5—
Conclusions and Recommendations

Overview

Improved technology is critical if U.S. shipbuilding companies are to regain a place in the world commercial shipbuilding market. To be profitable, it is necessary that U.S. shipbuilders at least be on a technical par with the international yards against which they would compete. However, U.S. shipbuilders currently lag behind in the four major categories of technology that this committee examined:

  • business-process technologies—the principal "up front" management processes and other management activities, notably technologies for preliminary design, bidding, estimating, and sourcing, that are linked to the marketing capabilities of shipbuilders;
  • system technologies—the engineering systems, such as process engineering and computer-aided design and manufacturing, that support shipyard operations;
  • shipyard production processes technology—the methods used in fabricating, assembling, erecting, and outfitting vessels; and
  • new materials and new product technologies—the innovations, including new designs and new components, that meet particular market needs;

Relative to these four categories of technology, as they are commercially applied, U.S. builders lag behind least in shipyard production technologies, are further behind in system technologies, and are far behind in business-process and new product and new materials technologies. This assessment of the committee is



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--> 5— Conclusions and Recommendations Overview Improved technology is critical if U.S. shipbuilding companies are to regain a place in the world commercial shipbuilding market. To be profitable, it is necessary that U.S. shipbuilders at least be on a technical par with the international yards against which they would compete. However, U.S. shipbuilders currently lag behind in the four major categories of technology that this committee examined: business-process technologies—the principal "up front" management processes and other management activities, notably technologies for preliminary design, bidding, estimating, and sourcing, that are linked to the marketing capabilities of shipbuilders; system technologies—the engineering systems, such as process engineering and computer-aided design and manufacturing, that support shipyard operations; shipyard production processes technology—the methods used in fabricating, assembling, erecting, and outfitting vessels; and new materials and new product technologies—the innovations, including new designs and new components, that meet particular market needs; Relative to these four categories of technology, as they are commercially applied, U.S. builders lag behind least in shipyard production technologies, are further behind in system technologies, and are far behind in business-process and new product and new materials technologies. This assessment of the committee is

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--> based on extensive experience and visits to international yards, knowledge of technical exchange agreements between U.S. and international yards, and the committee's workshop and literature review. The committee must make the sober observation that no industry in a position similar to the position of U.S. shipbuilding has become internationally competitive in less than ten years, if at all. Given the current position of U.S. industry, with labor hours twice the international level in some market segments, the industry confronts an enormous task. This committee urges a broader examination—focused on more than technology—to determine what is required for the success of the industry. In particular, this examination should cover financing of all kinds, with a close look at U.S. government regulations and subventions by other governments through training programs, port and area development subsidies, and the like, which are not directly tied to shipbuilding but clearly influence its economics. In the past, financing has been much more important than technology in determining the competitive position of shipbuilders, and this will probably be true in the future. The proposed broader examination could be led by the industry, with cooperation from the federal government. In taking this broad view, such an examination should ensure that total support for U.S. shipbuilding leads to a total change in the industry and not a continuation of past practices. This broader examination should also include the need for the United States to formulate a public policy approach that creates organizational, structural and financial incentives. The range of incentives may be essential for building a viable industry in the United States. Specific Conclusions The following summarizes the committee's conclusions for U.S. industry, government, and education to regain an international market position for U.S. shipbuilding. Conclusion 1: U.S. industry is behind other shipbuilding nations in all four categories of commercial technology: business-process, system, shipyard production, and new products and new materials technologies. Although U.S. shipbuilders are the best warship builders in the world, they have had almost no experience in commercial shipbuilding for the last 15 years and no significant international commercial experience for the last 50 years. Conclusion 2: U.S. shipbuilders are at a serious disadvantage in business-process technologies, including marketing, preliminary design, estimating, and sourcing. Having been absent from the commercial markets for large ships for many years, U.S. yards do not understand customers well, do not have libraries of product designs, and are unaccustomed to rapid, accurate parametric cost estimating based on recent commercial ship production. U.S. builders must acquire better technical capabilities corresponding to preliminary design, estimating, sourcing,

