Chapter 2 - Current trends in Naval shipbuilding
2.1
Australia's naval shipbuilding sector is influenced by worldwide
developments and cannot be examined in isolation. Since the end of the Cold
War, the global shipbuilding industry has undergone significant transformation.
This chapter considers the broader context of the industry as a background for
the committee's consideration of developments in Australia. It examines the
factors shaping worldwide trends in naval shipbuilding and looks specifically
at the experiences of major naval shipbuilding countries. In particular, the
committee looks at demand and supply patterns, the effects of changing
technology, and the dynamics of the international market.
2.2
A delegation of committee members who visited South Korea and the United
States (U.S.) witnessed first hand some of the developments taking place
overseas in the naval shipbuilding and repair industries.
The experience overseas
2.3
Today's modern military forces rely on new and advanced technology to
build greater defence capability—they want qualitative efficiency based on
advanced technology rather than quantitative force based on manpower.[1]
This desire for technological superiority is manifest in the increasing demand
for more complex naval vessels with better, smarter technology. Most notably, the
weapons, sensor and communication systems in modern warships are becoming more
sophisticated. For example, Raytheon Australia surmised that because of
'increasing combat effectiveness and the need to constrain crew sizes future
naval vessels are likely to be increasingly complex with greater use of
automation and systems'.[2]
Making a similar observation, the United Kingdom's Ministry of Defence (MOD) noted
that:
A manpower-intensive platform-heavy and predictable doctrine has
been replaced by the requirement for sophisticated, rapid and precise military
solutions.[3]
Falling demand, increased
capability
2.4
This quest for improved capability through developments in technology is
expensive and creates tension between the desire for cutting edge technology
and the ability to pay for it. Vice Admiral Paul E. Sullivan, U.S. Commander of
the Naval Sea Systems Command, noted that the cost of warships has continued to
increase. Furthermore, he informed the House Armed Services Committee on Shipbuilding
that the costs relating to combat and weapons systems are the 'single largest
driver in shipbuilding, even if costs of the weapons themselves are excluded'.[4]
2.5
Dr Donald Winter, U.S. Secretary of Navy, highlighted the challenges
created by the cost and affordability factors determining a country's
shipbuilding program. He identified how these two inter-related forces—the
rising costs associated with advances in technology and a decline in the
overall demand for naval vessels—are influencing defence policy:
The nexus between technology and resources is the driving factor
behind the dramatic changes in our plans for new ships...We are being pulled in
two opposite directions.
On the one hand, the Navy exerts constant pressure on itself and
on industry to increase the capabilities of our platforms through the
application of advanced technology. This costs money. At the same time, the
Navy is under pressure to control costs. The greater capabilities, generally,
the higher the costs—which means that the Navy can afford to buy fewer
platforms. But that too drives up the cost per ship. Both factors—greater
capability and lower numbers of ships—are pushing the cost of shipbuilding to
prohibitive levels.[5]
2.6
He concluded:
The upshot is clear: technology has provided us with
extraordinary capable ships but we cannot afford to buy as many of them as we
would like.[6]
2.7
He then spelt out the predicament facing maritime countries seeking to
maintain their naval capability:
We need a new shipbuilding model that can cost-effectively
provide significant increases in capability at low rates of production.[7]
2.8
Indeed, the increasing demands for improved capability at an affordable
cost have produced dramatic shifts in the industry. Businesses have adopted new
practices and entered into a range of different arrangements.[8]
New shipbuilding model
2.9
The South Australian government noted how the challenge for military
shipbuilders to manage the increasing cost of ship design, development and
construction in a fiscally constrained environment is leading to significant
structural changes.[9]
Faced with tight defence budgets and with little prospect of
amortising military ship building costs through increased export or commercial
activity, Governments have led the rationalisation process to ensure capability
is maintained.[10]
2.10
This trend toward consolidation from a larger industrial base with
shipbuilders amalgamating to a few in number is occurring in many maritime
nations.[11]
In 2002, the UK MOD noted that this re-structuring was also evident among the
major sub contractors:
Consolidation and globalisation at the level of prime
integrators, as well as of sub-primes or specialist high level sub-systems
suppliers, look set to continue if defence companies are to remain profitable
and retain the capability to undertake large defence projects. Cost and
capability pressures on national governments will not diminish, and even the US
may struggle to retain a wholly independent national capability in all areas of
defence. The process of consolidation has not concluded, and companies,
responding to the need to position themselves in a changing market, will
continue to seek restructuring opportunities. [12]
2.11
The same cost pressures have encouraged an increasing mutual
interdependence among prime companies and also among major sub-prime
contractors. This interdependence looks likely to continue.[13]
For instance in the United Kingdom, BAE Systems and VT Shipbuilding have entered
a cooperative arrangement for the Type 45 destroyers. This approach has
'allowed both parties to plan and invest for the longer term, train new workers
and deliver benefits through economies of scale, with each facility gearing up
to produce deliverables across the entire class'.[14]
According to the Managing Director of BAE Systems Naval Ships:
This longer term, co-operative approach to Type 45 has enabled
both businesses to develop their warship building capabilities for the future
at the same time providing value for money.[15]
2.12
This trend toward business consolidations, partnerships and alliances cuts
across industries and national borders as countries are finding that,
especially with highly complex systems, they cannot be self-sufficient in all
aspects of a ship's design and construction.
