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i

37–537 2008

[H.A.S.C. No. 110–39]

U.S. SHIPYARD MODERNIZATION

INITIATIVES AND SHIP COST REDUCTION

HEARING

BEFORE THE

SEAPOWER AND EXPEDITIONARY FORCES

SUBCOMMITTEE

OF THE

COMMITTEE ON ARMED SERVICES

HOUSE OF REPRESENTATIVES

ONE HUNDRED TENTH CONGRESS

FIRST SESSION

HEARING HELD

MARCH 20, 2007

(II)

SEAPOWER AND EXPEDITIONARY FORCES SUBCOMMITTEE

GENE TAYLOR, Mississippi, Chairman

NEIL ABERCROMBIE, Hawaii

JAMES R. LANGEVIN, Rhode Island

RICK LARSEN, Washington

MADELEINE Z. BORDALLO, Guam

BRAD ELLSWORTH, Indiana

JOE COURTNEY, Connecticut

JOE SESTAK, Pennsylvania

ROSCOE G. BARTLETT, Maryland

KEN CALVERT, California

TERRY EVERETT, Alabama

JO ANN DAVIS, Virginia

J. RANDY FORBES, Virginia

JOE WILSON, South Carolina

WILL EBBS, Professional Staff Member

HEATH BOPE, Professional Staff Member

JENNESS SIMLER, Professional Staff Member

JASON HAGADORN, Staff Assistant

(III)

C O N T E N T S

CHRONOLOGICAL LIST OF HEARINGS

2006

Page

HEARING:

Tuesday, March 20, 2007, U.S. Shipyard Modernization Initiatives and Ship

Cost Reduction ..................................................................................................... 1

APPENDIX:

Tuesday, March 20, 2007 ........................................................................................ 37

TUESDAY, MARCH 20, 2007

U.S. SHIPYARD MODERNIZATION INITIATIVES AND SHIP COST

REDUCTION

STATEMENTS PRESENTED BY MEMBERS OF CONGRESS

Bartlett, Hon. Roscoe G., a Representative from Maryland, Ranking Member,

Seapower and Expeditionary Forces Subcommittee .......................................... 2

Taylor, Hon. Gene, a Representative from Mississippi, Chairman, Seapower

and Expeditionary Forces Subcommittee ........................................................... 1

WITNESSES

Brown, Cynthia L., President, American Shipbuilding Association .................... 25

Montroll, Dr. Mark L., Professor, Industrial College of the Armed Forces,

National Defense University ............................................................................... 31

Sullivan, Vice Adm. Paul E., Commander, Naval Sea Systems Command,

U.S. Navy; Allison F. Stiller, Deputy Assistant Secretary of the Navy (Ship

Programs); Rear Adm. Charles H. Goddard, Program Executive Officer

for Ships, U.S. Navy; Rear Adm. David Architzel, Program Executive Officer for Aircraft Carriers, U.S. Navy; Rear Adm. William H. Hilarides,

Program Executive Officer for Submarines, U.S. Navy, beginning on page ... 3

Teel, Philip A., Corporate Vice President, Northrop Grumman Corporation

and President, Northrop Grumman Ship Systems, Inc. ................................... 29

Toner, Michael W., Executive Vice President—Marine Systems, General Dynamics Corporation .............................................................................................. 27

APPENDIX

PREPARED STATEMENTS:

Brown, Cynthia L. ............................................................................................ 52

Montroll, Dr. Mark L. ...................................................................................... 122

Sullivan, Vice Adm. Paul E., joint with Allison F. Stiller, Rear Adm.

David Architzel, Rear Adm. William H. Hilarides, and Rear Adm.

Charles H. Goddard ...................................................................................... 41

Teel, Philip A. ................................................................................................... 67

Toner, Michael W. ............................................................................................ 82

Page

IV

DOCUMENTS SUBMITTED FOR THE RECORD:

[There were no Documents submitted.]

QUESTIONS AND ANSWERS SUBMITTED FOR THE RECORD:

Mr. Taylor ......................................................................................................... 133

(1)

U.S. SHIPYARD MODERNIZATION INITIATIVES AND SHIP

COST REDUCTION

HOUSE OF REPRESENTATIVES, COMMITTEE ON ARMED SERVICES, SEAPOWER AND EXPEDITIONARY FORCES SUBCOMMITTEE, Washington, DC, Tuesday, March 20, 2007.

The subcommittee met, pursuant to call, at 2:48 p.m., in room

2212, Rayburn House Office Building, Hon. Gene Taylor (chairman

of the subcommittee) presiding.

OPENING STATEMENT OF HON. GENE TAYLOR, A REPRESENTATIVE FROM MISSISSIPPI, CHAIRMAN, SEAPOWER AND EXPEDITIONARY FORCES SUBCOMMITTEE

Mr. TAYLOR. The committee will come to order.

Today’s hearing will focus on shipyard modernization.

In the previous few years, under the leadership of Chairman Roscoe Bartlett, the committee has traveled to shipyards in Europe

and in Asia. And in almost every instance, I think it is fair to say,

the committee members were somewhat taken aback at the modernization of some of our economic competitors, as opposed to the

yards that are producing ships for the United States Navy.

This is in no way to question the individual skills of the folks

working at those shipyards, their dedication to build good ships.

But I do think it is fair to say when you compare a Hyundai to a

domestic yard or a Maersk to a domestic yard, we saw a great deal

of capital investment that we aren’t seeing in our own nation.

When we have had the opportunity to raise this question with

shipyard executives, they point to their dilemma, in that they are

responsible to their shareholders, that they basically have one customer, that, to a certain extent, they have a captive audience, and

that it is hard for them to justify additional expenditures when

they don’t know from year to year how many ships they are going

to be building.

I think that is a fair observation on their part. And so, the purpose of today’s meeting is to see what we as a nation can do as far

as investments on the part of our nation to stimulate shipbuilding,

to stimulate shipyard modernization, and to see that this industry

is here for decades to come.

I am pleased that the committee is moving along the path of adding several additional ships to this year’s budget. But in fairness

to the taxpayers who are going to pay for them, we want to make

sure that the citizens get the best possible value while the sailors

get the best possible ship.

We are very fortunate today to have Ms. Allison Stiller, Deputy

Assistant Secretary of the Navy for Ship Programs; Vice Admiral

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Paul Sullivan; Rear Admiral David Architzel; Rear Admiral William Hilarides; and Rear Admiral Charles Goddard joining us

today. We are very, very grateful for your time.

We are going to have a second panel of distinguished representatives of the private sector.

But before we do that, I would like to yield to my ranking member and former chairman of this committee and a guy I have

learned a heck of a lot from, Mr. Roscoe Bartlett from Maryland.

STATEMENT OF HON. ROSCOE G. BARTLETT, A REPRESENTATIVE FROM MARYLAND, RANKING MEMBER, SEAPOWER AND

EXPEDITIONARY FORCES SUBCOMMITTEE

Mr. BARTLETT. Thank you very much.

Good afternoon, ladies and gentlemen. It is a pleasure to be here

with you today to learn more about the Navy and industry’s effort

to control costs for naval vessel construction.

There are several key elements necessary to achieve cost reductions, including commonality of designs at the component and system levels, stability in the shipbuilding program, sufficient volume

to optimize workloads, and shipyard facility modernization.

The chairman and I have traveled around the world to visit Europe and Asia’s most competitive and efficient yards. We have seen

the art of the possible and are eager to understand what role Congress might play to facilitate the transfer of best practices from

these yards to the U.S. yards.

I was struck not only by what I saw on these production lines,

which was the sight of relatively few handwelding, but also what

I heard, or didn’t hear, which was the relative quiet of advanced

cutting processes such as lasers and water jets, and not the sound

of a grinder in all of Hyundai, by the way.

The contrast to our naval shipyards was stark. I do not believe

we are taking full advantage of these technologies and practices in

the construction of U.S. warships.

How critical is the length between shipyard efficiencies and

costs? I think we need to look no further than our recent experience with the Littoral Combat Ship (LCS).

While the issues with LCS are not directly tied to shipyard modernization, we have clearly seen that, once the modules for LCS–

1 began to be constructed out of sequence and the ship was in the

water without the maximum amount of outfitting having been completed, the resultant labor inefficiencies significantly increased the

price of the ship.

With that said, I must also acknowledge that commercial yards

have a very different task. Their key competency is construction of

cargo and passenger ships, which are often simpler in design and

require less oversight and integration of hull, mechanical and electrical systems.

These yards also benefit from economies of scale derived from

large commercial orders. Instead, our yards must strive to create

value for the Navy and their stockholders through a balance of

strategies, such as industrial efficiency, network services and

knowledge application.

3

As we have seen in foreign yards, industrial efficiency creates

value by producing standardized offerings at low costs. But the

Navy is never likely to need standardized, commoditized ships.

Consequently, we must also explore means to position our shipyards to connect people and services and to apply customized expertise to ship construction. If we were successful, we might even

find that other nations and other customers would be interested in

coming to the United States’ yards for their most challenging, highperformance ship needs.

I hope that we will learn more about these various possibilities

in today’s hearing.

I would like to conclude by thanking our witnesses for their service to our nation and for being here with us today. I truly look forward to your testimony.

And sadly, I have an appointment to which I must go in a couple

of minutes. It has been on the calendar for more than a month, and

it is one that I just couldn’t delay. But I will be back as soon as

I can for the continuance of your testimony and the questions.

Thank you very much, Mr. Chairman.

Mr. TAYLOR. Thank you, Mr. Bartlett.

Do any other members have an opening statement?

Ms. Bordallo.

Mr. Courtney, do you have an opening statement?

Okay. With that, the chair recognizes Ms. Allison Stiller.

Ms. STILLER. I am actually going to have—Admiral Sullivan is

going to give our opening remarks.

Mr. TAYLOR. Thank you.

Admiral Sullivan.

STATEMENT OF VICE ADM. PAUL E. SULLIVAN, COMMANDER,

NAVAL SEA SYSTEMS COMMAND, U.S. NAVY; MS. ALLISON F.

STILLER, DEPUTY ASSISTANT SECRETARY OF THE NAVY

(SHIP PROGRAMS); REAR ADM. CHARLES H. GODDARD, PROGRAM EXECUTIVE OFFICER FOR SHIPS, U.S. NAVY; REAR

ADM. DAVID ARCHITZEL, PROGRAM EXECUTIVE OFFICER

FOR AIRCRAFT CARRIERS, U.S. NAVY; REAR ADM. WILLIAM

H. HILARIDES, PROGRAM EXECUTIVE OFFICER FOR SUBMARINES, U.S. NAVY

STATEMENT OF VICE ADM. PAUL SULLIVAN

Admiral SULLIVAN. Good afternoon, Mr. Chairman, members of

the subcommittee. Thanks for inviting us here to discuss shipyard

maintenance and cost-reduction measures for our warships and

how we can modernize our shipyards today.

As you know, I am the commander of the Naval Sea Systems

Command, and my organization is a part of the team that is responsible for buying, building, maintaining and modernizing the

ships of the Navy.

As already stated, the rest of the acquisition team members are

here today, the three Program Executive Offices (PEOs) that build

ships and Ms. Stiller.

Again, thanks for inviting us. And we would like to get, quickly,

to the questions, so my statement will be short.

4

Without objection, we would like to submit our written testimony

for the record.

Mr. TAYLOR. So ordered.

Admiral SULLIVAN. Sir.

