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POLICY BRIEF: ASSA and US Manufacturers Address US Policy of Foreign Preference for Critical Compone


ASSA and US Manufacturers Address US Policy of Foreign Preference for Critical Components on US Navy Ships

Background:

As the Fiscal Year 2020 appropriations bills move toward final approval in Congress, the U.S. House of Representatives’ version of the Defense Appropriations Bill (H.R. 2740) contains critical legislation that must be passed to ensure the future health of the U.S. shipbuilding supplier industrial base. Specifically, Section 8108 prohibits the use of U.S. funds to buy critical shipboard components for the FFG-Frigate program that are not manufactured in U.S. plants. The American Shipbuilding Suppliers Association (ASSA) stands firmly with the House position that U.S. funds should not be used for critical components on our warships at the expense of U.S. manufacturing capability and U.S. jobs. New programs for U.S. shipbuilding suppliers to compete for are limited, and Congress should not give foreign manufacturing companies an advantage over U.S. companies that are already hurt by the decline of the U.S. maritime industry.

The United States Shipbuilding Supplier Base is at Risk:

By law (10 USC §7309), U.S. Navy ships are required to be built in U.S. shipyards. The national security justification for this is clear—whether it relates to protecting sensitive nuclear technology, ensuring the security of the supply chain, or maintenance of critical capabilities and skills in our industrial base. However, there is no such requirement for critical hull, mechanical and electrical (HM&E) components to be manufactured in the U.S. These HM&E components include vital systems such as propulsion systems, machinery control systems, shafts, bearings, ships service power generation and others.

The U.S. maritime industry has been in decline since government shipbuilding subsidies were ended during the Reagan administration. President Trump recognized the hardship being experienced by manufacturing suppliers, and through Executive Order 13806 called for an assessment of the defense industrial base and supply chain resiliency of the United States. This Executive Order states:

The loss of more than 60,000 American factories, key companies, and almost 5 million manufacturing jobs since 2000 threatens to undermine the capacity and capabilities of United States manufacturers to meet national defense requirements and raises concerns about the health of the manufacturing and defense industrial base. The loss of additional companies, factories, or elements of supply chains could impair domestic capacity to create, maintain, protect, expand, or restore capabilities essential for national security.

Although U.S. shipyards can still build hulls, decks and superstructures thanks to the Buy-America requirements in Federal law that protect them, that alone does not make a warship. Without a U.S. capability to build and maintain the critical components that enable shipboard operations, the U.S. becomes critically dependent on foreign entities. As the U.S. Government and shipyards continue to buy foreign-made components, U.S. suppliers dependent on defense programs are increasingly shutting down operations. According to DOD’s 2018 Annual Industrial Capabilities Report to Congress, published 23 May 2019:

Industries involved in the manufacturing of shipbuilding components were among the hardest hit by the global shift in the industrial base over the last 20 years. Of the top ten highest grossing industries in Navy shipbuilding, six are in the manufacturing sector. Since 2000, these industries experienced a combined decline of over 20,500 establishments in the United States. Contraction of the industrial base has limited competition among U.S. suppliers of Navy components and in many cases, competition has altogether vanished, forcing the Navy to rely on single and sole source suppliers for critical components.

Unfortunately, this trend is continuing to worsen, particularly as the U.S. government and U.S. shipbuilders continue to buy foreign critical components at the expense of U.S. jobs and U.S. manufacturing capability.

The Navy’s Acquisition Process is Further Harming United States Suppliers:

Despite dire warnings regarding the health of the U.S. shipbuilding supplier base, the U.S. Navy is currently providing foreign manufacturers an advantage over U.S. companies through the acquisition philosophy of the new FFG-Frigate program (FFG(X)). The Navy is pursuing a “parent craft” approach that allows U.S. shipbuilders to develop their proposals based on proven ships operating in foreign navies. This is a valid approach to saving time and cost; however, it largely eliminates U.S. suppliers from the competition due to the extent of foreign content on these parent craft.

The U.S. Navy has historically selected U.S. manufactured components for its major surface combatants and designated them as class standard equipment to be procured either as government-furnished equipment (GFE) or contractor-furnished equipment (CFE). In a major departure from that policy, the Navy has imposed no such requirement for the FFG(X), the Navy’s premier small surface combatant. As a result, foreign designs and foreign-manufactured components are being considered, with foreign companies performing a key role in selecting these components. Without congressional direction, it is assured that critical HM&E components on the FFG(X) will not be manufactured within the U.S. shipbuilding industrial supplier base.

The U.S. Navy’s requirements are very clear regarding the combat system, radar, C4I suite, weapons, and numerous other warfighting systems. However, unlike all major surface combatants currently in the fleet (CGs, DDGs), the Detailed Design and Construction (DD&C) Request for Proposal (RFP) for the FFG(X) does not identify specific major HM&E components such as propulsion systems, machinery controls, power generation and other systems that are critical to the ship’s operations and mission execution. Instead, the RFP relegates these decisions to shipyard primes or their foreign-owned partners, and there is no requirement for sourcing these components within the U.S. shipbuilding supplier industrial base.

The RFP also does not clearly identify life-cycle cost as an evaluation factor, separate from initial acquisition cost. This ignores the cost to the government of initial introduction into the logistics system, the training necessary for new systems, the location of repair services (e.g., does the equipment need to leave the U.S.?), and the cost and availability of parts and services for the lifetime of the ship. Therefore, lowest acquisition cost is likely to drive shipyard decisions towards foreign manufacturers; however, the Navy may be left with higher support costs over the ships’ life cycle.

