Both HII and GD were stocks I regularly would work with when I was trading for a MegaBank's advisory arm. Neither really stood out in my work.
Of course, HII is primarily shipbuilding and repair, while GD has diversification as a general defense contractor. There's a lot more systematic risk with HII, but both run the issues of being mostly defense contractors in an era of uncertain budgets. Can HII's focus give it the competitive edge over GD?
There is a need for more shipbuilding, but so much got sold off, it's not even funny anymore. Also, loss of suitable land for luxury developments has become a problem.
I’m intrigued by manufacturing capacity. I once saw a map depicting where Fletcher Class Destroyers were built in a time of urgent need. From Seattle-Tacoma to California and from the Gulf Coast to Maine, many shipyards responded to the call to build more ships. Today, we have far less capacity to build. How would we ever increase the number of ships produced in a year? I don’t believe that we have that capacity. I hope that I am wrong.
This is where unmanned unlocks some doors. What might be only a manned patrol boat could literally do the picket futy if a WwIi dedtroyer if unmanned. Not a perfect scenario, but plays to what strengths we have. Small yard capacity using smaller marine diesels.
This makes a bit of a case for the non-publicly traded yards like Bollinger. Given they have snagging a bigger share if the oie lately, it might play out that way.
CDR Salamander - you missed a major component of our shipbuilding malaise. It is easy to fall into the trap to blame the shipbuilding industry and their false blame game (lack of workers, etc.). But the reality is much more graphic. The PEO and NAVSEA rice bowl holders who are protecting their turf and resisting creative solutions. They keep pounding on the four government Navy shipyards to improve (they can only 'improve' so much - their abilities are inelastic). The reality is that our wonderful civilian executive SES cadre and rotating for promotion senior officers prevent solutions they can't control personally. For example, a company run by a retired submariner, Bartlet Marine, has been unsuccessfully trying to get a contract to establish a two drydock overhaul facility to relieve the pressure to overhaul fast attacks that currently compete with new construction within the main companies. Despite the fact that they had obtained a state agreement to fund the first two years of development (so free to the Navy), that they had retired four star experts on their board and a ton of engineering experrtise available. Location, arrangements, all provided in detail. But no joy. Why? Rice bowl owners resisted. Period. The deep state is alive and well. r/Karl
Once upon a time, stock buybacks were illegal. They were insider trading. Then they became legal. This error can be fixed. Requiring executive pay be based on corporate income and profits, not share prices, might help.
A new approach to building ships is needed. Perhaps we could import advanced South Korean technology. At the top end, there is a university field known as Naval Architecture. You can look up how many universities offer it, other than MIT.
Robotics for building large objects -- ships being about as big as you can get for a machine -- might be interesting. Perhaps Tesla could add a naval branch.
The stock thing is really ugly. Back in the 70s and 80s when all the leftists were screaming about obscene CEO compensation rather than global warming the corporations shifted from a salary with cash bonuses for performance to stock and stock options.
At that point it became important to manipulate the stock price to increase its value despite the actual value in the company. Option low, sell high, makes a ton of money. Stock should not be an executive or director compensation. That corrupts the values of those people.
It's all about incentives. The big shipbuilding companies don't have a financial incentive to act differently. They get most or all of the money from the government. They don't really compete with each other, except in a few areas. It's like the space launch industry 15 years ago. The two big companies had even stopped pretending to compete and had created a new company (ULA) to do all the launches. Then this new upstart SpaceX comes in and shakes it all up. The reason that worked is that SpaceX doesn't rely on government contracts to survive. They get those contracts, but most of their launches are for other customers or for their own Starlink product. They have the financial incentive to invest in and improve their product. That's what is missing for the shipbuilding - market opportunity. The shipbuilding industry is so heavily regulated that there's no opportunity for a new competitor to arise. HII and GD are just fine with that. It's extremely likely that they have captured the regulators in order to keep it that way. If we want change, we can't just throw money at the existing establishment. That leads to boondoggles like SLS. The government needs to get out of the way and let the market bring in new competition.
The government celebrated the end of the Cold War by effectively turning the defense industry into a non-competitive command economy. It has all the inefficiencies of a communist system, except for the profits flowing to private shareholders.
Not a lot of domestic market for warships and large naval auxiliaries. So any market would have to be in merchant ships. Someone more expert than me would have to assess the crossover potential but I do know what the government has done to merchant ship building which is basically to destroy the industry.
