Long-standing and attentive readers (H/T History of the Americans Podcast) are no doubt aware of my occasional use of this space for professional commentary, having long ago lost the patience required for onerous editorial processes.
I am reminded that NGC bought NN and Ingalls to create growth by giving them more platforms to put their stuff on and they would make it work by using their prime contractor skills from the B-2. shortly into it they found out that building airplanes and building ships is way different. ( even though Henry Kaiser figured out how to do both after building the hoover dam - imagine that past performance volume...). They tried to tell the shipbuilders how to make ships and it did not go well. The Cajun's in particular were more blunt than the gentile UVA grads at NN. Ultimately NG would decide to divest to HII because they saw that the shipbuilding enterprise was never going to get to the OM and FCF returns they were expecting. This concept of it's all about the shipyards not investing in their own yards and buying shares instead has been the drum beat of the SECNAVs GC for the last two years and it has not had any impact on the real issues we have with shipbuilding.
Brilliant writing Bryan. Had an opportunity to have a chat with Australian Senate and DepSec Shipbuilding on this subject as part of an Exec Forum. The ravages of COVID isolation and supply chain problems on their fragile defense industry was shocking. In large, we shared the pitfalls of peacetime acquisition behavior in an increasing unstable Asia. We didn’t entirely blame the demand side, but didn’t shy away from pointing out the entrenched bureaucracy it had created. The DepSec wisely took the counter side and shared the accountability required by Senate inquiry and audit. (We were in year 4 of the 50 year shipbuilding plan). It was cordial but serious conversation. One we need to continue and I think a stable market would bring investment or we risk building as we did in WWII.
Isn’t the key issue that if customers stop buying a given product, the company that makes said product will either go out of business, or make other things?
With a demand curve at or near zero, there is no price at which a supplier is willing to meet that demand and will seek other opportunities.
With only one US customer for warships, the buyer’s behavior seems to me to be the primary driver in all related market dynamics. But what do I know…
My memory is that somewhere (might of been in ED Basic course in 1981) I was told that the attraction to investors of shipbuilders despite the low profit margin was the cash flow. I stayed on the technical and design side for most of my career but I wonder if something has changed that impacted that.
There’s a very old idea that greedy capitalists and chaotic markets get in the way of efficient planning in which everything works perfectly, but the problem is it’s false. The world has never and will never work that way, and the best we have is to embrace free enterprise and chaos. Sure, the defense market is a monopsony basically. But if anything that makes the demand side of things even more important. If the demand signal was there - if the shareholders could grow rich by surging investment into industrial base infrastructure - does anyone doubt it would happen? If the Pentagon is willing to pay for a growing fleet, the supply will follow (unless regulation is so intense it stifles any semblance of a market process).
I’m a retired shipbuilder and this article is spot on. Several shipyards HAVE invested in capital improvements despite the fickle demand signals from the Navy, and if their quarterly financial results are disappointing they get hammered hard by the market. The next time you write about the industry, please include a picture of Ingalls for equal time. 😃
I am reminded that NGC bought NN and Ingalls to create growth by giving them more platforms to put their stuff on and they would make it work by using their prime contractor skills from the B-2. shortly into it they found out that building airplanes and building ships is way different. ( even though Henry Kaiser figured out how to do both after building the hoover dam - imagine that past performance volume...). They tried to tell the shipbuilders how to make ships and it did not go well. The Cajun's in particular were more blunt than the gentile UVA grads at NN. Ultimately NG would decide to divest to HII because they saw that the shipbuilding enterprise was never going to get to the OM and FCF returns they were expecting. This concept of it's all about the shipyards not investing in their own yards and buying shares instead has been the drum beat of the SECNAVs GC for the last two years and it has not had any impact on the real issues we have with shipbuilding.
Brilliant writing Bryan. Had an opportunity to have a chat with Australian Senate and DepSec Shipbuilding on this subject as part of an Exec Forum. The ravages of COVID isolation and supply chain problems on their fragile defense industry was shocking. In large, we shared the pitfalls of peacetime acquisition behavior in an increasing unstable Asia. We didn’t entirely blame the demand side, but didn’t shy away from pointing out the entrenched bureaucracy it had created. The DepSec wisely took the counter side and shared the accountability required by Senate inquiry and audit. (We were in year 4 of the 50 year shipbuilding plan). It was cordial but serious conversation. One we need to continue and I think a stable market would bring investment or we risk building as we did in WWII.
Isn’t the key issue that if customers stop buying a given product, the company that makes said product will either go out of business, or make other things?
With a demand curve at or near zero, there is no price at which a supplier is willing to meet that demand and will seek other opportunities.
With only one US customer for warships, the buyer’s behavior seems to me to be the primary driver in all related market dynamics. But what do I know…
Spot on and well said.
Spot on and well said.
My memory is that somewhere (might of been in ED Basic course in 1981) I was told that the attraction to investors of shipbuilders despite the low profit margin was the cash flow. I stayed on the technical and design side for most of my career but I wonder if something has changed that impacted that.
There’s a very old idea that greedy capitalists and chaotic markets get in the way of efficient planning in which everything works perfectly, but the problem is it’s false. The world has never and will never work that way, and the best we have is to embrace free enterprise and chaos. Sure, the defense market is a monopsony basically. But if anything that makes the demand side of things even more important. If the demand signal was there - if the shareholders could grow rich by surging investment into industrial base infrastructure - does anyone doubt it would happen? If the Pentagon is willing to pay for a growing fleet, the supply will follow (unless regulation is so intense it stifles any semblance of a market process).
I remember the Bath Iron Work slogan as: We Build Good Ships And Make Money. We Build Good Ships If We Don't Make Money.
I have some sympathies for Mr. Bollinger's viewpoint.
I fear the only action that will identify what the nation needs from the navy is a horrible peer to peer war. Please No!
I’m a retired shipbuilder and this article is spot on. Several shipyards HAVE invested in capital improvements despite the fickle demand signals from the Navy, and if their quarterly financial results are disappointing they get hammered hard by the market. The next time you write about the industry, please include a picture of Ingalls for equal time. 😃
Lotta HII in the words, so I had to spread the love.
Is it time to DODGE some of these? "it becomes subject to the alphabet soup of administrative processes (NISPOM, DCAA, DFARS, CAS, etc.). "