The Navy's goals for its Twenty-First Century Destroyer are suitably millennial. The DD-21 is supposed to be stealthier than current designs, $150 million cheaper, and so highly automated that its crew will be two-thirds smaller. A radically streamlined acquisition process will give the industry unprecedented freedom to design the ambitious ship. Rear Adm. Joseph Carnevale, the newly promoted DD-21 program chief, proudly declared: "We're right in the forefront of acquisition reform--and it starts right from the contract." So does the problem.
After six months of tinkering to meet industry and congressional concerns, the Navy's DD-21 program looks competitive--but mostly at the front end. Over the next three years, two shipyards and their industry teams will produce alternative designs: Mississippi's Ingalls Shipbuilding, a division of Litton Industries Inc., and its electronics systems integrator Raytheon Co. versus Maine shipbuilder Bath Iron Works Corp. and defense giant Lockheed Martin Corp.
But each yard's team will include representatives from its rival. The reason: No matter which team wins, "the design's got to be producible efficiently in both yards," Carnevale explained--because each yard will share about equally in the actual construction. So what benefit accrues to the yard that wins? Said a Bath spokesperson: "We don't have that determined yet."
"It's a surreal industry," said Renee Gentry, companies analyst at the defense-oriented Teal Group. "It's not competitive by any normal business definition.... You've got shipyards that are surviving in good measure on the basis of their political connections.... If they've got a major program, they'll give it half to one shipyard and half to another."
Indeed, the six major U.S. shipyards frequently collaborate. Newport News Shipbuilding (Virginia) and Electric Boat Division of General Dynamics Corp. (Connecticut) will share the New Attack Submarine; Avondale Industries Inc. (Louisiana) and National Steel & Shipbuilding Co. (California) share transports and auxiliaries; and Bath and Ingalls, after years of bitter competition, now share work on the current Aegis destroyer.
Carnevale argued that such sharing is economically more rational: "[Under competition,] the shipyard that won the majority of the ships actually got the lowest profit, because they had to bid so low." In their competition for a shrinking post-Cold War pool of work, one congressional staffer said, the yards were endangering their financial health. "At these levels of demand," said Loren Thompson, Lexington Institute analyst and consultant to the industry, "a major contract loss would be tantamount to bankruptcy.... And Congress is simply not going to let that happen."
Post-Cold War downsizing has already cut Big Six payrolls by a third. Said Brookings Institution expert and former Assistant Secretary of Defense Lawrence J. Korb, "I don't think you'd want to keep all six--but who the heck is going to choose?"
Not the Navy, especially after the heated political battle last year on Capitol Hill over the Aegis destroyer.
The huge Ingalls shipyard has long relied on two lines of business to carry its high overhead: destroyers, like the Aegis and the DD-21, and amphibious ships the Marine Corps uses for seaborne assaults. But in an industry upset in December 1996, Ingalls lost the contract for the new LPD-17 amphibious ships to a team from Avondale and Bath. The Navy's decision to compete freely sparked a firestorm on the Hill: in Korb's words, "[Trent] Lott got all upset when his yard didn't win."
Son of an Ingalls pipe fitter, the Mississippi Republican and Senate Majority Leader first urged his home-state shipyard to sue to get the contract back. Then he demanded that Bath give up two Aegis destroyers to Ingalls. The Maine delegation rallied to Bath's colors. It was "an uphill battle" against Lott's influence, said Rep. Tom Allen, D-Maine. "What I think we had going for us was the belief of a lot of players that the integrity of the whole process was at stake." (Lott's office failed to return repeated calls asking for comment).
In the end, said Allen, "the political pressures neutralize[d] each other." Bath kept its allocation of six Aegis ships, and Ingalls got its extra two--not at Bath's expense, but at the taxpayers'. In recent weeks, Lott has also pushed for the Navy to build an extra amphibious ship--one certain to go to Ingalls.
Given Lott's power, Thompson said, "It would be almost impossible to tell Ingalls it is not going to receive a share of a major contract. [But] I don't believe Ingalls could shut out Bath either." Besides, Congressional Research Service naval analyst Ron O'Rourke suggested, collaboration permitted Ingalls to concentrate its energies on finding a long-term replacement for the lost LPD-17 contract.
So when the Navy first asked for bids on the DD-21 in November, it received just one, from the same trio that currently builds all Navy destroyers: Lockheed Martin, Bath and Ingalls. Acquisition reform in general, and the DD-21 program in particular, stress industry cooperation; but the Bath-Ingalls-Lockheed axis was not what the Navy had in mind. Industry observers dubbed it "the Dream Team." Raytheon spokesman Dave Shea called it "monopolistic."
Although Avondale and Newport News both approached Raytheon, with the Navy's encouragement, neither had built destroyers in decades. Raytheon wanted Bath or Ingalls: "Teaming with anyone else," said Shea, "would not make us competitive." Again, the Navy ran aground on unintended consequences: the Navy's decision to protect both Bath and Ingalls, O'Rourke suggested, may have created an aura of irreplaceability about the two destroyer yards.
So the Navy proposed to break the Dream Team up, forcing one yard to partner with Raytheon for a straight-up competition. The shipyards' protests, and their congressional echoes, squashed that plan. The final outcome: the current system, whereby the yards compete on the design but share construction.
Carnevale insisted this result "is another great example of what acquisition reform has done for us. . . . We didn't go to a single competitive event and then have a monopoly after that." The DD-21 will likely copy the Aegis program's incentives to reward shipyards for reducing costs. Also, the yard to win the design competition will likely lay claim to the potentially lucrative contract to maintain the ships once built (although Carnevale added the caveat that the competition plan is still in the works). Finally, although officially secondary players, Raytheon and Lockheed have no guarantees of business and may well spur their shipyard partners to compete.
"This really represents continuity with the past in the destroyer business," said Thompson of the evolving contract, "and it seems to have worked really well. I don't think you can really draw any apocalyptic conclusions."
Harvard University's John F. Kennedy School of Government's Steven Kelman--an acquisitions reform pioneer in his days as head of the Office of Federal Procurement Policy--noted that defense acquisitions face "in some senses an insolvable problem. . . . You are buying stuff that is both well beyond the state of the art and which has no ready commercial marketplace." The DD-21 has not yet left harbor, but it is already facing the limits of competition.
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