This isn't the issue. It doesn't matter if HII and GD build things for other markets.
What matters is that HII is the ONLY provider of Aircraft Carriers and (and most other ships).
What needs to happen is that either company (or additional companies) have to be able to take on each type, so there can be competition for each build.
As far as my quick search took me, the only current class that's happening on is the Virginias and the Burkes. Not coincidentally, they are the ship types that are actually getting built.
Fuck the incentives they have shown not to work. You know what does work?
Investing in the right people. Those who have Pride in what they do. The ones that have passion for their mission.
All things an MbA & 3/4 of the professional classes do not.
We are fortunate to have a nation full of people who have pride @ passion for what they do.
If we didn’t we wouldn’t have the success of a Steve Jobs or Elon Musk.
We need to invest in those with same passion & committed to people & mission that SpaceX/Tesla/Andril have. Not in those who have the deepest Government Relations team.
I agree completely about the kind of people that are needed. What I mean by incentives is that we need to open up the market so that companies run by the people you describe will have the incentive to come in and start building better ships and doing it faster.
The free market is the best way of getting consumer goods in the hands of the population. It brings out the competitiveness which, when aligned with the ability to profit from ingenuity, has dragged mankind out of the primitive conditions into the world of wonders in which we live. Economic freedom is the first, and most important of the individual liberties our political system embraced.
However, weapons of national self defense are not consumer goods. We shouldn’t live in a world where a fellow can drop into Walmart and pick up a M29 Davy Crockett Atomic Weapon System. We have to build our own guns, bombs and ships. Reopen the Naval Shipyards and return to building naval ships in naval yards.
While that's a good idea, I'm not sure that you could find the waterfront to put a naval shipyard on now. Nor expand the ones that still exist.
BUT...putting some of those $$B into acquiring property, even if you have to invoke eminent domain to get the land. (And if ever there was a reason, national security seems like one...otherwise I'm not a fan).
Proceedings suggested a greenfield build on the old air station in Alameda. Otherwise much could be done at say Sparrows Point. Even if it would need to all be built on the surface rather than graving dock so as to least disturb soil.
No chance old Alameda NAS could be returned to doing heavy industrial, the county would fight it tooth & nail. Better chance of getting Richmond's Kaiser yard and Mare Island back into mainstream operation. Richmond is inactive and Mare Island still works on USCG & USNS ships, and both are located in counties where those immediate areas need the work. Not to mention the local Congressman has been push to get those locations up and running...a miracle in a state like CA where politicos are busily consumed by chasing social issues and are truly clueless to industrial labor.
I am sure there are some properties on the gulf coast that might suffice (Orange Texas was a facility in WWII and later for decommission purposes. I regret that the closures from BRAC in the 1980's and 90's have done us great harm. Some efforts need to be made to establish both new shipyards and training facilities. But with political infighting in Congress and other places it probably will not happen.
Industry does deserve to make a profit on DOD contracts, personally, if I was CNO or SENAV, for a day, I would muster the gov PM/PEO and the industry PM and ISIC, and have proved updates monthly, not as to progress, including industry staffing and what they are doing about it, supply chain issues and what is being done. What they shouldn’t do is say, RDA you have a problem, upon which the PM either gov or industry should be fired. They need to bring solutions not shoulder shrugs.
Senior Navy folks, civilian and uniform, were read into these incentive issues systemtatically starting in 2011. I designed and delivered that program for ASNRDA Stackley. That effort is ongoing still. In this respect, there are no surprises in Sal's points..
Shipbuilding is the classic bilateral monopoly. In practice, the government is at a disadvantage because Congressmen and rice bowl owners inside Navy have given away the government's bargaining power. The only way I see to break this is to disenfranchise the rice bowl owners by bringing in new suppliers. This requires someone from outside Navy to force things to be different.
Once competition is restored (or at least there is a threat of competition), industry behavior may change; it might not, depending on other factors. Regardless, there are powerful incentives for both sides of the bilateral monopoly to keep things as they are.
I won't contest Sal's numbers on buybacks, but this is a sideshow IMHO. The lack of competition and the behavior of Congressmen and senior Navy rice bowl owners is the real core of the problem.
My view is that it will take outside intervention to change things. Lack of growth in shipbuilding dollars going to these big firms means they cannot make their numbers for investors. The pressure that ensues will be the spur to action. If Congressmen and rice bowl owners cannot wield power, the firms have to change. If the firm's protectors in Congress and the Navy are able to act, we will get more of the same.
