BAE Shipbuilding Fiasco Has Lessons
(Source: defense-aerospace.com; published Nov. 7, 2013)

(By Giovanni de Briganti)
PARIS --- BAE Systems’ decision to cut over 1,700 shipbuilding jobs and to close its only remaining English shipyard holds several lessons for the future of Europe’s defense industry, and especially for shipbuilding and other metal-bashing businesses such as artillery and armored vehicle production.

BAE is a prime illustration of how heavy industry in the West struggles to survive in a world where developing countries are increasingly assuming their own naval shipbuilding and armored vehicle production, as was recently shown by Thailand’s decision to develop its own 8x8 armored vehicle instead of buying it from a foreign supplier.

It has finally been admitted that a private company’s primary focus on profitability cannot be reconciled with a government’s sovereign requirement to build warships -- or tanks, or howitzers -- in domestic shipyards or arsenals.

It is now equally clear is that West European governments eager to cash in on the post-Cold War peace dividend deluded themselves into believing that costly and unprofitable industrial activities, such as naval shipbuilding, would become sustainable and affordable simply by virtue of being handed over to private industry.

Sadly, this proved not to be true, and the fiction that privatized shipyards can better compete for commercial ship orders has now been conclusively discredited.

The Royal Navy has ordered its next replenishment ships from South Korea because British shipyards were unable to compete on price, and the Royal Navy budget could not stretch to paying British prices.

British Defence Secretary Philip Hammond conceded that “We hear a great deal about how shipbuilding will be sustained through the commercial market and the third-nation market, including the market for warships, but I am afraid I have seen no evidence to suggest that we are able to compete in what is a very aggressive global market for commercial shipping.

“I think that the shipbuilding industry in this country will be primarily dependent on Royal Navy orders placed in the United Kingdom, because of the sovereign requirement for us to have warship building capability,” he told the House of Commons Nov. 6.

For obvious reasons, however, governments prefer buying their warships and heavy vehicles from domestic sources, as this guarantees that these sizeable investments benefit their own industry; that they sustain domestic and not foreign high-technology and jobs; that they offer some export opportunities; and that they ensure equipment is not messed about with by foreign suppliers. Finally, buying from domestic industry ensures that long-term repair and support work also remains in-country.

The UK’s previous Labour government tried to reconcile these opposing requirements by agreeing to pay BAE Systems substantial compensation to maintain its shipbuilding capacity in the event, which has now come to pass, of a gap in the Royal Navy’s shipbuilding program.

Instead of giving this money to BAE, the current government has decided to use it to order three Offshore Patrol Vessels it doesn’t really need, but the net result is the same: unnecessary expenditure to maintain a very necessary capability.

And the sums are large. Philip Hammond told the Commons that “The marginal cost of [the three new OPVs], over and above the payments the MOD would anyway have had to make to keep the yards idle, is less than £100 million.”

Given that a modern OPV costs about £100 million (so £300m for three) one can deduce that MoD was to pay BAE about £200 million simply to keep the shipyards ticking over unproductively until 2016, when construction of the Type 26 frigates is due to begin.

And since these capacity gaps are certain to increase, because fewer warships will be ordered due to lower budgets and growing costs, it is likely that more such payments will become necessary as time passes. As Philip Hammond said, “we cannot alter the inevitable fact that we do not have a large enough Navy to sustain a multi-yard shipbuilding industry in the UK,” and that also is true for most European countries.

A second lesson to be drawn from the UK’s shipbuilding crisis is that high-technology Western shipyards cannot compete with shipyards in Asia or in developing countries for commercial contracts. Their technological edge is not enough to compensate for the fact that their cost base, especially in terms of personnel, is simply too high -- with the possible exception of cruise ships.

Thirdly, using Western R&D to design ships which are then locally built elsewhere, possibly by the customer in his own shipyards, rarely proves effective.

This is the strategy adopted by the Netherlands’ Damen Schelde Naval Shipbuilding, which a decade ago bought a Romanian shipyard in Galati, along the Danube River, and which is now its largest production facility. The Dutch navy’s four Holland-class OPVs were largely built in Romania, but this did not prevent their total price from approaching 500 million euros for four ships – not exactly competitive, although at over 3,700 tonnes these are larger than most OPVs.

Fourth, the oft-mooted consolidation of European naval shipyards, which some Continental politicians see as the best solution, is in fact the worst of all possible outcomes. By pooling the highest capabilities, technologies and investments, the cost base can only increase, while the shipbuilding requirements of European countries are not conveniently aligned in succession, but have much overlap which would stretch shipbuilding capacity at some times, and leave much excess capacity at others.

When military industries first emerged in 16th - 17th Century Europe, they were essentially organized as royal or government shipyards and ordnance factories, as only the sovereign could afford to keep them in business.

The slow erosion of British naval shipbuilding demonstrates that this is not a field for private companies to invest. Quite on the contrary, this is a field where governments should play their sovereign role by nationalizing basic naval shipbuilding facilities. This would not only ensure that know-how is maintained during activity troughs, but also that profit margins are not excessive nor that contracts are too favorable to private industry, as was manifestly the case with the carrier contract, where MoD ended up paying for 90% of any cost overruns.

Given its record on defense procurement, MoD is no doubt not the best candidate to manage nationalized naval shipyards. But nationalization – even if it appears outmoded and quaint in the 21st Century – is the best way for advanced economies to manage their naval shipbuilding and armored vehicle capabilities.

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