WHITE PAPER: PRESERVING AND SUSTAINING THE DOMESTIC SHIPBUILDING SUPPLIER BASE
On January 25, 2021, President Biden signed Executive Order 14005 “Ensuring the Future Is Made in All of America by All of America’s Workers.” This E.O. enforces existing Buy American laws, limits waivers, and proposes increasing the percentage of US content as well as domestic price preference. The President followed up on February 24, 2001, with Executive Order 14017, “America’s Supply Chains,” requiring each Department to implement more resilient supply chains, facilitate greater domestic production, and build and sustain the American workforce needed to support these goals.
The American Shipbuilding Suppliers Association (ASSA) strongly supports the goals of these Executive Orders and looks forward to working with the Made in America Director and with government agencies in furthering these goals to build and sustain the skilled workforce that delivers for its customers every day.
Issue: Because most shipbuilding components are procured by the shipyards—not directly by the government—Buy American requirements do not apply to these components. Domestic content requirements for ships can be met by simply procuring the hull steel and constructing the ship with largely US labor. Therefore, current Buy American laws—even with stricter enforcement—will do very little for the domestic shipbuilding design and supplier base.
There are statutory requirements in place for ships to be built in the US: 10 USC 7309 applies to ships for the armed forces, and the “Jones Act” applies to commercial ships in the conduct of coastwise domestic trade. The national security justification for building ships in the US is clear—whether it relates to sensitive nuclear technology, to security of the supply chain, or to maintenance of critical capabilities and skills in our industrial base. That same national security justification should apply to American ship designers and suppliers as well.
Without specific statutory support to sustain a robust domestic manufacturing base for shipbuilding design and components, the intended effects of these Executive Orders to support the production and sustainment of the ships our nation needs cannot be met. Specific policies and laws must be put in place to ensure that this critical element of the shipbuilding base and its skilled workforce can deliver and sustain the larger fleet the Navy needs and do so in a manner that provides transparency and security of the supply chain.
The US shipbuilding design and supplier base comprises thousands of highly skilled personnel through direct employment or second- and third-tier subcontractors located in nearly every state. Their potential to increase the US economy in the critical manufacturing sector and their contribution to local, state, and federal tax dollars are significant. More importantly,
Shipbuilding designers and suppliers are an essential, critical national security asset that cannot be replaced or replicated through foreign supply chains.
By limiting foreign suppliers, investment by US suppliers will increase innovation and enhance competitive pricing amongst American suppliers across a range of shipbuilding programs for our government customers.
The increased sales volume afforded by such protections decreases the cost of US goods and services in global maritime markets, and makes our industry more competitive worldwide.
Such policies will help to ensure the availability and sustainment of a skilled workforce that can design, produce, and sustain critical elements of our national security industrial base.
Status: The US Navy’s “Report to Congress on the Annual Long-Range Plan for Construction of Naval Vessels,” December 9, 2020, calling for a significant increase in Navy force structure, stated:
“The industrial base continues to be the fundamental enabler for achieving and sustaining the Navy’s future fleet. Our shipbuilding and supporting vendor base constitute a national security imperative that must be steadily supported, and grown, to maintain a skilled workforce. Consistent commitment to the steady acquisition profiles underlying this report is required to ensure the industrial supplier base achieves the capability and capacity required to build and maintain the Navy’s future fleet.”
DOD’s “Fiscal Year 2019 Industrial Capabilities Report to Congress” ( May 2019) stated: “Industries involved in the manufacturing of shipbuilding components were among the hardest hit by the global shift in the industrial base over the past 20 years…..Since 2000, these industries experienced a combined decline of over 25,000 establishments in the United States….Expanding the number of companies involved in Navy shipbuilding is important to maintaining a healthy industrial base.”
This was followed by the “Fiscal Year 2020 Industrial Capabilities Report to Congress” (January 2021), which placed the highest priority on re-shoring the defense industrial base and supply chains and restoring the shipbuilding base.
Several factors contributed to the contraction in the number of companies and facilities engaged in supplying critical shipboard components:
US government programs that supported robust commercial shipbuilding in the US were abandoned in the early 1980’s.