Incidentally, what Sal did not touch on here (but he has discussed elsewhere) is that as long as GOFO types can leave the uniformed service for defense contractor jobs immediately upon retirement (same for SES types), we will continue to get more of what we have seen. Put simply, shut off that employment option for five years and the rice bowl nonsense will be changed.
In my experience, the obvious incentive problem with leaving very senior government service for industry jobs (.....looking at you, Lloyd Austin, and many, many others) is a very touchy subject. If you raise this, people take great offense......as if their integrity was being challenged. What we have seen suggests the challenge wasn't inappropriate in some cases.
Again, it will take an outside force to change things. The players inside the building are not going to do this on their own.
Though the hire is at least as much for the contacts as it is for actual knowledge of anything. Not sure that the old boy network wouldn't be still viable in that amount of time.
CDR Sal, great (and accurate) summation of our problems with shipbuilding. Others here note (accurately) problems with industrial capacity, corporate competition (or lack thereof) and manpower to bend the metal. Also noted was the incentive structure (personal peeve). Changing the incentives for senior DoD official, the Military Industrial Complex (MIC, TM) and the congress has to happen before the numerous problems described can be addressed. Given that all three branches of the "Iron Triangle" are happy with the status quo makes shaking things up difficult. Would love to be more optimistic, but my seven-month stint in the yard in Pascagoula soured me on shipbuilding.
Where is Henry Kaiser when you need him? I am sure there is a senior executive of Kaiser's stature who would take on the job of being the shipbuilding czar.
Where's Teddy Roosevelt when we need him? Can we even imagine that he would have tolerated this for even another week? Without massive change involving large b**ls we're going to keep hearing, as Ross Perot predicted, a "giant sucking sound" that's our money and dignity circling the drain
Problem is finding him a shipyard or some waterfront land to open one.
Maybe his Boring Company (https://www.boringcompany.com/) can create some space in mountainous waterfront areas that are otherwise unusable. (The environmental impact statements will be a b**ch though unless he gets some top cover from a friendly government.)
The trick is having an affordable labor market of a certain size near where the yard can be built. We should look at the harbors who gave up shipbuilding and Navy presence and guilt them back into taking since they are harbor for crying out loud. Much more easily accepted and useful than our current day to day these days.
I doubt there are many experienced shipwrights in the vicinity of the Brooklyn Navy Yard, the Philly Navy Yard (not for expansion, anyway) and of course Mare Island and Long Beach Navy Yard are no more at all.
Build another shipyard on the West Coast? San Diego? .... Long Beach? The SF bay area? Portland? Bremerton?
It will be a war. The watermelons will be the opponents.
Mare Island is still there, physically I think some of this gets done by looking at the smaller commercial yards and determine which ones can really get bigger successfully to take the work.
Mare Island has been converted (or is in the process of being converted) to a recreational area - the docks area is being remediated of a century of chemical contamination.
The California watermelons will not allow anything else.
This is the issue in all of industry that actually builds things. We have a bunch of MBAs running the companies that do not understand what the company actually does and why it is important. The leadership of these companies see the stock price as the product, not whatever widget the company produces, so they put all effort into increasing that stock price instead of making a better widget, unless they figure that can help the stock price in some way. It is a big issue in the utilities as well, you used to have company employees that were vested in the company mission doing the work and you would have people doing it for 30 or 40 years, passing down the knowledge collected over that time to newer workers. Now most of the work is done by contractors that are in once are for a few weeks and then move to another and never really learn the area they are working or jobs they are doing before they move and have no real commitment to doing it right, because they will not be the ones dealing with the poor quality 6 months or 6 years later. But the contractors are cheaper so that is who the companies hire to do the work, and it shows with the amount of rework and the low total quality.
Agree with stock price manipulation. That's fallout from the whining about "obscene" executive compensation back in the 70s and 80s. Now rather than salary and cash bonuses for performance they get stock options. The value of those are maximized by price manipulation. Essentially the whole system is corrupted.
There was a video about Starbucks where it was mentioned that the founder of the company had to come back and fire all the MBAs who had 'optimized' the stores for maximum efficiency and in the process destroyed the reason why people came to Starbucks instead of McDonalds for coffee.
