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May 1, 2010

DEFENSE SPENDING

United States Navy—smaller ships on the horizon.

The bull run that characterized United States defense expenditures throughout the years of the Bush administration has come to an end—a victim of economic realities, the changed tempo of operations in Iraq and Afghanistan and the changing priorities of the world’s largest military.

Procurement spending peaked at $169 billion in 2008, and is forecast by Jane’s to slide steadily to $130 billion by 2014 (although to put this in context, the latter figure will still account for 39% of total military equipment expenditure worldwide).

Against this backdrop, it should be made clear that U.S. defense expenditures over the coming years still offer some reasons for cautious optimism for certain sectors in the near term.

The Budget

U.S. shipbuilders were—at first reading—among the beneficiaries of the 2011 (FY11) defense budget. It offered the naval sector much needed clarity following the period of uncertainty that faced the military after the election of President Obama. Furthermore, the budget contained a realistic, seemingly executable shipbuilding plan stretching to 2015, which was mindful of the need for industrial base stability, and a significant funding increase over the previous year.

The budget included provisions of $25.1 billion for shipbuilding procurement and RDT&E [Research, Development, Test and Evaluation], including $15.7 billion in the Shipbuilding and Conversion account of the U.S. Navy.

This represents a 12% increase in funding for shipbuilding from the previous year, and an apparent spending commitment to nine new ships in 2011, and a total of 50 new vessels through 2015 (averaging 10 ships per year).

Overall, the FY11 shipbuilding portfolio funds two DDG-51 Arleigh Burke-class destroyers, considered the workhorse of the fleet; two Virginia-class nuclear attack submarines; two Littoral Combat Ships; one Amphibious Assault Ship under the Amphibious Assault Ship Replacement program; one Mobile Landing Platform; and two Joint High Speed Vessels (one to be funded by the U.S. Navy, the other by the U.S. Army).

Overall, shipbuilders serving the U.S. Navy will be called on— under the service’s future years defense plan—to construct a total of 50 new ships between 2011 and 2015 at a total cost of $72.38 billion, including 17 Littoral Combat Ships; 10 Virginia-class submarines; eight Joint High Speed Vessels; eight Arleigh Burke-class destroyers; three Mobile Landing Platforms; and one Gerald R Fordclass aircraft carrier, the Navy’s newest design and the replacement for the Nimitz-class carrier used since the 1970s. Overall these vessels have a total aggregate displacement of 291,000 tons.

Clarity and a steady drumbeat of work are, of course, welcome for a sector which has historically faced periods of feast and famine as a result of cyclical procurement.

The current naval procurement plan does not, however, point to boom times ahead for the industry, and certainly not for shipbuilders’ suppliers. There are a number of trends which suggest optimism should be tempered by realism.

Priorities and Costs

Firstly, the U.S. Navy Defense Plan is notable for the programs omitted as well as those to be funded.

Among the grand, large-scale programs of the boom years to be sacrificed to the current era of cost-conscious procurement and pragmatism is the Zumwalt-class (DDG-1000 destroyer program). It remains truncated at just three ships (down from the 30 initially sought). Zumwalts can cost as much as $6 billion each, compared with about $1 billion for Arleigh Burke-class destroyers. Likewise, the Navy’s next-generation cruiser, CG(X), program is among the casualties of the current era.

Secondly—and perhaps most importantly for the shipbuilding sector’s materials suppliers—the U.S. Navy is looking towards the procurement of smaller vessels.

Programs such as CG(X) and DDG-1000 weren’t just remarkable as transformation programs to push technical boundaries, they were also physically vast. The Zumwalt-class vessels displace around 14,500 tons, while the CG(X) program envisages cruisers of between 20,000 and 25,000 tons displacement.

In place of such giants, the Navy has looked to the procurement of smaller, less-technically advanced platforms. The Arleigh Burke-class destroyers (a naval workhouse since the 1980s) displace between 8,300 and 9,200 tons. The Littoral Combat Ships, meanwhile, are less than half the weight (at between 2,800 and 3,100 tons).

The reasons for the shift fall— like virtually all U.S. military programs— into the categories of changed priorities and costs.

The Department of Defense’s overarching planning document— the Quadrennial Defense Review (QDR—published February 2010)—places great emphasis on asymmetric threats, rather than the Cold-War era peer-to-peer conflicts of the past. Hence, the Navy has looked towards more agile, smaller (and of course cheaper) “green water” combatants.

In terms of costs, the advantages of developing legacy platforms such as the Arleigh Burke-class are relatively clear.

Zumwalt-class and CG(X) programs—which progressed under the transformation doctrine of former Defense Secretary Donald Rumsfeld—were characterized by prohibitively expensive price tags as the costs of bringing cutting-edge technologies to maturity spiraled.

The realities which shaped the U.S. Navy’s near-term priorities are reflected in the long-term outlook.

The service’s hopes of establishing (and more importantly, maintaining) a 313-ship battle force were outlined by the then chief of naval operations (and now chairman of the Joint Chiefs of Staff) Admiral Mike Mullen in 2005. Naval shipbuilding aspirations were, during the boom years, towards the optimistic end of the spectrum (the Congressional Budget Office noted in 2008 that building and sustaining a 313-ship fleet would absorb around $27 billion annually).

The current 30-year plan of the U.S. Navy is arguably more realistic: Jane’s notes that the service will have a battle force of 284 vessels by the close of 2011. Given a shipbuilding budget averaging $15.9 billion a year, the battle force will meet the 313 target from 2020 to 2026 (hitting, in fact, 320 vessels in 2024), but decline will follow. Current assumptions point to the fleet dwindling steadily to 288 ships in 2032, albeit recovering to 301 in 2040.

Much will change over 30 years, of course, and requirements several decades hence are notoriously hard to predict.

The near-term trend is evident, however: The U.S. Navy is looking toward smaller ships.


Guy Anderson is editor and lead analyst at Jane’s Defence Industry (IHS Jane’s), based in London, England.