has but still only generates about 72% of the revenue per employee.  And now NG is hurling more and more CapEx money at both Ingalls and Avondale, telling Mississippi legislators that it needs to do this to stay competitive with GD.  One of these years they may work out that it's not the facilities that are the problem, it's the management.  Tim Colton, March 27, 2003.

   INGALLS' UNIONS GOT A PRETTY GOOD DEAL.  Under the new four-year agreement between Ingalls Shipbuilding and its unions the current journeyman rate goes from $16.37 to $18.32 in three increments - $0.55 now, $0.65 after 16 months and $0.75 after a second 16 months.  In addition, every employee will get a single lump-sum payment of $3,000 now.  The health care plan has been improved in a number of ways, with increases in employee contributions that are equivalent to about $0.21 an hour now, another $0.21 after the first 16 months and another $0.16 after the second 16 months.

According to Census data, the average wage for the whole shipbuilding industry is now over $17.00, so this deal puts Ingalls just about at the average level.  But, Mississippi has the lowest cost of living of any state in the Union: shipyard workers in other regions might well expect to get paid more than those in Mississippi.  So does this contract create a problem for other unionized shipbuilders?  Tim Colton, March 15, 2003.

   NORTHROP GRUMMAN SHIP SYSTEMS PLANNING MAJOR EXPANSION.  Click here to read the Sun-Herald's report of Northrop Grumman's justification to Mississippi legislators of its new $288mm expansion program at Ingalls.  This new program is in addition to the $300mm expansion program that they just completed.  Note that Northrop Grumman has also publicly assured Louisiana legislators that it is committed to investing "whatever it takes" to turn Avondale into a "cutting-edge" shipyard.  (If they really mean that, it will take a whole lot more than $288mm.)  NGSS seems to be planning investments on the assumption that (a) GD is going to go out of business, (b) there are new market opportunities coming along that nobody else knows about, and (c) there are thousands of skilled workers, supervisors, planners, etc, etc, in south Mississippi just sitting at home waiting for Ingalls to call.  Perhaps they should just wake up to the fact that they could produce a whole lot more with their existing facilities if they would just operate them efficiently.  Tim Colton, January 24, 2003.

   INGALLS REDELIVERS "ALMIRANTE BRION".  Ingalls Shipbuilding has redelivered the second of two Italian-built, "Lupo"-class frigates to the Venezuelan Navy, following its major overhaul and modernization.  When they redelivered the first ship, the "Mariscal Sucre", (F 21), in May, Northrop Grumman put out a self-congratulatory press release that made no mention of the fact that, when the $315mm two-ship contract was awarded to Ingalls in December 1997, they said that the work on both frigates would take two years and at that point it had taken almost four and a half.  They also said that the second vessel, the "Almirante Brion", (F 22), which came in at the same time as the "Mariscal Sucre", in January 1998, would be finished "this summer", and here it is the end of October.  How can it take almost five years to overhaul a couple of frigates?  Tim Colton, October 26, 2002.

   STILL NO FORMAL ANNOUNCEMENT OF THE TERMS OF THE PROJECT AMERICA DEAL.  It's been over two months since the deal was done to sell the wreckage of the grandiosely named Project America to PVSA-bender Norwegian Cruise Lines (NCL) and still no announcement of any kind from the U.S. Maritime Administration.  They must think that how they dispose of the taxpayers' assets is none of the taxpayers' business.  Why doesn't Senator McCain ask for a full accounting? 

And now comes more bad news, just when we might have thought that it couldn't get any worse.  Northrop Grumman said in its August 19 press release, that NCL would take possession by September 30, but here it is October 22 already and our sources tell us that the incomplete hull will not now be ready for tow until some time in December.  Tim Colton, October 22, 2002.

(In fact, the ship was towed out of Pascagoula on November 5: see NCL's press release, with a photograph, at http://www.ncl.com/news/pr111102.htm.)

   THE NEW DESTROYER PRICES ARE SCANDALOUS.  The award of FY02-05 contracts for ten more DDGs to Bath Iron Works (6) and Ingalls Shipbuilding (4) was anticipated and the split in favor of Bath is no surprise, coming after the agreement to move four LPDs from Bath to Ingalls.  Good news for the worthy shipyard workers in Bath and Pascagoula.  What is not good news, however, is the price that we the taxpayers are having to pay for these ships. 

When DDG 102 was transferred from Ingalls to Bath recently, its contract price magically grew from $369.8 million to $464.4 million, an increase of over 25%.  Well, we all know that Bath is not as efficient as Ingalls, even after GD has pumped $400 million into its facilities, but this price was also over 40% more than Bath had agreed to for DDG 101, the preceding ship in this long-running series.  No explanation from either Bath or the Navy, naturally. 

Now we discover that even that is apparently not enough for Bath.  The contract price for Bath's six ships averages $528.5 million, almost 15% more than their price for DDG 102 and 60% more than their price for DDG 101.  How can this be? 

Ingalls appears to have the same disease, although not in quite such a virulent form.  Their contract price for four ships averages $492.4 million, over 45% more than their price for DDG 100.

Now nobody wants Bath and Ingalls to stay busy, make money and keep out of the commercial side of the industry more than me, but, come on, guys, this is ridiculous.  Prices are supposed to go down with quantity, not up.  You were doing quite well earlier in the program (see chart).  What happened? 

The Navy long ago demonstrated that it doesn't give a damn how it spends the taxpayers' money, but someone in the Congress ought to.  Explanations are required.  Tim Colton, September 14, 2002.

   AKER KVAERNER'S HEAVY HAND IN PHILLY.  The firing of Ron McAlear was not a smart move.  Yes, I did say "firing".  Although the press release contained the usual BS about "leaving to pursue other opportunities" and the big shots in Oslo said the usual polite things about what a great job he had done, the fact is that he was heaved out.  Why?  Because Kvaerner Philly isn't meeting its productivity targets.  Well that sounds to me like a situation in which they should have fired the VP Operations, not the CEO.  But hold it a moment, the VP Operations is a Norwegian.  Can't fire him.  Only Norwegians know how to build ships and run shipyards.  OK, so we'll fire the American and promote the Norwegian who was in charge of the poor productivity.  Simple, really.

The organizational structure that they had might not be the best but it was fairly logical.  By all means put Norwegians in the key operating positions if that's what you need to do, but the front man needs to be an American, one who knows the industry forwards and backwards and who is well known and respected in the industry.  They had that in Ron McAlear and now they haven't.  And next time they are looking to hire an American in a senior position, there won't be many applicants.

