Navy Shipbuilding: Recent Shipyard Mergers - Background and Issues for Congress
Report for Congress
Navy Shipbuilding: Recent Shipyard Mergers –
Background and Issues for Congress
May 3, 2002
Specialist in National Defense
Foreign Affairs, Defense, and Trade Division
Congressional Research Service ˜ The Library of Congress
Navy Shipbuilding: Recent Shipyard Mergers –
Background and Issues for Congress
In April 2001, General Dynamics (GD) and Newport News Shipbuilding (NNS)
announced an agreement under which GD would purchase NNS. The following
month, Northrop Grumman (NOC) announced an unsolicited counteroffer to
purchase NNS. The Department of Justice (DoJ) and the Department of Defense
(DoD) reviewed the two merger proposals and in October 2001 announced that they
would oppose the GD merger proposal on the grounds that it would eliminate
competition in nuclear submarines and harm competition for emerging technologies
for both nuclear submarines and surface ships. DoJ and DoD did not oppose the
NOC merger proposal, and in November 2001, NOC assumed control of NNS.
NOC’s acquisition of NNS brought to an apparent conclusion a 5-year process
of consolidation in the ownership of the 6 private-sector shipyards that build the
Navy’s major ships. The 6 yards are now owned by two firms – NOC, which owns
In theory, the 6 yards might have been consolidated under 3 owners rather than
there may be further mergers and acquisitions involving shipyards that perform work
for the Navy. DoD concluded that the consolidation-related savings of the NOC-
NNS merger would be comparable to those of a GD-NNS merger. NOC stated that
these savings might amount to $1.9 billion to $2.6 billion over the next 10 years.
Critics of the NOC-NNS merger can argue that it might pose competition
concerns in areas such as construction of aircraft carriers and large-deck amphibious
ships. Supporters of the merger can argue that DoJ and DoD reviewed these issues
and did not object to the merger on competition (or other) grounds.
Shipyard mergers are unlikely to lead to significant changes in the total number
of blue-collar production workers employed at the yards, but can alter the distribution
of the total number of blue-collar workers among the yards. Shipyard mergers may
increase the strength of the shipyards and shipbuilding in the competition for limited
DoD procurement dollars. The mergers may raise questions concerning the treatment
of shipbuilding in industry proposals for large DoD “system-of-systems” acquisition
efforts. The mergers may also raise questions concerning the movement of senior
officials (particularly those with backgrounds in shipbuilding) between DoD/Navy
The debate over the merger proposals involving NNS raises a question regarding
the adequacy of the “savings-vs.-competition” framework for describing the merger-
review process. It also poses a potential question for Congress regarding the
executive branch view that DoD (rather than Congress or the taxpayers) is the sole
or primary customer for a firm whose products are purchased solely by DoD. Lastly,
the NOC-NNS merger raises a potential question regarding the technology-
transmission risks of building non-nuclear-powered submarines at NOC’s Ingalls
shipyard for export to a foreign buyer.
In troduction ......................................................1
The Navy’s Six Major Shipbuilders................................2
1995-2001 Consolidation in Ownership........................2
Employment Levels; Types of Ships Recently Built...............3
Northrop Acquisition of NNS....................................4
Competing GD and NOC Merger Proposals.....................4
DoD and DoJ Reviews......................................4
DoD and DoJ Decisions.....................................6
Northrop Completes Acquisition..............................7
Issues for Congress................................................8
Previous Potential for Consolidation to Three Owners.................8
Current Potential for Further Shipyard Mergers......................9
Consolidation-Related Savings From NOC-NNS Merger..............11
Sources of Savings........................................11
Competition In Shipbuilding....................................16
Competition Currently Rare in Ship Construction................16
Competition Implications of NOC-NNS Merger.................18
Potential for Bundled Competitions..........................29
Shipyards and Shipbuilding in the Political Process..................32
Overall Strength of Representation...........................32
Shipbuilding in System-of-Systems Acquisition Programs.........33
Movement of Officials Between DoD/Navy and Industry..............34
Reviewing Mergers on “Savings vs. Competition”...................35
DoD As “Sole Customer” In Merger Reviews......................36
Building Non-Nuclear Submarines At Ingalls For Export..............38
Appendix A: DoJ Lawsuit on GD-NNS Merger.........................41
Appendix B: Competition and GD-NNS Merger........................57
Potential Factors to Consider....................................57
Creation of Sole Sources.......................................57
Competition in Submarine Construction.......................57
Competition in Submarine Design and Technology Development...59
Number of Shipyard In-House Design and Engineering Staffs..........63
Share of Shipyard In-House Designers and Engineers................64
Share of Navy Research and Development Funding..................66
List of Tables
Table 1. Ownership of the Six Navy Major Shipbuilders...................2
Table 2. The Six Navy Major Shipbuilders.............................3
Table 3. Approximate Share of Designers and Engineers..................25
Recent Shipyard Mergers –
Background and Issues for Congress
On November 30, 2001, Northrop Grumman Corporation (NOC) assumed
control of Newport News Shipbuilding (NNS), bringing to an apparent conclusion
a 5-year process of consolidation in the ownership of the six private-sector shipyards
that build the Navy’s major ships. Following NOC’s acquisition of NNS, the six
yards are now owned by two firms – NOC, which owns three of the yards, and
General Dynamics Corporation (GD), which owns the other three.