As you know, the Navy has submitted the fiscal year 2008 longrange plan for construction of naval vessels to build us a 313-ship

Navy. And that program is built on stable mission requirements,

stable shipbuilding program, and stable costs of our ships.

And in order to succeed, that program is dependent on the costs

of our ships being predictable and executable.

We are currently embarked on several fronts to decrease the

costs of our new construction warships by working with our industry partners to modernize the ship-production process.

I will briefly summarize these initiatives, and then we will be

happy to take whatever questions you have for specifics.

The first is the shipbuilding plan itself. You will not see major

annual revisions to that shipbuilding plan because both pricing

structure and production capacity and sequencing depend on the

stability of that shipbuilding plan.

But in order to facilitate that, there are things that we can do.

There are some near-term things that we can do, some mid-term

things that we can do, I will say out five to ten years from now,

and some long-term things that both the Navy and the industry

partner teams should be working on.

Near term, I think that the Navy should be promoting block buy,

multiyear procurement, teaming, open architecture and commonality. And I will speak a little bit about each one of those.

We need to assign the proper level of experience from our side

in the Navy and sufficient numbers of people to properly steward

these shipbuilding programs.

We need to encourage facility and process improvements at our

contractor partners through incentives in our contracting structure.

We need to maintain a level workload through program stability.

And we need to act corporately as a navy and think cross-program, cross-shipbuilder wherever we possibly can.

In contrast, or I guess in concert really, our shipbuilding partners should benchmark off the best of the business and adopt efficiency strategies based on that benchmarking.

They should reduce the number of components and types of components, and that is really a team effort. We should buy common

parts, such as valves, piping, cabling and electrical components.

I would ask our industry partners to reinvest profits into things

in their shipyards that will increase their productivity.

We should investigate bulk commodity purchases where we can,

like steel or pipe.

Share best practices across shipyards. We only have two corporations now, so best practices can be shared amongst the big six.

Act corporately to share resources and leverage materials buys.

Where Congress can help as part of the team is to support the

stability in our shipbuilding plan as we submit it to you, support

the multiyear procurement in the instances where we request it,

and allow some flexibility to contract for parts in cross-class and

maybe even some cross-contracting parts, pooling it so we could

pool our purchasing power.

5

In the mid-term, again, 5 to 10 years out, I think the Navy

should further increase use of open architecture past even just the

combat systems; reduce our combat system baselines and surface

ships from the current 16 down to 5 or 6.

We need to introduce commonality in our design tools. We should

work, as we specify how our ships are built, to adopt class-common

equipment if it is at all possible.

We need to promote amongst our industry partners an integrated

product development environment where there is some common

ground for interchange of information. Right now we have several

different systems for all of that.

Long term, and I am talking past 10 years out, we need to, as

a navy, try to reduce the numbers of classes of ships. Today we

have 29 classes or subclasses of ships out there. Every one of those

has a logistics and operational tail that is associated with it.

We should try to reduce our tight model series, like the aircraft

piece of the Navy. And in that way, we can build more ships of

fewer classes and have some standardization of processes.

We need to increase modularity on a much, much grander scale

than we have today. We have modular construction today. We need

to expand what we have in LCS to have mission modules across

all our combatant ships.

We need to dramatically reduce, in the far term, the numbers

and types of components that we have in our ships.

Strive for full data product model interoperability.

Again, some of these are repeats of what I just said, but in the

long term we need to be continually working on that.

And open architecture on not just the combat systems and electronics, but also open architecture in a physical sense, that the

ships can be reconfigured easily.

As far as modernization incentives for shipyards: common parts

catalogue. That is a start toward an industry-wide ability to purchase out of the same parts catalogue. That needs to be expanded.

The integrated data environment improvements that are on the

horizon today with the new design tools should be spread across

our shipyards.

There are other incentives, such as Hurricane Katrina, which

Ms. Stiller is prepared to talk about, if you want. That is an opportunity to work toward, at least for the Gulf Coast yards, to work

toward recapitalizing them.

Other facilities incentives such as capital expenditures (CAPEX)

and ultra hull facility, and the PEOs can talk to any one of those.

And I think we still need to continue benchmarking, every so

often, our shipyards against the best in the world, with organizations like First Marine International, so we see where we are and

then go try to close the gaps.

Both the Navy and the shipbuilders need a comprehensive,

thoughtful program that works across the industry and across all

of our class. We need to work better together.

Again, thank you for the opportunity to present to you. And we

will stand by to take your questions from here on out.

[The joint prepared statement of Admiral Sullivan, Ms. Stiller,

Admiral Goddard, Admiral Architzel and Admiral Hilarides can be

found in the Appendix on page 41.]

6

Mr. TAYLOR. Thank you, Admiral Sullivan.

Do any other of our witnesses have an opening statement?

Admiral SULLIVAN. No, sir. I think the interchange is better.

Mr. TAYLOR. Admiral, I very much appreciate your statement.

The only thing that I didn’t hear you mention that I have curiosity about would be government-furnished equipment.

And I realize, between the LCS and the Coast Guard programs,

a lot of the changes that I think were proposed by Secretary Rumsfeld are now—in particular, design-build—I think those expertises

are once again returning I think to the proper place, which is with

the United States Navy and with the United States Coast Guard,

to design the ship and monitor its construction. And understanding

the needs of the yards to have some sort of predictability and an

ability to tell their shareholders that their investment has been

wisely spent.

What I didn’t hear you mention was government-furnished

equipment and to what extent the experts from the Navy, to what

extent the experts from the Coast Guard when the case exists, do

you walk through a yard and say, ‘‘You know, if you had this machine,’’ be it a laser cutter or a laser welder, a CAD, any number

of things that we saw at Maersk, any number of things we saw at

Hyundai that we don’t necessarily see at a domestic yard, does the

Navy ever propose to the private sector the furnishing of equipment that would still be owned by the government as a means to

control cost, knowing that the private sector, because of the limited

number of ships that are being built, doesn’t have a very big incentive to go get that themselves?

I am told it is the case for submarines. But I was just curious,

have you ever made a proposal like that or has Ms. Stiller ever

made a proposal like that when it comes to surface combatants?

Admiral SULLIVAN. I will let Ms. Stiller answer that one.

Ms. STILLER. Yes, sir. And on the government-furnished equipment side, there can be some confusion. We tend to think of that

as our combat systems that we provide.

But for government-furnished tooling, what you are talking

about, that typically becomes specified for individual programs or

classes of ships.

For example, CAPEX has been used extensively in the submarine

community. And I am going to have Admiral Hilarides give you a

little more detail on that.

We have also embarked with Bath Iron Works recently on the

ultra hull improvements that I am going to have Admiral Goddard

allude to, that is toward the end of the DDG–51 class that could

have benefits on future classes.

So usually the industry will propose to us things that they see

specific to individual programs that will help efficiencies and productivity. And we have looked at different ways to incentivize that

and be able to accommodate that.

And I would turn it over to Admiral Hilarides and then Admiral

Goddard real quick to give you those two examples.

Admiral HILARIDES. Thanks, Allison.

The CAPEX program came about as part of the contract negotiations for the multiyear procurement of the Hull 6 through 10 of the

Virginia class. And in the negotiations, I think it is important to

7

point out that it occurred in negotiation for a contract between the

government and the contractor.

A piece of the incentive pool was set aside to help facilitize the

shipbuilder to improve his cost performance. That incentive pool

was set out there. It is $91 million.

And the shipbuilders, both of them, Electric Boat and Northrop

Grumman Newport News, could come forward and propose a

project that either improved the processes or the facilities at their

yard that could show an immediate payback to the program.

And when that business case was accepted and signed up to by

both the contractor and the government, the government paid for

half of the cost of the facilitization. The contractor paid for the

other half.

When the project was complete, the second half of the incentive

pool for that project was released. So, in fact, government had fully

paid for it with the caveat that the proof was in the production.

So the proof was in the next ship to be built. It showed either

the savings that were promised by the project or it didn’t. If those

savings were proven, then the government let the contractor keep

the incentive pool that had been put forward to pay for it.

If the savings did not appear—and we had very specific metrics

for how you measure it—if the savings did not appear, the contractor would have to pay back the incentive to the government and

would, in fact, have to absorb the costs of the facilitization that occurred.

A couple points just to make about the program.

We had a relatively mature design when we put the CAPEX in

place. That is, we knew what it took to build the ship. And we had

a very good idea of what kind of facilities would make it less expensive to produce.

And so I would encourage, as we think about CAPEX projects,

to wait until our designs are mature and then make it part of the

contract negotiations, not just something that the government

would give to the shipbuilders.

Mr. TAYLOR. Would you call that program a success, Admiral?

Admiral HILARIDES. Yes, sir. We have seen savings. In fact, we

have seen savings well before we thought we were going to achieve

them. Those savings have appeared on earlier ships than the ships

we negotiated the CAPEX for. In fact, we have seen it on the first

two or three ships.

Mr. TAYLOR. And at what point did you recoup the Nation’s investment?

Admiral HILARIDES. The business cases that we accepted were to

pay back over two or three ships. And in general we are seeing that

payback and sometimes faster, yes, sir.

Mr. TAYLOR. With that in mind, it is my understanding that we

will have built, when the program is terminated, something like 50

DDGs, Aegis class. At any time was a similar proposal made to

those two suppliers? And if not, why not?

Admiral HILARIDES. Sir, I think I will let Admiral Goddard address the DDG program.

Admiral GODDARD. A little bit different approach, Mr. Chairman,

on the ultra hull facility that BIW is moving out on with our assistVerDate 22-MAR-2001 11:46 Aug 06, 2008 Jkt 037537 PO 00000 Frm 00011 Fmt 6633 Sfmt 6633 C:\DOCS\110-39\079280.000 HAS2 PsN: HAS2
8

ance. Again, as you said, a large program, in this case 62 hulls will

eventually be built.

The idea here is to continue to improve the productivity improvements that BIW has been seeing, and also to set themselves up for

the DDG–1000 contract that is coming up.

And they came forth with a proposal to invest in a facility that

will allow them to move some more of the pre-outfitting work earlier into the construction process and have larger units prior to

erection than they do.

So we will see some savings on the tail end of the DDGs. And

what we worked with them is an incentive for them, if they meet

their targets, that they will be paid—it is roughly around $3.5 million that we have set up in the contract.

But what they have done for us is they have lowered the ceiling

prices on the contracts, and they have also lowered targets. And if

they underrun the targets, we have agreed to give more of the

money back to them on the share line. So it has been a good position for both of us.

Part of the thing that the government did is we agreed to early

release of retentions on payments, in order for them to free up

some cash to go make that investment.

Now, we won’t see those returns for a while. The facility doesn’t

come in until 2008. But a downstream improvement to the DDG–

1000 is they also lowered their price to us, which we are in the

midst of negotiating, to account for those efficiencies that they are

going to see.

So, for a modest investment on the government’s part, in terms

of incentives and in terms of early release of retentions, we are

going to get some significant benefits downstream on that program.

Mr. TAYLOR. Admiral, help me with this. On a cost-plus contract,

what incentive does the private sector have to come to you and say,

‘‘I want to save you some money’’?

Now, I will use the analogy of I am building a house right now.

I have got a contractor who gets 20 percent on the top of everything that I spend. He really doesn’t have much of an incentive to

save me money. It is the only house I am ever going to buy.