The prevailing view in Aker Kvaerner also seems to be that marketing, sales, industry relations, community relations, engineering, human resources, estimating, are all redundant and just a waste of money.  In fact, everything's redundant that's not directly related to hanging steel.  Having decided that the yard will only build containerships - I guess tankers are too hard, even for Norwegians - they also seem to have decided that they don't have to sell them.  The customers, apparently, will come to them by default.  The fact that there are only two customers and the 2600-TEU ship that Aker Kvaerner insists on building is not well suited to either of these customers' trades, is, apparently, irrelevant.

 As to external relations, one might think that Aker Kvaerner would be concerned to overcome some of the animosity that they have generated in the industry and in the community.  They should want to become a key player in the U.S. maritime industry, helping to influence maritime policy and working to improve the condition of the industry as a whole, to everyone's benefit.  But no, apparently, they would rather be for ever the outsider.  What a sorry way to run the Pennsylvania taxpayer's shipyard.  Tim Colton, August 27, 2002.

   A BUILD-UP OF THE INGALLS WORKFORCE WOULD BE A SERIOUS MISTAKE.  It was revealed this week by Senator Lott in the Biloxi Sun-Herald (What, you don't read the Biloxi Sun-Herald?  Well, shame on you, you don't know what you're missing!) that Northrop Grumman (NYSE:NOC) is planning to increase the size of the Ingalls Shipbuilding workforce by 2000 to 3000 over the next 2 to 4 years.  This projection is not what you would call precise, and a couple of days later an NGSS spokesman tried to convey the impression that this build-up will be spread over all three yards, which makes no sense whatever.  It is, however, a clear indication that NOC is planning to move the entire LPD 17 program to Ingalls, i.e., the five remaining Avondale ships as well as the four Bath ships.  Otherwise you can't force the numbers.  It's not the DD(X), or Deepwater, or CG overhauls, or anything else.  The number of jobs to be created by the DD(X) program has been greatly exaggerated, and nothing's going to happen out in the yard in the next four years anyway, the time it takes those guys to engineer things these days.  Nothing's going to get built for the Coast Guard's Deepwater Program any time in the next four years either.  It has to be the LPD 17 program and even this is not new work, given that the cruise ships went away and the LHD program is winding down. 

Our rough estimate of Ingalls' manpower requirements over the next four years is illustrated below.  We have had to make a lot of assumptions in developing this chart, some of which are probably wrong.  And our s-curve is probably not the same shape as Ingalls' s-curve.  But we should be reasonably close and the required build-up is certainly very clear.  In fact, the build-up looks, at first glance, to be more like 4,000 than 2,000 to 3,000, but remember that there are 1,600+ people missing from the front of this chart who had been working on Project America.  If they go back to work first, then the number of new employees required is around 2,500.

Clearly, Ingalls needs to get the LPD program in there ASAP and put their Project America people back to work.  Then they need to hire about another 2,500, right?  Wrong.  Once they get their workforce back to about the 10,000 level they need to start outsourcing any additional work, to the extent necessary to maintain the in-house workforce at that level.  There are three reasons for this strategy:

(1) Experience has shown, time and again, that a significant increase in a shipyard's workforce is followed immediately by a significant and shipyard-wide decline in productivity.  You can hire people but you can't hire experience.  Given the current critical shortage of middle management and production staff, to increase the workforce by 20% would be suicidal.  They need to stick with the present workforce and concentrate on improving its efficiency.  To give Northrop Grumman credit (for once), they have been working hard on improving their efficiency, both Ingalls and Avondale fully embracing (at last) the principles of modern, systematic shipbuilding.  But they have a long way to go.  

(2) Even without the increased costs that would result from declining productivity, recent experience indicates that there are precious few economies of scale in naval shipbuilding.  There should be but apparently there aren't.  You would think that if you were to give the big shipbuilders more work, their fixed costs would then be spread over a larger direct labor base and, as a result, their overhead rates would be reduced.  But no: they just find new ways to spend, spend, spend indirect dollars.  One of the most egregious of the Navy's many failures in recent years has been its inability to get the big shipbuilders to cut their overheads.

(3) As we have pointed out many times over many years now, subcontracting of work by the large shipbuilders to the smaller shipbuilders is a win-win-win strategy.  The big yards' costs go down, because the smaller yards are so much cheaper, so they make more profit; the smaller yards get more work, so they make more money too; and the Navy doesn't pay any more or less for its ships in the short term and in the longer term pays less.

There's a much bigger issue here than simply whether Northrop Grumman knows what it's doing or not.  Let's be absolutely clear.  A healthy shipbuilding industry is not one that consists of two giant companies with 95% of the business and hundreds of little family firms fighting to staying alive on a diet of workboats.  A healthy shipbuilding industry is one with (a) at least three large, diversified, companies (you need at least three for true competition), (b) a second tier of at least three well-capitalized mid-sized shipbuilders that are capable of building deep-draft oceangoing merchant ships and that can also build naval auxiliaries if needed, and (c) a third tier of versatile small yards, such as we have now, that can build the myriad of smaller boats, craft and barges that our economy requires.  It is in everybody's long-term interests that we take steps to move the industry in the direction of this type of structure.  In theory, this is MARAD's job, but in practice it is up to the Navy, because it's the Navy that's got the money and the power to make it happen.  Tim Colton, August 22, 2002, (chart added August 24).

   AVONDALE TO SUB OUT HULL BLOCKS.  Second-tier shipbuilders have been asked by Northrop Grumman Ship Systems Avondale Operations to bid for the supply of pre-outfitted hull blocks both for the Navy's LPD 17 program and for the Polar Tankers crude carriers.  Apparently both programs are falling further behind schedule.

Let's examine this.  First, the table below tells the LPD story.  The first of the three ships under contract at Avondale (and let's not complicate this exercise by introducing the ship subcontracted to Bath Iron Works and now scheduled to be built by Ingalls), is now expected to be delivered more than 28 months late, requiring about 43% more time than had been planned.  To be fair to Avondale, there are many reasons for this extraordinary delay and not all of them can be blamed on the shipyard.  This is reflected, in fact, in the revised schedule for the second and third ships, which are now expected to be delivered at two 8-month intervals instead of the original 20 months and 10 months: apparently, Avondale thinks that all those up-front problems have been fixed.  This acceleration, may, however, prove to be a mistake.

The table below tells the Polar Tankers story.  The first of the five ships under contract at Avondale was delivered 15 months late, requiring about 50% more time than had been planned.  In this case, the responsibility for the delay is probably largely the shipyard's.  The revised schedule according to Avondale shows them catching up to the original schedule.  The revised schedule according to Polar Tankers shows them not catching up to the original schedule.  Which is right?  Having delivered two ships already, the up-front problems on this program must have been fixed.