Other countries (e.g., Japan, S. Korea, EU, Scandinavian, China) invested billions of dollars in new ship designs and in modern, integrated steel fabrication and shipyard infrastructures, including expansion of the supplier base.
Many foreign governments subsidize their domestic industries or even wholly or partially own the shipyards and supplier entities.
Foreign adversaries frequently deny commercial businesses in the U.S. defense industrial base from accessing their own markets or participation in their defense sector.
Current trends threaten further contraction of the domestic shipbuilding design and supplier base and promote increased use of foreign manufactured components in US government ships:
A disproportionate emphasis on initial acquisition cost in awarding shipbuilding contracts, minimizing true cost of life-cycle support that often eclipses any initial acquisition cost advantage from procuring foreign components; and
Recent acquisition programs that facilitate or encourage selection of foreign components through use of “parent craft” (often foreign), resulting in lost volume for US ship designers and suppliers.
The pandemic exacerbated the challenge to sustain and expand the shipbuilding supplier base, focusing the spotlight on a serious national security threat due to lack of transparency in the second, third and fourth tier of the supply chain across all DOD programs. Former USD(A&S) Ellen Lord at a July 16, 2020, Ronald Reagan Institute event stated: “Another risk is that manufacturing overseas might produce equipment and gear that's not entirely what it seems. We could have implants in those electronics. So all of a sudden ... we have U.S. systems calling home to China. We also have the theft of intellectual property that is very well documented, where what we think we licensed for a specific use is all of a sudden repurposed into capability organic to China."
Government officials have expressed increasing concerns regarding the buildup of China’s Peoples Liberation Army (PLA) and, in particular, the recent rapid expansion of the PLA Navy (PLAN), as stated in the Department of Defense’s Annual Report to Congress “Military and Security Developments Involving the Peoples Republic of China 2020”:
“Naval and Shipbuilding Industry. China, the top ship-producing nation in the world by tonnage, is increasing its shipbuilding capacity and capability for all naval classes, including submarines, surface combatants, and transport and amphibious ships. China’s two largest state-owned shipbuilders—the China State Shipbuilding Corporation and the China Shipbuilding Industry Corporation, merged in November 2019 creating the world’s largest shipbuilder as measured by production capacity. China domestically produces its naval gas turbine and diesel engines, as well as almost all shipboard weapons and electronic systems, making it nearly self-sufficient for all shipbuilding needs.”
Policy and Statutory Actions Recommended:
ASSA strongly supports the expansion of Buy American requirements to apply directly to shipbuilding designers and components as the only sure way to sustain the domestic supply chain and the accompanying skilled workforce. The following steps are key components of ensuring this goal.
1. Require domestic manufacture of HM&E components for ships to ensure security of the supply chain and the capacity for surge production. These components are those considered to be critical to the operation of ships built for the government. Such a requirement could be established by specific component or by requiring 100% domestic content of the overall ship (perhaps on an incremental basis). This would address several issues:
a. Emphasis on uniqueness of shipbuilding supplier base: While DOD has an
understandable desire to engage with allied nations in sharing systems and
technology, shipbuilding design and components should be an exception. Due
to lack of meaningful commercial shipbuilding opportunities in the US, the government
(Navy, Coast Guard, other agencies) is frequently the sole customer. Thus, the loss of
any one subcontract to a foreign supplier will increase the cost of these domestically
produced components to other government contracts, eliminating any expected cost
savings from lower-cost foreign components. The low volume of opportunities for
suppliers requires special emphasis on domestic manufacturers to ensure that current
suppliers are sustained and that any additional foreign sources are required to establish
b. “Re-shoring” of design and manufacturing capability: The pandemic heightened
concerns regarding the domestic manufacturing and supplier base and has caused DOD
and the national security community to focus on reconstituting manufacturing capability
for critical components and subcomponents in the US.
c. Ensuring capability of shipbuilding suppliers to surge production: This has been a key
concern of the Navy for several years, in recognition of the fact that a diminished
manufacturing base will have limited capacity to surge in time of emergency. Requiring
domestic sourcing will strengthen the defense industrial base and ensure surge
d. Recent acquisition of component suppliers by foreign entities: ASSA supports foreign
investment in the US to create US jobs. We support recent legislation to monitor the
Chinese and Russian government’s acquisition and consolidation of the American supply
chains to seek greater global control.