On the flip side, we are those six shipyards’ only customer. And

so I am having a little trouble with understanding why they would

be incentivized to find these savings, as opposed to someone from

your office making that proposal to them.

Admiral GODDARD. I understand, Mr. Chairman.

In this case, because of the surface combatants, we are fortunate

that we have two yards to build those surface combatants. And so,

what this does is this helps to set them up to perhaps get better

terms downstream when we go to run the competition for those follow-on DDG–1000s.

We have several ideas on how to do that, either a profit-related

kind of offer that we did on the DDGs, which was very successful

in keeping the costs down between the two yards on those. Or perhaps, in the case of quantity, where we have an odd number of

ships, the lower-priced yard would get an additional ship to go

build.

So those are some of the things, downstream, that help

incentivize these kinds of investments for us.

9

So it is important to maintain competition between yards where

we can, like we have enough numbers with the combatants.

Mr. TAYLOR. To what extent can you point to, in the aftermath

of Katrina, when our nation very generously offered to help some

of the yards that were damaged by that storm, to what extent can

you point to the Navy walking through those yards and saying,

‘‘You know what, for the future you need to be doing this. We are

willing to help you with an investment for this’’—fill in the blank.

Can you give me any examples of that?

Admiral GODDARD. Mr. Chairman, I am relatively new to the

Program Executive Office (PEO). Allison Stiller was involved in all

of those. I am going to pass the question, if you don’t mind, to her,

who did a lot of the selection of those projects.

Ms. STILLER. Yes, sir. One thing that we are mindful of, in the

Navy, is that the shipyards understand their processes and the

production flow in their particular yards better than the Navy. We

can pass along ideas that we have seen in other yards, but they

have to apply it to their own yards and their own processes.

What Northrop Grumman Ship Systems, that I am sure Mr. Teel

can comment on—he is in the next panel—did right after Katrina

was bring in First Marine International, who had done the

benchmarking study for the Office of the Secretary of Defense

(OSD), and hired them to come in and help them in their yard to

understand what flow, what projects should they be investing in for

the future based on their yard and the projected workload in the

future.

Some of those suggestions manifested themselves in proposals

that came to the Navy for the Katrina $140 million that was specifically carved out, that the Navy ran a competition with the affected Gulf Coast yards for.

Northrop Grumman was selected for three projects under that.

And one is the panel down at Ingalls, as well as at Avondale, and

another one was in their Gulfport facility.

We are in the process of negotiating the final terms of the contracts. But we feel very confident that that is going to have return

on investment for the Navy and for the company.

There was state investment, as well as corporate investment, in

those projects as well. They were able to demonstrate to us that we

will see return on investment.

And, in fact, the panel line accomplishment at Ingalls, we will

want to see the returns there, just to verify the return on investment before we enter in to the next one at Avondale.

Mr. TAYLOR. The chair yields to the gentlewoman from Guam.

Ms. BORDALLO. Thank you, Mr. Chairman.

I have just a couple of questions.

I think, Admiral Sullivan, you probably would be the one to answer this, or any of the other witnesses: What specific types of

things can be done to modernize our shipyards? Would these things

result, then, in lower- or higher-priced warships?

And why do the shipyards currently not make these investments

from earnings? What prevents the shipyards from attempting to

match the world-market standards in automation?

10

Admiral SULLIVAN. Ma’am, why they don’t make the investment—well, first, they are making some of the investments. And

you have heard a couple of——

Ms. BORDALLO. Yes, I did.

Admiral SULLIVAN. I will turn it over to Admiral Architzel to

hear what is getting done with the aircraft carriers.

But I have to say, and you can ask the next panel, but for each

shipbuilder, they work for a corporation that has shareholders, and

those shareholders need to see a return on investment from the

corporate position.

And they each have the hurdle rate. And if an investment in the

facility can’t make the corporation’s hurdle rate, they have a tough

time selling it.

And I have been involved in some of those discussions, where, at

some times, the Navy has been able to supplement or through a

contract incentive make the difference. Or in some cases, the states

have kicked in and helped out with capital expenditures.

But there is a lot we can do on the contract, with contract incentives, and I would like Admiral Architzel to comment on that.

Admiral ARCHITZEL. Ma’am, Admiral Dave Architzel, PEO, carriers.

On the carrier aspect of it, we are in a construction preparation

contract, and we have been in that since 2004 on the CVN–21 program.

I would like to approach this from three areas, if I could, also,

to the chairman’s question. It comes down to incentivizing or how

do we incentivize and assist? And there are three areas: cost, performance and schedule.

If I took the first piece, I would say we have a construction preparation contract that deals with fixed-fee-type awards. Those are,

right off the bat, for things like long-lead propulsion plant design

or long-lead material buys, advance construction.

For example, in 2006 and in 2007, we will look at commenced advance construction at—at contract award in 2007, we will have

fully 25 percent of the hull units for the lead ship will be in some

phase of some construction.

And this is where you have gone seven years from the start of

the last carrier to the start of this carrier. So this is really assisting

stability and bridging that area for the shipyard to bring the workload, to help them with some of that as well.

But it is also learning how to build some significant aspects that

are different on the 21 program—the lead ship, 78, as opposed to

the Nimitz class.

So on the second piece, the second area, award fee, is also included in the construction preparation contract. That goes to encouraging platform design progress, design model products.

Initially, we started off with awarding the award fee that focused

on attaining the key performance parameters needed with the ship.

Those refer to things like manpower reductions, sortie-generation

rate, electrical power generation, the weight and KG critical performance parameters that are desired to be key performance. So we

had award fee for that to encourage the attainment of those threshold values.

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And then, as we went forward, we realized that we also had special incentives we wanted to encourage the shipyard, and those

dealt with two areas primarily.

The first dealt with our facilities and meeting future facilities.

We can’t buy facilities for the company, but we could incentivize to

schedule. By that I mean, we looked and talked with a company

about what facilities did they need that were unique for the CVN–

21 program that they needed to build in their yard.

They covered a wide range of areas. They came forward with a

covered maintenance assembly facility, which is a huge facility

under roof, first time they have had that kind of capability.

Today, if you were to go to that shipyard, you would see propulsion plant units from both the carrier and the Virginia class submarine program in that facility being constructed.

In addition to that, we had a need for a heavy steel plate facility.

This carrier has four-inch plate steel that would be plates of steel

from me to you, that length, four-inch thick, hundreds of tons in

weight.

If you were to take in the old design measures or handling measures to turn those steel plates, it could take up to a week sometimes or days to turn a steel plate. The machines that we bought,

in place now, can turn that machine in hours. And you can also

level the plate. You can also torch the plate and cut it to size much

more efficiently.

Then you have the covered maintenance assembly facility, which

goes to the point I heard before from my other PEO colleagues that

talked about moving to the berthing dock, the Dry Dock 12. We actually have a covered maintenance assembly facility there where

we can outfit in much higher detail than we have previously done,

which will reduce the cost on assembly of the ship, as you can have

higher production units put into the actual berthing dock, Dry

Dock 12, when you actually build the ship.

Also envisioned in this incentive is the power unit assembly facility, which will be where we will build the actual propulsion plants

themselves, which will be also built adjacent to the dry dock so

that we can have a crane that can lift it directly into the Dry Dock

12.

To do this, we now have heavier assemblies, recognizing that

these are not going to be able to be handled by the 900-ton gantry

cranes presently at Northrop Grumman Newport News. So we also

looked at: What cranes will you need, and what size will you need?

Will they need to upgrade that crane to a 1,050-ton crane? That is

also part of our incentives.

We incentivize these schedules because they all want to—making

schedule sooner for our lead ship as we need it. The amount that

we actually put in incentive was $30 million. The company invested

around—today that would be somewhere around $180 million of

capital funds.

I believe, if we looked at our global sheets projected now as we

go toward our cost datasheets for the actual contract awarded to

the ship, you will see that the return on our money has already

come back. More than our $30 million investment has already come

back. Today, I would sit at around $58 million just on the lead ship

alone.

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So these do make sense, these kind of incentivized areas.

And the second type of incentive would be for—I mentioned we

had gone after our key performance parameters. And we found,

over a very short period of time, that we actually were meeting

thresholds in all our key performance priorities. But where we really now had to get to was our cost target for the ship.

So we changed in this year, 2007, in our construction preparation

contract, we changed our incentive to be—instead, took some of the

award fee away from making KPPs, which we were already making

and we are satisfied with that, and we took that money and applied it to an incentive to cost target.

So we now take and challenge the company to come down from

where they presently are estimating our contract costs would be of

delivery of both recurring and non-recurring, and on both sides,

both on the recurring, which would be the design for the whole

class of ship, as well as the construction end for the lead ship itself,

and task them to come up and make progress toward those targets.

And, when they do, they are incentivized by getting incentive

feedback for that effort. And if they were not to make those incentives, then they would lose that incentive.

And it seems to be working rather well. And we are optimistic

as we head toward the December 7th contract award.

Thank you.

Ms. BORDALLO. All right, the other question is: We have heard

that foreign commercial yards are much more efficient than the

U.S. yards. At least that is what we sort of saw when we toured

the shipyards in Asia.

Are foreign military vessels constructed at these commercial

yards?

Ms. STILLER. Yes, ma’am. In some cases—it depends. In some of

the yards we visited, they did build military ships as well as commercial ships. In some cases, those yards had that military construction segregated off from their commercial construction.

What we found in the Yokohama yard, IHI, was that their surface combatant, price-wise, as they translated it to U.S. dollars,

was probably comparable to a DDG–51, in a follow-ship kind of

configuration, although their surface combatant is smaller, but if

you scale it, it was about the same. And we saw that at Hyundai

as well.

And they were building on about the same build cycles as we see

on our DDG–51 program. A little bit smaller vessel, but price-wise,

they are about the same.

And as I recall, most of their discussion on their military side

was they don’t build them in the quantity, both in how many you

buy a year—a lot of times, theirs was spread out much like we

spread out our Navy buying.

Ms. BORDALLO. I do remember touring one of the shipyards

where they did say they worked on military—but I couldn’t remember which one it was. Was that the one in Hyundai?

Ms. STILLER. Both of them.

Admiral SULLIVAN. It was both IHI and Hyundai.

Ms. BORDALLO. Right, right.

Okay, now, getting back to the comments you made, Admiral, I

just can’t figure out why we couldn’t build into the contracts, when

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we do build commercial ships of any kind, not just the carriers—

well, you spoke of the carrier, right? Wasn’t that what you were

discussing?

But when we build the commercial ships, why can’t we build

something into the contract when they contract with us, to set

aside for modernization of the plants. Could that be a possibility?

Ms. STILLER. Well, in the case of—if a shipyard gets commercial

work in the yard, where they are building Navy ships as well, we

certainly see an advantage—you know, an overhead reduction and

even on the vendor base, in some cases, if they can leverage buys.

We don’t have a mechanism to incentivize them, necessarily, for

commercial work. We can incentivize them to improve productivity

on their Navy work, which could indirectly transfer to their commercial work.

Ms. BORDALLO. Do we ever lose money?

Ms. STILLER. Do we ever lose money on our ship contracts?

Ms. BORDALLO. Any of the commercial ships?

Admiral SULLIVAN. Are you asking, do our shipbuilders lose

money when they build commercial——

Ms. BORDALLO. Yes, or just break out even, or——

Admiral SULLIVAN. They have been all over the map. Some have

had dramatic losses, and some have had break-even. Most of the

Jones Act ships are okay.