In a steady-state operation, building repeat LPDs at 8-month intervals is equivalent to building 1.5 complete LPDs a year.  Similarly, building Polar tankers at 8-month intervals is equivalent to building 1.5 complete Polar tankers a year.  The question is, how many people does this workload require?

Avondale's productivity appears to be deteriorating.  Its take-over, first by Litton Industries and then by Northrop Grumman, resulted in the early retirement (or departure for other reasons) of many of its most experienced personnel.  In addition, there is a general shortage of mid-level talent being experienced by all U.S. shipyards, as a result of the cataclysmic downturn in the industry in the 1980s, when we essentially lost a generation of shipbuilders.  And Avondale's long-running labor disputes may be over but it still doesn't have the happiest workforce in the business.  By my estimate, and being fairly generous as to Avondale's current productivity, the combined work content of the two programs requires a production workforce of over 7,000, substantially more than Avondale currently employs.  Result, the need for extensive subcontracting.  If they hadn't accelerated the follow ships of the LPD program, they might have been able to handle it.

It is now widely rumored in the industry that Northrop Grumman Ship Systems will shift the entire 12-ship LPD program, including both Avondale's 3 ships + 5 options and Bath's 1 ship + 3 options, to Ingalls.  This is an excellent idea.  In fact, it's such a good idea that you will not be surprised to hear that I suggested it back in September, in a position paper that can still be found on this web site: click here to read it.  In return, Avondale will get to build any large Coast Guard cutters required by the Deep Water Program, which I didn't suggest - I suggested that they should subcontract all the Deep Water cutters to Bollinger and Halter - but which is nevertheless not inconsistent with my suggestion.

Curiously enough, when the recently retired VADM Nanos challenged the industry last year to propose ways of cutting costs, one of my suggestions, which got shouted down by the so-called "Big Six", was just this.  If the big yards were to subcontract work to the second-tier yards, it would be a win-win-win situation.  The big yards' costs would go down, because the second-tier yards can produce pre-outfitted steel for at least 25% less, so they would make more profit.  The second-tier yards would get more work, so they would make more money too.  The Navy wouldn't pay any more or less for its ships in the short term but it would get the second-tier yards involved in the big yards' programs, which, in the longer term, should make the industry stronger, more competitive and less divided.  Of course, I'm the eternal optimist.   Tim Colton, July 8, 2002, modified July 18, 2002.

   LPD DEAL LOOKS LOPSIDED.  Northrop Grumman, General Dynamics and the Navy have announced the execution of an MOU under which Bath Iron Works would transfer its contract for LPD 19 and three option LPDs, to Ingalls in return for Ingalls' contract for DDG 102 and three additional unawarded DDGs.  As we said when we reported the likelihood of this deal on April 11, this is a good idea, one that ought to result both in a significant reduction in the total cost of the 12 LPDs and remove a lot of risk from BIW's medium-term outlook.  What's curious, however, is that it appears to be lopsided in favor of Ingalls.  The contract value of LPD 19 is 33% more valuable than the contract value of DDG 102 - $490mm versus $369mm - and an LPD is roughly twice the size of a DDG - about 18,000 tons versus about 9,000 tons.  Why did GD agree to a one-for-one swap?  They appear to be saying that they can make more profit on a single DDG than they could have expected to make on a single LPD, despite the LPD's greater labor content?  Probably so.  Northrop Grumman, however, says in its press release that the swap will not affect its financial projections, which appears to be saying that they expect to make the same profit on LPD construction that they make on DDG construction.  Well they must know what they are doing or they wouldn't be in charge, would they?  Tim Colton, June 18, 2002.

   AVONDALE SEALIFT SHIPS DELAYED AGAIN.  The last two of Avondale's series of seven large medium-speed ro-ro ships (T-AKRs 305 and 306) have been delayed yet again, the new deliveries being August 2002 and February 2003.  The originally contracted deliveries for these ships were October 2000 and September 2001, so T-AKR 305 will now be 22 months late and T-AKR 306 will be 17 months late.  No learning curves at Avondale, it seems.  Meanwhile, NASSCO, which got its original T-AKR contract 5 months after Avondale, delivered its seventh ship 9 months ago and will deliver an eighth ship this September.  Let's see now, that means that Avondale will have taken 113 months to build 7 ships (September 1993 through February 2003), 23 months (25%) longer than the 90 months that NASSCO took to build their 7 ships (February 1994 through August 2001).  Moreover, NASSCO will have comfortably built an eighth ship before Avondale can finish its seventh.  This has nothing whatever to do with Avondale being owned and managed first by Litton Industries and now by Northrop Grumman, of course.  Perish the thought.  Tim Colton, May 23, 2002.  Late News: The sixth ship was, in fact, delivered on July 11, but it is now understood that the last one will be delayed by at least another three months.  Tim Colton, July 13, 2002.

   INGALLS REDELIVERS "MARISCAL SUCRE", (F 21).  Ingalls Shipbuilding has redelivered the first of two Italian-built, "Lupo"-class frigates to the Venezuelan Navy, following its major overhaul and modernization.  Unsurprisingly, Northrop Grumman's self-congratulatory press release makes no mention of the fact that, when the $315mm two-ship contract was awarded to Ingalls in December 1997, they said that the work on both frigates would take two years and it seems to have taken almost four and a half.  How can it take four and a half years to overhaul a frigate?  And the second vessel, the "Almirante Brion", (F 22), which came in at the same time as the "Mariscal Sucre", in January 1998, will not be finished until "this summer", whenever that is.  (It's pretty much summer all the time in Pascagoula.)  Tim Colton, May 16, 2002, amended May 23, 2002.

   INGALLS GETS ANOTHER MONSTER CONTRACT.  Ingalls Shipbuilding has been awarded a cost-plus-award-fee contract for DD(X) design agent activities, including the design, build and test of engineering development models for major systems and components.  The value of this contract is given as $2,879,347,000.  This apparently might include some kind of demonstrator, but no actual functioning warship: they are planning to take an old DD and convert it as a prototype, but that will be a separate procurement.  Only about 38% of the contract value (a mere $1.1 billion) goes to the shipbuilders (including losing bidder but locked-in second-source Bath Iron Works), the rest going to Raytheon and a legion of assistant system integrators, vendors, consultants and other hangers-on.

Well, this beats everything.  $2.9 billion to design a destroyer: they've got to be kidding.  Compared to this, the LHD 8 contract (see below) is a bargain.  Now I know for sure that the Navy's leaders have lost their minds: I had only suspected it before.  The only good thing about this contract is that it's RDT&E, not SC,N, money.  But it's still the U.S. taxpayer's money and the Navy should be thoroughly ashamed of itself.  I predict, however, that this project will go the way of the Arsenal Ship and DD-21 and will be cancelled.  Tim Colton, April 29, 2002.