The consolidation of these six shipyards under two parent firms raises several
issues of potential interest to Congress, including potential savings resulting from
consolidation, the potential impact on competition in Navy shipbuilding, the potential
impact on shipyard employment levels, and the potential impact on the shipyards and
shipbuilding of the political process.
This report supercedes three earlier CRS reports on shipyard mergers –
RL30251, which discussed shipyard mergers proposed in 1999;1 RS20899, which
discussed a proposal made by GD in early 2001 to acquire NNS;2 and RL30969,
which discussed both this proposal and a competing proposal made by NOC in early
1 CRS Report RL30251, Navy Major Shipbuilder Ownership Consolidation: Issues for
Congress, by Ronald O’Rourke. Washington, 1999. (May 27, 1999) 28 p.
2 CRS Report RS20899, Navy Shipbuilding: General Dynamics’ Proposed Acquisition of
Newport News – Issues for Congress, by Ronald O’Rourke. Washington, 2001. (April 26,
2001 to acquire NNS.3 A fourth CRS report, 96-785 F, discussed issues facing these
shipyards in 1996, as the merger process was getting under way.4
The Navy’s Six Major Shipbuilders
1995-2001 Consolidation in Ownership. Six private-sector shipyards
build the Navy’s major ships. In alphabetical order, these shipyards are:
!Avondale Shipyards of New Orleans, LA;
!Bath Iron Works (BIW) of Bath, ME;
!Electric Boat (EB) Corporation of Groton, CT, and Quonset Point,
!Ingalls Shipbuilding of Pascagoula, MS;
!National Steel and Shipbuilding Co. (NASSCO) of San Diego, CA;
!Newport News Shipbuilding (NNS) of Newport News, VA.
As summarized in the table below, until September 1995, these six shipyards
were owned by six separate organizations. General Dynamics, the owner of EB since5
Litton Industries, the owner of Ingalls since 1961, purchased Avondale in August
1999. NOC purchased Litton in April 2001, becoming the owner of Ingalls and
Avondale, and then purchased NNS in November 2001.
Table 1. Ownership of the Six Navy Major Shipbuilders
Au g. Sep. Dec. Nov. Au g. Ap ril Nov.
1995 1995 1996 1998 1999 2001 2001
BIW BHC a
NASSCO Employee-owned b
3 CRS Report RL30969, Navy Shipbuilding: Proposed Mergers Involving Newport News
Shipbuilding – Issues for Congress, by Ronald O’Rourke. Washington, 2001. (May 22,
4 CRS Report 96-785 F, Navy Major Shipbuilding Programs and Shipbuilders: Issues and
Options for Congress, by Ronald O’Rourke. Washington, 1996. (September 24, 1996) 126
5 GD’s Web site [http://www.gd.com] states: “General Dynamics was officially established
April 24, 1952, although it has organizational roots dating back to the late 1800s. The
company was formed shortly after its predecessor and current operating division, Electric
Boat, acquired the aircraft company Canadair Ltd. and began building the first
nuclear-powered submarine, USS Nautilus.”
Avondale Employee-owned c
Litton NOC NOCIngalls Litton
No. of owners6554332
a BHC refers to Bath Holding Corporation, an owners group led by the investment firm of
Gibbons, Goodwin & van Amerongen and backed by the Prudential Insurance Company.b
NASSCO became employee-owned in 1989.c
Avondale became employee-owned in 1985.d
NNS was spun off from Tenneco Corporation and became an independent, publicly traded
company in December 1996.