We have forgotten our history. During WW II the Navy evicted the management of Federal Shipbuilding in New Jersey when its quest for profits got in the way of the war effort. The Navy replaced the management team with Navy people until a new management team acceptable to the Navy was named. The Navy also forced, yes forced, major component suppliers to license their proprietary designs and manufacturing techniques to their closest competitors. This provided the Navy with multiple sources of supply and reduced cost. The Navy yards were also building the same ships as the private shipyards, submarines, destroyers, cruisers, battleships and yes, aircraft carriers. This kept the private yards at least somewhat honest on the basic cost of the ships. We could do the same thing today.
Our current shipbuilding crisis has its roots in the fact that we are buying Ferraris and Lambroghinis instead of Fords and Chevys. On a vehicle for vehicle comparison any Ferrari beats any Ford on any day with one glaring exception, that quantity, and thereby affordability, has a quality of its own. Look at the destroyers we built during WW II. They were based on proven designs, which were frozen before one pound of steel was cut by a shipyard. There were no hugely profitable "engineering changes" for the shipyard to get well on after grossly underbidding the contract to begin with. Destroyers, cruisers, whatever that were built at commercial yards were sent to the public yards after commissioning to have the accumulated alterations installed, even when it might mean undoing work done at the shipyard.
The bottom line is that in the 1940-46 period we had essentially mass production of even naval vessels, up to battleships and aircraft carriers, because the Navy insisted on simple, basic designs and the Congress ordered lots of them. This resulted in high steady demand for components and labor which reduced the price of the components and increased the supply of labor to meet the need. Now we hand build a limited number of ships each year on a varying purchase schedule that provides a demand for labor and components that is not even remotely predictable. This is made worse by the "good old boy/girl" network in which contracts are awarded at prices and schedules that both the shipbuilder and the Navy knows are not even remotely realistic. Given the current shipbuilding ordering and contracting environment perhaps hoarding profits and driving up stock price to meet the demands of Wall Street "analysts" may be the only rational way to go. Unless radical change is made which will only be possible after the people, and thereby Congress, gets scared. Since the people are so used to being lied to by the politicians, both civilian and uniformed, this is not likely to happen anytime soon barring some catastrophic event.
The biggest misfortune is for the large shipbuilders themselves. Back in I believe the 1990's Newport News Shipbuilding (now HII) attempted to build commercial tankers after the drop in Navy shipbuilding from cashing the peace dividend. They bid on a group of, I believe, four double hull tankers, won the bid and signed a fixed price contract with a large shipping company. When the first ship was finished Newport News handed the shipping company a bill for the usual overruns, changes & etc. as they normally did with Navy contracts. Unfortunately for Newport News, the shipping company laughed at them and pointed out that a fixed price contract was a fixed price contract. They said, essentially, "thank you for the ship here's the check for the contract price, where's the title?" Shortly thereafter, Newport News, one of the nation's oldest and largest commercial shipbuilders quietly exited the commercial shipbuilding business forever.
Another great article. I have become so cynical of the entire MIC, especially on the Navy side. In a recent interview, by Shawn Ryan of Dan Driscoll (SecArmy), Dan discusses the changes he has made and wants to make, then notes that the average tenure of a SecArmy is only 2 years. Hard to make a lasting change to an enormous, barnacle-burdened system in that short time frame. Like CNOs, I suppose.
"In the long run, if we want to fix shipbuilding, we need to fix industry. In the short run, perhaps we should look at finding other companies in the industry who are more focused on getting things that displace water, in the water." I suggest we prioritize the short-run option (Korea and Japan?) and use that to leverage the long-run change we desire.
Both HII and GD were stocks I regularly would work with when I was trading for a MegaBank's advisory arm. Neither really stood out in my work.
Of course, HII is primarily shipbuilding and repair, while GD has diversification as a general defense contractor. There's a lot more systematic risk with HII, but both run the issues of being mostly defense contractors in an era of uncertain budgets. Can HII's focus give it the competitive edge over GD?
There is a need for more shipbuilding, but so much got sold off, it's not even funny anymore. Also, loss of suitable land for luxury developments has become a problem.
I’m intrigued by manufacturing capacity. I once saw a map depicting where Fletcher Class Destroyers were built in a time of urgent need. From Seattle-Tacoma to California and from the Gulf Coast to Maine, many shipyards responded to the call to build more ships. Today, we have far less capacity to build. How would we ever increase the number of ships produced in a year? I don’t believe that we have that capacity. I hope that I am wrong.