Globally integrated production
systems
2.13
Changing technology and the increasing costs associated with the design
and development of state-of-the-art communication and combat systems in
particular has meant that few countries or companies in their own right can
produce such sophisticated and expensive systems. There is a trend toward what
the department of Industry, Tourism and Resources termed 'globally integrated
production systems'.[16]
For example, Professor Peter Dombrowski noted that the U.S. Navy has taken
steps to explore promising technologies developed elsewhere in the world. He
used the HMS Triton as a model for the future which involves
collaborative development between the United States and Great Britain. He
explained:
Such collaborative development offers the possibility of sharing
R&D costs and combining technical capabilities to produce a more innovative
product than might have been otherwise possible. In addition, if ultimately
satisfactory to both parties, it could provide for a larger production run
since, presumably, both partners will have a stake in procuring offspring of
the developmental model.[17]
2.14
He maintained that joint ventures, teaming and licensing arrangements
that would allow the U.S. government and American shipbuilders to develop
cooperative relationships with foreign companies were feasible. He suggested
that cooperation between U.S. and overseas shipyards would be as likely to
involve yards such as Bender and Bollinger as the big six, thereby potentially
broadening the shipbuilding landscape.[18]
A new 'heavy industry' sector
2.15
A growing synergy in technologies is also occurring which is influencing
the approach to the construction of naval ships. One of the major benefits
flowing from the new construction methods is that it allows other industries to
use the same facilities. Although naval shipbuilding is a highly specialised
industry, there are strong parallels with the infrastructure needs of the oil
and gas sector and the resources sector more generally.
2.16
This complementarity in technologies is evident in Australia. The
Western Australia Chamber of Commerce and Industry observed that the risk
profile for an oil and gas platform or an LPG plant is similar to the defence
industry which encourages the technologies used in these sectors to blend.[19]
It saw a unique opportunity for both industries to take advantage of the
growing similarity between the two sectors:
These industries are merging and their technologies are merging
right across the world, and it is about who is the centre of technical
excellence.[20]
2.17
The Western Australia Chamber of Commerce and Industry observed the
extent of this blending and integration of technologies:
It is like telecommunications: a merging of technologies is
occurring in engineering. There are three things happening. Centres of
technical excellence in engineering are being established around the world, and
engineering companies from around the world are coming together in one spot. If
I am an expert in defence, I am basically trying to win defence contracts out
of a place in the United States and I am engineering worldwide. If I am an
expert in oil and gas, I am setting up in Houston, Yokohama and Perth and
engineering oil and gas projects, and I have all my engineers doing that in one
spot. There is a merging of engineering across the planet into bigger and
bigger engineering centres.[21]
We are also starting to see integration. Communications,
especially broadband, have allowed people to move information 24 hours a day.
Right at the moment, our engineers in Perth would be using companies to do
drafting in India—and they will be working. Then they will move to San Diego
and all around the planet to get their engineering and drafting done.[22]
2.18
In effect, naval shipbuilding can no longer be viewed as a discrete
industry sector with capacity and productivity assessed on the basis of
individual shipyards. Shipbuilding in the new technology era is part of the
emerging heavy engineering sector. It is a process of collaboration and
integration spanning the cutting edge of the electronics and IT industries.
This partnership between companies and across sectors is also happening in the
context of globalisation with alliances being formed between companies in
different countries.
A protected industry
2.19
Even with a growing reliance on globally integrated production systems
to supply and install high technology systems, many countries want to continue
to build their own complex naval vessels. As much as possible they want to
retain sovereignty over their own defence capabilities.[23]
Thus, naval shipbuilding countries throughout the world seek to maintain a
degree of control over their domestic industry by providing some form of direct
or indirect assistance to their naval shipbuilding industry.[24]
Vice Admiral Paul E. Sullivan told a subcommittee of the U.S. House Armed
Services Committee on Shipbuilding that protection through direct or indirect
subsidies can take different forms in the naval shipbuilding industry. He cited
monetary grants given by a government to lower the price faced by producers (or
consumers) of a good, or mechanisms such as soft loans, debt guarantees, tax
shelters, provision of equity capital and other types of assistance.[25]
2.20
A number of witnesses also remarked on the various incentives offered by
governments to their naval shipbuilders in order to sustain a domestic
shipbuilding capability (see also paragraphs 9.9–9.14). The Australian
Shipbuilders Association asserted that some countries maintain industry
protection in the form of 'hidden tariffs and subsidies that provide a false
perspective on their efficiency'.[26]
Rear Admiral Doolan (retired), National Defence Committee, Returned and
Services League of Australia, contended that:
Nations design and build and market warships to other nations
for explainable reasons. They gain economically, industrially, scientifically
and strategically. In sum, they sell warships to other countries because it is
in their national interests to do so. Variations to industrial relations
regimes, taxation laws, shipbuilding subsidies and a host of other like
mechanisms are available to vendor governments marketing warships to other countries
at a cost that is less than that for which the vessels can be produced in the
buyer state. More to the point, most if not all of these mechanisms can be kept
from public scrutiny under one guise or another.[27]
2.21
Tenix also drew attention to the range of government benefits in the
form of subsidies and protective legislation that are used to shield the local
industry from overseas competition.[28]
The U.S. Jones Act is often cited as a form of protection.
Major shipbuilding economies
2.22
To examine more closely changes underway in the naval shipbuilding
industry, the committee considers developments in two major military
shipbuilding economies—the U.S. and Europe with a special emphasis on the UK.
It also briefly discusses developments in the major shipbuilding countries in Asia.
