Mulling Bath’s “Bad” Bid

by admin on January 19, 2017

Reports claim that General Dynamics Bath Ironworks is trying to force the Navy to grant it a cost-plus contract to build the initial Flight III DDG-51 destroyer. The cost-plus request is a real head-scratcher for observers–and it is an action that should concern every Blue-Water Navalist out there.

Obviously, a cost-plus proposal is a pretty dramatic step for Bath to take–particularly given the competition and the current political and budget environment.

It is unlikely a Trump Administration SECNAV will respond well to any cost-plus contract.

What made Bath do this?

Bath’s request for a cost-plus contract is a huge vote of “no confidence” in the Flight III DDG-51 “Variant”. I share their concern. The ship will be power-dense, built for tech that isn’t ready, and it’ll be pushing against the very last margins salted away by 1980’s era naval architects. A single miscalculation could unravel the whole platform–and the progression of war (particularly Electronic Warfare) is going to force last-second requirements change. It’s going to be a mess, and I’ve been worried about it for some time.

By now, Bath knows the signs of a problem program, having been through the ringer with the first-in-class (and ultimately orphaned) three-ship DDG-1000 production run. Making matters worse, Bath doesn’t have any other projects underway to absorb or efficiently use labor–if there is a design hiccup, labor will be wasted (whereas spare labor at Ingalls can be sent off to work one of, oh, four (?) shipbuilding programs currently underway in Mississippi.

But, as the DDG-51 is the mainstay US surface combatant, we should all take a deep breath and ask some probing questions about why Bath–of all the yards out there–is balking. The DDG-51 is a “Bath” product. It made “The Yard”.

This contractual equivalent of a slap in the customer’s face may reflect real concern that the Flight III design isn’t ready. Certainly, it is tough to ask what is, essentially, a single-product, labor-challenged shipyard, to take the “first-in-class” beating all over again. But, given the interest (and capital improvements) Bath has in trying to keep the DDG-1000 alive in some (any!) form, this fracas may well be a strategy to try and force the Navy to cough up a more accurate estimate of the Flight III DDG-51 cost, making the DDG-1000 price look better.

Both factors are likely in play here.

Fighting For Fixed Price

I had the opportunity to discuss all this with the Times Record’s Nathan Strout, reminding Bath that:

For shipbuilding, cost-plus contracts have an important role in mitigating the shipbuilder’s risk of taking on a new contract for a fledgling naval ship — new shipbuilding programs mean the yard must retool, train new people, and gamble on the longer-term future of a program that is, very often, uncertain

Of course, Acting Secretary of the Navy Sean Stackley (Congrats!) will quietly recall that Bath has a long record with the Burke Class. The Flight III Arleigh Burke Destroyer is a variant of a ship Bath Ironworks has been designing and building since the late eighties. The first ship of this class, the USS Arleigh Burke, was awarded to Bath more than thirty years ago, and Bath Ironworks built more than half of the sixty-two Arleigh Burke destroyers that have been delivered to the U.S. Navy to date.

And finally, Bath has been awarded five Arleigh Burke contracts (an initial Flight IIa and four Flight IIa “tech inserts”) that are, essentially, exercises in Flight III risk reduction.

To an outsider (or to Bath’s mortal rival, Huntington Ingalls), the risks should be pretty manageable by now. And, frankly, overall, General Dynamics has a strong record of responding to design challenges in other programs. General Dynamics Electric Boat accepted–and earned a profit–after accepting fixed price contracts on variants of the Virginia Class submarine. The intra-variant design changes were significant, but the company responded with a fixed-price bid and did quite well.

But it’s not that easy:

According to Hooper, both sides have a point. On the one hand, the Navy can say that BIW has made dozens of Arleigh Burke-class destroyers and should be capable of making appropriate estimates. On the other hand, there are some major changes being made with the Flight III program, and the kinks have yet to be worked out. A report from the Government Accountability Office in August actually called for the Flight III program to be delayed in order to give the Navy time to increase design knowledge.

“The risks are high; the design isn’t ready to be built yet and the platform’s weight, power and space margins are slim enough that even a small design oversight could be catastrophic,” said Hooper. “But even given the risks, Bath’s request for cost-plus contract is a tough pill to force upon Washington, D.C. right now.

If I were a shipbuilder, I’d be terrified of integrating a still-immature radar into a very dense ship that has no margins. It’d be the shipbuilder–not the radar maker or the system integrator–who’d be on the butt end of angry Presidential Tweets about cost overruns.

The risk that the Flight III design will change between now and the mid-2020s is very high. The naval battle over spectrum and electrical-powered warfare is being fought today. Electronic warfare developments are coming quickly, and any metal-bending platform developer, sitting around at the wrong end of the technology development cycle, is going to be pressed by the customer to modify and incorporate new items to support new electronic and spectrum warfare initiatives until the bitter end.

For a ship that has darned little margin, that’s not a good place to be.