   INGALLS GETS A MONSTER CONTRACT.  Ingalls Shipbuilding has received an amendment to its FY00 contract for design and construction of LHD 8 (that's the ship that the Navy never requested).  The price tag on the amendment is $1.37 billion.  Yes, $1.37 billion.  If this is an amendment, this huge sum should be in addition to the $360 million already funded on this contract but, fortunately for the taxpayer, the Northrop Grumman press release says that this amazing figure of $1.37 billion includes the prior funding.  Either way, it's far too much.  And since delivery is not until July 2007, it's bound to go up quite a bit more, because that's how naval shipbuilding works: the longer you take, the more you spend and the more you spend, the more you get paid.  Somebody please tell me that this is not true.  There's got to have been a mistake somewhere.  LHD 7, which was commissioned less than a year ago, only cost $795 million (only?): even LHD 1, with all its developmental costs, only cost $880 million.  Now I know that LHD 8 has a gas-turbine propulsion system and all-electric auxiliaries that are going to save $10 million a year in operating costs compared to the steam-powered LHDs, but that couldn't account for it costing $100 million more than LHD 7, let alone $575 million more.

Hey, Admiral Nanos, what ever happened to "more bang for the buck"?  You could buy four DDGs or three LPDs with this money.  A year ago, you were challenging the shipbuilding industry to cut its costs by 10%.  The industry and the Navy's friends in Congress are up in arms at the inadequacy of an SC,N budget that only buys 5 or 6 ships a year, but if you keep ordering ships that are as expensive as this one, you'll be down to 3 or 4 ships a year.  Come on, let's hear it: how exactly do you justify paying 70% more for LHD 8 than you paid for LHD 7?

I say, cancel this contract now and spend the money on more DDGs.  Tim Colton, April 19, 2002.

   GENERAL DYNAMICS OUTSHINES NORTHROP GRUMMAN.  Here are the comparative figures from the two companies' first quarter reports, both of which were released yesterday.  The numbers really speak for themselves but that won't stop me from commenting on them anyway.  First, in both cases, the shipbuilding operations are less profitable than the companies' other business activities.  Second, by anybody's standards, the shipbuilding profit margins are unsatisfactory (although they are much better than those of any large foreign shipbuilder).  Third, GD is significantly more profitable than NOC.  Having pointed out these simple facts, it's remarkable that the spin in the press has been that NOC's results are good and GD's aren't, possibly because journalists, being liberal arts types, just look at gross numbers and, gee, NOC's sales and profits have both doubled, while GD's have only gone up a little bit.  Fortunately, the market knows better: NOC's stock, which had been rising on Tuesday, fell $2 yesterday after the company reported, while GD's stock, which had been falling on Tuesday, rose $2 yesterday after the company reported, on very heavy trading.  Whooba!  I know which company I prefer.  Tim Colton, April 18, 2002.

   LPD DEAL IN THE WORKS.  Northrop Grumman, General Dynamics and the Navy are reported to be negotiating a deal under which Bath Iron Works would give up its subcontract from Avondale for 4 of the 12 "San Antonio" class LPDs, in return for some more "Arleigh Burke" class DDGs.  This is a good idea, one that ought to result in a significant reduction in the total cost of the 12 LPDs and remove a lot of risk from BIW's medium-term outlook.  It would require congressional approval, of course, but that shouldn't be a problem.  How many DDGs should they get in exchange for the four LPDs?  Six?  Seven maybe?  Eight even?  Tim Colton, April 11, 2002.

   GENERAL DYNAMICS CONSISTENTLY OUTPERFORMS LARGER COMPETITORS.  There is an excellent article in the Wall Street Journal today (March 13, 2002) about General Dynamics.  You should be able to find it with this link:  http://online.wsj.com/article/0,4286,SB1015972986864104200,00.html?mod=COMPANY    It's so good that it requires no further comment from me (for once).    Tim Colton, March 13, 2002.

   NORTHROP GRUMMAN SHIP SYSTEMS REPORTS AN OPERATING PROFIT OF ONLY 1% IN 2001. Northrop Grumman Corporation (NYSE:NOC) made a net profit of $427 million on total sales of $13.6 billion in 2001 (3.1%).  Operating profit was $1,006 million (7.4%).  NOC's Ship Systems Division, which is made up of Newport News, Ingalls and Avondale, achieved an operating profit of only $19 million on total sales of $1.9 billion (just 1.0%).  Pretty uninspiring.  More analysis here in March, after we see the full 10-K.  Tim Colton, January 30, 2002.

   INGALLS AND AVONDALE TO MERGE.  Northrop Grumman has announced that it is going to "align" its shipbuilding operations at Ingalls and Avondale.  This novel use of the verb appears to be a euphemism for "merge" or "consolidate".  Under this so-called "alignment", all bidding, contracting, program management, engineering, procurement and operations management will be centrally managed by Northrop Grumman Ship Systems.  If this isn't a merger, what is?  There is logic to this decision, but only if Northrop Grumman has decided to abandon all pretense of being a commercial shipbuilder, because this move absolutely guarantees that Avondale will never again be able to bid competitively for a commercial contract.  (Of course, we know that Ingalls achieved that dubious distinction many years ago.)  This is great news for the competition, especially with all the Jones Act shipbuilding opportunities coming down the track.

The Northrop Grumman press release is just packed with muddled thinking.  It describes the two shipyards as "complimentary": even if it means "complementary", they aren't going to be complementary any more.  They might have been complementary, if Northrop Grumman had followed a strategy of making Ingalls the premier naval shipbuilder, which it could be, and Avondale the premier commercial shipbuilder, which it might once have been.  The press release also describes the company's immediate imperatives as being to "outperform customer expectations on the LPD 17 amphibious assault ship, in terms of cost, schedule and quality" and to "win a leading role in the development of the Navy's future generations of surface combatants ....".  Ambitious goals, I don't think.  Considering that the LPD 17 program is at least 30% over budget and more than two years behind schedule - the Congress has had to appropriate over $4 billion (so far) for only four ships - the customer might be forgiven for having abandoned its original expectations and being more interested now in just getting some ships built.  And they already have a leading role in the development of the Navy's surface combatants - they have had for decades.

Isn't it depressing to watch the continued destruction of the U.S. shipbuilding industry?  Tim Colton, January 15, 2002.

