Russia Says It Held Naval Drills With China And Iran
March 18 (Reuters) – Russia, China and Iran have completed three-way naval exercises in the Arabian Sea that included artillery fire at targets on the sea and in the air, the Russian...
by Captain John Konrad (gCaptain) Shipbuilding and repair in America is in crisis. Every large ship built here costs multiples of what it would cost to build them in Asia and most government ships are well behind schedule and over budget. US Shipyards shoulder much of the blame and in recent testimony, the US Chief Of Naval Operations promised Congress the navy would take measures to prevent profiteering. Last week in a lengthy exposé the New York Times pulled on the thread accusing shipbuilding lobbyists of working against the needs of the Navy to generate larger profits. But how big are shipyard profits and is lobbying the biggest problem facing shipbuilding efforts today?
Editor’s note: The topic at hand is important, yet complex, and not easily summarized in a few thousand words. We have endeavored to explain a novel approach to this issue using accessible language and examples from various sources, including books, history, and popular culture. Our aim is not to provide a definitive analysis of the subject, but rather to encourage fresh lines of thinking and dialogue in order to address what seems like an intractable problem. Clearly, the current method employed by the US Navy to construct and maintain ships in the United States is not working, and we hope this editorial will inspire new dialogue.
Shipping and farming are two career paths young men can take who enjoy operating heavy equipment. Personally, I have never been interested in farming so I was surprised at how much I have enjoyed the Amazon Prime show Clarkson’s Farm. Even more surprising are the parallels I found between Jeremy Clarkson’s greatest frustrations and my own.
Yes shipyards make profits and yes they employ lobbyists but both the New York Times and CNO failed to mention that both profits and lobbying efforts by aerospace contractors far exceed that of shipyards. Neither mentioned that America’s largest shipbuilding company – Huntington Ingalls Industries ($HII) – has a market cap of only $8.80 billion making it worth less than 1/4 of what Elon Musk paid for Twitter and giving it a stock market value less than 1/14th that of aerospace conglomerate Raytheon.
For those who are not familiar with Wall Street market cap under $10B is considered low and can be seen as a vulnerability or fragility in a company’s financial structure. When a company has a low market capitalization, it is typically smaller and less established than its peers in the market. This means that the company may be more susceptible to adverse events or “black swan” events that can have a significant impact on its financial health. For example, a company with a low market cap may be more vulnerable to changes in market conditions, economic downturns, or unexpected regulatory changes. These types of events can cause significant fluctuations in the company’s stock price and lead to a loss of investor confidence, which can further drive down the market cap.
Moreover, a low market cap may also limit the company’s ability to raise capital, which is essential for growth and expansion, especially in shipbuilding which requires large investments in land, new equipment, and infrastructure. This can hinder the company’s ability to compete with larger, more established players in the market, making it more difficult to attract investors or secure financing for new projects or initiatives. It can also hinder a company’s ability to complete large contracts.
Some have suggested that the US Navy directly subsidize shipyards and help build infrastructure but the US Navy is the customer, and would not be in a legal or ethical position to provide cash outside of contracts. That is the job of the US Maritime Administration (MARAD) but unfortunately, the US Navy has mostly ignored that organization for years, has given it little support in Congress and has watched as it has withered away to less than 1,000 employees. Today MARAD is run by a former US Navy Rear Admiral, Commandant Ann C. Phillips, who works under US Navy veteran Pete Buttigieg but neither has publicly expressed any significant financial support – nor new programs like low-interest loans to compensate for the high cost of capital – to rebuild their former services most important asset for servicing the fleet – shipyards.
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And without asking MARAD for help there is little the Navy can do to fund shipyards besides pay more for contracts because it is the customer and working providing cash and financial support directly would be viewed by many as a clear ethical violation.
And if you think the problems at HII are troublesome, other shipyards are in outright crisis. Some are even worth less and some are worth just a small fraction of the value of the ships they are building for the military. For example, in November Louisiana-based Bollinger Shipyards announced it will acquire VT Halter Marine for just $15 million which is less than the value of the land, infrastructure, and hundreds of millions of dollars in new modernization upgrades. This is a shockingly low price for a yard with major government contracts in hand, notably the Polar Security Cutter (PSC) program for the U.S. Coast Guard, which could include up to three vessels valued at $1.9 billion, and the Auxiliary Personnel Lighter-Small (APL(S)) program for the U.S. Navy.