The United States
2.23
The U.S. provides an example of a country where the demand for naval shipbuilding
and repair has been falling for some time resulting in a significant decline in
the production of warships. Orders for U.S. warships declined 60
percent during the decade following the end of the Cold War. The total number
of warships in the U.S. Navy reached a peak at the end of the financial year
1987 then began to decline. In 2002, the number of ships in the U.S. fleet was
just over half the number of the 1980s that comprised almost 600 ships at its
peak.[29]
The number of battle force ships in the Navy fell below 300 in August 2003 and by
March 2005 had fallen to 288.[30]
In March 2006, the U.S. Navy had 281 ships.[31]
Recently, before the U.S. Armed Services Committee, Admiral Mike Mullen expressed
concerns that the current rate of shipbuilding did not provide the stability America
'must possess to preserve its vital industrial base'.[32]
2.24
This steady drop in demand precipitated significant consolidation in the
industry with shipyards closing or merging. In 1990, there were 14 U.S. yards
capable of constructing large commercial ships and sophisticated warships and
cutters. According to Dr Scott Truver, National Security Programs, Anteon Corporation,
'since then mergers, acquisitions, and closings have consolidated the nation's
new construction capabilities for highly complex, large warships to just six
private yards, owned by two corporations'—General Dynamics and Northrop
Grumman.[33]
Following the same pattern, the U.S. Navy's shipyards have consolidated and
realigned facilities, falling from eight yards in 1990 to four in 2004.[34]
For example, to reduce overheads and sustain engineering excellence, the Navy
merged two West Coast facilities in 2003, Puget Sound Naval Shipyard and the
Bangor-based Navy Intermediate Maintenance Facility.[35]
2.25
In pursuit of greater efficiencies, the U.S. Navy has developed a new
model for its ship maintenance and repair operations. The objective 'is to take
the four public repair yards and operate them as a single enterprise: common
business practices, common procedures to flow the work force among the yards to
accommodate surges of work and try to create efficiencies'.[36]
2.26
The 1990s also witnessed the creation of joint ventures between foreign
and U.S. shipyards, 'primarily motivated by the desire to construct certain
ship types within the United States and to compete in the U.S. market'.[37]
The U.S.—the Arms Export Control
Act and the International Traffic in Arms Regulations (ITAR)
2.27
The U.S. has a clearly stated and well-established protectionist policy
for their shipping industry. The Merchant Marine Act, 1920 stipulates
that no merchandise shall be transported by water between points in the United States
either directly or via a foreign port in any other vessel than a vessel built
in and documented under the laws of the United States and owned by persons who
are citizens of the United States.
2.28
The U.S. believes that such measures are necessary to ensure that the
country has a merchant marine of 'the best equipped and most suitable types of
vessels sufficient to carry the greater portion of its commerce and serve as a
naval or military auxiliary in time of war or national emergency'.
2.29
This statutory requirement that all U.S. flag ships be built in the U.S.
means that the U.S. shipbuilding industry is effectively shielded from genuine
competition from overseas. The substantial volume of shipbuilding created by
this legislation assists productivity in the U.S. On the other hand, other
countries are effectively closed out of the U.S. shipbuilding market. The
Australian Manufacturing Workers Union highlighted the closed nature of the
industry:
...the recent US free trade agreement failed to get access to the US
shipbuilding industry, symptomatic that the US government, for all of its
rhetoric about free trade, sees shipbuilding as a key strategic industry and is
not prepared to sell it out for supposed gains in a free trade agreement with Australia.[38]
2.30
The U.S. also has stringent policies that control the sale of defence
articles and defence services. The policy, reflected in the Arms Export
Control Act 1976 (AECA), rests on the premise that all such sales must be
consistent with the foreign policy interests of the United States. The
following strict conditions apply to the sale or lease of defence articles and
services—the sale or lease would strengthen the security of the United States
and promote world peace; the recipient agrees not to transfer title to, or possession
of, the article or service without prior approval; the recipient has the capability
and intent to maintain and protect the security of the article or service and
is eligible to purchase or lease the article or service.[39]
The International Traffic in Arms Regulations (ITAR), which provides for the
promulgation of implementing regulations, executes the AECA statutory authority
to control the export and import of defence articles and services.[40]
Europe
2.31
The shipbuilding industry in Europe has also experienced consolidation over
the past decades with job losses and yard closures. According to a recent UK
Ministry of Defence White Paper, Europe has twelve military shipbuilding
companies with most in the UK, France, Germany, Spain, Italy and the Netherlands.[41]
The industry in Europe, however, has taken a different course from that taken
in the U.S.
2.32
The UK Ministry of Defence noted that in the United States, changing
market conditions prompted the consolidation of the industry into a handful of
'super' prime contractors. With regard to Europe, however, it found that:
...although major companies such as BAE Systems and European
Aeronautic Defence and Space Company (EADS) have emerged, the general pattern
of industrial restructuring so far has been to create joint ventures—MBDA,
Agusta-Westland—rather than consolidation on the US model. This reflects Europe’s
history of collaborative programmes, and allows a degree of national control to
be retained. The disadvantage is that it is more difficult to create synergies
and strong managerial structures. Some European companies have also widened
their markets by investing into the industries of other countries, presenting
themselves as multinational companies with more than one national identity:
notably BAE Systems, Rolls-Royce and Thales, but with smaller companies also
having significant interests abroad.[42]
2.33
Mr Günter Verheugen, Vice-President of the European Commission
responsible for Enterprise and Industry, commented more directly on the
influence that national interest has on the rationalisation process in European
shipbuilding industry. He stated that:
The Commission is neither driving nor holding back the emerging
trend of consolidation of naval shipbuilding yards. But whilst national
consolidation has already begun in some countries, further cooperation between
yards is hampered by diverging operational requirements of national navies and
the absence of a truly common market for defence equipment.[43]
2.34
A recent report endorsed by the Interparliamentary European Security and
Defence Assembly noted that the process of consolidation 'had turned out to be
far more difficult than in the United States'. It also observed that European
companies and governments are yet to adopt a common and cooperative approach to
naval shipbuilding with countries focusing on their own particular concerns.