   INGALLS GETS A CURIOUS CONTRACT.  The Navy awarded one of the three FY-02 DDGs (DDG 102) to Ingalls Shipbuilding at the end of the day on Friday, December 21, but made no award to Bath Iron Works, although it has the money for two more ships for Bath.  Maybe next week.  Notable about the Ingalls contract is the price, which, at $370 million, is 9% higher than their price for the immediately preceding ship in the series.  Only in gray shipbuilding do we see reverse learning.  The contract delivery of September 2007 is also odd, because it's 21 months after the preceding ship in the series and Ingalls has previously been scheduling deliveries of DDGs at 5-month intervals.  Smells to me like Ingalls is planning, with the Navy's concurrence, to stick something else into production before this DDG.  That would at least partially explain the higher price, too.  What can it be?  An LPD or two perhaps?  Tim Colton, December 22, 2001.

   MORE LPD 17 PROBLEMS.  Scheduled deliveries of the first four ships of the LPD 17 class from Avondale and Bath have been moved to the right by 14 months, with delivery of the lead ship now planned for November 30, 2004.  When the contract was originally awarded, in December 1996, the delivery date for the first ship was July 15, 2002, 67 months after contract award.  So now the first ship will be delivered 28.5 months later than was originally planned, and that's assuming that this new date holds up.  Another fine mess.  Tim Colton, December 22, 2001.

   DOD CANCELS THE DD-21 PROGRAM.  So the Department of Defense has decided that the Navy's much anticipated new generation of surface combatants is not what we need after all.  Well, duh.  Not only was it never what we needed, it was also ludicrously over-complicated and expensive.  The Navy keeps saying that it wants cheaper ships but it also keeps specifying progressively more complex and expensive ships - Norm Augustine's Law XVI at work.  Now the two design teams have been told to take a clean sheet of paper and design a wholly new family of ships, currently called DD(X), which will be producible in different variations for different missions.  Versatile and inexpensive.  OK, a good decision, but who's going to ensure that the design teams don't get carried away again and load this baby up with high-priced technology too?   Tim Colton, November 27, 2001.

   DoD BLESSES NORTHROP GRUMMAN'S ACQUISITION OF NEWPORT NEWS, WHILE DoJ BLOCKS GD's EFFORT AS ANTI-COMPETITIVE.  Well of course.  This is what I've been saying all along.  Obviously, the sensible folks in OSD read this web site.  Go to the Positions page of this web site to read my analysis.   Tim Colton, October 24, 2001.

   WILL $19 MILLION BE ENOUGH?  Ingalls Shipbuilding, American Classic Voyages and the Maritime Administration have agreed on a contract price increase of $19 million per ship and an extension of both ships' delivery dates of one year.  In addition, Ingalls and AMCV are jointly putting in an additional $43 million per ship in equity.  Since this is equity that wasn't deemed to be necessary at the outset, we can assume that it reflects additional construction costs.  So the admitted over-run is at least $62 million per ship.  But is that all?  How much more is Ingalls being forced to suck up?  It can be presumed that Ingalls thought it had some profit in its original contract price, if not a lot, and that it has none now.  If it's given up $20 million per ship (say) in anticipated profit, the apparent cost overrun is over $80 million per ship.  And is that really all?  We probably won't read all about it in Northrop Grumman's SEC filings, because it will be buried in the purchase price for NOC's acquisition of LIT, but don't  be surprised if there are at least two more contract renegotiations between now and February 2005.  And don't expect AMCV to exercise any of its options.  And don't expect Ingalls to build any more cruise ships.   Tim Colton, September 21, 2001.

   GD BUYING NNS WILL SAVE BILLIONS?  Go on, pull the other one.  According to a report in the Wall Street Journal, the Navy favors General Dynamics' bid to buy Newport News Shipbuilding because it reckons that the merger will result in savings of between $3 billion and $4 billion over the next 10 years and that this outweighs any concern over the almost complete elimination of competition for naval shipbuilding contracts.  Delusion is still rampant at the Navy Department, I see.  Will they never learn?  Newpy News had over $2,072 million in revenues last year, 98% of it from the Navy: $959 million (45%) was from ship construction and $1,113 million (55%) from fleet maintenance, engineering services, etc.  EBITDA was a healthy $261 million.  Their core markets are not going to grow in the next 10 years and may, in fact, decline, especially if this Administration kills the CVN(X).  Where does the Navy think that savings of $300 to $400 million a year are going to come from?  Wages are going to go down?  Get out of here!  Productivity is going to improve?  Yeah, right!  Production overhead can be cut?  Well certainly, but what's this got to do with GD taking over?  Material is going to cost less?  Why would it?  So any savings have got to be in the G&A.  Newport News' G&A last year was $271 million (13% of sales): that's ludicrously high, but even if you were to halve it, you would only save $135 million.  There must be something in the water at the Pentagon.  Tim Colton, August 30, 2001.

Will U.S. Shipbuilders Ever Cut Their Costs and Construction Times?  Here's One Approach to Stimulating Some Improvement

It is generally agreed that the so-called “Big Six” shipbuilders have little or no real incentive to cut costs on Government contracts.  This belief is reinforced by the responses of these shipbuilders to the Navy’s repeated challenges to them to help find ways to stretch the SCN budget – “to get more bang for the buck”: the shipbuilders’ suggestions are, without exception, measures that they think that the Navy should take, without a single suggestion for anything that they themselves might do. 

A large part of this problem lies in the forms of contract employed by the Navy for shipbuilding programs, which provide no real incentive to the shipbuilder to improve his performance.  Cost-plus contracts are incentives to spend more money, not less.  Fixed-price-incentive (FPIF) contracts are intended to encourage cost reduction, but the Navy takes back such a large share of any saving that they are greatly diminished in value.  This take-back is, of course, justified by the requirement that the Navy must also share in any over-run, but this commitment is itself a disincentive to the shipbuilder to attempt to cut costs.  In addition, the Navy provides no contractual incentive for schedule reduction or penalty for schedule over-run.  In the commercial world, in contrast, shipbuilding contracts are all firm-fixed-price: if a shipbuilder saves money, he keeps it.  In addition, commercial shipbuilding contracts provide significant rewards for early delivery and significant penalties for late delivery.

It is also generally agreed that U.S. shipbuilders are uncompetitive in the international commercial shipbuilding market, with costs that are at least 35% higher than those of European shipbuilders and construction times that are at least 50% longer.  (The differentials with Far East shipbuilders are very much worse, but an objective of becoming competitive with European shipbuilders may be achievable, while one of becoming competitive with Far East shipbuilders would lack credibility.)

A large part of this problem lies in the inability of the large U.S. shipbuilders (with the exception of NASSCO) to implement modern shipbuilding processes.  They are not, apparently, either unable or unwilling to invest in their facilities, as the smaller yards are, but they do seem to be incapable of operating them efficiently, despite over 20 years of studying world-class shipbuilding methods in the National Shipbuilding Research Program.