Further, the U.S. Navy’s acquisition approach not only encourages, but advantages, the use of foreign designs, most of which have a component supplier base that is foreign. Some of these component suppliers (and in some cases the foreign shipyards they work with) are wholly or partially owned by their respective governments and many enjoy direct subsidies, as well as other benefits from these nations that are investing in their maritime industries (e.g., requirements relaxation, tax incentives, etc.). This uneven playing field, and the high-volume commercial shipbuilding market enjoyed by the foreign suppliers, make it unlikely for an American manufacturer to compete strictly on cost. As incumbent component manufacturers, these foreign companies have a substantial advantage over U.S. component manufacturers. Even if acquisition costs are matched, the non-recurring engineering (NRE) costs that may be required to facilitate new equipment into a parent craft’s design often preclude the shipyards from changing out components.

Why This is Important:

The only way to preserve the U.S. capability to build critical systems for our warships, vital to the vessels that comprise our country’s sea power, is for the U.S. to source components from within the U.S., in the same way it sources ships from US shipbuilders. Given the lack of significant commercial shipbuilding in the U.S., the market is too small to sustain a supplier base if that base is not also used by the military. Because the U.S. Navy and U.S. shipyards are reluctant to willingly source U.S. components, Congress must mandate domestic manufacture requirements.

George Williams, CEO of the American Shipbuilding Suppliers Association (ASSA) noted that “U.S. shipbuilding capability is preserved through ‘Buy American’ requirements. The Government, rightly so, prohibits the procurement of warships from foreign companies. Without these requirements most, if not all, U.S. shipyards would be out of business due to low volume and stiff competition from foreign subsidized shipyards. Due to U.S. shipbuilders now relying on foreign suppliers many of our U.S. shipbuilding suppliers face crucial decisions regarding their businesses. The way to ensure that the U.S. has design and manufacturing capability is to use it, and not depend on foreign sources.”

The Navy has plans to order 20 FFG-Frigate ships over the next decade or more, representing a critical missed opportunity for our U.S. shipbuilding supplier industrial base should these components be procured from foreign manufacturers.

It is well established that many foreign manufacturers are owned outright, partially owned, or heavily subsidized by their home governments. This has spawned an environment that is antithetical to a free market system. American manufacturers are being compelled to compete with foreign manufacturers with significantly more resources by virtue of their various government affiliations, as well as their large commercial volumes. As a result, domestic manufacturers tend to be less price competitive than their foreign counterparts. It is relevant to note here that this applies to initial costs only, because the Navy tends to spend more on support over the lifetime of foreign made components.

The domestic manufacture of critical components for U.S. shipbuilding has a significant impact on U.S. economic security. The potential decommissioning of facilities—and the resulting exportation of valuable high-skilled, domestic jobs in the United States should be a vital concern to all Americans. We have learned this lesson before with the DDG-51 restart program. Resuscitating the closed production line of a critical U.S. reduction gear manufacturer led to significant financial expenditures and took a tremendous amount of time to reconstitute.

Congress has allocated nearly $1.3 billion for the manufacture of the first FFG-Frigate. Although the Navy has complained about the cost impact that Buy-America requirements would have on this program, the components identified in Section 8108 of the House-passed bill represent a very small portion of that budgeted amount, and the percentage difference between U.S. pricing and foreign pricing is even more insignificant. U.S. taxpayer dollars that are spent in the U.S. have a much more significant return on that expenditure due to local, state and federal tax revenues. There is also the additional benefit that U.S. shipbuilding suppliers bring via their own suppliers in terms of additional well-paying jobs, tax revenues, etc. Zero percent of U.S. taxpayer dollars sent to Europe or Asia for shipboard components are returned to the U.S. economy. Additionally, several of the critical components included in the House legislation have maintenance requirements that will bring revenue to either U.S. companies or foreign companies for many decades to come. According to the National Association of Manufacturers, every dollar spent in U.S. manufacturing plants adds $1.82 in business growth in other supporting sectors, with life-cycle support of shipboard components adding additional multiples of economic value.

This is a Matter of United States National Security:

The domestic manufacture of critical components for U.S. shipbuilding is widely acknowledged as being vital to national security. Similar to the need for a requirement that U.S. government ships be built in the U.S., the national security rationale for domestic manufacture of critical ship components should be self-evident. Aside from the obvious benefit of maintaining critical manufacturing capabilities there are the additional benefits including supply-chain security, cyber-security protection of equipment, preservation of workforce skillsets, and intellectual property considerations. US shipbuilding suppliers, who have been supporting the US Navy for decades additionally have intimate knowledge and experience with the robust requirements of US military specifications that foreign manufacturers traditionally struggle with.

On the topic of supply-chain security, George Williams of ASSA has additionally stated, “It is very apparent that China is aggressively buying up manufacturing capabilities around the world. If the U.S. does not begin to value U.S. manufacturing, it’s not inconceivable to think that the worldwide shipbuilding industrial supplier base will be monopolized by China in 10 to 15 years. Does the U.S. Armed Forces want to be at the mercy of China, or some other foreign power?”

Conclusion – United States Congressional Action is Necessary:

There are two critical factors regarding this issue: investing U.S. taxpayer dollars in U.S. jobs versus those in Asia or Europe and preserving manufacturing capability in the U.S. that is critical to supporting our national security needs. Over the last twenty-five years, the U.S. industrial infrastructure has eroded to a critical level. A strong domestic industrial base is essential for our national security, a healthy and thriving economy and a diversified industrial workforce. It’s now time for Congress to take action to protect critical U.S. jobs and stop the outsourcing of critical components for our warships before America becomes totally dependent on components, parts and service technicians from foreign manufacturers.

ABOUT ASSA

ASSA is a member-driven, national association representing the American Shipbuilding Supplier base to the U. S. Congress, Navy, Coast Guard and shipbuilders. The mission of ASSA is to advocate for the American Shipbuilding Supplier Base to ensure its long-term stability for supporting our national maritime industry.


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