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--> costing, quality, delivery, and adapting designs to customer needs. They must also acquire a better understanding of the close relationships among these capabilities. For example, foreign shipbuilders have developed regular working relationships with suppliers and are able to procure good quality components rapidly and cost-effectively; whereas U.S. shipbuilders, constrained by U.S. government procurement regulations, have little experience with international equipment suppliers. Similarly, U.S. builders have little knowledge of commercial customers and market segments. In other industries, building this kind of knowledge has been time consuming and expensive. Conclusion 3: System technologies, engineering and manufacturing systems that support the yard, are also behind international practice. Although U.S. shipbuilders understand quite well the CAD/CAM models currently used and often use the same models as international shipbuilders, the aggregate of foreign experience results in simpler and more accurate construction, faster planning and estimating of shipyard labor hours, and fewer engineering labor hours per ship. Moreover, most U.S. yards are constrained by physical location and U.S. environmental standards. Improving the basic layout and material flows to international standards will be difficult and will require a high degree of process simulation to minimize capital costs while improving process flow and unit cost. Such process simulation technology now has many other applications, but it must be adapted for commercial shipbuilding so that yards can reprocess their work flows within financial constraints. Conclusion 4: Within the shipyards, U.S. shipbuilders are behind in the commercial aspects of shipyard production processes technology . Although the basic technology is well understood and the technology being applied in international yards has been observed and analyzed by U.S. shipbuilders, the labor hours required by foreign shipbuilders are as much as 50 percent fewer than those required by their U.S. counterparts. In addition, foreign builders cut and weld more complex shapes to closer tolerances and to international commercial standards. As in other industries, such as automobiles and machine tools, international competitors are producing high quality products faster and at lower cost than the United States. Conclusion 5: U.S. shipbuilders, again because of their long absence from the international market, do not have close knowledge of customer requirements or ready product designs and materials technologies to serve different commercial market segments. For example, fast ferries are being made in Australia, other ferries in Europe, and cruise ships in both Scandinavia and Italy. The Koreans and Japanese are building tankers and other bulk carriers. U.S. shipyards will in some ways have to start from the beginning, competing against yards that have designs that are "almost ready" to build. In addition, U.S. experience with new technologies, particularly with components and engineered products that go into

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--> commercial vessels, is minimal. Although U.S. builders have superb systems and engineering skills, they have little practice at integrating components to satisfy customer requirements. Once again, obtaining this experience will take time and money. Conclusion 6: U.S. government programs have been and are helpful for U.S. shipbuilders trying to reenter commercial shipbuilding. But they are not sufficient. Specifically, the ARPA MARITECH program at $40 million a year is similar in scale to the amount invested in technology by the international yards. MARITECH's budget and the associated matching funds from participating companies represents about 2 to 3 percent of U.S. sales if the U.S. production goal is to produce 30 to 50 large commercial ships per year. Thus, MARITECH can potentially match the technology investment of international competitors. During the early phases of MARITECH, the focus has also been on the "front end" of the shipbuilding process, that is, on new marketing and preproduction and on product design and materials, the areas where the industry is weakest. MARITECH, then, is of about sufficient scale and has been directed at the areas of greatest need. Continued support of these front-end areas, including process modeling, is a way government can help. Continued support for shipyard production and design technology improvements is desirable, but it will have a modest effect unless there is an innovation that will capture customers or substantially reduce cost. In short, the MARITECH program should be allowed to run its course. However, MARITECH is structured so that project results are proprietary to participants, thus limiting the effectiveness of the program to the U.S. shipbuilding industry as a whole. Thus, shipbuilders are encouraged to participate, but the results of MARITECH programs that are useful to all U.S. shipbuilders should be made available to all of them. The NSRP, concentrating on standards, technical evolution of components, and processing, is helpful and of good quality, although it is substantially subscale. Unless NSRP encourages shipbuilders to spend several times the amount NSRP provides, the program will not be robust enough to make a difference. U.S. shipyards possess skills of a very high technical order and can produce vessels whose technical sophistication is far greater than is required for commercial fleets. But high technology comes at a high cost. The many other shipbuilding-related programs that the committee examined offer very high technology but at costs that are prohibitive for the international commercial market. For many years the government programs that have been the most consequential have been financial, not technical, programs. The construction differential subsidy in the 1970s and Title XI, more recently, have clearly made a much greater difference than technical programs. The implications, however, are beyond the scope of this report. To improve the U.S. position, perhaps the most important help government could now provide would be U.S. Navy procurement of noncombat ships made to