Here's A New Approach:

The basic concept behind the proposal presented here is that a shipbuilder must commit to a long-term improvement plan, or LTIP, of cost and schedule reduction before it can receive either a Government contract or any form of Government assistance.  Compliance with this LTIP would then be rewarded, while non-compliance would result in penalties or withdrawal of either contracts or assistance.

A typical LTIP would commit the shipbuilder to a detailed program of investment in both facilities and equipment (hardware) and systems and procedures (software).  Associated with the investment program would be a business plan that reflected a progressive improvement in operating efficiency, to be measured against an established baseline, and reflecting significant reductions in all three cost sectors - labor, material and overhead.

This LTIP would need to be accepted by the Navy (or Coast Guard) before the shipbuilder could bid for any ship construction program, and by MARAD before the shipbuilder could execute any commercial contract that utilized Title XI financing.

In the case of naval shipbuilding, the Navy would then use firm-fixed-price contracts exclusively: all option prices and deliveries would need to be consistent with the LTIP.  Similarly, MARAD would require all commercial shipbuilding contracts associated with Title XI applications to contain prices and deliveries that were consistent with the shipbuilder’s LTIP.

In return for these commitments, the Government would provide low-cost financing for the proposed capital investments.  In the case of naval shipbuilding, this could be built into the terms of shipbuilding contracts, but it would be better if it were independent of specific contracts, because the shipbuilders should be made to feel that they should make these improvements regardless of their future work prospects.  The best vehicle for financing the improvements is, therefore, the Title XI program. 

The best incentive for the shipbuilders to improve their performance will lie not with the availability of Title XI, which is, after all, available now, but with the prospect of the increased profitability that would result from lower costs.  An essential ingredient of this approach would need to be restraint on the part of the Government in not driving down shipbuilders’ prices to the point that their projected savings disappear, because this would obviously kill any desire to improve.  For this reason, a second type of incentive is needed that would reward those shipbuilders that meet the objectives of their LTIP and penalize those that do not.  One way of doing this would be to tie the level of profit that can be earned on a Government contract to the shipbuilder’s performance on his LTIP, but this would only work for naval shipbuilding.  An alternative approach would be to include a cost-sharing clause in the agreement for Title XI financing of the improvements.  As the shipbuilder exceeds his LTIP objectives by predetermined increments, the Government could pick up an incrementally larger part of the financing cost.  This technique would not, however, work in reverse, as a disincentive for not meeting the LTIP objectives.

The approach to providing incentives to shipbuilders to improve their performance outlined above is conceptual: it obviously needs to be discussed and fleshed out.  Send me your comments and suggestions.

Are the "Big Six" Shipyards Now Fully Loaded with Work?  What Does This Mean for the "Midsize Three"?

The Navy's award on October 19 of the T-AKE contract to NASSCO fills the only big gap in the workload of the "Big Six" shipbuilders for the next five years.  Let's look at their workloads, yard by yard, in the context of the capabilities and capacity of the individual facilities.  In the discussion that follows, I have assumed that all current contract options will be exercised.  I have also made some assumptions as to which ships will be built on which building positions: these assumptions may not be correct but they won't be far off, being based on the individual shipbuilders' established practices.  Remember that a shipyard's capabilities and capacity are defined by its erection berths and launching ways, not by its fabrication shops or outfitting capabilities.  It will be seen that the capacity for building Jones Act product carriers, containerships and shuttle tankers is in the "Midsize Three" shipyards rather than in the "Big Six".

Click on schedule to see a graphic depiction of the workload described below.  (Please note that this is a fairly large file and may take some time to load.)

Avondale Industries: 

Avondale has two major ship construction programs in hand:

• a contract with the Navy for up to 12 "San Antonio" (LPD 17) class amphibious assault ships, of which 4 will be subcontracted to Bath Iron Works, and

• a contract with Polar Tankers (ARCO's tanker operating company)  for up to 7 large double-hulled crude oil carriers. 

Avondale has two pairs of building berths, one pair in the Upper Yard and the other in the Lower Yard: both pairs of berths lie parallel to each other and parallel to the river.  In both cases, ship erection starts on the inland position: the incomplete ship is transferred to the outer position when the preceding ship is launched.  In the Upper Yard, Avondale builds large ships and launches them by transferring them laterally on to a large floating dry-dock: ARCO's tankers are being built here.  In the Lower Yard, Avondale builds midsize ships and launches them sideways from sliding ways: the Navy's LPDs are being built here.  Avondale has capacity available in the Upper Yard: they should be able to build the ARCO tankers at a faster rate than the one-a-year rate required by the delivery schedule.  In theory, they could probably fit something simple in between each ARCO tanker if they wanted to.  In practice, this would be somewhat disruptive to the tanker construction program and they will probably not want to do this, especially as they seem to have their hands full managing both this program and the LPD 17 program at the same time.

Bath Iron Works: 

Bath has two major ship construction programs in hand:

• a contract with the Navy for "Arleigh Burke" (DDG 51) class guided-missile destroyers, of which 9 remain to be launched, and

• a contract with Avondale for 4 "San Antonio" (LPD 17) class amphibious assault ships. 

Unless the program is canceled, Bath will also get half of the upcoming "Zumwalt" (DD 21) class fire-support destroyer program.  Bath's new land-level shipbuilding facility has three building positions, each long enough to allow "tandem" shipbuilding.  (In tandem shipbuilding, erection of the hull of the next ship is started on the inland end of the berth while the preceding ship is still there.)  Ships are launched by longitudinal transfer onto a floating dry-dock.  Bath should be able to handle this workload on only two of their three building positions, so they have substantial available capacity.

Electric Boat: 

Electric Boat has two major ship construction programs in hand:

• a contract with the Navy for the last of 3 "Seawolf" (SSN 21) class attack submarines and

• a contract with the Navy (in joint venture with Newport News) for the first 4 "Virginia" (SSN 774) class attack submarines. 

EB's land-level shipbuilding facility is designed to produce three or four boats a year, with launches by longitudinal transfer onto a floating dry-dock.  It cannot be used efficiently for anything but submarine construction, however, and the Navy would certainly throw a fit if EB were to propose to build anything other than U.S. Navy submarines.  EB has a significant amount of excess capacity, therefore, but no market for it.

Ingalls Shipbuilding: 

Ingalls has three major ship construction programs in hand:

• a contract with the Navy for "Arleigh Burke" (DDG 51) class guided-missile destroyers, of which 9 remain to be launched,

• a contract with the Navy for "Wasp" (LHD 1) class amphibious assault ships, of which 1 remains to be launched, and

• a contract with American Classic Voyages for 2 large cruise ships. 