e. Growing concerns over cyber threats and intellectual property theft: The lack of
transparency in the supply chain at the second and third tier for foreign manufacturers
increases the likelihood that electronic and other components could threaten the
security of key ship components. These concerns within the national security
community are most directly focused on Chinese subcomponents. While the
Cybersecurity Maturity Model Certificate (CMMC) program is intended to focus on this
issue and bring transparency and security to the supply chain, meeting these
requirements also imposes a greater burden on many supplier companies who are
smaller and have fewer programs across which to apply the cost burden.
f. Costs of domestic components: Just as US shipyards are deemed uncompetitive with
foreign yards, domestic suppliers frequently cannot compete on cost against foreign
suppliers who have commercial customers, receive subsidies or direct investment from
their governments, and who may not be subject to the same labor, health,
environmental and cost accounting regulations. However, the impact of these costs can
be minimized by spreading them across a range of US government shipbuilding
programs and thereby maintaining this critical capability.
In addition to strongly supporting legislation requiring domestic design and manufacture of ships and critical components, ASSA believes these additional steps should be taken to advance this objective:
2. Strengthen statutory requirements that sustainment costs must be realistically assessed early in the acquisition cycle and requiring assessment of direct impact of component selection on the domestic supplier base. a. Sustainment as an element of acquisition plans: Although recent changes to acquisition policies require sustainment to be considered as a key factor in early stages of programs, initial acquisition cost remains the overriding factor as long as shipyard primes select key ship components, and life-cycle cost does not adequately consider the benefits of domestic suppliers. Shipyards can derive additional benefit from promoting improved life-cycle costs and should be incentivized to do so. Government Acquisition Plans should clearly specify that critical US based HM&E components be designed into any new program, and that ships be designed by US firms using US labor.
Impact on the industrial base: Individual shipbuilding acquisition plans are not required to include the impact of foreign supply across the entire supplier base. Selection of foreign suppliers can negatively impact cost to government shipbuilding programs because of lost volume to domestic suppliers on those programs. This is particularly critical when those same suppliers are involved in nuclear submarine and aircraft carrier programs, which do not allow foreign suppliers, and therefore increasing the cost of those programs as well.
Commonality and familiarity with Navy specifications: Proven domestic design and component suppliers are experienced with the range of Navy specifications (shock/vibe/EMI/cyber) and logistics support (parts, service), minimizing the instances of components not meeting those specifications, requiring costly change, qualification delays, long distance support and frequent maintenance. A GAO report of March 2020 (GAO-20-2), “Increasing Focus on Sustainment Early in the Acquisition Process Could Save Billions” documented numerous examples where inadequate focus on sustainment and life-cycle costs of systems resulted in billions of dollars needed to repair and replace, over and above the initial acquisition plan estimates.
Long-term benefit to the Navy: Ensuring a robust US supplier base will help the Navy’s efforts to maintain the fleet and additional volume for US suppliers will help to lower acquisition costs across a range of government shipbuilding programs.
Capability the Government Needs
US suppliers are keenly aware of the need to be competitive and responsive to the government, for both initial acquisition opportunities and in providing life-cycle support. Many have years of experience in this business and others are recent suppliers, both having invested in innovative technology and facilities dedicated to supporting the Navy. They are experienced, familiar with their US government customer’s rigorous specifications, and maintain the skilled and dedicated US workforce needed to support our national security requirements and contribute to the nation’s economy. 6
Bottom Line: Current Buy American laws—even with stricter enforcement—will do very little for the domestic shipbuilding design and supplier base. There must be specific policies and laws that will ensure this critical element of the shipbuilding base and its skilled workforce can deliver and sustain the larger fleet the Navy needs and do so in a manner that provides transparency and security of the supply chain.
FOR MORE INFORMATION, CONTACT: American Shipbuilding Suppliers Association
Tish Williams, Senior Vice President
Direct Line: 228-216-9048
George Williams, CEO
ABOUT ASSA: ASSA is a member driven, national organization, advocating for the American Shipbuilding Supplier Base to the U. S. Congress, Navy, Coast Guard and shipbuilders to ensure the long-term stability of the U. S. national maritime industry.