The European naval defence industry today has to contend with
the existence alongside one another of companies of different nationality,
subject to different rules and with ties in certain cases to different
governments. Market pressure alone is not enough to bring European companies
closer together: to make large-scale reorganisation happen, government
intervention is necessary.[44]
2.35
Indeed, Professor Keith Hartley, Centre for Defence Economics, University
of York, observed that there had been relatively few 'giant' mergers of the
type that characterised the U.S. and European aerospace industries. He
explained:
Typically, the European warship industry is structured around a
national leader which forms a domestic monopoly. These include BAE Systems in
the UK; DCN (state-owned) in France, Fincantierei (state owned) in Italy; Izar
in Spain (state owned, comprising a merger of the Bazan yard and the private
civilian yard, Astilleros Espanoles); HDW and Thyssen in Germany; and Kockums
in Sweden.[45]
2.36
He maintained that European maritime nations place a high value on
retaining an independent industrial capability in warships and support their
warship building through preferential purchasing; ie a buy British or buy
French policy.[46]
This means that despite the pressure to consolidate, the shipbuilding industry
in Europe is characterised by duplication with 'many countries and yards
involved in the design and build of destroyers and frigates (9 countries),
small warships (6 countries) and conventional submarines (5 countries)'.[47]
A protected industry
2.37
As noted above, European maritime nations support their warship
construction through preferential purchasing policies which favour the home
industry.[48]
Indeed, naval shipyards in a number of member states of the European Union are
state-owned or state-controlled.[49]
The European Union recognises that Defence industries are of a strategic nature
and therefore have a special relationship with the state:
As sole clients, states determine demand for products on the
basis of military needs linked to their strategic objectives and thus define
the size of the market. They participate, to varying degrees depending on the
country, in the financing of R&D, thus influencing the technological
know-how and long-term competitiveness of industry...State control also extends
to industrial restructuring, although to a more limited degree, and even to the
level of shareholding...
States may...see fit to set up special supply guarantees. The
maintenance of a purely national industrial capacity for defence may seem a
reliable way of being able to respond to strategic interests and emergency
situations (military operations).[50]
2.38
It accepted that state support is required because production volumes
are limited and the risk of commercial failure high.
2.39
On this matter of protection, Tenix noted in its submission that the
European Economic Union has implemented measures to prevent subsidies for
commercial vessels, but that no similar prohibition exists for naval
shipbuilding projects.[51]
Its concern, however, was with the benefits that accrue to European
shipbuilders:
Many shipbuilders in Europe who specialise in large naval
vessels are Government-owned and derive considerable financial advantage from
that ownership.[52]
2.40
Despite the costs involved, the European naval shipbuilding nations
continue to strive for national independence in warship construction. Their governments,
as major buyers, or in some cases the only buyers of warships, use their
purchasing and political power to protect their domestic shipbuilding industry.
Ship repair
2.41
With regard to ship repair, the UK Ministry of Defence noticed the move
toward rationalisation in the industry and a similar pattern of influence
exerted by the respective nations:
Similarly, there are extensive military ship repair facilities
throughout Europe and within the US, many still controlled by national
governments; consolidation and rationalisation is also evident in this area. To
date, rationalisation has not extended across borders, although some
cooperative programmes have been pursued by European governments. Retaining
national military support facilities is widely seen as an essential requirement
for mounting and supporting operations of a first class Navy.[53]
2.42
The committee now turns to look in more detail at developments in the naval
shipbuilding industry in the UK.
The United Kingdom
2.43
The United Kingdom is an example of a member of the European Union that
has witnessed a decrease in ship orders resulting in a series of closures and
consolidations of naval shipbuilders.[54]
2.44
In 2005, the RAND Corporation produced a report, commissioned by the UK's
Ministry of Defence, that examined the domestic capacity for naval ship
construction (The UK's naval shipbuilding 2005 report). It noted that the end
of the Cold War brought about a profound reduction in naval shipbuilding for
the UK as requirements lessened and the country sought to capitalise on the ‘peace
dividend’. After 1970, the Royal Navy combatant fleet experienced a marked and steady
decline in its size. In 2000, it had shrunk to about 60 per cent of its 1970
size.[55]
2.45
The resultant fall in ship orders caused a series of closures and consolidations
of naval shipbuilders.[56]
According to the UK's naval shipbuilding report, the industry in the UK also
underwent a period of de-nationalisation in the late 1980s:[57]
From 1985 to 1990, designated shipyards were sold off. Coincidently,
this period also corresponded to the time when naval ship orders began to
decline. At the start of privatisation, the naval shipbuilders were, for the
most part, profitable. Soon after privatisation finished, the bottom fell out
of the market and these shipyards struggled to survive. There were too many
shipyards chasing too few programmes. The intense competition that ensued
during this period—driven by the MOD policy to compete work—led to very low
bids from firms that were simply looking to fill their yards with work...although
this situation may have led to better prices for the MOD, it left the shipyards
in a vulnerable state. Certainly, there was little investment, modernisation,
or upgrades in the shipyards during this period.[58]
2.46
This situation resulted in a number of shipyards going into receivership
while others re-structured under single ownership.[59]
The Ministry of Defence reported that ownership of UK warship yards has
consolidated to the extent that by 2005 only two main companies existed with
the skills necessary to design, manufacture and integrate complex warships.[60]
2.47
Similar to other European nations, the UK places a priority on retaining
its industrial capability in warships. Professor Keith Hartley noted in
particular that the British government is the only buyer of nuclear-powered
submarines for its navy, and is 'willing to pay the price of creating and
retaining' its national submarine industrial base.[61]
South Korea, Japan and China
2.48
There is little information available about the military shipbuilding
industry in Asia. It is without doubt, however, that countries such as South
Korea, Japan and China now dominate the construction of commercial vessels.
According to the 2004 global order book position, South Korea secured 37.6 per cent
of the outstanding orders; Japan had a 28 per cent share while China accounted
for 14.2 per cent of the orders.[62]
2.49
The South Korean shipyards are renowned for their efficiency in
producing commercial tankers. Their business model is based on high-rate
production and they have forward orders running for many years.[63]
Dr Stephen Gumley, DMO, told the committee that Defence had purchased the Delos,
a 37 000-tonne vessel, from a South Korean shipyard for $A50 million.[64]
He maintained that the production capacity of these shipyards was 'just
phenomenal'.[65]
Indeed, Lieutenant General David Hurley recalled a tour of those yards:
...we...asked the Koreans if they would be interested in building a
20,000-tonne LHD, they looked down their noses because they 'don't build tugs'.