Ms. BORDALLO. Thank you, Mr. Chairman.

Mr. TAYLOR. I thank the gentlelady.

Now the gentleman from Connecticut, Mr. Courtney.

Mr. COURTNEY. Thank you, Mr. Chairman.

And, Admiral Sullivan, just looking through your testimony, on

page three where you, sort of, gave the recommendations about

what Congress can do and the shipbuilders can do, I mean, there

seems to be, sort of, a common thread there in the recommendations, about our job would be to promote stability in the shipbuilding program and that the shipbuilders should do their best to try

and, again, keep some kind of even keel or level pattern, in terms

of just trying to keep the momentum going forward.

But it just seems to me that, at some point, you know, we are

kind of stretching the bubblegum to almost the breaking point, just

in terms of the size of the work that is out there.

After Admiral Hilarides and others testified a couple weeks ago

on the submarine-building program, we heard from the manufacturers afterwards. And Electric Boat and General Dynamics testified that they are pretty much at the tail end of running out of repair and maintenance work, which is really going to put them in

a pretty bad place as far as maintaining stability in the workforce

that is there.

And, you know, with the shipbuilding plan that the Navy is promoting right now, that they really are going to struggle in terms

of whether or not the workforce is going to be able to hang in there

until 2012 when it goes up under the Navy’s proposed plan.

And it just seems that the goals of trying to get more efficiencies

with volume purchases, which Ms. Stiller, you know, indicated in

the case where you have commercial and Navy shipyards, I mean,

obviously that is where you get those benefits.

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I mean, is this budget enough to really keep these shipyards

moving in the right direction? Or are they just going to limp along

and not get the benefit of the economic order efficiencies and the

volume discounts that they can get for materials and maintain

their workforce?

Admiral SULLIVAN. Yes, sir. Tough question. The budget that you

see coming in the President’s Budget 2008 is more than it was in

the President’s Budget 2007. And that shipbuilding program, if we

hang with it, will eventually produce us that 313-ship Navy.

The stability is important because the shipbuilders need to know

that they are at least getting that next ship.

And I guess I am showing my age, because I am coming at this

from the context of having been a submarine program manager

during the 1990’s when we did not order very many submarines at

all and trying to get to a stability in the Virginia program where

we were at least getting one per year.

So, it is stable. Is it at a rate that I would personally like? We

would always like more ships. But in the context of running a 313-

ship Navy and trying to build the classes and types of ships that

we need to meet the warfighting needs and also balance the aviation procurement issues that we have along with the operation part

of the Navy, that is what the budget will bear. And it supports that

313-ship plan.

Mr. COURTNEY. I mean, obviously, though, I mean, if we look in

the recent past, I mean, there was an expectation at one point that

we were going to be at two ships a year, two boats a year, and that

kept getting sort of pushed back to 2012.

And, I mean, obviously, the proposal for this year’s budget, you

know, that is really sort of begging the question about whether or

not that commitment is going to be there to get us to that next

level of economic order efficiency, because that is really a future

Congress that this budget sort of leaves that question to.

So I am just sort of looking to see where, you know, our support

of the President’s plan achieves the goal of supporting stability in

the shipbuilding plan. Because the real tough choice is really further down the road, the way it has been presented, isn’t it?

Admiral SULLIVAN. Yes, sir. Getting to two a year in 2012, that

represents a significant investment.

I would like Allison to talk about what the Navy has done and

will be doing to try to smooth that out.

Ms. STILLER. Going to two a year in 2012, we also submitted, as

part of this year’s budget, a legislative proposal to do multiyear

procurement for the next block buy on Virginia-class submarines.

And that includes submarines between fiscal year 2009 and fiscal

year 2013.

In the legislative analysis for that, it is clear that we will have

to go to two a year. And our plan is, in the shipbuilding plan, is

to do that in 2012 with advanced procurement money in the budget

in 2010 and 2011.

So we submitted the multiyear request this year, as opposed to

waiting for next year with the budget, so that we show the commitment that we, the department, are serious about a multiyear procurement for this next block of submarines.

15

So I think, yes, the budget has to come to fruition later on. But

right now the multiyear procurement legislation request is setting

the stage for that.

Mr. COURTNEY. And so, that is how we can respond to Admiral

Sullivan’s suggestion in his testimony——

Ms. STILLER. Yes, sir.

Mr. COURTNEY [continuing]. That we promote stability?

Ms. STILLER. Yes, sir.

Admiral SULLIVAN. Yes, sir.

Mr. COURTNEY. I guess the other question I have is that, as far

as trying to maintain the stability in the workforce, I mean, it really does seem up there right now that the repair and maintenance

work, there is almost a cannibalistic sort of atmosphere of building

up amongst the shipyards there. And I just wonder if you could

comment on if there are ways of sort of using that as a bridge.

Admiral SULLIVAN. Yes, sir. And the fact of the matter is the

submarine in particular, the submarine repair workload, is going

down. We are at peak and starting to go down the other side of the

peak of these submarine—the Los Angeles-class and the Ohio-class

submarine refueling overhauls.

And when those are done, we won’t be refueling those ships

again. And that represents less work for the entire slate of shipyards, both public and private, that do repair work on submarines.

So what we have tried to do is come up with a comprehensive

plan to balance the remaining submarine repair work across the

public and private sector with a set of priorities: We would like to

overhaul the submarine in home port wherever possible, and look

at the workload of each particular shipyard and try to decrease the

bumps or the peaks and valleys in the workload.

And that is an overall shipyard business plan that I would be

happy to share with you at another session.

Mr. COURTNEY. Great. Thank you.

Thank you, Mr. Chairman.

Mr. TAYLOR. I thank the gentleman.

Ms. Stiller, I am curious: In 2007, what kind of recommendations, as far as government-furnished equipment, did you make?

Specifically, you talked about the panel line at Avondale.

I guess I will preface that by saying, at least for the two Gulf

Coast yards, I know that there is a reluctance on the part of management in two ways: Some of them fear that if the numbers of

shipbuilders go down, that they will lack the political clout that it

takes to fund these ships. I get this secondhand.

The one I have heard firsthand is the return on investment to

their shareholders, and that they have to explain to corporate that

this is not a highly profitable thing, that it is important to the future of the yard.

But, to the first point, with Hurricane Katrina and the shortage

of labor in the region, the yards really did have an opportunity to

modernize without laying off a single worker. To what extent did

your office take advantage of that situation?

Ms. STILLER. Mr. Chairman, well, we looked at the proposals that came in under this Katrina 140, I call it—$140 million. We

specifically asked to understand what efficiencies we would see in

the yard as a result of the projects that were proposed, the return

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on investment that we would see by these efficiencies and to our

programs, and also the level of commitment, either corporately or

state or locality.

So all of those proposals—we also wanted to understand, you

know, how that would apply in the future as well as return on investment, immediate.

We got proposals well beyond $140 million. And so we had to

make some hard choices in how we went about it.

But in some cases—and I would ask that you pose this to Mr.

Teel, too, when he is up next—but Ship Systems, for example, have

proposals that they intend to fund through their corporate measures, as well as through some of the proposals that we selected

through this Katrina money.

There is a comprehensive plan that we have seen from Ship Systems that shows all the investment they intend to make within

their yard post-Katrina and how that feeds into the ships that are

laid into the Navy’s budget so that they can effect the cost savings

into those ships over time.

So there is a broader investment, not just from the Navy, in this

Katrina 140, that the shipyards are also doing. And Mr. Teel can

certainly elaborate on that.

Mr. TAYLOR. How much of your 2008 prospective budget do you

plan on allocating for shipyard modernization funds?

Ms. STILLER. We have no funds that are set aside directly. But

as Admiral Hilarides and Admiral Goddard talked about, there are

program funds with existing contracts where—and Admiral

Architzel as well—where the programs are incentivizing the yards

in different ways. Because it is important for us to be able to see

how we are going to see those improvements in a particular program so we understand the savings and that we can account for

them.

So we tend to attack this problem program by program, although

we do try to look and share across, for example, if there are multiple—for example, Newport News, where submarines and carriers

are being constructed, the two PEOs share incentive ideas. And, as

Admiral Architzel said, an investment that he made in the carrier

program also has benefit to the submarine program.

So we try to make sure we see that, but we want to tie the program dollars into the return on investment so that we can see the

savings and capture the savings as well.

Mr. TAYLOR. So you do not have a dollar amount in mind?

Ms. STILLER. I don’t know, by program, what we have done. No,

sir, I don’t have that in mind.

Mr. TAYLOR. Would any of you other gentlemen?

Admiral ARCHITZEL. Mr. Chairman, I think there is, in addition

to things like the CAPEX or incentives, as I mentioned when I

talked about how we worked for schedule incentives to do that,

there are also other areas where we have worked with a company,

from my case, from Northrop Grumman Newport News—two concrete examples.

One would be the building of the new pier, Pier 2, at Northrop

Grumman Newport News. That pier, we can’t give dollars to do

that, but we did work with the company that established the need

for the pier, established the need for how we would go about doing

17

this, and worked with them to say how we could get them some

business relief or waivers to accelerate a depreciation, that made

the business case more attractive for them to build that pier.

That pier is built. It will be used for the 70 or the 77 as we go

down and now use that pier. It is a double-decker pier. It keeps

things out of the weather. It has much more efficiencies in line as

we go forward at that yard.

In addition, with the 70, we needed some additional shore steaming equipment that was not there. And we used program dollars,

where they are appropriate, to come in and assist on that

facilitization, very specifically to shore steaming.

So two examples, also, that it has done, sir.

Mr. TAYLOR. Okay.

Admiral HILARIDES. Sir, if I could on that, I would say that there

are tens of millions of dollars still available in the CAPEX program. That program hasn’t played all the way out, and the shipbuilders are evaluating other ways to continue to use that incentive.

So there are additional resources. They were set aside as part of

the total contract, but they are still available.

Mr. TAYLOR. Under your 2007 funds.

Admiral HILARIDES. Yes, sir.

Mr. TAYLOR. This year.

Admiral GODDARD. There are other vehicles also, Mr. Chairman,

that we use, like National Shipbuilding Research Program (NSRP),

where we work with the shipyards. And we collectively have contributed to that program with them, where they come forth with

some proposals that will benefit all of us.

The common parts catalog that you heard about is one of those

initiatives that was undertaken under NSRP. And we also have another one that is under way with common data exchange to get at

this. If we don’t have common tools, at least let’s have common

data that we can pass back and forth.

Mr. TAYLOR. Admiral Sullivan, you were talking about

modularity for future ships. To what extent will the DDG–1000 be

modular?

And I have to express my personal frustration when the Navy retires a ship at 17, 18, 19 years. And I would sure hate to see the

DDG–1000 fall into that category because we weren’t planning

ahead.

Admiral SULLIVAN. Yes, sir. It is modular to a very large extent.

I will let Admiral Goddard talk to that, because he has got the ship

and he was also the program manager that designed the ship.

But to take that one step further, Mr. Chairman, and say, okay,

we now have a stealthy, medium-sized surface combatant hull

form, hull structure, electric and propulsion machinery physical

plant that now, if at all possible, should be used as the infrastructure that supports future surface combatants beyond DDG–1000.

That is where I would like to take the Navy in the far term.

Now, in terms of the specifics of how modular is the ship itself,

I would like to turn that over to Admiral Goddard.