Still Fighting for DDG-1003

At the end of the day, Bath has no better option right now than to fight for an “in production” platform it can “lock” down competitively. The DDG-1000 is it. So, to let Nathan tell it:

“Hooper argues that BIW could be pursuing a strategy to convince the Navy to take a second look at the Zumwalt-class destroyers. By pushing the Navy to adopt a more realistic (and more expensive) view of the Flight III destroyers, the more expensive yet more advanced Zumwalt-class destroyers could look more attractive.

“Such a strategy could be seen as a win-win for Bath — while a higher cost estimate reduces the overall risk to the yard posed by the Flight III, a higher price estimate would also allow policymakers to make better-informed comparisons between the next-generation DDG-1000 and the resurgent ‘DDG-1000 Killer,’ the DDG-51 Flight III,” said Hooper.

The Navy takes this threat seriously enough that CNO Richardson spoke up earlier this week, reminding a Defense One audience that there were no plans to build more Zumwalts.

Give Bath a Break:

To be perfectly honest, there’s no reason to lean forward on the Flight III contract now. Appreciate that Bath’s competitive environment isn’t great and that they’re going to have a very hard time competing with Huntington Ingalls (I’ve written about Bath’s dilemma here). You can’t get perfect competition, and the geographical realities (remember what Hurricanes Katrina and Rita did to Ingalls? I do!) demand some measure of distribution of key shipbuilding assets (even if one can’t be quite as competitive).

So for now, I’m a proponent of being nice. Convert the contract for the first Flight III into a more conservative Flight IIA “technology insert” platform, and then use the time to obtain a “solidified” Flight III plan, with a locked down, finalized design.  And then, when the plan is ready, give Bath a bunch of work–bury them in DDG-51s and give the yard some extra work to load shift–some Ice-Hardened OPCs or some patrol ships (Huntington Ingalls will be buried under a bunch of other stuff and probably won’t miss the work).

The last thing the Navy needs in the mid-2020s is an out-of-control Ford Class-esque fiasco. If the DDG-51 Flight III blows though their cost cap, it could wreak havoc on a Navy struggling to pay the bills on the mid-production Columbia Class SSBNs.

If the DDG 51 Flight III cost is too high, then the Navy might do well to have a discussion about the future of the DDG-51–possibly moving the cruiser platform up to an LPD-17 hullform, and down-scoping the DDG-51 to be a “low-end” littoral bruiser or an ASW-focused ship.

And then, maybe–juust maybe–Big Navy should take the head of the General Dynamics aside and quietly suggest to her that the Corporate office help the Navy reset the tone with Bath Ironworks by doing a little more tinkering with the leadership there.

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iron-man2012511113In the Trump Era, “Big Defense” CEOs must either market themselves as visionary, “national” assets or wait to die under withering attack from the White House.

Look, for any defense company has a big marquee program like the F-35, the Ford Class Carrier or the SSBN(X), being a colorless, faceless and largely anonymous means of service delivery is, to the Trump Administration, a sign of exploitation-ready weakness.

I’ll be frank. Owners of large defense contracts can’t stealth their way out of this. They’ll need to be either feared or liked by the Trump Administration. There is no middle ground.

For those sad companies that the Trump Administration neither fear nor have a reason to like, well, they’re at real risk. Un-feared and unloved, they will be little more than prey–a herd of slow-moving old-school Corporate Brontosauruses just waiting around to be ravaged by a hungry, savvy and marketing-focused Trump-osaurus Rex. The mechanism will be simple and brutal–whenever the Trump Administration needs a quick domestic win, then those faceless, anonymous contractors will be the first to see their programs challenged and, possibly, sacrificed.

No program–no matter how much they contribute to national security–is safe.

1360698039523Eating the Brontosaurus:

This was easy to see coming. Early in December, I was “fairly certain the Trump Administration would relish the political theatre in killing off a defense program or two”. Days later, Mr. Trump sent out his “Cancel Order” tweet about Air Force One. Two weeks later, Mr. Trump was attacking the “out of control” F-35 on Twitter, and setting them in opposition to a somewhat desperate Boeing.

It makes sense.

Harassing a big contractor like Lockheed Martin or Boeing is a simple, easy way to get a political win–over the past decade, Lockheed, in particular, has taken American Government Business for granted. Lockheed has no real domestic “presence”, focusing the company’s public outreach on being an “international” company. Aside from some niche “STEM” outreach initiatives, Lockheed cannot make a strong case for why the company matters to Mr. Trump’s base and Mr. Trump’s overall political well-being.

Making matters worse, Lockheed’s CEO, Ms. Marylin Hewson, is not somebody who Mr. Trump is likely to warm up to either–she’s certainly competent, wily and smart as all get out, but she’s not somebody who is likely to have strong personal chemistry with Mr. Trump.

Politically, it is even worse for Lockheed. Lockheed has no identifiable geographical center. Instead, it has spread facilities around the country, focused on building strong relations with Congress. That’s fine, but….there’s also the problem of having too much of a good thing. Today, when raw theatrical politics count, Lockheed is left with a diverse, geographically distributed set of workplaces that, for a variety of reasons, don’t make good populist theatre.

An industrial tool built to influence Congress has little ability to impact the Executive Branch.