Employment Levels; Types of Ships Recently Built. The table below
summarizes the current owners of these yards, the number of people employed by the
yards in December 2001, and the types of major Navy ships that the yards have built
in recent years.
Table 2. The Six Navy Major Shipbuilders
YardOwnerEm-Types of Major Navy Ships Built in Recent Years
Decem- pow ered
Ca r- ines Co m- Sea lif t
riers ba t - La r g e Other
ants Deck (LPD,
(LHA, LSD )
LH D )
BIW 6,823 X X? a
GDEB 9,239 X
NASSCO 2,925 X
Av o nda le 5,388 X X
NOCIng a lls 10,120 X X
NNS 16,968 X X
Number of owners with recent experience, by ship type
12 2 1 2?*2
Source for employment figures: Data provided to CRS, January 24, 2002, by American Shipbuilding
Association, which collected the figures from the shipyards.
a BIW is shown as a builder of LPD/LSD-type amphibious ships because of its membership
on an Avondale-led team that won the competition to build the Navy’s new San Antonio
(LPD-17) class ships. Under the Avondale-BIW teaming arrangement, BIW would build
every third LPD-17 and would thus build 4 of an anticipated 12 LPD-17s. In early 2002,
however, it was reported that GD, NOC, and the Navy are discussing a plan to shift BIW’s
4 LPD-17s back to NOC in return for NOC shifting some of its DDG-51s to BIW. If this
plan is implemented, BIW would not build LPD-17s and would no longer qualify as having
recent experience building LPD/LSD-type amphibious ships, leaving NOC as the only firm
with such experience.
Business Situation. These six yards have only limited amounts of
commercial ship construction6 and overhaul work and consequently are highly
dependent on Navy ship construction contracts. The reduction in Navy ship
procurement that began in the early 1990s reduced work loads, employment levels,
and total profits at several of the yards. Increased business pressures faced by the
yards since the early 1990s appear to have been a major factor behind the
consolidation in ownership of the yards that has occurred since 1995. The
consolidation in ownership among the Navy’s major shipbuilders, however, has not
led to a major consolidation of facilities – the number of organizations that own the
yards has been reduced from six to two, but none of the six yards has been closed or
Northrop Acquisition of NNS
Competing GD and NOC Merger Proposals. On April 25, 2001, GD and
NNS announced an agreement under which GD would purchase NNS for about $2.6
billion, including assumption of about $500 million in NNS debt. On May 8, 2001,
NOC announced an unsolicited counteroffer to purchase NNS for the same total cost
of $2.6 billion, including assumption of the $500 million in NNS debt. In contrast
to the GD proposal, which was an all-cash deal, NOC offered to purchase NNS’s
outstanding shares using a combination of NOC stock (75%) and cash (25%).
DoD and DoJ Reviews. The Department of Justice (DoJ) and the
Department of Defense (DoD) reviewed the two competing merger proposals for
several months. DoJ’s review focused on the potential antitrust implications (i.e., the
implications for competition) of the proposed mergers. DoD’s review focused on
both the potential antitrust implications and the potential savings that each merger
could realize through the streamlining of merged operations.7 DoD’s review was
6 Construction of ocean-going commercial ships in U.S. shipyards fell precipitously
following the Reagan Administration’s decision in the early 1980s to end the Construction
Differential Subsidy (CDS), which subsidized the construction cost of U.S.-built commercial
ships to make them more cost-competitive against ships built in foreign yards, and has
remained at relatively low levels since.
7 For an overview of basic U.S. antitrust law, see CRS Report RL31026, General Overview
of United States Antitrust Law, by Janice E. Rubin. Washington, 2001. (June 18, 2001) 7
p. Page 3 of the report discusses the Horizontal Merger Guidelines of DoJ and the Federal
Trade Commission (FTC), which were last revised in 1997 and “offer an indication of the
ways in which mergers and acquisitions will be analyzed by the Antitrust Division [of DoJ]
and the FTC; although they are not binding upon the courts, they are considered to be
persuasive.” The report notes (footnote 4 on page 3) that
The 1997 revision dealt only with the Agencies’ treatment of the so-called
conducted in accordance with DoD Directive 5000.62 of October 21, 1996 – the
directive establishing DoD policy relating to mergers and acquisitions of major DoD
suppliers – which states that it is DoD policy to:
Assess the potential implications for DoD programs resulting from a merger or
acquisition involving a major defense supplier. The assessment shall consider
the potential loss of competition for DoD contracts and subcontracts, estimated
cost savings or cost increases for DoD programs that can be expected to result
from the merger or acquisition, and any other factor resulting from the proposed
merger or acquisition that may adversely affect the satisfactory completion of a8
Congressional Interest. The competing merger proposals for NNS, and the
DoD and DoJ reviews of the proposals, were closely followed by Members of
Congress, particularly those who track issues relating to Navy shipbuilding, the
defense industrial base, industry mergers and acquisitions, and government antitrust
policy. Some of these Members wrote or signed letters to DoD and DoJ providing9
their views on the matter while the two departments were conducting their reviews.