This is where unmanned unlocks some doors. What might be only a manned patrol boat could literally do the picket futy if a WwIi dedtroyer if unmanned. Not a perfect scenario, but plays to what strengths we have. Small yard capacity using smaller marine diesels.
We don't have the space.
Nor do we have the ability to build engines and gearboxes for all those new ships - or propellors. Shafts? Maybe.
Electronics? Questionable
Weapons? Nope.
This makes a bit of a case for the non-publicly traded yards like Bollinger. Given they have snagging a bigger share if the oie lately, it might play out that way.
CDR Salamander - you missed a major component of our shipbuilding malaise. It is easy to fall into the trap to blame the shipbuilding industry and their false blame game (lack of workers, etc.). But the reality is much more graphic. The PEO and NAVSEA rice bowl holders who are protecting their turf and resisting creative solutions. They keep pounding on the four government Navy shipyards to improve (they can only 'improve' so much - their abilities are inelastic). The reality is that our wonderful civilian executive SES cadre and rotating for promotion senior officers prevent solutions they can't control personally. For example, a company run by a retired submariner, Bartlet Marine, has been unsuccessfully trying to get a contract to establish a two drydock overhaul facility to relieve the pressure to overhaul fast attacks that currently compete with new construction within the main companies. Despite the fact that they had obtained a state agreement to fund the first two years of development (so free to the Navy), that they had retired four star experts on their board and a ton of engineering experrtise available. Location, arrangements, all provided in detail. But no joy. Why? Rice bowl owners resisted. Period. The deep state is alive and well. r/Karl
The advent of Acquistion Professionals has made the situation much worse. AAAV in the Marine Corps is a good example. Zumwalt is another.
It’s easy to complain and blame the corporations, and great clickbait,
So, you're not willing to engage in the specifics? OK. Enjoy your decline.
Once upon a time, stock buybacks were illegal. They were insider trading. Then they became legal. This error can be fixed. Requiring executive pay be based on corporate income and profits, not share prices, might help.
A new approach to building ships is needed. Perhaps we could import advanced South Korean technology. At the top end, there is a university field known as Naval Architecture. You can look up how many universities offer it, other than MIT.
Robotics for building large objects -- ships being about as big as you can get for a machine -- might be interesting. Perhaps Tesla could add a naval branch.
Ya beat me to it… 1982 was the year the rule changed.
The stock thing is really ugly. Back in the 70s and 80s when all the leftists were screaming about obscene CEO compensation rather than global warming the corporations shifted from a salary with cash bonuses for performance to stock and stock options.
At that point it became important to manipulate the stock price to increase its value despite the actual value in the company. Option low, sell high, makes a ton of money. Stock should not be an executive or director compensation. That corrupts the values of those people.
It's all about incentives. The big shipbuilding companies don't have a financial incentive to act differently. They get most or all of the money from the government. They don't really compete with each other, except in a few areas. It's like the space launch industry 15 years ago. The two big companies had even stopped pretending to compete and had created a new company (ULA) to do all the launches. Then this new upstart SpaceX comes in and shakes it all up. The reason that worked is that SpaceX doesn't rely on government contracts to survive. They get those contracts, but most of their launches are for other customers or for their own Starlink product. They have the financial incentive to invest in and improve their product. That's what is missing for the shipbuilding - market opportunity. The shipbuilding industry is so heavily regulated that there's no opportunity for a new competitor to arise. HII and GD are just fine with that. It's extremely likely that they have captured the regulators in order to keep it that way. If we want change, we can't just throw money at the existing establishment. That leads to boondoggles like SLS. The government needs to get out of the way and let the market bring in new competition.
The government celebrated the end of the Cold War by effectively turning the defense industry into a non-competitive command economy. It has all the inefficiencies of a communist system, except for the profits flowing to private shareholders.
Not a lot of domestic market for warships and large naval auxiliaries. So any market would have to be in merchant ships. Someone more expert than me would have to assess the crossover potential but I do know what the government has done to merchant ship building which is basically to destroy the industry.
This isn't the issue. It doesn't matter if HII and GD build things for other markets.
What matters is that HII is the ONLY provider of Aircraft Carriers and (and most other ships).
What needs to happen is that either company (or additional companies) have to be able to take on each type, so there can be competition for each build.
As far as my quick search took me, the only current class that's happening on is the Virginias and the Burkes. Not coincidentally, they are the ship types that are actually getting built.
Fuck the incentives they have shown not to work. You know what does work?