Mr. TAYLOR. Admiral.

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Admiral GODDARD. It was one of the first ships that we had an

open architecture requirement on. So the software has been developed with that in mind.

Additionally, how we put the electronics in are enclosures that

were meant to be modular, so we can easily upgrade and refresh

the blade servers, for example, on a total ship computing environment.

We took a look at the BLS cells, which are a modular form of

deploying weapons, and looked at growth capability in those, in

order to position ourselves for missile defense downstream and how

much growth we might need to put into those cells to be able to

go do that.

It has a very large aviation facility in order to stay pace and look

at different options in terms of what we want to deploy from air

vehicles from that platform.

So there is a lot of thought given to those kinds of things in

terms of modularity, as well as the growth piece that Admiral Sullivan talked about in terms of positioning that ship to be modified

to be a future cruiser, if that turns out to be the right path.

Mr. TAYLOR. What about electrical power generation? What sort

of excess capacity will the ship have?

Admiral GODDARD. Sir, that ship has 80 megawatts of power. It

uses that power only under very rare circumstances, essentially

when it is going as fast as it needs to go, 30 knots-plus, plus is

going to use all its weapons and so forth.

So the majority of its operational profile, it has a lot of excess

electric capacity that can be used for growth. And that was part of

the reason that we switched to the integrated power system on that

ship, to position ourselves for some future weapons.

Mr. TAYLOR. And that translates to what in percentages?

Admiral GODDARD. When it is normally operating around, let’s

say, in a 5-, 10-knot type of loitering position, it is only using

roughly 20, 25 percent of its power.

Mr. TAYLOR. Okay.

Admiral SULLIVAN. There is an equivalent example in the aircraft carrier world. Admiral Architzel can tell you about the

upgradability of that ship for the future and how much excess

power that has, if you would like.

Admiral ARCHITZEL. Mr. Chairman, on the 03 level, which is the

gallery deck for the carrier, in the past, when you would come in

and deploy a carrier your combat system resides on the 03 level.

And every time you would make a deployment, we would come

in and change that whole combat suite out. And it involves welding, cutting—very disruptive overhauls to the ship every time you

do that.

The CVN–21 program and the lead ship, the 78, are designed

with a flexible infrastructure on the 03 level for about a hundred

frames on the 03 level, about 400 feet.

That will allow you to then take in-deck mounting systems which

will allow for adaptive installation of what is required for furniture,

more cots adaptation. It also has ducting in the floor, so you don’t

have to come in and change ducting every time you modify space.

Electrical zonal distribution, which will bring electric power to

the space and allow it for distribution within there.

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So a much more adaptive architecture for the future, as we go

forward, to allow that kind of change without having to go in and

cut and weld every time you want to make those kind of changes

to the ship.

You mentioned electrical distribution. This carrier will have 2.5

to 2.7 times the electrical capacity of the Nimitz-class. And it will

also have zonal distribution. And the electrical distribution itself is

distributed, such that we have much more power available on the

03 level than the Nimitz design, where you might have even had

power but you couldn’t distribute it to where you needed it.

Mr. TAYLOR. The chair recognizes the gentleman from Pennsylvania, Mr. Sestak.

Or would you prefer I go to the ranking member? Whichever is

easier for you.

Mr. SESTAK. I am sorry. Say again, sir?

Mr. TAYLOR. Are you ready, or would you prefer if I went to the

ranking member?

Mr. SESTAK. I will defer just for a moment. Thank you.

Mr. TAYLOR. The chair recognizes the ranking member.

Mr. BARTLETT. Thank you very much.

Mr. Chairman, we have talked in the past of a conflict that our

shipyards have had that is not of their making and not of ours either but is just a reality today.

When I repeat the ‘‘Lord’s Prayer’’ and I come to that part that

says ‘‘Lead us not into temptation,’’ I have some concern about

some of the things that we do in the Congress, like putting young

men and women together on ships, as an example.

But I want to chat for just a moment about a conflict that we

have in shipbuilding. We have these shipyards that have, in effect,

a captive audience, as you pointed out. We are their only customer.

In reality, the only people that build ships for us is them, and the

only people they build ships for is us. And so, we really are kind

of captive to each other.

But they have a fiduciary responsibility to their stockholders,

which means that since there is really hardly enough work to go

around, it doesn’t make a whole lot of sense, with your commitment

to your stockholders, to invest a lot of money in upgrading the

shipyards, because you are going to get the work anyhow.

That is just the reality of where we are. We have so few ships

to build and so few people building them. And, looking to the future, we might get by now with less shipyards, but what if we had

a surge? And with nobody there to build the ships, so from a national security perspective, we appropriately make the argument

that, ‘‘Gee, we have got to keep all these shipyards alive.’’

And I have used the analogy before that we are very much like

the farmer with seven horses and enough food to keep five really

healthy. We keep moving the food around to the horse that looks

the worst.

And how do we get by this?

And I know that people that run our shipyards want to do two

things very well. They want to do the best thing they can for the

country and the taxpayer, and they also have a responsibility to

their stockholders. And these two things are in real conflict.

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And absent real competition, which is where we want to get, is

there another way around this? Or do we just have to get to real

competition, no matter what, to get us out of this dilemma we are

in?

Admiral SULLIVAN. Mr. Bartlett, volume of work always helps.

Volume of work is what we can provide in the context of the 313-

ship Navy. And that is where our budget is, or the Shipbuilding &

Conversion (SCN) portion of the budget, is going up.

Commercial work would help, because it provides volume. It provides the flexibility to share overhead, and that helps some.

Mr. BARTLETT. But unless they become more efficient and do it

cheaper, we are not going to get the commercial—it is kind of a

chicken-and-egg thing. Where do you start?

Admiral SULLIVAN. Yes, sir.

Mr. BARTLETT. Clearly, clearly, if our yards were modernized to

the extent of some of the foreign yards we saw, if they had the efficiency out there, they could be getting commercial work.

But if they are not going to get the commercial work, then the

argument for making those investments just is extremely difficult

when their only customer is us.

Admiral SULLIVAN. I agree, sir. It is very tough.

And when you were out of the room, we talked about some of the

measures we had been taking. Some are contract incentives that

the three PEOs talked about. In some cases, there are ways that,

if an improvement does not meet the hurdle rate of the corporation,

that the Navy and the state have come in.

And the instance I can think of is graving docks at Electric Boat,

where the state helped and the Navy helped, and that got those

two docks modernized.

And that is exactly what you are talking about, that surge capacity. Because for the workload that Electric Boat has in submarine

construction, they don’t need those two graving docks. But it is a

good thing to have for the United States Navy, so we all came out

winners on that one.

More of that needs to be done, but it is really on a case-by-case

basis for each facility’s improvement.

Mr. BARTLETT. Yes, I am convinced that everybody in the shipbuilding area and everybody in the Navy is doing the best they can

under the circumstances. It is just that we are in a very difficult

situation where we are where we are because of where we are. And

if we are going to move off of that, something has to give. And that

is why we made these visits to all of these shipyards around the

country.

But I think everybody agrees where we are now is not fair to the

stockholders, it is not fair to the workers, it is not fair to the taxpayers. And we just have to find a way around this, and I appreciate very much your commitment to try to do this.

Thank you, Mr. Chairman.

Mr. TAYLOR. Thank you, Mr. Bartlett.

The chair recognizes the gentleman from Pennsylvania, Admiral

Sestak.

Mr. SESTAK. Thank you, Mr. Chairman. I apologize for coming in

at the last minute.

21

Admiral, I have a question. There was a study done by the Deputy Under Secretary of Defense for Industry Policy a couple years

ago, and I know it received a mixed review within the Navy.

My question is, though, that what I was most struck by in that

study was how it talked about the need for collaborative initiatives

between industry, the Navy, Congress, and other government departments. But there were words in it like ‘‘gain a more in-depth

understanding, work with industry, review the acquisition rules

with them, stabilize ship acquisition, improve incentives, continue

to support them with improvements.’’

Has there been any thought given to—in my limited understanding of kind of watching it from here is, watching people come and

go, there always seems to be these groups, but I have yet to really

see a group that involves this type of a collaborative approach.

I am wondering if there is not something that can be done more

in that line along the area of bringing—and this will also be your

area, too, but if you didn’t mind, Admiral, for yours, and then step

over to her area.

We talk about this a lot and studies have talked on it and I probably dismissed it, but it just seems as though there are at least

three or four principal partners here, of which Congress obviously

is one and industry is and the Navy is, to bring it together in much

more than a, ‘‘Yeah, we talk to one another,’’ but a much more almost formal type of an approach to this, as this study talks about.

Admiral SULLIVAN. Yes, sir, excellent question. And I agree with

you. There is a lot that can be done.

And I mentioned some of those things earlier in my

testimony——

Mr. SESTAK. And I apologize.

Admiral SULLIVAN [continuing]. Where we should be thinking

cross-class, buying by commodity, buying off the same parts list,

trying to figure out a way within the law and within the ability

that we can in the contracting world, sharing the load, if you will,

across working with our shipbuilders on our various programs.

And in that light, Ms. Stiller started a series of meetings last

year with the PEOs, and I have joined in in the last couple, to start

working as a group to try to figure out what are the policy changes

that are needed, how do we collaborate together and how do we

work across contract. And I would like her to talk about that.

Mr. SESTAK. If I could, Admiral, though, Admiral Owens always

used to say, ‘‘There are enough studies out there.’’ And, you know,

is it time to just formulate it?

And, yes, now we have got PEO talking with NAVSEA within

the Navy, and I gather that is an accomplishment. Is it really important that we now get in the industry in that same room and

Congress in that same room?

Because, I mean, two years ago, you could have heard the same

question come up here from Mr. Taylor or the other ones.

Is it time we actually formalized that and moved out on that?

Admiral SULLIVAN. I would say we have got the first two. We

have formalized and we are moving out on NAVSEA PEOs and industry with a thing called Joint Executive Management (JEM), and

Allison will talk to that in a second.

22

Involving Congress as a formal entity, we have not done that yet,

and that is something maybe we should explore.

Mr. SESTAK. But you have involved—but industry is——

Admiral SULLIVAN. Yes, sir. And if Allison could elaborate, that

would, I think, help.

Ms. STILLER. Yes, sir. When I first came into the job, it was apparent to me, not just at the PEO level but at the program manager level, within the Navy, that because they are so focused on

their program, that we didn’t have a lot of opportunity to share

ideas across multiple programs.

So I started, informally at first, meetings just so the program

managers across the three PEOs would get to know each other and

know what the other ones were working on.

As a result of that, we have come out with some specific actions

that we have taken together on how we deal corporately, as a better corporation, in dealing with our industry partners.

One of the outgrowths that didn’t start from this forum but that

Admiral Architzel and Admiral Hilarides have instituted and we

have been working in for a while is this Joint Executive Management Group, which is a partnership with Newport News, because

there are cross-implications in submarines and carriers. So we

have begun to expand that, in working with industry.

We also have continuous dialogue with our industry partners,

probably more on an informal level than you have alluded to. But

I think there is really good dialogue, especially with all of the industry partners.

We understand their needs on stability, and we have been working very hard within the department to stabilize the shipbuilding

plan, to get at that requirement.

We have also encouraged industry corporately to look at corporate ways to leverage across their yards, in material buys or in

workload sharing and that sort of thing. And we have seen some

of that.

So I would agree with Admiral Sullivan. We have started in certain areas. Have we involved the Congress? No. Can we and should

we? Absolutely.