“efficiency defense” often put forth in support of a merger: although
“[e]fficiencies generated through a merger can enhance the merged firm’s ability
and incentive to compete, which may result in lower prices, improved quality,
enhanced service, or new products,” mergers that are, on balance,
anticompetitive will not likely be approved (section 4). Efficiencies “almost
never justify a planned merger to monopoly or near-monopoly.” 1997 FTC
Chairman Robert Pitofsky, quoted at 72 Antitrust & Trade Regulation Report
The report also notes the “premerger notification” provisions added to U.S. antitrust law by
the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (P.L. 95-435), which allow DoJ
and the FTC to examine potential mergers and acquisitions before they are implemented.
Reviews of proposed defense (and other) mergers are sometimes called Hart-Scott-Rodino
(or HSR) reviews.
The Horizontal Merger Guidelines are also mentioned in CRS Report RS20241, Monopoly
and Monopolization – Fundamental But Separate Concepts in U.S. Antitrust Law, by Janice
E. Rubin. Washington, 2001. (Updated August 20, 2001) 6 p. The report notes (footnote
15 on page 4) that “a merger that is, on balance, anticompetitive, will not generally be
‘saved’ by claimed or actual efficiencies, nor likely be approved by reviewing
8 Department of Defense Directive Number 5000.62, October 21, 1996, Subject: Impact of
Mergers or Acquisitions of Major DoD Suppliers on DoD Programs, page 2. This directive
supercedes a memorandum from the Deputy Secretary of Defense, “Antitrust Aspects of
Defense Industry Consolidation,” of May 10, 1995. For the entire text of this directive (and
other DoD Directives) on the Internet, go to [http://www.dtic.mil/whs/directives/] .
9 For articles discussing some of these letters, see Scarborough, Rowan. Lott Urges
Pentagon To Approve Takeover By Northrop. Washington Times, May 11, 2001: 1;
Capaccio, Tony. Rumsfeld Urged to Take No Position on Newport News Merger Bids.
Bloomberg news service story, August 2, 2001; Lerman, David. Battle For NN yard
DoD and DoJ Decisions. On October 23, 2001, DoJ and DoD issued news
releases announcing that they would oppose the GD merger proposal but would not
oppose the NOC proposal. The DoD news release stated, in its entirety:
The Department of Defense has completed its review of the proposals by General
Dynamics Corp. and Northrop Grumman Corp. to acquire Newport News
The DoD concluded that the proposal by General Dynamics would eliminate
competition for nuclear submarines, resulting in a monopoly. Additionally, the
[proposed GD] acquisition would harm competition for surface combatants and
for the development of emerging technologies for both nuclear submarines and
The department determined that the benefits and savings offered by each
transaction were comparable. The Northrop Grumman transaction has the
additional benefit of preserving competition. DoD’s views have been10
communicated to the Department of Justice.
“Either transaction would produce savings for the Department that are
comparable in both nature and amount,” said Glenn Flood, a Pentagon spokesman,
in announcing the decision. “A General Dynamics acquisition of Newport News,
however, would constitute merger-to-monopoly in nuclear shipbuilding11
Another article quoted Flood as follows: “Either transaction would have
reduced costs. But in addition to cutting costs, General Dynamics would become a
monopoly, hurting competition for not only nuclear submarines but also surface
ships. We believe Northrop Grumman will preserve competition in the submarine12
Becoming A Clash Of The D.C. Titans. Newport News Daily Press, August 5, 2001: B1;
Castelli, Christopher J. Senators Lobby Against General Dynamics-Newport News Merger.