It was just a size they do not consider...[66]
2.50
According to a 2003 report by First Marine International Limited, South
Korean shipyards took over 50 per cent of the container ship market in 2002,
over 40 per cent of the oil tanker market and significant shares of the gas and
chemical tanker markets. South Korean shipbuilders are endeavouring to pursue
the higher value sectors to maximise profits, in particular the LNG carriers.
They are yet to make their mark to any significant degree on the passenger ship
sector, which is also a high value added sector.[67]
2.51
The committee's delegation to South Korea obtained some insights into
naval shipbuilding in that country. The Republic of Korea's naval shipbuilding
industry is structured around three major primes. Daewoo Shipping and Marine Engineering
(DSME) and Hyundai Heavy Industries (HHI) are the principal suppliers of
frigates and destroyers, while Samsung Heavy Industries also supplies landing
craft. DSME's majority shareholder is the Republic of Korea Government, while
Hyundai is completely privately owned.
2.52
Members of the delegation were interested to observe that, due to the
scale of their production and diversified commercial product base, both DSME
and HHI are each able, in effect, to operate Common User Facilities within one
company. The efficiencies derived from economies of scale, automation and
modular construction were clear.
2.53
While naval construction comprises a small proportion of DSME's
production, representatives commented that the technology gain and prestige
associated with naval construction are key drivers for DSME's naval building
program. Representatives noted that it is the profit from commercial building
which makes naval shipbuilding viable, although the Republic of Korea government
does make down payments for naval acquisitions. Naval shipbuilding also forms a
small component of HHI's construction work and representatives confirmed a
preference for commercial work. The naval vessels produced by HHI include submarines,
destroyers, frigates, corvettes, patrol vessels, fast attack craft and logistic
support vessels. HHI is developing a 10 000 tonne Aegis destroyer (HDD-10000)
and a 16 000 tonne Landing Platform Dock.
2.54
Japan produces mainly bulk carriers for the home market, oil and
chemical tankers and gas carriers. The Japanese shipbuilding industry has lost
a considerable share of the container ship market to Korea.[68]
Chinese builders concentrate on tankers and bulk carriers and hope to achieve
the capability to build LNG carriers.[69]
The Government of South Australia submitted that China will emerge in the next
decade as a serious low cost competitor as it expands its shipbuilding
infrastructure and starts to build more complex ships.[70]
Segmentation in the shipbuilding industry
2.55
A 2006 study by ACIL Tasman surmised that this growing segmentation of
the shipbuilding industry is 'an indication of the continuing cost competitiveness
of Korea and China in the tanker and bulk carrier end of the construction
market and the growing specialisation of industrialised countries in the
high-end shipbuilding'.[71]
2.56
The Australian shipbuilder Austal agreed with the view that the move in
the production of the larger and less complex steel ships from Europe to Japan,
South Korea and China was due mainly to cost efficiencies, particularly the
labour component associated with the construction of large steel commercial
vessels:
The technology associated with the majority of very large steel
ships for commercial applications is relatively simple, mature and well
understood, and contracts are generally awarded on the basis of price and
delivery times. As a result, global construction of very large steel ships has
steadily migrated to lower cost countries—principally from Western Europe to Asia
(South Korea, Japan and increasingly China) and to some extent Eastern Europe. [72]
2.57
Thiess Pty Ltd also drew the committee's attention to the shift of major
shipbuilding activity away from developed countries to countries with cheaper
labour. It explained:
Korea and China, but particularly Eastern European countries
such as Poland and Romania, have benefited from that evolution. However, it is
interesting to note that ships with high value adding are still constructed in
first world regions such as Western Europe. Large complex passenger vessels are
all being built in countries like Norway or France. Only lower value cargo ships
with low levels of technology are being constructed in less developed
countries.
This indicates that cost of labour is only a small parameter in
the overall cost of a complex vessel such as a naval ship. Capacity to program
manage huge projects, expertise in a large number of disparate disciplines and
capacity to integrate and resolve problems across a wide variety of
technologies are not typically second or third world competencies.[73]
2.58
Clearly, the shipbuilding industry divides into sectors according to the
degree of complexity involved in the construction of the ship. At the moment,
countries such as Japan, South Korea and China have captured the global market
for large steel hulled ships associated with relatively simple and well
established technology, mainly tankers and bulk carriers. While fiercely
competitive in this sector, they are not major competitors in the naval
shipbuilding sector where even countries with a long tradition and recognised
capability struggle to keep pace with advances in technology.
2.59
The committee now turns to international developments in the methods of
producing a naval ship.