Investing in the right people. Those who have Pride in what they do. The ones that have passion for their mission.
All things an MbA & 3/4 of the professional classes do not.
We are fortunate to have a nation full of people who have pride @ passion for what they do.
If we didn’t we wouldn’t have the success of a Steve Jobs or Elon Musk.
We need to invest in those with same passion & committed to people & mission that SpaceX/Tesla/Andril have. Not in those who have the deepest Government Relations team.
I agree completely about the kind of people that are needed. What I mean by incentives is that we need to open up the market so that companies run by the people you describe will have the incentive to come in and start building better ships and doing it faster.
The free market is the best way of getting consumer goods in the hands of the population. It brings out the competitiveness which, when aligned with the ability to profit from ingenuity, has dragged mankind out of the primitive conditions into the world of wonders in which we live. Economic freedom is the first, and most important of the individual liberties our political system embraced.
However, weapons of national self defense are not consumer goods. We shouldn’t live in a world where a fellow can drop into Walmart and pick up a M29 Davy Crockett Atomic Weapon System. We have to build our own guns, bombs and ships. Reopen the Naval Shipyards and return to building naval ships in naval yards.
While that's a good idea, I'm not sure that you could find the waterfront to put a naval shipyard on now. Nor expand the ones that still exist.
BUT...putting some of those $$B into acquiring property, even if you have to invoke eminent domain to get the land. (And if ever there was a reason, national security seems like one...otherwise I'm not a fan).
Proceedings suggested a greenfield build on the old air station in Alameda. Otherwise much could be done at say Sparrows Point. Even if it would need to all be built on the surface rather than graving dock so as to least disturb soil.
No chance old Alameda NAS could be returned to doing heavy industrial, the county would fight it tooth & nail. Better chance of getting Richmond's Kaiser yard and Mare Island back into mainstream operation. Richmond is inactive and Mare Island still works on USCG & USNS ships, and both are located in counties where those immediate areas need the work. Not to mention the local Congressman has been push to get those locations up and running...a miracle in a state like CA where politicos are busily consumed by chasing social issues and are truly clueless to industrial labor.
Then learn to speak Russian, and give up your sovereignty.
Russian is so 20th Century.
Mandarin is the thing these days.
I am sure there are some properties on the gulf coast that might suffice (Orange Texas was a facility in WWII and later for decommission purposes. I regret that the closures from BRAC in the 1980's and 90's have done us great harm. Some efforts need to be made to establish both new shipyards and training facilities. But with political infighting in Congress and other places it probably will not happen.
There probably are some. But what I'm familiar with in my area are all redeveloped.
Well all but one. Out of the three or four that used to be here.
There probably are some. But what I'm familiar with in my area are all redeveloped.
Well all but one. Out of the three or four that used to be here.
Industry does deserve to make a profit on DOD contracts, personally, if I was CNO or SENAV, for a day, I would muster the gov PM/PEO and the industry PM and ISIC, and have proved updates monthly, not as to progress, including industry staffing and what they are doing about it, supply chain issues and what is being done. What they shouldn’t do is say, RDA you have a problem, upon which the PM either gov or industry should be fired. They need to bring solutions not shoulder shrugs.
Senior Navy folks, civilian and uniform, were read into these incentive issues systemtatically starting in 2011. I designed and delivered that program for ASNRDA Stackley. That effort is ongoing still. In this respect, there are no surprises in Sal's points..
Shipbuilding is the classic bilateral monopoly. In practice, the government is at a disadvantage because Congressmen and rice bowl owners inside Navy have given away the government's bargaining power. The only way I see to break this is to disenfranchise the rice bowl owners by bringing in new suppliers. This requires someone from outside Navy to force things to be different.
Once competition is restored (or at least there is a threat of competition), industry behavior may change; it might not, depending on other factors. Regardless, there are powerful incentives for both sides of the bilateral monopoly to keep things as they are.
I won't contest Sal's numbers on buybacks, but this is a sideshow IMHO. The lack of competition and the behavior of Congressmen and senior Navy rice bowl owners is the real core of the problem.
My view is that it will take outside intervention to change things. Lack of growth in shipbuilding dollars going to these big firms means they cannot make their numbers for investors. The pressure that ensues will be the spur to action. If Congressmen and rice bowl owners cannot wield power, the firms have to change. If the firm's protectors in Congress and the Navy are able to act, we will get more of the same.
