Naval Shipbuilding Drifts Into Uncharted Seas

The Sydney Morning Herald reports today that the chief executive officer of Australian shipbuilder Austal is resigning after only two years on the job. Nobody outside the company seems to know why he is leaving. Normally, few people in Washington would care why the CEO of a modest ($500 million in annual sales) shipbuilder on the other side of the world was departing, but in this case the company is one of two bidders seeking to build dozens of surface combatants for the U.S. Navy. The program in question is called the Littoral Combat Ship, and it was conceived early in the decade to replace frigates in shallow-water operations with an uncommonly fast warship sporting interchangeable warfighting modules.

It’s hard to say how the idea of switching out modules depending on missions will fare in the real world, because there’s never been anything like the new vessel. But the Navy is working hard to award Austal or competitor Lockheed Martin a production contract by the end of the year. Lockheed is offering a fairly conventional steel “monohull,” albeit one that can move about as fast as the speed limit on the Dulles Toll Road. Austal is offering a very unconventional aluminum trimaran, which presumably makes its bid riskier — a non-traditional supplier offering a non-traditional design to execute a non-traditional concept of operations. However, the fact that Austal is in the competition at all, and that Lockheed Martin is teamed with Italian shipbuilder Fincantieri, tells you a lot about how the face of naval shipbuilding is changing.

Although America has never been a global leader in the construction of oceangoing commercial vessels, there was a time not so long ago when over a dozen domestic shipyards competed for the right to build naval vessels. The industry gradually consolidated as warships became more complicated, and then necked down to two multi-yard conglomerates when the Cold War ended — General Dynamics and Northrop Grumman. Each company had three yards, with Northrop owning the biggest in Mississippi and Virginia while GD’s smaller New England yards had better reputations for workmanship. Compared with the performance of naval shipbuilders in other countries, they were both world-class. But the Navy chafed at being forced to select between only two suppliers, so when the Littoral Combat Ship program was begun at the height of Donald Rumsfeld’s military transformation initiative, it decided to look to non-traditional shipyards for its revolutionary vessel.

Embracing an out-of-the-box acquisition strategy aimed at developing the new warship in half the usual time certainly seemed transformational, but at the time the Navy didn’t realize that the two bigger, more capable classes of new warships that it was planning to buy from traditional suppliers would both be canceled by defense secretary Robert Gates. It also didn’t realize that Northrop Grumman would grow so unhappy with results from its shipbuilding operations that it would decide in 2010 to completely exit the business. That’s what happened though, so the U.S. Navy now faces a future in which most of the shipyards building its warships are likely to be owned by companies it isn’t accustomed to dealing with. Layer onto that prospect the congressional intrigues that surround the most politicized part of the defense industry, and you have a prescription for endless uncertainty.

In the brave new world of post-cold-war shipbuilding, General Dynamics looks like a rock of stability, and the Navy has duly rewarded it. The Obama Administration’s decision to go public with plans to accelerate purchase of auxiliary ships as a way of raising hopes at Northrop’s flagging Avondale yard near New Orleans shouldn’t obscure the fact that GD’s West Coast shipyard is more likely to win that program based on proficiency and past performance. However, Louisiana politicians may step in to protect Avondale from closure, now that Northrop has disclosed there isn’t enough work to keep both of its Gulf Coast shipyards operating at high capacity. A conspiracy theorist might conclude that Northrop Grumman CEO Wes Bush is playing his exit from shipbuilding just right to attract motivated buyers. On the other hand, it isn’t hard to see why an executive focused on generating higher, more sustainable shareholder returns might want to deploy his resources elsewhere.