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--> commercial specifications. Although it may not be practical for all noncombat ships, Navy procurement represents the largest single shipbuilding budget and has the greatest potential for improving U.S. industry's commercial performance. It would be important that the material and equipment used for these ships be commercial items used in commercial ship construction, not items based on military specifications that had been converted to commercial specifications. Conclusion 7: The educational system, which produces the naval architects and marine engineers with a basic understanding of design and materials and the systems thinking needed to design ships, is absolutely essential to the long-term health of the U.S. shipbuilding industry. In the long run, the development of systems thinking and analysis, together with basic technical research (often funded by ONR), will be important to the U.S. position in international shipbuilding. It is equally clear, however, that education, because its effects are seen over such a long time, cannot make a material difference in the next five to ten critical years as U.S. shipyards try to regain a position in international shipbuilding. In the short run, university faculties could help in several ways. For example, outside the NA&ME faculties, there is extensive knowledge in process simulation, which is the only approach this committee believes will allow U.S. yards to restructure themselves at minimal capital cost to approximate world-class yard economics. As the industry becomes more successful commercially, more undergraduates will likely be attracted to the industry. The evidence suggests that in any technological area, including NA&ME, students are likely to choose a technical field only if jobs exist after graduation. Until U.S. shipbuilders create a demand for more graduates, ONR can continue to provide an extremely valuable function by funding research for faculty members, funding Navy projects, and providing fellowships. In fact, this may be the only source of support for some young faculty members. The committee was unable to determine whether there will be a shortage of NA&ME graduates in the next several years. First, many past NA&ME graduates have turned to other industries where there are jobs. A good number of these graduates could return to the field with three to five years of experience in industry and be satisfactory naval architects and marine engineers. Deep involvement of NA&ME faculty members with the industry in trying to help it become competitive is not apparent. When other industries were seriously challenged by international competition, the faculty of related schools made efforts that were not purely technical but were also designed to bring about both technical and economic improvements in process engineering, tooling, material processing, and the like. NA&ME faculties contribute little to the economic health of the U.S. shipbuilding industry. In turn, the shipbuilding industry seems to contribute little to the health of the schools. The common distress of both should mark the beginning of a common effort to strengthen both.

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--> Conclusion 8: Judged by the difficulty that other industries have encountered, the magnitude of the task of regaining a significant share of international shipbuilding is enormous. No other substantial industry has achieved such a turnaround. Industries that have been severely damaged by international competition and recovered were still in their markets and took several years to learn new skills to become serious international players. This is true for the electronics, electrical equipment, automobile, and steel industries, for example. All of them had to invest and incurred large losses over several years to reestablish a position. This fact argues against the likelihood of success for U.S. shipbuilders, at least from a banker's perspective. For shipbuilders, it simply calibrates the difficulty of their task and helps to establish the level and quality of effort that will be needed for success. Policy Recommendations Recommendations for Industry Recommendation 1. Individual shipbuilders should develop detailed plans for entry into the international commercial market. To ensure a high probability of success in becoming competitive, shipbuilders must develop comprehensive strategies and detailed plans. These plans must cover required building hours, quality levels, skills, and management systems in detail. This recommendation might seem trivial or not particularly helpful. But discussions with executives in industries that have regained international positions against tough competition invariably indicate that a better early understanding of the difficulties, the competitors, and the customers would have made a major difference. Plans also need to include reasonably good estimates of capital expenditures and their timing, the risks of achieving success in different market segments, and of the likely levels of yard manpower, which almost certainly will be substantially lower than the manpower levels required for construction of military ships. Detailed plans may be more than a single yard can afford. Corporate owners of shipyards will almost certainly require reasonable expectations of return before investing the amounts that are likely to be needed. Although such recommendations may seem self-evident, they were not evident to automotive, steel, and electronics companies, except in hindsight. Recommendation 2. Shipbuilders and shipowners should become more involved with and supportive of schools of NA&ME. During the current decline of the shipbuilding industry, looking at the health of education may be difficult, but doing so is essential to the long-term health of the shipbuilding industry. Recommendations for Government Recommendation 3. The Department of Defense should acquire all noncombatant ships, including Sealift ships, using commercial specifications and commercial