Mr. SESTAK. I guess the reason I ask—and I don’t really know

the acquisition side that well, but I can remember—I mean, it is

important, and, Admiral, you have to correct me, but I think the

submarines had an HF sonar or something that ended up being

used on the DD—what is it called now?

Ms. STILLER. DDG–1000.

Mr. SESTAK. DDG–1000. But initially that wasn’t going to happen. I mean, it was because the Navy—and I gather you did—

brought them together that all of a sudden we got a good buy on

this, because the sonar could go over to the other ones.

And my take on it has been that NAVSEA has tried to talk about

common chassis, for instance, more cutting across.

But I have also wondered about industry just saying, ‘‘Well, do

you really need that rearview mirror up there, where you push the

button’’—and you know the example I am going to give—‘‘and, boy,

it just automatically, if some light comes in, focuses itself—do we

really need that?’’

23

And the thing about bulk buying and stabilization is that we

have been there. But the other thing about designing for production and things like that, isn’t that where industry really has a

hand to help us, if we get them inside the room, to much better

bring this cost into something that is aligned along the ideas of

what I understand NAVSEA has talked about, of there are maybe

only three common chassis or something for our future.

Do you know what I am talking of?

Admiral SULLIVAN. Yes, sir. We need more of that. I think we explored that to a great distance when we worked on the design of

the Virginia-class.

That was industry driving the government, ‘‘Do you really want

to buy this,’’ for instance, ‘‘hydraulic valve that is a one-of-a-kind

valve, has a very stringent acoustic and shock requirement, when

its commercial equivalent made on the bench next-door costs onefourth the same cost, and if you can just figure out a way to design

it into the ship a little bit better, you can buy the cheaper valve?’’

And we went a long way down that road. We need to continue

that across all of our classes and allow industry to drive us more.

Mr. SESTAK. Could I ask the following? Can I get a copy, if you

have, what are these meetings you are talking about, so I have an

idea of a little bit more the formality of it and the participants?

Because I know there are these informal ones and getting together, but these studies have been going on for quite some time.

And then you have whatever, every ship class. I don’t mean just

LCS, but it has almost become an issue.

And I am curious about how far those have gone down the road

in the sense of bringing it together, if you didn’t mind providing

that.

Ms. STILLER. Absolutely no problem. Would be happy to.

Mr. SESTAK. The only other question, which—Aker Shipyard

would be Philadelphia. Do you find what they have done up there

in Aker Shipyard is of some potential where the cost of the ship

has gone down from 13 times what they would make it overseas

to, potentially, with the new buy, down almost three or four more

ships, one to one, because of how they have gone about their buy

as a model?

Are you familiar with Aker?

Ms. STILLER. I am. I have not visited the yard, but I am familiar

with their model. And it is like what you see in most yards in the

European yards and in the Asian shipyards. It is volume-dependent. And, also, they are able to leverage their buys not just in the

U.S. but internationally, as well.

And, Admiral Sullivan, maybe you——

Admiral SULLIVAN. I have been there. And they build vastly simpler ships than the Navy builds to a standard, proven design with

zero change environment.

Mr. SESTAK. I guess my question was more of the investment

that they put in to do it like they do in Korea. That is more what

I was taken with. They made a decision that what was going to

built, the right toolings and everything would be there, that initial

upfront investment. I thought that is what really drove them down,

not just the bulk buy. Because, up until recently, they had gotten

24

down to two or three times the cost, but that has only been with

two or three ships.

But it has been that investment. And I gather it might not be,

but I would have to—not too dissimilar to what we do for aircraft,

when we decide to build a new F–22, but there is that initial investment in the infrastructure to make sure that you have the correct toolings in order to then go off and build the ship.

Admiral SULLIVAN. Yes, sir. I would agree with that, and they

did make that investment upfront, and it has paid dividends.

Again, though, when the principal function of the shipyard is to

assemble steel plate and one or two standard sizes of pipe with one

or two standard sizes of fittings, you are talking an order of complexity about one-hundredth of what you are talking about for a

warship.

And the same thing goes for the aircraft industry. And I know

the airplanes cost a lot of money, but the jigs and fixturing that

are put together to go do a long production build of many, many

units in an aircraft are somewhat translatable to our part of the

business. And we need to keep working on that.

But I would caution that there is so much, I will call it, custom

work in a warship that, if you are only building, let’s say, six or

seven of a class or even 10 to 15 of a class, you can’t get the economic rate of return that you can because it is so complex and because the production run is small and because there are large, long

distances in time between each ship and the next.

Mr. SESTAK. Admiral, then what does it say about the prospects

for achieving nirvana of trying to have these costs be something

that would permit us to afford a 308-ship Navy? I mean, if that is

the case, are we really just whistling in the dark?

Admiral SULLIVAN. I don’t think we are whistling in the dark.

We need to continue with all the things we have discussed here

today.

But in even those most efficient yards that we have visited, the

cost of their combatants is about the same as the cost of our combatants, even the yards that the Philadelphia yard cannot compete

with. In their commercial business, they are number one in the

world, let’s say, but their warships cost the same as our warships.

Mr. SESTAK. But the Congressional Budget Office (CBO) says

that the cost of our shipbuilding program will be 35 percent more

than what we estimate, based upon how we have always done

things. Is that realistic?

I mean, we predicate our ability to have that size fleet based

upon no increase in cost of what we have estimated for the fleet.

Many of these issues here are ones that have been around for a

decade or so. I mean, do you think we have got it now?

Admiral SULLIVAN. Let me talk about the CBO estimate.

The CBO—and we talked to them; we passed them our numbers

and our assumptions. And a lot of this has to do with how do you

budget for risk. The CBO doesn’t have to budget for a shipbuilding

program that has to also be balanced with an aviation program,

with personnel and with fleet operations. So when they do their

calculations, the range of costs that they see for our ships, they will

do that on the conservative side.

25

The Navy necessarily budgets to a much more aggressive number

than what the CBO is, and I think that is the difference.

Mr. SESTAK. Aggressive means optimistic?

Admiral SULLIVAN. No, I would say more aggressive. The CBO

tends to go toward worst-case analysis. If the Navy budgets for the

worst case, that is hard to do across everything that you are buying

in the Navy on a given year.

Mr. TAYLOR. Admiral Sestak, I hate to do this, because this is

a great line of questioning. Unfortunately, we have a hard stop in

28 minutes, because the full committee will be meeting.

Mr. SESTAK. That is fine.

Mr. TAYLOR. And so, in fairness to the next panel.

Mr. SESTAK. Thanks very much.

Mr. TAYLOR. We want to thank this panel for being with us

today.

The chair now calls the second panel: Mr. Mike Toner, Executive

Vice President of Marine Systems Group of General Dynamics; Mr.

Phillip Teel, the President of Northrop Grumman Ship Systems;

Ms. Cynthia Brown, the President of the American Shipbuilding

Association; and, Dr. Mark Montroll, Ph.D., Professor of the Department of Acquisition at the National Defense University.

And we want to recognize a number of his students that are here

with us today. And thank you for being with us.

Ms. Brown, are you going to be first?

Ms. BROWN. That is fine.

Mr. TAYLOR. If I could, Ms. Brown, I hate doing this to you, but

we really do have a hard stop now in 27 minutes. So if we could

limit each of you to six minutes. That way you can get your statement in, and we will supply written questions for the record.

Ms. BROWN. And, Mr. Chairman, please give me a high number

when the six minutes is up here.

Mr. TAYLOR. Okay. The machine is on.

Ms. BROWN. I will try to be brief.

Mr. TAYLOR. The chair recognizes Ms. Cindy Brown of the American Shipbuilding Council.

STATEMENT OF CYNTHIA L. BROWN, PRESIDENT, AMERICAN

SHIPBUILDING ASSOCIATION

Ms. BROWN. Let me begin by thanking you for this hearing.

Persistently low and unstable rates of Naval ship production

have taken a tremendous toll on the shipbuilding industrial base

that is vital to our national defense.

Let me just say that, in 2001, we had a fleet of 341 battle force

ships. It has now plunged to a 90-year low of 276 ships today.

This has given tremendous challenges to our shipyards in trying

to manage the schedule, workload, and to sustain their skilled engineering workforce, their production workforce, and having the

ability to make investments in their facilities and processes, and in

managing the day-to-day operations of their business.

Put simply, there is no substitute for volume production in reducing the cost of every ship we build and maximizing capital investments by the industry.

26

Even though we have struggled in a very anemic production environment, these shipyards have made major investments, large investments in their capital and their facilities.

I will name just a few examples, where over a billion dollars in

recent years has been invested. These investments include automated design tools, covered facilities, automated steel cutting facilities, facilities for constructing larger modules, cranes for increasing

lift capacity for larger modules, laser cutting equipment, state-ofthe-art panel lines, new and expanded power grids, and heavy moving equipment, just to name a few.

If asked, every shipbuilder would tell you that more capital investment in processes and facilities would increase efficiency and

further reduce cost.

Their ability to do so, however, depends on their cash flow, work

projections and profits to demonstrate a return on such investments to their corporate parents. The current business environment for shipbuilding makes the corporate return-on-investment

business case very difficult to make.

Corporate investment dollars favor the facilities that have the

largest profit margins and that show the growing order book.

Where shipyards may not be able to make the corporate return-oninvestment business case, there are many investments that could

be made in the shipyards that would show a very favorable return

on investment to the government.

To make such investments possible, the American Shipbuilding

Association (ASA) asks you to consider legislation that would require the Navy to expand the use of special incentive fees in all

Navy shipbuilding contracts for the purpose of investing in facilities and process improvements where such favorable returns on the

investment are there for the Navy.

The legislation we ask you to consider is a modified and expanded version of the current capital expenditure program, or

CAPEX for short, that has been included in the Virginia-class contract that you discussed today. I won’t describe it further; I will

give you just a couple of examples.

An incentive fee award of $7 million to Newport News Shipbuilding to invest in a second modular outfitting facility will result in

estimated savings of approximately $34 million in the construction

costs of the Virginia-class program. An investment of $9 million by

Electric Boat in a new coating facility at its Quonset Point shipyard will save an estimated $140 million in the program.

We commend the nuclear Navy for their efforts to expand incentive fees for capital investments.

ASA recommends that the Navy include, in all of its programs,

money for incentive fees for the purpose of capital investments if

the contractor makes a business case that, number one, the savings

through changes in the design, material use, technology or production process would result in savings in the ship program or, two,

a proposed investment itself would result in savings in the shipbuilding program or programs.

The proposed legislation recommends a 2008 authorization of

$100 million as seed money for incentive fees across all shipbuilding contracts. It would require the Navy to report back to you no

later than May 1 of 2008 on how the Navy has distributed or plans

27

to distribute the $100 million provided in fiscal year 2008 for specific capital expenditures by a shipbuilding program.

And it further provides that the Navy would annually budget

money in its shipbuilding programs to provide incentive fees for the

purpose of the capital investment beginning in fiscal year 2009.

Funding requested for incentive fees for this purpose would be

required to be identified by the Navy by ship program, concurrent

with future budget submissions to the Congress.

The legislative proposal would reduce the cost to the Navy by

emphasizing designs that translate into ships that are easier to

produce, as you talked about today, helping to control non-value requirement changes that add costs but are not operational necessities, and reducing the cost of ships for target investments.