As with Bath, Ingalls will also get half of the upcoming "Zumwalt" (DD 21) class fire-support destroyer program, assuming that the program is not canceled.  Ingalls' land-level shipbuilding facility has three lanes, each with multiple building berths: ships are moved from position to position as they get progressively closer to being ready for launching, which is by lateral transfer onto a floating dry-dock.  Like Bath, Ingalls' should be able to accommodate its entire workload on two of its three building lanes, especially given their recent facility improvements, so they have substantial available capacity.

Amendment, November 22: If the AMCV cruise ship program is dead, Ingalls could easily accommodate the LPD 17 program in Pascagoula, relieving Avondale of a huge headache and freeing it up to build shuttle tankers or other commercial vessel types.

NASSCO: 

NASSCO now has four major ship construction programs in hand:

• a contract with the Navy for 8 "Watson" (T-AKR 310) class large medium-speed sealift ships, of which 1 remains to be launched,

• a contract with the Navy for up to 12 "Lewis and Clark" (T-AKE 1) class combat support ships,

• a contract with Totem Ocean Transport Express (TOTE) for 2 large trailerships, and

• a contract with Alaskan Tankers (BP's tanker operating company) for up to 6 very large double-hulled crude oil carriers. 

NASSCO has three building berths, two end-launch ways on which they build ships of up to Panamax beam and a graving dock in which they build large ships.  The T-AKEs will be built on the end-launch ways and the BP tankers will follow the TOTE trailerships in the graving dock.  NASSCO has capacity available on its end-launch ways for about the next 18 months, but after that, they are going to be busy for years and years.

Amendment, November 12: It has been suggested that NASSCO might add a third end-launch way.  This is not impossible but would be very expensive, not only because of its intrinsic cost but also because of the disruption to ongoing operations.  NASSCO's facility is already very crowded.  A much more practical approach would be to develop an off-site block fabrication facility and concentrate on speeding up the erection process on the existing building berths.  

Amendment, December 8: Apparently NASSCO has, in fact, done what I suggested above.  The use of Bath Iron Works as a subcontractor and a significant speeding up of the erection process allows all T-AKE construction to be concentrated on a single end-launch way, leaving the other end-launch way available for commercial work, such as Matson's containerships.

Newport News Shipbuilding: 

Newport News has two major ship construction programs in hand:

• a contract with the Navy for 2 "Nimitz" (CVN 68) class aircraft carriers, of which 1 remains to be launched, and

• a contract with the Navy (in joint venture with Electric Boat) for the first 4 "Virginia" (SSN 774) class attack submarines. 

Newport News builds surface ships in a single very large graving dock and submarines on a land-level facility with launches by longitudinal transfer onto a floating dry-dock: they also have extensive idle dock and way space that have not been used for many years.  The graving dock has no new construction scheduled until the keel is laid for CVN 77 in May 2003.  The land-level facility is building only portions of submarines and is seriously under-utilized.  Like Electric Boat, therefore, Newport News has substantial excess capacity but can find no markets for it.

Alabama Shipyard: 

Alabama has two ship construction programs in hand:

• a series of large tank barges, for several different customers, and

• a series of offshore service vessels for Hornbeck Offshore Services.

More significantly, Alabama is working on a deal with Conoco Shipping for the construction of a major series of large shuttle tankers.  Alabama builds ships on two land-level building positions, launching them by longitudinal transfer on to a floating dry-dock.  The facility is designed to be able to produce 2 or 3 ships a year, depending on the type and size.  Alabama clearly has substantial excess capacity.

Halter Pascagoula: 

Halter only has one large-ship construction program in hand:

• a contract with Pasha Hawaii Transport Lines for two car carriers. 

Halter currently builds ships on a single land-level building position, launching them by longitudinal transfer on to a floating dry-dock.  The facility is designed to be expanded to two building positions, each long enough to allow tandem construction.  At present, the yard can only produce 1 Panamax ship a year, but once the planned facility is completed, its capacity should be 4 ships a year.  Halter has no excess capacity at present, but has significant potential.

Kvaerner Philadelphia: 

Kvaerner only has one ship construction program in hand:

• a contract with a sister company, Kvaerner Finance, for a containership. 

Kvaerner builds ships in a single large graving dock, which is long enough to allow the use of the tandem approach.  The facility is designed to be able to produce 3 or 4 Panamax ships a year, depending on the type.  Kvaerner clearly has substantial excess capacity.

An Open Letter to Phil Dur, the New President of Northrop Grumman Ship Systems

Dear Phil:

Congratulations on your appointment to the single most difficult job in the U.S. shipbuilding industry.

Being President of Northrop Grumman Ship Systems may seem to some to be a plum assignment.  After all, if one reads Litton Industries' SEC filings, one can see that the shipbuilding biz earns pretty good returns, at least by the low standards of the industry.  And I doubt that you are being underpaid.

There are, however, one or two little storm clouds over your empire.  If you haven't yet noticed them yourself, don't hold your breath waiting for someone in either Pascagoula or New Orleans to point them out to you.

That, in fact is the first problem, or set of problems:

(1) Whatever your guys found in the course of their due diligence last year, they didn't find half of it;

(2) Whatever the shipyard guys have told you about their problems, it's worse than that; and

(3) Whatever they have told you the over-run on the cruise ships is going to be, it's going to be more than that.  In fact, I'll bet you dinner at Matthew's Downtown that the final cost for the two ships ends up being at least 50% more than the current EAC, whatever that is.  (Since I wrote this, AMCV has folded and the project is now dead, which creates a wholly new set of problems.)

Now I'm not accusing anyone of deliberately concealing the bad news.  It's just that this is how it always is in U.S. shipyards.  The number of shipyards that can do accurate EACs is negligibly small.  And the emotional involvement of shipyard managers in their work is so intense that they can never bring themselves to believe that things could ever actually be worse than they already are.

Now here are some more painful truths about your two shipyards:

(1) Ingalls builds great ships for the Navy but has not had a successful commercial project in the past 30 years.  Not one.  But don't ask management if this is true or not.  Ask the financial people. 

First, look at the cruise ships: a disaster from the outset.  Ludicrously under-priced.  A disaster predicted from day 1 by many industry observers, i.e., not just me.  This fiasco alone could result in the elimination of the Title XI program and, as a result, the closing of shipyards and shipping companies all over the country.  Thanks a lot, Ingalls management. 

Second, SeaRex.  Good grief, guys, if Alabama couldn't build them for the budget, why on earth would you think that Ingalls could?  And whatever possessed Ingalls management to chop up, as if for scrap, assets that were not theirs to dispose of?