Inside the Navy, August 6, 2001; Holzer, Robert. Lott Steps Up Opposition To General
Dynamics’ Bid For Shipbuilder. DefenseNews.com, August 23, 2001; Gertz, Bill, and
Rowan Scarborough. Inside the Ring. Washington Times, August 24, 2001: 8; US Senator
Queries General Dynamics’ Newport Bid. Reuters wire service story, September 18, 2001;
Ratnam, Gopal. Senator Questions Claims In General Dynamics’ Bid For Shipbuilder.
DefenseNews.com, September 18, 2001; General Dynamics’ Bid For Newport Questioned.
Los Angeles Times, September 19, 2001; Muradian, Vago. Kohl, DeWine Question GD-
NNS On Antitrust, Urge Rumsfeld To Avoid Monopoly. Defense Daily, October 1, 2001:
10 DoD News Release No. 536-0 of October 23, 2001, available at
11 As quoted in Capaccio, Tony. Northrop Wins Pentagon Approval to Buy Newport News.
Bloomberg news service, October 23, 2001.
12 Gilpin, Kenneth N. U.S. Moves to Block General Dynamics Bid. The New York Times,
October 24, 2001. Another article quoted Flood as saying, “The bottom line is, we think
The DoJ news release stated, in part:
The Department of Justice today filed an antitrust lawsuit to block the
proposed acquisition of Newport News Shipbuilding Inc. by General Dynamics
Corporation. The Department said that if the merger were allowed to proceed, it
would eliminate competition for nuclear submarines – a weapon platform of vital
importance to the security of the United States – resulting in a monopoly.
Additionally, the Department said the proposed acquisition would harm
competition for other military ships – conventionally powered surface
combatants – and for the development of electric drive, an emerging technology
for powering nuclear submarines and surface combatants.
The Department of Defense coordinated with the Department of Justice in
the investigation that resulted in the lawsuit, and advised the Department that it
had significant competitive concerns with the transaction.
"This merger would give General Dynamics a permanent monopoly in
nuclear submarines and would substantially lessen competition in surface
combatants," said Charles A. James, Assistant Attorney General in charge of the
Department's Antitrust Division. "Our armed forces need the most innovative and
highest quality products to protect our county. This merger-to-monopoly would
reduce innovation and, ultimately, the quality of the products supplied to the
military, while raising prices to the U.S. military and to U.S. taxpayers."...
[General Dynamics and Newport News] are the only manufacturers of
nuclear submarines and two of only three companies that build large ships of any
kind for the U.S. Navy. The companies are also leaders on the only two teams
working to develop electric drive technology for nuclear submarines and surface
"We greatly appreciate the assistance of the Department of Defense in
investigating this matter," added James. "Justice and Defense are united in the
view that the proposed merger should not go forward, and that competition plays
an important role in ensuring that the United States can purchase the best13
platforms and systems to protect our country."
The text of the DoJ lawsuit is reprinted in this report as Appendix A.14
At an October 25, 2001, DoJ briefing on its decision for Senators John Warner
and George Allen (with reporters also present), Deputy Assistant Attorney General
there would be possibility of a monopoly if General Dynamics acquired Newport News.
That was the major concern. If Northrop acquires Newport News, it would be a better
arrangement.” New London Day, October 24, 2001.
13 DoJ News Release 01-549 of October 23, 2001, available at
14 The text is also available in the October 29, 2001, issue of Inside the Navy.
R. Hewitt Pate said that DoJ’s decision to oppose the GD merger proposal “was not
a close call” and that “From an antitrust point of view, it doesn’t get any worse.”15
On October 26, 2001, three days after the DoD and DoJ announcements, GD
announced that it was terminating its merger agreement with NNS. The
announcement signaled that GD would not contest DoJ in court over DoJ’s decision
on the GD proposal.
Northrop Completes Acquisition. On November 2, 2001, NOC announced
that DoJ had closed its investigation of NOC’s merger proposal, clearing the way for
the merger to proceed.
On November 8, 2001, NOC announced that NOC and NNS had signed a
definitive merger agreement. NOC took control of NNS on November 30, 2001, and
announced on January 18, 2002, that it had completed acquisition of shares of NNS
common stock not previously purchased in its tender offer that expired on November
NOC announced on April 1 that it had completed integrating NNS into NOC in
terms of NNS’s policies and operating practices, and that it intended to continue
operating NNS as a separate division of NOC for about 18 months (i.e., until about
October 2003), after which NNS will be integrated into NOC’s ship systems division,16
which includes Avondale and Ingalls.