With a good relationship between Mr. Trump and Ms. Hewson unlikely, Lockheed has no easy way to convey threat to Trump. Electorally?  Well, try and find a map on Lockheed’s website to show where they employ people in the USA. It’s hard to find. In the press?  Lockheed only focuses on the specialist press. There’s nothing to show that Lockheed is tied to the folks Mr. Trump’s political engine needs.

To the average Trump voter, Lockheed is a non-entity.

Boeing is a bit better positioned–they’re motivated, they have executives that appear more likely to “click” with Mr. Trump, and they’ve got a strong presence in states the Trump Administration will need in the next election. So when Boeing needs some love to survive the upcoming trade war with China, Lockheed will be pilloried, and some of Lockheed’s work-share will handed over to Boeing.

download (1)What to Do?:

For any defense contractor that is too big to ignore, the route to survive is to go full populist. I warned Big Defense about their civic disconnect two years ago, writing:

It’s strange that the public image of the Big Defense CEOs seem–at least according to google’s image selection analytics–far too stodgy. Too stuck in the ‘90s. And it’s that sector-wide disconnect with today’s innovative business culture–a overtly populist edge–gives Mr. Musk and his other Silicon Valley confederates an opportunity to diminish their defense rivals. They’re taking full advantage–and it is one of the reasons why they–and not representatives of Big Defense companies–are being hailed as the champions of America’s technological future.

These tech populists have piqued America’s imagination, creativity and interest.

For the health of Big Defense, that’s gotta change.

Here’s what needs to happen:

muilenburg_dennis_bio_pic_400x400First, identify executives that are either likely to bond–or intimidate–Mr. Trump’s inner circle: If you have either a personable bon vivant or some kind of ex-CIA operative in the executive suite, direct them to build contacts within Trump’s inner circle. This doesn’t need to be the CEO–just somebody who is seen by those in Mr. Trump’s orbit as having influence on the CEO.

Second, get the CEO to go public and go American early and often: The American public adores high-profile CEOs, and the Trump Administration recognizes that the public, starved for dynamic leadership, turned to high-profile CEOs out there to fill the vacuum. Defense CEOs need to get smart, grab the American flag, wrap themselves in it, and align their products with apple pie, baseball and the American Way.

This will be a hard pill for companies like Lockheed to swallow–Lockheed has long-stated their goal will be to use international sales to boost the bottom line, and, to do that, the company has been shedding their “American” image/base. Unless Lockheed can convince the public (and Mr. Trump) that their international push is an American virtue, then…don’t highlight it. Focus on raw, blunt Americana.

Third, CEOs need to recognize both the American public and Mr Trump are more comfortable treating companies as personalities: It is no secret that the average taxpayer will spend more time reading biographies than they ever will commit to examining a company prospectus–That’s why Big Defense CEOs must put energy into crafting their public image. Any rags-to-riches story, a “scrappy winner” theme or spy story associated with a Big Defense CEO will be assimilated by the public far more quickly than a technical product portfolio—but once the public starts getting engaged in the CEO’s personal story, they’ll inevitably learn more about (and sympathize with) the wider company and their products, too.

It’s simple…if Lockheed can sell America (and Mr. Trump) on Ms. Marillyn Hewson (which I don’t think can be done easily), then Lockheed will have gone a long way towards securing sales of Lockheed’s major product lines. Same rules apply for General Dynamics, BAE and all the other Big Defense conglomerates.

Put another way, it’s time to move away from having defense products “sell themselves” to the taxpayer. Lacking a big challenge like the Cold War or the War on Terror, average taxpayers aren’t gong to be moved by an interesting (and critical) defense product, like, say, the F-35. But….that said, an average taxpayer might be more interested if the F-35 was woven into a part of a larger, more personality-oriented storyline (Like Mr. Musk putting it “all on the line” for Tesla, or Apple growing out of Steve Job’s garage, etc, etc).

That personalized approach is what Big Defense CEOs need to try.

Fourth, the CEO must sell a BIG vision to Americans:

Rather than focus on selling to the American government (let the corporate underlings do that), Big Defense CEOs need to get out there and sell a vision to the American taxpayer–and, well, if that vision is only achievable with their company’s products, all the better, right?

But they need to sell a vision. A mission. Listen to Mr. Trump’s speeches. Look at his career. A big sweeping vision sells. Define that vision and, like Mr. Elon Musk, place your company at the center of it.

140412-N-PM781-002Finally, build some labor-heavy and identifiable geographical centers: If a company can’t generate good political theatre–creating a real and visceral political capital by rallying workers and so forth, then they’re vulnerable.

This is something of a retro move, but old defense contractors (Like, say the Krupp Family) used a similar tactic to survive and thrive in the face of monarchies, strong central governments or even (in Krupp’s Case) authoritarian ones. But it’s a lot harder for a leader to successfully harass a company that, in essence, funds and maintains, essentially, their own town. (After years of bemoaning their pricey Washington State presence, Boeing may learn to appreciate their status as the largest public employer in Washington State yet.)

It may, in the coming  decade, be more important for companies to offer larger, more cohesive political blocks to the Executive Branch than to spread small bits of manufacturing around the country as a means to influence Congress.

Which, if we put this into maritime terms, means that it’s probably a pretty good time to own a shipyard.

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