$15m for billions in lucrative military contracts. Sounds like a great deal until you start digging into what a contract with the USCG or US Navy involves.
Related Book: The Abandoned Ocean: A History of United States Maritime Policy by Andrew Gibson and Arthur Donovan
There is no doubt that building ships in America is expensive but basic financial accounting proves there aren’t many profits being made let alone profiteering.
What does this have to do with farming? In the second season of Clarkson’s Farm the team faces problems big and small. On the big side of the equation BREXIT resulted in the end of several critical subsidies and the real possibility of financial collapse. Politicians quickly step in and proclaim the importance of the farming industry and suggest that farmers diversify into new income streams. Clarkson takes this message to heart and decides to open a farm-to-table restaurant on the premises but, spoiler alert, his dreams of turning a simple sheep shed into a dining establishment are dashed by the local planning council. When he tries to appeal to His Majesty’s Government he finds a top legal team to present his case but his hopes are dashed when the estimated costs exceed £500,000.
On the small side, Clarkson also has a small farm stand and, thanks to his celebrity status, it becomes wildly popular but there is a problem. He has no parking at the farm stand. He does, in fact, have many acres of available land but the government won’t let him pave or even spread gravel. The makeshift parking lot turns into a mud lot and a dirty mess which angers the town council further.
Political and US Navy support (words) without actual financial backing or real government support (action) rings true for shipyards too but it is the story of the badger that really hits home. At the time of filming the UK was suffering from an endemic of bovine tuberculosis that threatened Clarkson’s herd of cattle. Unlike the post-BREXIT promises for renewed subsidies that never arrived, in this case, the government swept into action spending millions of pounds to save the industry.
How was the money spent? On government programs, government experts, government contractors, and government red tape of course. You see the disease is spread by badgers and Clarkson’s farm is home to a huge system of interconnected tunnels and chambers called a sett. His farm is teeming with them. Animal testers sweep into action and confirm his badgers are infected. A highly qualified badger expert is quickly dispatched to the farm along with a smart and dedicated wildlife consultant. A nationwide dead-badger collection program is put into place and a media campaign asks citizens to collect and bag badger roadkill.
Also read: Jeremy Clarkson ordered to shut his Diddly Squat restaurant
Every possible measure is taken to stop the spread of TB except the one measure that makes the most sense: letting the farmers trap infected badgers. Rather than provide actionable advice the government support team warns Clarkson repeatedly of the fine AND JAIL TIME he will face if he disturbs the badger habitat.
And this is the problem with our American shipyards. Just as many farmers are forced to sell to a single buyer – the government – American shipyards are wholly reliant on their biggest customer: the US Military.
It’s easy to say that the military appropriations process is convoluted and broken. It’s easy to assume that shipyards are profiteering – or at least some executives or investors are skimming from the top – from outrageously expensive navy contracts. It’s easy for CATO to blame the Jones Act or for K&L Gates lobbyist to suggest that making the Jones Act stronger would fix shipyard woes. It makes great headlines for the New York Times to report on the stunningly high cost of building ships and blame congress. It’s easy to blame unions, or “lazy American shipyard workers” high wages, or the lack of technical schools that teach welding.
What if many of the problems we acknowledge are just symptoms of something bigger?
Also Read: Shots Fired In Jones Act Debate
Or what if all these theories are wrong? What if the Badger expert who visits Clarkson’s farm to help solve the problem really is highly competent and good at his job? What if he really does want to help and is just being honest when telling Clarkson he WILL get arrested if he breaks the law?
What if it’s the creation of jobs itself and the high competence and education of America’s workforce that is the real problem?
How could this possibly be so? If the shipbuilding industry really is a monopsony – when there is only one buyer in a market (e.g. the US Military) for a good and sellers have no alternative – then we must ask how does the US Navy manage contracts? We must also ask if the US Navy has the resources to manage those contracts and assist the shipyards and if they have the expertise on staff to oversee newbuild projects.
We must look at NAVSEA.