Current trend—growing complexity in the construction of naval vessels
The fall in demand for naval vessels coupled with the ever
increasing advances in technology, such as the use of 2D/3D computer aided design
and modularisation are revolutionising the way ships are built. The concept of
shipbuilding has shifted away from the traditional method where ships were
constructed on a slipway and built up as they went forward. Although modular
construction has been used in Australia for many decades, this method of
construction has become increasingly complex as the modules themselves increase
in size and sophistication. Ships are now designed to be built in large modules
that can be near complete before final consolidation. The Chamber of Commerce
and Industry of Western Australia noted:
Most ships used to be stick built. All the people would turn up
on site and start by levelling the ground. They would then put a stick—a piece
of steel—in the ground and bolt it down. It would be like a meccano set. They
would build it that way. That is the way people traditionally built
worldwide—stick build. Engineering has changed. Our ability to integrate has
allowed us to move away from the stick build concept. We can build a 3,000,
4,000 or 5,000 tonne module somewhere, roll it up and plonk it down. So now we
have modularisation—integration.[74]
Building in modules
2.60
The trend toward building a ship using modules has dramatically changed
the dynamics of shipbuilding and according to the Government of South Australia
has 'proved to be the most cost effective way to deliver modern warships'.[75]
Some commentators refer to this change as a 'paradigm shift' in the
construction of modern ships which allows more flexibility and reduces cost and
risk.[76]
The use of modular assembly is now common practice:
The world has changed. It is all about integration—being able to
bring big bits together into a central point and those bits come from all
around the world.[77]
2.61
Modular ship production starts with hundreds of smaller subassemblies
such as piping sections, ventilation ducting, other shipboard hardware and
major machinery items being joined together. These sections are then assembled
with other shipboard sensors and weapons to form ship modules.[78]
The Government of South Australia described the final assembly of modules into
the finished product:
Modules, often weighting hundreds of tons, and between 60% to
90% complete, are then moved to the final consolidation site where they are
aligned and then welded together on land to form the completed ship hull.[79]
A floating dock, slipway or shiplift is used to launch the
completed hull... Following launch, final ship outfitting is completed at the
wharf, systems are set to work, and pre-delivery certification and onboard crew
training finalised.[80]
2.62
The integration of modules means that only one major site is needed to assemble
the various parts of the ship that have been constructed elsewhere. Thus, a
wide network of sites for construction of ship modules is now involved which,
according to the Australian Industry and Defence Network Inc. (AIDN), accounts for
60 to 80 per cent of fit outs. Mr David Miller, Executive General Manager of
Tenix, stated that 'it is simply the way we do business'.[81]
He explained the advantages of this method of construction:
The primary driver is simply that it allows you to distribute
work across a large area. It lets you, as a shipbuilder, concentrate on the
high-end value of the problem, which is bringing various building blocks
together so that you can take the module work itself and subcontract either to
other shipyards or to steel fabricators who are not necessarily shipyards. [82]
2.63
Many other witnesses also highlighted the benefits that derive from this
new approach particularly the potential to lower construction costs
significantly and to better plan and implement the various phases of a project:
Imagine a module with seven different fabrication yards all
building at the same time. You can crunch your schedules together, because they
are all building a different bit and they are using their own skill sets. So
you can crunch project times together and you can have the same amount of
control, because it is all computerised. It is basically crunching it together
and it is reducing costs—and that is what is driving the engineering world
right at the moment.[83]
2.64
According to a recent study of major shipyards, the U.S. is yet to
embrace fully this modern state-of-the-art shipbuilding technology. It found
that, with a few exceptions, the extent of module construction in U.S. yards
was 'disappointingly low'. It concluded:
This is often the result of building legacy designs where vessel
design did not incorporate outfit modules. Although most yards now accept the
benefits of outfit module building, they, and in some cases the Navy, appear to
be reluctant to spend man-hours re-designing legacy vessels and few are
familiar with the spatial design techniques that make module building highly
efficient and effective. In addition, most yards lack dedicated module assembly
facilities and, even in those yards that are active in module building, the
work is often carried out in dispersed areas within different buildings or even
in the open.[84]
2.65
During the delegation's visit to the U.S.A., members witnessed the
technological advances being made in naval shipbuilding and the move toward
modular construction. Modularisation techniques now apply both in platform
construction and systems design. In relation to platforms, larger modules are
being produced allowing more fit-out and testing to occur on land earlier in
the build process. The delegation noted that international benchmarking studies
have assisted U.S. shipbuilders to improve their efficiency and production
processes. In relation to systems, open architecture is enabling system
components to be packaged and configured to specific requirements and combined
with commercial off the shelf products.
2.66
For example, the delegation noted Bath Iron Works' (BIW) enhanced use of
modular technology and the major efficiency gains achieved through this
technology. The advent of mega units (larger modules, weighing up to 1400 tons)
has enabled BIW to build ships in 21 separate units. Previously 25 units, each
weighing up to 480 tons, were required. A key advantage of the larger mega
units is that a greater proportion of ship fit-out can be undertaken prior to
the ship's final assembly.
2.67
BIW participated in the U.S. Department of Defence's International
Benchmarking study and has been able to use the experience to improve its
efficiencies. In 2000, BIW rated below both the average US shipyards and
international yards on a range of productivity criteria. By 2005, it was well
above U.S. averages and slightly above international averages.
2.68
It should be noted that, according to Mr Miller, Executive General
Manager, Tenix, Australia is one of the countries leading the world with
developments in modular construction.[85]
Modularisation in Australia will be discussed in chapter 6.
Modern construction and the challenges for the prime contractor
2.69
The continuing advances in technology present a particular challenge for
naval shipbuilders who need high order technological as well as managerial
skills. The success of any project depends on the expertise that shipbuilders
bring to the integration of the various modules. As noted by the Western
Australia Chamber of Commerce and Industries, the emphasis is on the future and
the ability to integrate:
It is no longer about your ability to fabricate. Fabrication is
a separate skill— and half a ship could come in or half a plant could come in.[86]
2.70
The growing requirement for highly complex systems in modern warships
makes these systems and their integration a central concern to today's
shipbuilders. ADI explained:
...the role of traditional shipbuilding has changed away from a
focus on platform—in other words, hull—construction to combat communications
and command and control systems, as the demands of modern naval capability have
become more sophisticated.[87]
2.71
The Collins class submarine built in Australia illustrates some of the
complexities faced by a modern naval shipbuilder:
Aboard the Collins, we have 108 systems integrated into a
pressure hull, one of which we are required to safety certify. It is a safety-critical
piece of equipment. That alone makes it an engineering and technical challenge.
The shipbuilder, or the submarine builder, in that case, is responsible for
integrating those systems into the vessel. The combat system constitutes a
system and there are the communications system and other systems. Even by the
time we are done with everything that can be construed as a related part of the
combat and C3I system, we still have 100 systems that are integrated which work
to keep the platform in motion, keep the crew safe at deep-dive depth and a lot
of other things.[88]
2.72
The challenge for modern naval shipbuilders is to manage these extremely
complex projects and the relationships between subcontractors. The critical
role of bringing together increasingly sophisticated systems as a functioning
whole means that the role of designing and integrating them is a highly difficult
and very expensive undertaking. Companies, such as Raytheon as a Mission System
Integrator (MSI), assume a prominent role in the construction of a modern naval
vessel. Mr Ron Fisher, Managing Director, Raytheon Australia, explained:
...in the US model for the DDG1000, Raytheon is the MSI and it has
Northrop Grumman and Bath Iron Works, along with Lockheed Martin, as part of
the subcontract. As the mission systems integrator, it is responsible for
putting it together. In that sense, that is the new model going forward, rather
than the traditional primes.[89]
2.73
Indeed, officials from Lockheed Martin told the committee's delegation
visiting the U.S. that with Australia's Air Warfare Destroyers (AWDs), the
anti-air warfare system, the combat system and the ship need to be built as a
single entity with the integrated Aegis system providing the basis for the ship
design. They noted that Australia is 'buying an Aegis ship, not buying a ship
and putting Aegis on it'.