Issues for Congress
Previous Potential for Consolidation to Three Owners
Was consolidation of the 6 shipyards under 2 owners inevitable?
As a result of the post-Cold war downturn in defense procurement that began
in the early 1990s, many segments of the defense industry went through a process of
mergers and acquisitions that consolidated ownership under two firms or in some
cases under a single firm. Production of tactical aircraft, for example, was
consolidated under two firms (Boeing and Lockheed Martin), while production of
tanks was consolidated under a single firm (GD).
Not all segments of the defense industry, however, have been consolidated
under two firms or a single firm. For example, at least three firms are commonly
cited as major combat system integrators (Boeing, Lockheed Martin, and Raytheon)
15 Eisman, Dale. General Dynamics’ Plan Raised Concern Over Antitrust Law. Virginian-
Pilot, October 26, 2001. Another article quoted him as saying the case “was not a close
call,” that “In a merger context, it doesn’t get any worse,” and that “This was not a close
case.” Lerman, David. Senior Official Discounts Issue of Direct Competition. Newport
News Daily Press, October 26, 2001.
16 Liang, John. Northrop Grumman Completes Newport News Shipbuilding Integration.
InsideDefense.com, April 1, 2002.
and at least three firms are commonly cited as major military radar makers (Lockheed
Martin, NOC, and Raytheon).
In the case of the 6 shipyards, a consolidation to three firms rather than two may
also have been possible. Following GD’s acquisition of BIW in 1995, which created
a firm that owned 2 of the 6 yards (EB and BIW), the 4 remaining shipyards might
have organized themselves into two additional 2-yard organizations. Avondale, for
example, might have merged with Litton/Ingalls (a merger that did occur) while NNS
merged with NASSCO (a merger that did not occur). Alternatively, Avondale might
have merged with NNS (something the two companies proposed but did not
implement) while Litton/Ingalls merged with NASSCO.
The possibility of consolidating the 6 shipyards under 3 firms, however, may
have been made less likely by GD’s November 1998 acquisition of NASSCO, which
created a diversified shipbuilding organization that owned 3 of the 6 yards and
accounted for 40% to 45% of the Navy’s shipbuilding programs on a dollar basis.
This development may have prompted the owners of the 3 remaining yards to
question the viability of attempting to continue as smaller and less diversified single-
yard firms – something that at least one of these 3 yards would need to attempt,
following GD’s acquisition of NASSCO, if the 6 yards as a group were to continue
being owned by more than 2 firms.
Events following GD’s 1998 acquisition of NASSCO appear to reflect the
pressure this acquisition created among the 3 remaining yards to seek mergers with
other yards: Within 6 months of the GD-NASSCO merger, the 3 remaining yards
became involved in 4 merger proposals – NNS-Avondale (proposed in January
1999), GD-NNS (proposed in February 1999), Litton/Ingalls-Avondale (proposed in
May 1999 and implemented in August 1999), and Litton-NNS (proposed in May
1999).17 In light of this potential pressure to consolidate, it may have been unlikely
for NNS – the sole remaining single-yard firm as of August 1999 – to remain a
single-yard organization indefinitely.
Current Potential for Further Shipyard Mergers
Will there be further mergers and acquisitions involving shipyards that perform
work for the Navy?
With ownership of the 6 yards consolidated under 2 firms, the process of
consolidation in the ownership of these 6 yards now appears complete. Given DoD’s
and DoJ’s rejection of the proposed GD-NNS merger on antitrust grounds, it appears
unlikely that the DoD or DoJ would approve a further consolidation in the ownership
of all 6 of these yards under a single firm.
17 For discussions of these merger proposals, see CRS Report RL30251, Navy Major
Shipbuilder Ownership Consolidation: Issues for Congress, by Ronald O’Rourke.
Washington, 1999. (May 27, 1999) p. 4-10.