The Naval Sea Systems Command, commonly known as NAVSEA, is the largest of the United States Navy’s five system commands, responsible for the design, construction, and maintenance of the Navy’s fleet of ships and their associated systems and equipment. Established in 1974, NAVSEA is headquartered in Washington, D.C., and oversees a workforce of more than 83,000 civilian and military personnel across the United States, including major shipyards in Virginia, Maine, Washington State, and California. Its responsibilities include developing and maintaining the Navy’s fleet of nuclear-powered aircraft carriers, submarines, warships, sealift ships, and other vessels, as well as the systems that support them, such as communications, weapons, and propulsion. The command also plays a key role in ensuring the safety and environmental protection of the Navy’s operations, with a focus on sustainable practices and responsible management of resources. In addition, NAVSEA is responsible for the Navy’s research and development efforts related to ship design, engineering, and technology.
At first glance, this seems like just another large government organization. Many, in fact, are proud of the Navy’s commitment to shipyards, the talent of NAVSEA employees, and the sheer size of NAVSEA’s budget. This overwhelming commitment in fact reinforces the complaint that the dire situation American shipyards face. The delays, the astronomical prices, the labor disputes, the onslaught of criticism from the likes of CATO, the lack of new investment in equipment and infrastructure – all of it – is not the fault of the Navy. The Navy has OVER 80,000 employees dedicated to supporting shipyards. The NAVSEA employs many of the best and brightest naval architects, marine engineers, nuclear engineers, software designers, and shipyard consultants in the world. The vast majority of these government workers are patriotic Americans who value the freedom American naval supremacy has afforded not just the United States but the globalized world.
And NAVSEA is right to be proud of its workforce. Sure there is same fat and freeloading found in any government organization but, overall, NAVSEA (and other related commands like Military Sealift Command) employs countless dedicated, smart and educated workers. But the simple, unavoidable, fact is that American shipyards are failing and have little to show for the eye-watering prices they charge their only customer.
“The decision to decommission ships only 4 years old came after the ships, built in Wisconsin by Fincantieri Marinette Marine in partnership with Lockheed Martin, suffered a series of humiliating breakdowns,” writes Eric Lipton in the NY Times article titled The Pentagon Saw a Warship Boondoggle. Congress Saw Jobs. “Humiliations including repeated engine failures and technical shortcomings in an anti-submarine system intended to counter China’s growing naval capacity.”
Lipton is wrong to accuse “the consortium of players with economic ties to the ships — led by a trade association whose members had just secured contracts worth up to $3 billion to do repairs and supply work on them” of wrongdoing. He is correct in saying that forces “mobilized to pressure Congress to block the plan to decommission and stop building certain ships” but fails to mention the simple fact that the money must be spent somewhere and the aerospace lobby, which has much deep pockets thanks to Raytheon’s outsized profits and enormous $145 billion valuation, is working just as hard to redirect that funding towards unproven “hypersonic missiles” aboard failing $8+ Billion dollar Zumwalt class ships and struggling fighter jet programs.
And it’s not just futuristic-looking ships like the Zumwalt and LCS. The Navy has also failed to build enough simple vessels like fireboats and salvage tugs or enough oilers to replace critical fuel storage tanks that leaked in Hawaii causing irrefutable harm.
Lipton’s NY Times article is right about one thing. Congress and the US Navy love created jobs and that’s the crux of our badger problem. Even the most respected and well-meaning badger expert is of little use to the farmer if he can not help Clarkson take proven measures like trapping and relocating infected badgers. In fact, each visit by the badger team requires the farm to stop farming and work diligently on unproven alternatives to trapping or killing sick badgers. Meetings, and testing, and reports, and consultations all require the farmer for redirecting resources from actual farming to “helping the government help them”.
What Lipton doesn’t capture in his article is a simple fact that billions upon billions of dollars of shipyard contracts are not being squandered or stolen but spent on people diligently “helping the government help them”. Lots of paperwork. Lots of audits. Lots of meetings.
And when you are talking about NAVSEA you are faced with and organization of over 80,000 people. To put that in context NAVSEA alone (and not including NAVAIR which employs over 40,000 people) is roughly twice the size of the entire US Coast Guard, and absolutely dwarfs the US Maritime Administration’s roughly 800 employees who – by outsourcing much of the logistics and support work to Korean firms – is currently build a new state of the art maritime academy training ships at Philly Shipyard. And it’s building these ships (mostly) on time and within budget.
