U.S. Shipbuilding Industry the First to Consilidate Due to Defense Spending Realities

by: Matthew Potter
September 22, 2010

Category: Austal, Boeing, Business Line, Companies, Congress, Contract Awards, Department of Defense, Events, Federal Budget Process, General Dynamics, Industry Analysis, Lockheed Martin, logistics, Military Aviation, northrop grumman, Northrop Grumman Corp., production program, Restructuring, Services, States, U.S. Marine Corps, U.S. Navy | RSS 2.0

Northrop Grumman (NOC) has announced that they will close one of their yards in Avondale, LA with the first layoffs planned for early October as well as look at selling their shipbuilding business. This decision is based on the fact that the Navy is not buying enough ships and has led to rumors of a Boeing (BA) and Northrop merger.

With the pressures on the defense budget caused by the fighting in Iraq and Afghanistan for the last nine years as well as the high cost of new ships the number of orders each year has been reduced. On top of that the Obama Administration canceled or restructured planned programs by ending the DDG-1000 and substituting current DDG-51 class ships as well as ending a plan to have two designs produced for the new Littoral Combat Ship (LCS) and have a competition. Northrop says that the Avondale facility will close when it completes the two LPD-17 class amphibious warfare ships being built there.

The Navy is trying to aid the company and keep its industrial base larger by accelerating a new tanker program three years. This will allow Northrop to bid on them and perhaps be able to build them in Avondale. The moving up of the construction will also free up dollars in the out years for the new SSBN program which is expected to eat up most of the ship building dollars.

Even with this announcement there is no guarantee that Northrop will win the work since the ships are based on an existing hull already made by General Dynamics for underway replenishment ships. Northrop is just reacting to the writing on the wall.

The Secretary of Defense, Robert Gates, has just announced a whole set of initiatives to make defense spending more efficient. Spreading work across multiple ship yards just to keep them working is not the way to gain efficiency. It might make sense from an industrial base concern but is not the best way to save the taxpayers money. The Pentagon either has to balance these two demands or accept that their industrial base will begin to wither if their is not enough work to keep it going.

The same may happen to the aviation industry as F-22 and C-17 production is ending leaving just the JSF and the new KC-X tanker as major programs. This might not be enough to support Lockheed Martin (LMT) and Boeing’s capabilities for military aircraft production. Boeing will close their Long Beach, CA plant once the last C-17 rolls off the line and without winning the KC-X won’t have a military aircraft in production. This might make them tempted to merge with another contractor to keep some capability.

The cost of modern weapons may lead to a round of consolidation such as happened in the Nineties as the industry adjusted to the reduced defense dollars after the end of the Cold War. Unfortunately this is capability that will be hard to re-grow if needed putting the U.S. in an interesting position in the future if there is a need for another ramp up in defense spending.

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