Incidentally, what Sal did not touch on here (but he has discussed elsewhere) is that as long as GOFO types can leave the uniformed service for defense contractor jobs immediately upon retirement (same for SES types), we will continue to get more of what we have seen. Put simply, shut off that employment option for five years and the rice bowl nonsense will be changed.
In my experience, the obvious incentive problem with leaving very senior government service for industry jobs (.....looking at you, Lloyd Austin, and many, many others) is a very touchy subject. If you raise this, people take great offense......as if their integrity was being challenged. What we have seen suggests the challenge wasn't inappropriate in some cases.
Again, it will take an outside force to change things. The players inside the building are not going to do this on their own.
I'm not sure 5 years is enough of a moratorium.
I'd like to make it forever. Though perhaps 10 years would work out just fine.
Sir, Those are friendly amendments I could readily support!!
5 Years is a long time from knowing what's happening, to remembering things that are no longer relevant. 10 years is a relative eternity.
Fair enough.
Though the hire is at least as much for the contacts as it is for actual knowledge of anything. Not sure that the old boy network wouldn't be still viable in that amount of time.
Average life span minus average retirement age.
So 20ish years?
CDR Sal, great (and accurate) summation of our problems with shipbuilding. Others here note (accurately) problems with industrial capacity, corporate competition (or lack thereof) and manpower to bend the metal. Also noted was the incentive structure (personal peeve). Changing the incentives for senior DoD official, the Military Industrial Complex (MIC, TM) and the congress has to happen before the numerous problems described can be addressed. Given that all three branches of the "Iron Triangle" are happy with the status quo makes shaking things up difficult. Would love to be more optimistic, but my seven-month stint in the yard in Pascagoula soured me on shipbuilding.
Where is Henry Kaiser when you need him? I am sure there is a senior executive of Kaiser's stature who would take on the job of being the shipbuilding czar.
Where's Teddy Roosevelt when we need him? Can we even imagine that he would have tolerated this for even another week? Without massive change involving large b**ls we're going to keep hearing, as Ross Perot predicted, a "giant sucking sound" that's our money and dignity circling the drain
Sounds like an Elon Musk challenge.
Problem is finding him a shipyard or some waterfront land to open one.
Maybe his Boring Company (https://www.boringcompany.com/) can create some space in mountainous waterfront areas that are otherwise unusable. (The environmental impact statements will be a b**ch though unless he gets some top cover from a friendly government.)
The trick is having an affordable labor market of a certain size near where the yard can be built. We should look at the harbors who gave up shipbuilding and Navy presence and guilt them back into taking since they are harbor for crying out loud. Much more easily accepted and useful than our current day to day these days.
Yeah, but a lot of that land has been repurposed to luxury housing, commercial, or parks.
As for housing, I wouldn't be opposed to building a decent "company town" and making rent free housing a perk of employment.
I doubt there are many experienced shipwrights in the vicinity of the Brooklyn Navy Yard, the Philly Navy Yard (not for expansion, anyway) and of course Mare Island and Long Beach Navy Yard are no more at all.
Build another shipyard on the West Coast? San Diego? .... Long Beach? The SF bay area? Portland? Bremerton?
It will be a war. The watermelons will be the opponents.
Mare Island is still there, physically I think some of this gets done by looking at the smaller commercial yards and determine which ones can really get bigger successfully to take the work.
Mare Island has been converted (or is in the process of being converted) to a recreational area - the docks area is being remediated of a century of chemical contamination.
The California watermelons will not allow anything else.
Plus, the workforce in the area is not industrial
This is the issue in all of industry that actually builds things. We have a bunch of MBAs running the companies that do not understand what the company actually does and why it is important. The leadership of these companies see the stock price as the product, not whatever widget the company produces, so they put all effort into increasing that stock price instead of making a better widget, unless they figure that can help the stock price in some way. It is a big issue in the utilities as well, you used to have company employees that were vested in the company mission doing the work and you would have people doing it for 30 or 40 years, passing down the knowledge collected over that time to newer workers. Now most of the work is done by contractors that are in once are for a few weeks and then move to another and never really learn the area they are working or jobs they are doing before they move and have no real commitment to doing it right, because they will not be the ones dealing with the poor quality 6 months or 6 years later. But the contractors are cheaper so that is who the companies hire to do the work, and it shows with the amount of rework and the low total quality.
Agree with stock price manipulation. That's fallout from the whining about "obscene" executive compensation back in the 70s and 80s. Now rather than salary and cash bonuses for performance they get stock options. The value of those are maximized by price manipulation. Essentially the whole system is corrupted.