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--> procurement practices. Current procurement practices create inherently inefficient design, engineering and procurement practices in U.S. shipyards. The business methods developed to meet these procurement requirements are entrenched in U.S. yards and leave them unable to operate effectively in the international marketplace. Recommendation 4. ARPA should continue current efforts in MARITECH, concentrating on the ''front end" of the process. Until the industry reaches a level of investment approximating that of European yards for technology and capital, only ARPA is investing at the scale required for the industry to become competitive. The "front end" includes both business-process technologies, such as marketing, estimating, sourcing, and process simulation, and technologies related to product design. ARPA should insist on viable business plans for each project, and if they are lacking, should cancel the project and concentrate funds where there is a reasonable chance of success. Recommendation 5. The Maritime Administration (MARAD) should continue and should expand its role in assisting U.S. yards to enter the international commercial market. MARAD should be more aggressive as an informed commentator on efforts required by the industry to become internationally competitive. MARAD can also help by collecting general market information, much like the departments of Commerce or Labor, but success will depend on individual shipbuilders understanding their target market segments to a depth well beyond that achievable by MARAD. Nevertheless, MARAD, by combining information from the departments of State, Commerce, Defense, Labor, and Transportation, can provide useful perspective to the industry. More useful still would be a technical assessment of international yards that would provide U.S. industry competitors with some idea of the gaps they must overcome. This information would need to be available to any U.S. competitor who requested it. There will be a serious need to monitor the many ways other governments subsidize their shipbuilding industries. Because financial mechanisms and subsidies have played a major part in competitive position for decades, the single most important function of MARAD would be to ensure reasonably accurate measurement of these subventions and subsidies in other shipbuilding countries. Recommendation 6. ONR should continue support of NA&ME faculty through fellowships, research projects directed at Navy objectives, and to the extent possible, projects with commercial economic impact. Certainly, the economics of technology will be of overwhelming interest to the industry in the next decade. Relatively little study has been done of the economics of various available technologies. U.S. shipbuilders must achieve many fewer labor hours, shorten delivery schedules, and achieve greater precision in shipbuilding. To the extent that it falls within ONR's charter, achieving better understanding of the economics of technology around the world and of the differences between the economics of

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--> technology used in military versus commercial shipbuilding would be invaluable. Finally, a significant effort in process simulation at the level of the entire yard, including suppliers, material handling, fabrication, erection, and outfitting, would provide the least-cost approach needed for U.S. shipbuilders to reenter the market. Recommendations for NA&ME Schools Recommendation 7. NA&ME schools must become more involved with the U.S. shipbuilding industry through research in business-process, system, and ship-production technologies, as well as through soliciting support for these and other kinds of research. The schools should continue concentrating on subjects traditionally taught but should turn much greater attention to the economic health of the industry. The future of NA&ME faculties depends very much on the health of the industry for the next decade or two, yet the schools appear to have few efforts under way to ensure the industry's health. Universities, with their multiple disciplines, led by the naval architects and marine engineers who justifiably lay claim to being good systems thinkers, should be able to seize the problem that U.S. shipbuilders face, understand what it will take to create a healthy industry, and reach as far afield as needed to understand the cultures, political motivations, and economic infrastructures of international competitors. The committee hopes that this talented group of academicians will take the initiative.