I would like to also bring to your attention another practice

which is hurting our efficiency, and this is where the Navy is withholding and retaining payments owed to the six shipyards.

Today, day-to-day operations, cash flow is essential to operating

the business, as well as to paying your vendors in a timely fashion.

Today, more than $300 million is being withheld or retained in

payments that are owed to the six shipyards in compliance with

the terms of their contracts.

I would ask that the committee direct that the Navy cease this

practice so that that money can be there and available so that all

the shipyards can operate more efficiently and pay their vendors in

a timely fashion.

I am asked often, ‘‘Why don’t the shipyards go to court?’’

Mr. TAYLOR. Ms. Brown.

Ms. BROWN. Okay.

Mr. TAYLOR. We very much appreciate your statement.

Ms. BROWN. Thank you.

[The prepared statement of Ms. Brown can be found in the Appendix on page 52.]

Mr. TAYLOR. Who would like to go next?

Mr. TONER. I would like to.

Mr. TAYLOR. Okay, Mr. Mike Toner.

STATEMENT OF MICHAEL W. TONER, EXECUTIVE VICE PRESIDENT—MARINE SYSTEMS, GENERAL DYNAMICS CORPORATION

Mr. TONER. Thank you, Mr. Chairman and members. I am Mike

Toner. I am the Executive Vice President of Marine Systems for

General Dynamics.

I want to thank especially yourself, Mr. Chairman, and former

Chairman Bartlett for the time that you spent in our shipyards in

August this summer. I think you saw a number of the things that

we are going to talk about.

I have provided a written testimony for the record, but I would

like to go and talk about three basic items.

I think there are some slides that I have asked that you have

and take a look at.

And if you could look at the first one, which is identified as the

global shipbuilding industrial base slide, this comes out of the FMI

study, which was provided to Congress, like I said, in the first part

of January 2006.

28

If you look at this chart, it is in four basic sections. The first section is steel work. The second section of three areas is really the

outfitting, manufacturing and erection, that is the delivery of the

ship. The third section is the shipyard layout. The fourth section

is how you engineer and plan and how you procure material, et

cetera.

If you look at the majority of these things—the General Dynamics shipyards, which are in green; the U.S. average shipyards,

which are in yellow, which is the compilation of both the General

Dynamics and the Northrop shipyards; and the international yards,

which is in gray—it pops out to you right away that the process

that we use for outfitting, manufacturing and delivering ships were

either world-class or equivalent to them anyway in that aspect.

And that is our philosophy of driving work to the left, getting the

ship complete, minimizing the time in the water, and getting it to

sea and ultimately delivered.

There are two areas where we are a little bit behind.

One is the steel work area, which you would expect in the submarine yard, where we don’t have a lot of steel, per se. It is big,

it is bulky, but it is not plate forms and shapes. Our issue there

is to go work at NASCO to improve that part. And we have made

significant improvement in that area from 2000. We are not quite

there yet, and there is more happening in there.

Significantly, in the yard layout, you would expect the three General Dynamics yards, which are very small yards relatively speaking, that that would be the issue. In reality, the numbers would

show you that the Bath and Electric Boat yards are equal to or

equivalent or better than world-class. The NASCO yard, however,

is far behind. And that is where we are focusing in NASCO.

When you were out there in August, you saw some pieces moving

around, and we were looking for space. Well, we have knocked

down a bunch of buildings. We are getting more space, and we are

making space for our blocks as we prepare to do commercial work.

At the end of the day, the three yards: Electric Boat is in a low

rate of production. We are trying to get to two submarines a year.

BIW has low rate of production coming on with DDG–1000.

NASCO, we have a commercial project in-house of five of what we

sell, PC–1 product carriers, and an option for four others, so a potential of nine ships.

Low rate production, by its nature, develops the CAPEX program, and you have heard about the CAPEX program from the

submarine side. It is a program that is good. It has worked for us

at Electric Boat, and a form of it we used up at BIW in order to

put into the ultra hull.

I would ask that you turn to the next page, which is an interesting document in that it shows the amount of labor hours versus

material in each of the three major projects that I have in the shipyard.

The labor hours and investments that we have made in material—oh, by the way, since the late 1990’s to today, we have invested over $600 million in these shipyards. That is equivalent to

about 25 percent of the earnings that we made in those shipyards

over that same period of time.

29

Each one of these projects, we have taken at least a million manhours out of the ship construction; in the case of Virginia, 2 million; in the case of T–AKE, about 1.2 million on the first or second

ship; and on DDG–51, from the first ship on the land level facility

to the ship that we are building today, it is about 1.5 million to 1.6

million.

The interesting thing here is that the material is the major portion of this program. What we just talked about was what we did

in the shipyard labor side. The material portion is a big chunk of

the business.

I ask you to go to the next slide, and you look at the standard

chart that you see a number of times that has the shipbuilding

budget over the last three decades.

I would ask you not to look at that, but to instead look at the

line between 1983 and 1995. Take out the two blips, the two peaks,

and you see what is happening to our vendor base. Our vendor

base is deteriorating. It has been deteriorating for a long period of

time.

We go into the 1990’s, low rate production exists. We go into the

late 1990’s and start of the 2000s and we have lead class ships

coming on, high material, high labor use, because the labor hours

go up on the first of a class ships. And the number of first-of-aclass ships that we have seen is uncharacteristically high for this

timeframe. And, as a result of that, you see the costs skyrocket up.

The issue here, as we get past the first-of-a-class ships, we will

control the hours. Our issue is going to be, what do we do with the

vendor base? And I think there are three things for it.

I think stability has started. We have only got a year, year and

a half of it, but it looks like it is going to start.

I think you have a method to measure the ability of the yard in

the studies that we do, in the benchmarking processes. And I think

you have a way to incentivize us if we are in low production. But

we need volume, and we have to work together to work that volume to get that vendor base back.

Those are my comments, all I have to say, and thank you for

your time.

[The prepared statement of Mr. Toner can be found in the Appendix on page 82.]

Mr. TAYLOR. Mr. Toner, thank you very much.

Mr. Phillip Teel, Northrop Grumman Ship Systems.

STATEMENT OF PHILIP A. TEEL, CORPORATE VICE PRESIDENT, NORTHROP GRUMMAN CORPORATION AND PRESIDENT, NORTHROP GRUMMAN SHIP SYSTEMS, INC.

Mr. TEEL. Thank you, Chairman Taylor, Ranking Member Bartlett. I appreciate being here today.

And today I represent all of Northrop Grumman’s corporate shipbuilding capability, Newport News and Ship Systems.

I have submitted a written statement for the record, and I would

ask that be included in the record.

Mr. TAYLOR. With unanimous consent.

Mr. TEEL. Before I talk specifically about modernization, I want

to make a couple of points that I believe are important and germane.

30

Obviously, we believe, and as the others have testified today in

your line of questioning and discussion, that the objective is to

build ships with capabilities that meet the Navy and Coast Guard’s

requirements, but at a lower cost than we are building them today.

Sometimes, frequently, we, I think, think about our objectives

being different. And we certainly want to focus on just that.

Another issue is I really believe we need to recognize that facility

modernization alone will not achieve the objectives. A major portion of it, but that alone won’t do it. And some of it has been

touched today, and I will try to touch on that some more.

It has to occur in combination with process changes: process

changes that we in the shipyards make and process changes that

we make in conjunction with our customers and, in some cases,

process changes that we make in conjunction with our customers

and Congress.

And, again, some of those have been talked about today, and I

will cycle back to that a little later.

We have done a very detailed analysis of commercial shipbuilding around the world, as I know you have. We have had several

of our people, over the course of the last few years, spend time in

these shipyards, as Ms. Stiller mentioned.

We have also hired FMI directly after the storm to work with us

arm-in-arm, actually using the study that Mr. Toner referred to as

the mechanism to begin to look at how we would improve our capability relative to the benchmark location we found ourselves compared to foreign commercial yards.

In the process of that analysis—and we would, at any time, be

more than happy to share that with the entire committee—what

we have come to learn is that commercial shipbuilders have an intense focus on design for production.

In addition to all of the facilitation that is apparent and automation that is apparent through any walkthrough, they also are very

focused on cost-effective designs, reduced complexity through the

whole of the shipbuilding system, from the vendor base all the way

to the ship in the water.

That notion of design for production dominates the global commercial market. It is not apparent in the U.S. military market.

Commercial builders focus on design for production results in

standard designs, proven systems and subsystems, standard components and parts, and limited customization.

To illustrate, and Admiral Sullivan mentioned it earlier, if we

just look at the different part types, there are at least ten times

the number of part types in a surface combatant that you will find

in a commercial vessel and you can go through every system and

subsystem in the ship and find the same thing.

Second, most commercial suppliers produce a much greater number of ships. Much has been said about that. Obviously, we don’t

see that happening in Navy shipbuilding, but I will talk some more

about how that applies later.

And not only are the numbers greater, but, also, the cycle times

are much shorter, the intervals between ships within a given class

build.

31

The DDG program, for instance, within our yard, the average interval is about 200 days between units, with as much as 400 days

between units. Best in class commercial yards, it is about 40.

Now, clearly, volume drives that, but I think there are other

issues that can deal with that, as well.

That combination of standard capabilities, standard parts, standard everything, combined with far fewer changes, which is the

third item, in the case of commercial ships, you may see 240

changes between the first ship of a class and the second. Within

our LHD program, between number one and number two, there

were 3,500 changes. And between that ship getting to the—from

the time it was designed until the first ship was in the water, there

were 5,700 changes. You may see 240 in a commercial ship and

only two from ship to ship.

So between those three different items, the facilitization of automation fits the commercial world so much better than it does the

world that we operate in.

Now, the results of the lessons that we have learned from our activities in the commercial yards tell us that we have got to develop

techniques and we have learned some of those techniques from

those shipyards and we have begun to put them in place as we redesign our yards on the Gulf Coast.

Those things can only go so far, and we strongly recommend that

there be, as Congressman Sestak mentioned earlier, a very focused

effort between the U.S. Navy, Coast Guard, the Congress and the

shipbuilders, which would include some from the vendor base, to

actually begin a detailed focus, not study, we know the items that

need to be addressed, to look at how we address those items to

bring some of that change and variability out of naval vessel systems.

[The prepared statement of Mr. Teel can be found in the Appendix on page 67.]

Mr. TAYLOR. Thank you, Mr. Teel.

The chair now recognizes Dr. Mark Montroll, professor at the

National Defense University.

STATEMENT OF DR. MARK L. MONTROLL, PROFESSOR, INDUSTRIAL COLLEGE OF THE ARMED FORCES, NATIONAL DEFENSE UNIVERSITY

Dr. MONTROLL. Chairman Taylor, Representative Bartlett, I am

a professor at the Industrial College of the Armed Forces National

Defense University.

I have served as the director of the shipbuilding industry study

class for the past nine years. I am delighted that my current class

could be here today to be part of this important hearing.

Each year, the class’s task is to study the industry and assess

its ability to support our national security strategy requirements.

This has given me an opportunity to observe shipbuilding practices

throughout the world.

The most striking difference that I observe among shipyards are

their physical size, use of automation and proximity to their supplier base. It is often the combination of these three elements that

give shipyards their competitive advantage in the global marketplace.

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World-class shipyards tend to optimize around high-volume, lowcost production processes. Production processes and practices that

make commercial shipbuilding extremely efficiently are not always

the best choices for the construction of warships.