2.74
Further underlining this point, Lockheed Martin representatives
explained to the committee's visiting delegation that systems integration is
the major area of risk for naval shipbuilding programs. They stressed that
while advanced technology exists and its performance is proven, the business
models underpinning projects can be the most difficult factor to manage. To
illustrate the skills needed to manage partnerships effectively, especially
those responsible for major systems, they cited a recent major multi-national
integration project—the F310 Frigate for the Norwegian Navy. The vessel
included weapons and systems built in Italy, France, Norway and Germany and the
ship was built in Spain.
2.75
According to ADI, shipbuilders must ensure that all components of the
project—design, platform construction and the installation and integration of
platform, combat and command support systems and the test and evaluation regime—produce
an end product that is 'safe for our sailors and fit for purpose'.[90]
ADI explained that to deliver the 'fully integrated package of capabilities,
the core competencies of a successful prime tenderer must now be prime
contracting, project leadership and project management'. It noted:
Project management delivers the ability to ensure that schedules
are developed and managed, costs are controlled, risks are identified and
mitigated, resources are available when and as required, subcontractors are
managed, overseas technologies are introduced and management tools are current
and are applied. Modern shipbuilding also demands comprehensive systems design
and development and the ability to manage the software development to schedule
cost and performance—a critical success factor for modern projects. Finally, it
demands systems integration and testing that demonstrates to government that
the product, as specified, meets its requirements.[91]
2.76
Mr Ron Fisher, Raytheon, also underlined the crucial role of the modern
shipbuilder as project manager. He noted that the shipbuilder fails if the
shipyard, the fabricators and the module builders are not aligned.[92]
ASC explained the skills needed for success:
An efficient shipbuilder must be able to employ creatively
advanced technology and associated systems to design processes for constructing
parts of a ship in a logical sequence, to manage the complexity of bringing the
thousands of sub-systems together in a workable and harmonious manner, and to
test and set-to-work subsystems and then the entire ship system. Indeed, the
fewer the number of complex ships to be built, the more importance is placed
upon the ability to effectively design all aspects of the vessel and then
employ advanced techniques to model, plan and schedule production/construction
so that mistakes can be avoided and opportunities for improvements can be
incorporated before any steel is cut.[93]
2.77
Clearly, shipbuilding is not primarily about metal shaping or
fabrication. It is a highly complex undertaking that requires specialist skills
to integrate modules in the final assembly of a naval vessel in order to
satisfy all conditions of the contract. Shipbuilders throughout the world face
this challenge but ultimately it is the responsibility of governments, as the
sole buyers of naval vessels, to ensure that their shipbuilding projects are
managed properly and effectively. Australian shipbuilders are no exception,
they require highly developed skills to manage the complex task of ship
construction. Defence similarly needs to be able to oversee and effectively
manage a major naval acquisition project from inception to final product. These
matters are taken up in part IV of the report.
Developing and retaining a skilled
workforce
2.78
A number of studies have shown that the dramatic changes taking place in
the shipbuilding industry place increased demands on the workforce,
particularly given the rapid rate in the development of technology. Highly
skilled people are needed to design, build and integrate the modules that comprise
a large weapons platform. The 2005 UK's shipbuilding report noted:
The design of modern naval ships is now done using sophisticated
three-dimensional computer-assisted design (CAD) tools. Thus, the design
workforce must be highly skilled and educated. Production also requires many
proficient skills or trades, such as electricians, welders, and painters.
Testing these complex systems also requires commissioning and test specialists
to verify functionality. For certain skills, it might take years to become
proficient (e.g., nuclear-qualified welders and commissioning engineers). The
workforce for the production trades might peak in the thousands for a typical
naval vessel. [94]
2.79
Even in some areas of steel fabrication, military standards are higher,
for example in welding and surface flatness.[95]
2.80
It should be noted that the skills critical to the shipbuilding industry
take time 'to build and effort to sustain'.[96]
Specifically, the 2005 Rand Report on the UK's naval shipbuilding industrial
base mentioned workers who have an intimate knowledge of naval shipbuilding
rules and standards that are crucial to a company's naval success.[97]
It stated:
...it can take test and commissioning engineers 10 to 20 years
working in the industry to become fully proficient. Furthermore, these
engineers cannot be easily replaced in the short term by technical experts from
other industries or even other shipbuilding fields (eg. submarines or naval
surface ships).[98]
2.81
The RAND Corporation warned about the potential loss of expertise should
these people leave the industry:
Once made redundant, they [UK shipyards] believe, many of these
highly skilled persons will not return to the shipbuilding profession.[99]
2.82
Most countries face difficulties in building-up and maintaining a highly
skilled workforce to support their naval shipbuilding industry.[100]
In the UK, 'design engineers are in short supply; and the intellectual support
of underpinning science and technology is also fragile in some areas'.[101]
2.83
The U.S. also has concerns about retaining a skilled workforce
especially where gaps in production mean that highly qualified and skilled
workers leave the industry.[102]
A consequence of the fall in demand for naval vessels in the U.S. has been the
erosion of the skill base in the shipbuilding industry.[103]
Indeed, the ability to develop and maintain the expertise and higher order
capabilities to sustain an in-country shipbuilding industry depends
significantly on movements in demand. The situation in Australia regarding the
availability of a skilled workforce is discussed in full in chapter 7 and
further in chapter 15.