How can a failing organization that is so ignored, underfunded, and marginalized – to the degree an entire book has been written about its many failures – outmaneuver and outbuild the mighty NAVSEA? Could it be the very fact MARAD doesn’t have the manpower to inspect, audit, issue design changes, “gold plate” requirements, monitor safety violations, issue fines, attend meetings, and otherwise suck up the resources of the contract yard. MARAD didn’t have the NAVSEA workforce so it outsourced the project management to Totem Marine who subcontracted much of the work to our allies in South Korea.
In almost every business labor is expensive, but while the narrative has been focused on reducing labor costs at the shipyards (Our largest shipyard, Huntington Ingalls employs roughly half as many people as NAVSEA) and improving the efficiency of steelworkers… few have been looking at the workload imposed on the shipyards by NAVSEA’s enormous workforce.
And in addition to the well-meaning and highly competent workers helping shipyards you also have what David Graeber, author of the book Bullshit Jobs, calls bullshit jobs. Drawing on his experience as an anthropologist and activist, Graeber argues that many of the jobs in today’s economy serve no real purpose, but exist merely to keep people employed and justify the existence of managers and bureaucracy. He explores the psychological toll of working in a job that one knows is useless, and offers a vision of a society that values meaningful work and human connection over profit and productivity. Even worse than the Bullshit jobs itself is many of the people at NAVSEA and the shipyard industry with advanced education in critical areas like engineering and architecture working not with hardhats and drafting squares but with books of regulatory requirements and mandatory HR training.
Kurt Vonnegut summed up the Badger problem best in his book Sirens of Titan. In this work one extraordinary lucky man discovers a way to pick winners in the stock market. He makes a fortune but, of course, has to pay a heavy tax bill until he meets a brilliant young accountant named Winston Niles Rumfoord. This young man declares that the Internal Revenue Service (IRS) is the only agency of the United States government that has any sense. He explains that this is because the IRS knows that money is the only thing that really matters and that the rest of the government is just “window dressing.”
Rumfoord goes on to describe how the IRS uses the tax code to manipulate the behavior of individuals and corporations, and how it has become the de facto arbiter of American society. He then says that it’s impossible to fool the US government or avoid paying taxes without – as the British badgered man would agree – facing huge fines and jail time.
But Rumfoord has a plan. He looks across the street from the wealthy investors’ tiny office and proposes constructing a large building filled with secretaries and lawyers and managers who must follow strict regulations and attend countless meetings.
“But none of these people will generate any profit,” says the investor. Rumfoord agrees but said the secretaries will misplace tax forms, the lawyers will file lots of briefs, the managers will tire the IRS agents with countless meetings to “get this right” and the IRS will quickly realize it’s spending more money auditing the company than it is bringing in from company taxes. Every agent on the case will leave and warn other agents not to get involved.
Then the investor asks how they will convince the employees to “misplace paperwork”. Rumfoord says that’s the best part… you don’t have to. In fact, it works better if you demand that your employees go out of their way to help the IRS. Human failures and mistakes will take care of the rest.
As brilliant as Vonnegut was his story missed the mark. In Sirens of Titan the large workforce is designed to overwhelm the IRS with countless meetings, rules and processes for the purpose of increasing after-tax earnings. In the real world however, the tables are turned, it’s the government – NAVSEA specifically – that’s overwhelming the profiteers.
In a military context, Field Marshall Erwin Rommel is sometimes credited with saying, “Lazy people do little and unintelligent people motivated create problems but they are easy to solve. Highly intelligent motivated people forced to follow strict rules of military culture sometime do more harm than good by creating problems that are impossible to solve.”
I am not sure if Rommel’s quote is accurate but I’m convinced that shipbuilding monopsony is entangled in a highly complicated set of problems that are difficult to solve.