While each new commercial ship may have unique, leading-edge

interior design features contributing to commercial differentiation,

the basic hull and machinery systems tend to be mature technologies. And once the purchase contracts are signed, the owners

rarely request engineering or design changes.

Warships present a higher level of complexity than even the

most elaborate commercial cruiser cargo ships. Tightly integrated,

leading-edge weapons, sensors, fire control and communications

systems, coupled with ship, crew and system survivability, as well

as ship maneuverability, sea-keeping and station-keeping, provide

the strategic advantage to warships operating in the battle space.

The necessity to simultaneously integrate and balance all of

these attributes contributes to the inefficiencies associated with

construction of warships.

The battlespace is constantly evolving, and if ships under construction are not able to keep up with real-world requirements,

they may lose their competitive edge even before they are placed

into action.

It is unreasonable to expect or desire that the Navy will ever

produce a cluster of ships that are absolutely identical and for

which no changes are allowed during the construction process. It

would, therefore, seem to make sense to promote a design and construction process that acknowledges that changes will be made and

efficiently accommodates them.

As the best and newest shipyards in the world continue to become more and more efficient at mass-producing high-volume, lowcost, standard-design ships, U.S. shipbuilders have an opportunity

to set the world standard on mass customization of low-volume,

reasonable-cost, flexible-design ships.

Although the combination of low volume, reasonable cost and

flexible design would have been impossible to achieve even a decade ago, in today’s modern, networked world, the theories, tools

and processes exist to make this a reality.

The shipyards cannot do this alone. The infrastructure investments necessary to achieve this goal can be justified across the

Navy’s shipbuilding enterprise, but may not be justified across any

single ship contract or single yard’s expected order book.

While my class was analyzing the global shipbuilding industry

last spring, another one of the Industrial College’s seminars was

analyzing the state of advanced manufacturing around the world.

In their report, they wrote, ‘‘To ensure that the Department of Defense (DOD) leverages the private sector’s investment in manufacturing technology, policymakers should apply digital thread technologies to all DOD system acquisition programs which link all aspects of the system together from computer-aided design to computer-aided manufacturing to operations, support and logistics.’’

This is precisely the path I am suggesting we pursue.

When I spoke before this subcommittee last year, in response to

the questions asked of me, I suggested that in order to stimulate

and stabilize the demand for U.S.-built ships, we should fund the

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Chief of Naval Operations (CNOs) long-range plan for construction

of naval vessels in a stable fashion, support the U.S. Maritime Administration’s (MARAD) shipping initiative, and fund their Title XI

and other Federal ship financing programs.

I continue to stand by these suggestions and am delighted to see

that there has been great progress in stabilizing the Navy’s shipbuilding plan.

If we also invest in the production infrastructure that enables

our shipyards to set world standards for mass customization in

shipbuilding, our Navy will continue to operate the finest, most advanced ships the world has ever seen. Our sailors deserve no less.

Thank you very much for allowing me to be here today. I look

forward to your questions.

[The prepared statement of Dr. Montroll can be found in the Appendix on page 122.]

Mr. TAYLOR. Thank you.

The chair yields to the gentleman from Maryland.

Mr. BARTLETT. When I look at the first chart, global shipbuilding

industrial base, and deficiencies only in two areas, steel work and

yard layout, I might conclude that, with a little improvement there,

that we ought to be able to compete globally. Or is process not included in these?

Mr. TONER. Process is, sir, in there.

Mr. BARTLETT. So what this says is, then, is that if you improve

your yard layout and your steel work, you should be able to compete internationally.

See, we represent 25 percent of the world’s economy. We represent essentially none of the world’s commercial shipbuilding.

When I drive into work, I see Komatsu and Hitachi heavy earthmoving equipment competing side-by-side with heavy earth-moving

equipment made in this country. I drive down the road and I see

foreign-made and American-made automobiles. If we can compete

in heavy earth-moving equipment and in automobiles, I am not

ready to admit that we can’t compete in shipbuilding.

We are the most creative, innovative society in the world, and,

Mr. Chairman, we just ought to be able to compete, and there isn’t

any reason that we shouldn’t.

We compete in these other areas, and we ought to be able to compete in commercial shipbuilding. And to the extent that we can do

that, the necessary upgrade of our yards will then be something

that the chairman of the board can readily promote.

But how do we get over this hurdle? Because what this graph

tells me is that, with a little improvement in those two areas, you

are as good as anybody in the world. Is that right?

Mr. TONER. That is right.

Mr. BARTLETT. So, then, why can’t we compete commercially with

anybody in the world?

Mr. TONER. The fundamental problem is there isn’t the volume

and the cost of material. If you look at my yard today that is doing

commercial work probably in man-hours a factor of three higher

than what some of the international yards for a similar-type ship.

Now, I think I can get that down, and we will work that through

process and some facilitization that we are doing. And it is part of

the layout process. But the fundamental reason remains that the

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foreign national yards will produce a ship for what it cost me for

material. I haven’t figured out how to do it with nobody.

Mr. BARTLETT. The Chinese are planning to build, what, the largest shipyard in the world, and as of now, they have no customers.

And I suspect that when they build that shipyard, they will be able

somehow to acquire the customers so that they will have the base

so that they can purchase the steel and so forth at competitive

prices.

How are they going to be able to do that and we can’t?

Mr. TONER. We don’t have the volume of ships to build.

Mr. BARTLETT. They will?

Mr. TONER. If you went back into the early 1980’s, prior to the

removal of subsidy for shipbuilding, we built about 10 percent of

the world’s ships and a few years back, that was about 2,000 ships

a year and 10 percent would have been 200 ships. Could you imagine what 200 ships would mean for this industry?

Mr. BARTLETT. We would be in hog heaven, wouldn’t we?

Mr. TONER. How about 25 ships?

Mr. BARTLETT. I understand.

Mr. TONER. That is where it is. And my concern is the activities

that we have put in place, that Phil and I talk about, we will get

the hours down, we will get the hours to where they are going to

be. The problem is going to be the vendor base behind us, the material. And you need volume to go get that.

I don’t have a magic pill for that. I don’t know. I need more

ships; I guess that is the name of that tune.

Mr. BARTLETT. The Chinese have nothing now, and they are

going to build the biggest yard in the world.

Mr. TONER. The Chinese are building ships now, and they don’t

have nothing.

Mr. BARTLETT. We went to their shipyard, and, I will tell you, they pay their people $5,000 a year and they have essentially no

automation. They were swarming over that ship that was vastly

different from the one in South Korea.

And they were losing money, by the way, and he didn’t seem all

that distressed by it. He was kind of smiling when he mentioned

how much money they were losing because the price of steel went

up.

Mr. TONER. Well, we are not really in the business to lose money.

I don’t think that is something that you want us to do.

Mr. BARTLETT. I guess in a socialist system, it doesn’t matter.

Thank you, Mr. Chairman.

Mr. TAYLOR. In the brief time remaining, the chair yields to Admiral Sestak.

Mr. SESTAK. I guess my question, sir, is, without the volume, can

you continue to make a profit?

I mean, it is not——

Mr. TONER. Well, this is for my yards, I can speak for my yards,

okay. We have been, since the middle–1990’s, if you looked at that

third chart—and I believe you were out of the room at the time.

Mr. SESTAK. Yes, sir, I apologize.

Mr. TONER. But that third chart, we went into what we call low

rate production. We have been at low rate production for submarine facilities for a number of years. The only repair for that,

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or the fix, is to get to two submarines a year. And I think we are

very close to being in that arena.

The commercial yard that I have out at NASCO is—we went

through a very difficult time in bridging—between the late–1990’s

to the start of the T–AKE, we took on some commercial work and

we took on two tote ships, which are like row-rows for Alaskan

trade, and four large oil tankers——

Mr. TAYLOR. Mr. Toner, I very much apologize, but under the

rules of the House, this subcommittee cannot meet while the full

committee is meeting, and the full committee just began a meeting.

So I am going to have to cut you off. We do very much appreciate

your being here.

Mr. TONER. Thanks for your time.

Mr. TAYLOR. We very much regret that this second meeting was

called after this meeting was already scheduled, but we have to

abide by the rules of the House.

The subcommittee stands adjourned.

[Whereupon, at 4:33 p.m., the subcommittee was adjourned.]

A P P E N D I X

MARCH 20, 2007

PREPARED STATEMENTS SUBMITTED FOR THE RECORD

MARCH 20, 2007

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QUESTIONS AND ANSWERS SUBMITTED FOR THE

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QUESTIONS SUBMITTED BY MR. TAYLOR

Mr. TAYLOR. Is there any way to increase the amount of commerical work ongoing

at US shipyards? To what extent is it the Navy’s responsibility to facilitize the shipyards to compete for commerical work?

Admiral SULLIVAN. While the major shipyards are not competitive in the commercial arena, the second tier yards are active in commercial work. We currently have

a number of incentives available to all U.S. shipyards to improve their ability to

compete for commercial work. These include the Title XI Ship Loan Guarantee program, contract incentives, and Shipbuilding Capability Preservation Agreements. All

of these programs work to enhance the shipyard’s ability to compete for commercial

work.

While the Navy would welcome increased commercial work at the shipyards, as

it would lower the costs to the Navy, the Navy has no control over the shipyard’s

business strategies. Recent forays into commercial work by the major U.S. Shipyards have proven unsuccessful, as the skill sets and equipment required on military vessels tends to be different than those required on commercial vessels.

Mr. TAYLOR. Foreign commercial yards are reportedly more efficient than US

yards. Are foreign military vessels constructed at these commercial yards? If not,

how do foreign military yards compare to US yards in terms of competitiveness?

How do these yards maintain their competitive edge?

Admiral SULLIVAN. In January 2006, the Secretary of Defense submitted an independent study to assess the overall effectiveness of the Navy ship construction program to the Congressional Defense Committees. An independent shipbuilding

consultancy firm, First Marine International (FMI), completed the assessment and

wrote a report, entitled First Marine International findings for the global shipbuilding industrial base benchmarking study.

In general, foreign yards are more efficient than the U.S. yards, however U.S.

trends have improved in key areas. Three major findings of FMI’s report were:

1. The six major private U.S. shipyards have made progress in improving shipbuilding best practices since a previous round of benchmarking was conducted

in 1999. However, more emphasis should be placed on production design and

engineering, quality control, and information technology (enterprise resource

planning systems).

2. U.S. Naval vessels appear to have more work content than comparable international vessels.

3. In addition to the overall benchmarking assessment, FMI also produced company proprietary benchmarking results for each individual shipyard. These individual results offered shipyard-specific recommendations of discrete actions

for each U.S. shipyard. The investment requirements necessary to implement

these plant improvements are supportable based on U.S. shipbuilder profit

margins. It was the Secretary of Defense’s expectation that the U.S. shipyards

will use their own resources if they choose to pursue these improvements.

In some foreign shipyards, both commercial and military vessels are constructed.

This military construction’s often segregated from the commercial construction.

These foreign yards are roughly equivalent to U.S. shipyards in terms of performance on their military vessels. For instance, at the Yokohama yard, IHI, we found

that their surface combatant was comparable pricewise to a smaller version of a

DDG–51, in a follow-ship kind of configuration. If you were to scale their combatant,

the cost would be about the same. Hyundai shows a similar result.

Foreign commercial yards maintain their competitive edge by:

1. Receiving governmental subsidies

2. Higher commercial ship production rates

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