Peaks and troughs in demand for naval
vessels
2.84
A number of commentators have remarked on the important role that
governments have in assisting their domestic industry better manage the work
flow. They point to the dominant position of governments in determining demands
on the naval shipbuilding sector.[104]
John F. Schank from the RAND Corporation, observed that the Ministry of Defence
in the UK and the Department of Defense in the U.S. essentially set demand
conditions—'they decide the nature of the programs in terms of their number and
size; the nature of the market, that is, whether it's run by competition or
allocation; and, at least indirectly, the number of firms that will survive'.[105]
The following section briefly discusses the difficulties caused by uneven
demand flows.
The United States
2.85
The U.S. faces workforce problems created by fluctuations in demand,
with the boom and bust cycle in the technical areas of shipbuilding a particular
concern.[106]
2.86
The recent U.S. study into major shipyards suggested that the government
and Navy could assist shipbuilders by working with industry to smooth demand in
order to provide more stable employment. Both the shipbuilding industry and
government were concerned about the fluctuations in the shipbuilding workload
and realised the need for a stable shipbuilding program to ensure 'minimum
sustaining employment levels and retention of critical skills'.[107]
The recently announced Chief of Naval Operations' 313 ship fleet of the future
was intended to address these concerns.[108]
This plan, designed to produce a more stable and predictable funding
environment, would provide industry with a definitive direction to develop
strategic long-range plans.[109]
2.87
It should be noted, however, that industry recognised that it also had a
role in adjusting to the movements in workload. The President of Northrop
Grumman, Mr Philip Teel, considered that managing movements in demand was
nothing exceptional and should be considered part of the job of running a naval
shipbuilding program. He told the committee's visiting delegation that managing
workforce volatility remained an issue regardless of the shipbuilding schedule,
as the build process for each ship itself has workload peaks and troughs.
The United Kingdom
2.88
Having experienced a downturn in demand, rationalisation and erosion of
capability in the shipbuilding industry, the UK has embarked on its largest
naval shipbuilding program in many years. This development has created problems
for the UK government.[110]
The ambitious proposal to expand the UK's naval capability will test the
existing shipbuilding industrial base. The RAND report recorded that shipyard
sources in the UK had expressed concern about the workload gap between 2003 and
2006 when it was anticipated that shipyard owners could lay off workers they
may need in the future. It noted that the shipyards are worried that unless the
Ministry of Defence starts other programmes earlier than planned, shortages of
certain kinds of highly skilled workers, such as design engineers, might occur.
2.89
Mr John F Schank noted that one of the most significant findings coming
out of their research was the 'importance of a comprehensive, long-term MOD
shipbuilding strategy or plan.[111]
He suggested that a strategic plan would help eliminate the 'boom and bust'
cycle that characterises ship production and design in the UK:
It would allow the MOD to make more efficient use of shipyard
facilities and workforce skills and exploit the government's 'smart buyer'
expertise. It would help the MOD better understand the financial implications
of its acquisition strategy and anticipate problems by allowing it to
independently assess shipyard demand. It should also lead to reduced cost and
schedule risk through greater program certainty.[112]
2.90
Professor Martin Edmonds also referred to what he believed was the
absence of an overall government industrial strategy towards the UK naval
shipbuilding sector.[113]
Indeed, the UK's Defence White Paper stated:
We have been working to smooth out the long term cyclical demand
for naval warships and provide a more predictable future for ourselves, and
industry. But this more stable future can only be achieved if the design,
manufacturing, support and integration capacity within the industry is matched
to that pattern of demand.[114]
2.91
Clearly, developing and sustaining the high level of skilled workers
needed to sustain a modern shipbuilding industry is a major challenge for the
industry worldwide.
Conclusion
2.92
Over recent decades, the global naval shipbuilding industry has faced
major challenges with dwindling demand for ships but increased pressure for more
highly sophisticated and expensive systems and weaponry. Advances in technology
are accelerating the changes. To accommodate these shifts, the naval
shipbuilding industry has undergone a period of transition marked by
consolidation with fewer major producers. Furthermore, these remaining
producers are increasingly looking to form alliances or cooperative
arrangements to meet the demands of constructing a modern warship.
2.93
Broader heavy engineering capacity has also developed based on modular
cad/cam design and manufacturing techniques which have rendered more
traditional ship yard facilities obsolete and inefficient.
2.94
Without doubt, the advances in production technology will continue and
the countries that keep pace with such developments will improve their
international competitiveness. High order computing skills, the use of
automation and robotics and the capability to integrate highly complex
operating systems using a modular approach will be paramount to a modern
cost-effective shipbuilding industry. As noted earlier, the costs of achieving
such a high level of capability are great.
2.95
Even with a growing reliance on a globally integrated production system
to supply and install high technology systems, many countries place a priority
on building their own complex naval vessels—as much as possible they want to
retain their own capabilities.[115]
Advances in technology and the change to modular construction have also created
considerable demand for a highly skilled and stable workforce. Naval
shipbuilding nations face the difficult task not only of developing but
retaining skilled workers especially with the boom and bust nature of the
industry.
2.96
The many demands on the shipbuilding industry mean that maritime
countries across the globe face a common difficulty in finding the most
cost-effective way to maintain an up-to-date naval shipbuilding capability.
They must address issues created by the falling demand for ships, the
escalating costs of construction and of keeping pace with advances in
technology, as well as the need to develop and retain skilled workers. In light
of these challenges, the governments of countries keen to maintain their naval
shipbuilding capability are under pressure to review their approach to the
industry. Recent studies conducted into the U.S. and the UK naval shipbuilding
industries highlighted the important role that governments have in assisting
the industry to adjust and succeed.
2.97
As a nation with an established naval shipbuilding industry, Australia confronts
similar challenges as overseas countries in sustaining the industry. Having
discussed the international context, the committee, in the following two chapters,
looks at the effect that past and current naval shipbuilding projects have had
on Australia's capability.
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