Consolidation in American Naval Shipbuilding
In 1993, a bottom-up review concluded that declining demand after the end of the Cold War needed a restructured defense industry with fewer assets. During a Pentagon dinner that has come to be called the “Last Supper,” Deputy Secretary of Defense William J. Perry signaled to the industry that the Department would support consolidation. That policy lasted until 1998, and it had profound effects on the American defense industry.
In November 2008, the Institute for Defense Analysis submitted a report that looked at the effects of consolidation in the naval shipbuilding sector. Had it made a difference to the sector’s efficiency? The report offers an excellent introductory look at the merger and acquisition dynamics and rationales, then examines the American naval shipbuilding sector in some depth. Its conclusions?
“In summary, there are two main reasons that the ship sector did not rationalize as a result of the mergers.”
“First, the individual shipyards had already rationalized about as much as they could before they were acquired. Second, unlike missile manufacturing, which could be rerouted into new plants at manageable investment, naval shipyard construction requires shipyards specialized to particular ship types. General Dynamics could not cost effectively move production from one yard to the other and shut down the less utilized yard. Despite that one sector closed facilities and the other did not, both are working to improve operating efficiency and reduce costs… not directly the result of the mergers…
“The government expected substantial savings associated with the rationalization or reduction of infrastructure subsequent to industry consolidation. However, instead of combining companies with like capabilities, which could have rationalized with less disruptive change, the defense industry developed into broadly diversified, multi-product companies. Only in the missile sector were conditions right for rationalization: there was adaptable duplicate capacity that could be shut down, and industry had the opportunity to benefit from the savings.
If the government looks to consolidation as a path to lower costs in the future, it should look closely at the post-merger plan to see what specific fixed assets will be eliminated from the system. It then needs to assess the realistic likelihood that these assets will be removed. Based on these results, we believe that the successful rationalization resulting from the missile sector consolidation was the rare exception and not what to expect as a rule.”
Gannett’s Navy Times and Defense News have also covered this report. Read the Institute for Defense Analysis’ full report: “Infrastructure Rationalization in the U.S. Naval Ship Industrial Base” [PDF format] for more.
- DID (Aug 17/08) – CSIS Fires A Broadside at US Naval Acquisition Strategy
- RAND Corp. (2006) – Why Has The Cost of Navy Ships Risen?
- DID (April 12/06) – The Lion in Winter: Government, Industry, and US Naval Shipbuilding Challenges