There was a video about Starbucks where it was mentioned that the founder of the company had to come back and fire all the MBAs who had 'optimized' the stores for maximum efficiency and in the process destroyed the reason why people came to Starbucks instead of McDonalds for coffee.
How can anyone afford to work at Electric Boat on those wages given the cost of living in the Groton area?
Had a friend in HS, very smart, UPENN grad, did engineering at EB for a few years then left for Law School guessing $ had something to do with it.
That’s just not a convenient fact.
We have forgotten our history. During WW II the Navy evicted the management of Federal Shipbuilding in New Jersey when its quest for profits got in the way of the war effort. The Navy replaced the management team with Navy people until a new management team acceptable to the Navy was named. The Navy also forced, yes forced, major component suppliers to license their proprietary designs and manufacturing techniques to their closest competitors. This provided the Navy with multiple sources of supply and reduced cost. The Navy yards were also building the same ships as the private shipyards, submarines, destroyers, cruisers, battleships and yes, aircraft carriers. This kept the private yards at least somewhat honest on the basic cost of the ships. We could do the same thing today.
Our current shipbuilding crisis has its roots in the fact that we are buying Ferraris and Lambroghinis instead of Fords and Chevys. On a vehicle for vehicle comparison any Ferrari beats any Ford on any day with one glaring exception, that quantity, and thereby affordability, has a quality of its own. Look at the destroyers we built during WW II. They were based on proven designs, which were frozen before one pound of steel was cut by a shipyard. There were no hugely profitable "engineering changes" for the shipyard to get well on after grossly underbidding the contract to begin with. Destroyers, cruisers, whatever that were built at commercial yards were sent to the public yards after commissioning to have the accumulated alterations installed, even when it might mean undoing work done at the shipyard.
The bottom line is that in the 1940-46 period we had essentially mass production of even naval vessels, up to battleships and aircraft carriers, because the Navy insisted on simple, basic designs and the Congress ordered lots of them. This resulted in high steady demand for components and labor which reduced the price of the components and increased the supply of labor to meet the need. Now we hand build a limited number of ships each year on a varying purchase schedule that provides a demand for labor and components that is not even remotely predictable. This is made worse by the "good old boy/girl" network in which contracts are awarded at prices and schedules that both the shipbuilder and the Navy knows are not even remotely realistic. Given the current shipbuilding ordering and contracting environment perhaps hoarding profits and driving up stock price to meet the demands of Wall Street "analysts" may be the only rational way to go. Unless radical change is made which will only be possible after the people, and thereby Congress, gets scared. Since the people are so used to being lied to by the politicians, both civilian and uniformed, this is not likely to happen anytime soon barring some catastrophic event.
The biggest misfortune is for the large shipbuilders themselves. Back in I believe the 1990's Newport News Shipbuilding (now HII) attempted to build commercial tankers after the drop in Navy shipbuilding from cashing the peace dividend. They bid on a group of, I believe, four double hull tankers, won the bid and signed a fixed price contract with a large shipping company. When the first ship was finished Newport News handed the shipping company a bill for the usual overruns, changes & etc. as they normally did with Navy contracts. Unfortunately for Newport News, the shipping company laughed at them and pointed out that a fixed price contract was a fixed price contract. They said, essentially, "thank you for the ship here's the check for the contract price, where's the title?" Shortly thereafter, Newport News, one of the nation's oldest and largest commercial shipbuilders quietly exited the commercial shipbuilding business forever.
As far as I know, NASSCO still does commercial work. Not a lot, but they do from time to time.
Another great article. I have become so cynical of the entire MIC, especially on the Navy side. In a recent interview, by Shawn Ryan of Dan Driscoll (SecArmy), Dan discusses the changes he has made and wants to make, then notes that the average tenure of a SecArmy is only 2 years. Hard to make a lasting change to an enormous, barnacle-burdened system in that short time frame. Like CNOs, I suppose.
"In the long run, if we want to fix shipbuilding, we need to fix industry. In the short run, perhaps we should look at finding other companies in the industry who are more focused on getting things that displace water, in the water." I suggest we prioritize the short-run option (Korea and Japan?) and use that to leverage the long-run change we desire.
I'm a bit depressed about our future now.
CDR, HHI also build submarines, Newport News, not Pascagoula. They share the Virginia class with EB.