This does not, however, mean that there is no potential for further mergers and
acquisitions involving shipyards that perform work for the Navy. Various
possibilities for further mergers and acquisitions remain:
!NOC or GD could seek to acquire other shipyards in the United
States that overhaul and repair Navy ships or build smaller ships for
the Navy and Coast Guard, so as to gain a greater share of these
markets. NNS, for example, acquired Continental Maritime, a San
Diego shipyard that overhauls and repairs Navy ships, in December
!Shipyards that overhaul and repair Navy ships or build smaller
ships for the Navy and Coast Guard could merge among
themselves. For example, Bollinger Shipyards, a Gulf-Coast
shipyard organization, in August 2000 acquired five overhaul and
repair yards from Friede Goldman Halter, another Gulf-Coast
shipyard organization. Bollinger now operates 14 Gulf Coast
shipyards. Another example is U.S. Marine Repair (USMR), a
shipyard organization owned by the Carlyle Group investment
firm.18 USMR was created by Carlyle’s acquisition of Southwest
Marine (SWM) in October 1997 and its acquisition of Norshipco in
July 1998. (SWM itself was created through a series of shipyard
acquisitions in the 1990s.) USMR now operates six shipyards – the
SWM yards in San Diego, CA, San Pedro, CA, Ingleside, TX, and
Pearl Harbor, HI, Norshipco’s yard at Norfolk, VA, and San
Francisco Drydock’s yard at San Francisco, CA.19
!NOC and GD could seek to acquire foreign shipyards to gain
either a better position in the international market for warships or
better access to certain technologies. GD, for example, reportedly
is interested in acquiring a 40% interest in the Australian Submarine
Corporation of Adelaide, Australia, a firm that was created in 1985
to build Australia’s six new Collins-class non-nuclear-powered20
submarines using a design licensed from Kockums, a Swedish
18 The Carlyle Group [http://www.carlylegroup.com], established in 1987, describes itself
as “a private global investment firm that originates, structures and acts as lead equity
investor in management-led buyouts, strategic minority equity investments, equity private
placements, consolidations and buildups, and growth capital financings.”
19 Dates on Carlyle’s acquisitions of SWM and Norshipco are from the Comment on the
News page of [http://www.coltoncompany.com] an internet site that posts information and
news concerning shipyards and shipping. The comment page states that USMR has grown
further with “the subsequent addition of Pacific Ship Repair (San Diego CA) in December
1998 and Marisco (Honolulu HI) in June 2001. USMR’s internet site
[http://www.usmarinerepair.com/], however, lists only the six yards discussed above.
20 Non-nuclear-submarines traditionally have been referred to as diesel-electric submarines,
but the term is no longer inclusive of all non-nuclear-powered submarines because of the
emergence in recent years of alternatives to the diesel engine, such as fuel cells and Stirling
builder of non-nuclear-powered submarines.21 And in March 2002,
it was reported that One Equity Partners (OEP), a business entity
owned by Chicago-based Bank One, had purchased a controlling
share of the German firm Howaldtswerke-Deutsche Werft (HDW),
a leading maker and exporter of non-nuclear-powered submarines.
The report speculated that the OEP’s purchase might be intended to
pave the way for HDW to be acquired by GD or NOC.22
!NOC or GD could decide to sell one or more of its yards to a
third party, such as another major defense firm. In 2001, during the
DoD/DoJ review of GD’s proposal to acquire NNS, some observers
engines, as power sources for non-nuclear-powered submarines. This report uses the term
non-nuclear-submarines so as to not exclude submarines powered by such alternative
21 Ferguson, Gregor. U.S. Submarine Builder Studies Possible Australian Partnership.
DefenseNews.com, April 10, 2002; Hamilton, Robert A. EB Looking At Sub Builder Down
Under. New London Day, September 9, 2001; Oz Firm Eyed As Taiwan Sub Source. Far
Eastern Economic Review, September 6, 2001; Garran, Robert. Navy Ties Up To Uncle
Sam. The Australian, July 11, 2001.
22 Mulholland, David, et al. US Bank Takeover Of HDW Raises Technology Issues. Jane’s
Defence Weekly, March 20, 2002. The article stated:
Speculation is rampant that the deal is a cover for a US shipyard to acquire
HDW’s diesel-electric submarine technology. This, US military, US government
and US and German industry officials said, would potentially allow a US
shipyard to acquire state-of-the-art diesel-electric submarine technology to
supply such submarines to international customers, in particular Taiwan....
There is also speculation that Northrop Grumman or General Dynamics (GD)
may be behind OEP’s acquisition. It is the policy of both companies not to
comment on mergers and acquisitions. Industry sources in Europe, however, said
that General Dynamics has approached Babcock Borsig [one of HDW’s previous
owners] in the past about buying HDW, but this could not be confirmed.
Industry and investment community sources says Bank One is in negotiations
with both Northrop Grumman and General Dynamics for HDW and that
Northrop is the preferred customer. “This is phase one; the bank transaction is
designed to clarify the industrial structure to pave the way for an American
partner,” an investment community source said. “Negotiations have gone on
with both Northrop and GD and Northrop is the front-runner.”...