Third, Chouest.  Same argument here.  What on earth made Ingalls management think it could build OSVs cheaper than the little guys who specialize in them?

Fourth, fifth and so on, a whole bunch of inland barges, drill rig projects, L-780 jack-ups and other nightmares that Ingalls management thought would be easy-peasy at the time and has now conveniently forgotten about.

(2) In diametric contrast to Ingalls, Avondale is actually a commercial shipbuilder pretending to be a naval shipbuilder.  Let's face it, the LPD 17 program is not a continuation of the LSD 44 program.  And T-AOs and T-AKRs are not combatants.

The problems of the LPD 17 program were also predictable.  Ingalls was right to protest its award to Avondale: that was a dumb decision by the Navy.  And one result is that Avondale has become so mired in the high-overhead naval shipbuilding culture that they now seem to have forgotten how to build commercial ships.

Take a look at NASSCO.  Even when there was no commercial work to be had, NASSCO never allowed itself to get too far away from its commercial roots, with the result that they are now significantly better than Avondale by every criterion of evaluation - cost, cycle time, quality, customer satisfaction, you name it.

So, Mr. Dur, what can we do about all this?

Well one thing we don't need to do is send a bunch of Ingalls managers over to New Orleans to straighten the Avondale folks out.  That's how to make things worse, not better.  And this idea of operating both facilities as if they were one, as some kind of semi-virtual shipbuilding enterprise, is for the birds: you'll just end up with two shipyards that don't do anything well.

One good move would be to make the current management commit their individual careers with the company to the sanctity of all the current project EACs.  They have saddled Northrop Grumman with these losers, make them at least guarantee that they don't get any worse.

Let's think strategically for a moment.  I assume that you do that kind of thing at NOC.  You may have noticed already that shipbuilders don't know how. 

Fact #1: The defense budget is declining.  DD21 might even be cancelled.  So you need an efficient naval shipbuilder that can wipe the floor with the other naval shipbuilders, right?  Well, you've got that: its name is Ingalls.  (Since I wrote this, DD21 has been cancelled, or at least it has been delayed by at least three years and its mission has been changed beyond all recognition.)

Fact #2: The Jones Act is not only still with us but, thanks to ARCO, BP and (especially) TOTE, it's more secure than it's been for decades.  And it's not only still with us, it's positively bursting at the seams with a whole lot more demand than there is supply.  So you need an efficient commercial shipbuilder that can get back on equal terms with NASSCO and share the Jones Act pie with NASSCO  and Kvaerner and maybe Alabama and Halter, right?  Well, you haven't got that today but Avondale has been there before and could be there again, given competent management.

So here are four suggestions:

(1) Shift the LPD 17 program to Ingalls and the cruise ship program to Avondale.  A big decision, but worth it.  (If the cruise ship program is in fact dead, just let Avondale loose to chase the Jones Act shuttle tanker business.)

(2) Tell Ingalls management that anyone who even suggests the possibility of ever again taking on a commercial project will be fired on the spot.

(3) Get all the naval shipbuilders out of Avondale, hire some real commercial shipbuilders - foreigners even - prohibit them from ever again bidding on Navy projects, and task them with getting the production overhead under 100% and the SG&A under 6% within a year.

(4) I don't know enough about the Full Service Center to know whether it's the right vehicle for business development, but there are a number of ways to make money in the maritime industry besides building ships.  Newport News and GD have both discovered that.  Hire someone with imagination and a commercial background to go out there and bring back some opportunities for diversification.

Who knows, follow my advice and you could have this monster turned around in a couple of years.

Good luck.

Why Northrop Grumman's Offer for Newport News Makes More Sense than GD's

Afterword, October 23, 2001: DoD and DoJ agree.  Today DoD blessed NOC's attempt to acquire NNS and DoJ went to court to block GD's attempt to acquire NNS.  Sensible decision.

There are really two questions here.  The first is: Which offer is worth more to the NNS stockholders?  But that question's entirely up to them and they seem to be favoring GD by a lopsided margin.  Normally, that would be the only question, but we're talking about major defense contractors here.  So, the second question is: Which solution best meets the national interest - sale to GD, sale to NOC or sale to neither?

This is not hard.

There are six large naval shipbuilders.  Each has its strengths and don’t let’s spoil the day by even mentioning the possibility that each might also have a weakness or two.

GD owns three of them – Electric Boat, Bath Iron Works and NASSCO – while NOC owns two – Ingalls and Avondale – and Newport News is, as of today, on its own.

If I were DoD or DoJ or SEC or whoever, I couldn’t make a decision on this issue without making an assumption about the outcome of the $3 billion T-AKE program, which is not due to be decided until September.  Personally, I would have to assume that GD will win it.  NASSCO has proved itself in recent years to be a much better shipbuilder than Avondale and the third player in this competition, Halter, has effectively now disqualified itself.  NASSCO has Bath as its subcontractor, which pushes up GD's pricing, because Bath is so much more expensive than NASSCO, but ship price is only one part of the evaluation formula and the NASSCO/Bath combination should still be cheaper than the Avondale/Ingalls team.  In fact, watch for NASSCO to reduce Bath's participation after contract award, just as Avondale will do once the LPD program finally gets under way.

This being the case, the six gray shipbuilders, aided and abetted by the Navy, will have managed to divide up the Navy market for the next ten years like this:

Note that, in this scenario, GD will be a contractor for 5 out of the 7 major programs, missing out only on the CVN program and the almost-over LHD program, while NOC will be a contractor for only 4 of the 7, one of which is the LHD program.

Obviously, duh, if GD is permitted to buy Newport News, GD's 5 out of 7 will become 6 out of 7: it will become virtually a sole source for the Navy’s large ships, building every type and size of large naval vessel.  If, on the other hand, NOC gets Newport News, we still won’t have much competition, but at least we will have reasonable balance and the possibility of some future pretense at competition.  There's an argument here for not letting either of them buy NNS: it might have been a contender a few years ago, but not any more, not in the current political climate.  And NNS is better off putting itself under the protective aegis of one of the big defense contractors before rather than after the whole defense structure gets realigned by Secretary Rumsfeld and company.

Both these defense behemoths want Newport News’ CVN and SSN business, of course, but we must not forget that Newport News does other things these days besides build amazingly expensive ships.  Bill Fricks and crew have done a great job of diversifying Newport News in the last few years and thoroughly deserve whatever they get out of the upcoming deal.

Next question.  If you were (a) NOC, (b) GD, how would your corporate strategy change if DoD were to cancel (a) CVNX and/or (b) DD21?

Next question after that.  Who is going to build the Streetfighter?