Update: gCaptain reader John Casey informs us is concept was introduced by Kurt von Hammerstein-Equord who was the Commander-in-Chief of the Reichswehr and a critic of Hitler. You can read a brief overview of his work here: The Four Classes of Military Officers: Clever, Diligent, Stupid and Lazy
How do we fix this mess? There are two solutions, one is simple and one is complicated and difficult. War is the simplest solution. Ukrainians today don’t need to ask permission to kill a badger or a Russian soldier. They are empowered to make decisions and the government spends most of its time helping to get them the resources they need… not making sure they are wearing hard hats, following “woke” training requirements, or attending countless meetings. Everyone is too busy for that.
One tempting solution is to slash government spending at NAVSEA and elsewhere but if America faces war with peer-level competitors (the “war fix” doesn’t work when waging war in an economically impoverished nation like Iraq) I’m confident NAVSEA’s highly talented and motivated workforce will start swinging hammers and demanding change. We can’t just fire half the workforce at NAVSEA because those tens of thousands of workers, including the ones like the UK’s badger expert, are a coiled spring of experience and expertise that will fire into action once released from the bonds of red tape by the necessity of war.
As US Navy Fleet Admiral Ernest J. King said, “Winston Churchill once observed that Americans will always do the right thing, only after they have tried everything else.” America is able to “do the right thing” during times of great need because the experience and education are being built by the workforce of NAVSEA during peacetime even while progress is slow. Or, in nautical terms, we would say that NAVSEA is “underway, not making way” meaning that the propeller is turning but no forward progress is made because the entire propulsive power of the ship’s enormous engine is dedicated to fighting a strong current.
The other solution is more difficult. It requires strong leadership, strong support of those willing to say uncomfortable truths, a willingness of SES executives to take career risks, and building a culture of cutting red tape. As famed venture capitalists Ben Horowitz wrote in his bestselling book… leaders must be willing to do Hard Thing About Hard Things and solve problems when there are no easy answers.
And it’s probably best to start with the hardest thing a business ever has to face: building a new culture that is highly effective. This is so important that maybe it’s a good idea to shut down NAVSEA for 6 months to give shipyards some breathing room and focus solely on that.
As a licensed captain and former senior officer aboard ships tasked with extremely dangerous multi-billion dollar offshore drilling and ship construction projects, I learned that sometimes the hardest thing to do is the most effective: stand back and watch junior officers make mistakes and only step in to shield them from harm or provide them with the resources needed to be successful. Sometimes too much help is a bad thing.
The crisis in American shipbuilding and repair is not a result of profiteering or laziness, but rather the unintended consequences of a government-driven monopsony. The US Navy’s commitment to supporting shipyards and the sheer size of NAVSEA’s budget reinforces the complaint that American shipyards face. Despite employing countless dedicated and educated workers, American shipyards are failing and have little to show for the exorbitant prices they charge their only customers. The problem is not unique to shipbuilding, as evidenced by the government’s response to the badger problem on Clarkson’s Farm, which demonstrates how even the most respected and well-meaning experts are of little use to farmers if they cannot take proven measures like trapping and relocating infected badgers. The solution to the crisis in American shipbuilding and repair requires an examination of the unintended consequences of government-driven monopsonies and a reassessment of the Navy’s procurement process. Only by doing so can we ensure that our military remains strong and that American shipyards can once again become competitive on the world stage.
In conclusion, the shipbuilding industry is facing a complex set of problems that are not being addressed by focusing solely on reducing labor costs and improving efficiency. The sheer size and overwhelming bureaucracy of organizations like NAVSEA can create unnecessary workloads and hinder progress. In addition, the prevalence of “bullshit jobs” and the use of advanced education in non-productive roles further compound the problem. To fix this, we need strong leadership and a willingness to take risks to cut red tape and build a culture of effectiveness. It won’t be easy, but it’s necessary. We must reread Kurt Vonnegut and we must avoid the “Badger problem” and find a way to solve problems that are impossible to solve. Whether through war or a concerted effort to build a more effective culture, we must find a way forward. Right now shipyards are surviving but just barely with tiny market caps and a customer – the US Navy – that does not understand corporate finance structures like market capitalization or the cost of capital. Time is running and that’s before even mentioning the fact that many Chinese military shipyards do not have a Badger Problem, have better access to Wall Street capital than our own shipyards or NAVSEA and are expanding at previously unimaginable rates.
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