HDW currently owns Sweden’s Kockums and is in the process of buying
Greece’s Hellenic Shipyards. HDW is also eyeing a Portuguese shipyard and has
industrial partnerships with Spain’s Izar and Italy’s Fincantieri....
HDW has done much research into air-independent propulsion (AIP) that has
given its diesel-electric submarines considerable endurance under water, greatly
reducing the performance gap between nuclear and non-nuclear submarines,
according to experts. HDW’s work on fuel-cell technology is particularly
attractive because it is efficient and quiet.
speculated that if the GD-NNS merger proposal were rejected, GD
might consider exiting the shipbuilding business by selling its three
yards to another firm.
!Finally, it is theoretically possible, if perhaps unlikely, that NOC
could at some point in the future seek approval to sell one of its
yards to GD, or vice versa, or that NOC and GD could seek approval
to swap shipyards.
Consolidation-Related Savings From NOC-NNS Merger
How much consolidation-related savings will result from NOC’s acquisition of
Sources of Savings. Shipyard mergers can lead to consolidation-related
savings to the federal government and taxpayers in several areas, including the
!Facilities. Bringing two or more shipyards under common
ownership can provide opportunities for closing or reducing
unneeded, redundant, or excess shipyard facilities, and thus for
eliminating or reducing the fixed overhead costs associated with
maintaining these facilities. Facilities-related fixed overhead costs
can include items such as depreciation, insurance, rent, property
taxes, utilities, cleaning and waste removal, maintenance and repair,
and security costs.
!Centralized Personnel and Expenditures. Shipyard mergers can
provide opportunities to combine and streamline previously separate
headquarters, central administrative, and design and engineering
staffs, and to reduce centralized expenditures for items such as
computers and data processing (including computer-aided design
costs), independent research and development (IRAD), corporate
allocation costs (i.e., corporate office allocation costs and franchise
taxes), and marketing activities.
!Materials and Components. Shipyards under common ownership
can lower the costs of their purchases of materials and components
by combining their purchases into larger bulk orders. Savings in this
area can be increased by designing ships of various types with
deliberate commonality in materials and components.23
23 The formation through mergers of two shipbuilding organizations (GD and NOC) that are
each capable of building various kinds of ships may create a potential for reducing future
ship-procurement costs by designing ships so that ships in different categories (e.g., surface
combatants, amphibious ships, and sealift and auxiliary ships) take greater advantage than
at present of commonality in design at the component or system level, and perhaps even to
begin to take advantage of commonality in design at the level of entire ship sections
!Best Practices. Shipyards under common ownership can share their
best business practices — their trade secrets — and combine their
respective strengths in areas such as strategic business planning,
facility management, project management and supervision, in-house
design and engineering, worker training and supervision, material
and component purchases, subcontractor relationships, and shipyard
production processes and techniques.
!Distribution of Workload. The managers of a multi-yard
organization can shift work from one yard to another, so as to avoid
or minimize potentially expensive fluctuations in the workload at
individual yards or take advantage of the ability of one yard to
perform certain elements of work at lower cost.
!Availability and Cost of Capital. Becoming part of a multi-yard
shipbuilding organization can give a shipyard improved access to
investment capital that can be used to modernize the yard’s facilities
and thereby make them more efficient. The yard’s new owner might
have a pool of capital readily available, or the yard, by virtue of
becoming part of a larger organization, might now be able to borrow
capital at lower interest rates.
Facilities-related Savings. During the time that its merger proposal was
being reviewed by DoD and DoJ, NOC stated that it had no plans to close any of its24
shipyards following a NOC-NNS merger. This will limit the potential savings that
could be realized from reducing facilities. The NOC-NNS merger, moreover, will
not create an opportunity for streamlining and consolidation in the area of nuclear-
ship construction, as a GD-NNS merger would have. But a NOC-NNS merger might
nevertheless lead to some streamlining of tools and facilities, particularly if these
tools or facilities perform limited amounts of work and the intermediate products
made by these tools or facilities can be easily and economically transported from one
yard to another. All three of the yards in question build large surface ships, and two
of them – Ingalls and NNS – specialize in the construction of large surface ships with
complex combat systems.25 This may create an opportunity to streamline tools and
facilities involved in the production of such ships.
(including the basic hull structure). Pursuing commonality at the level of entire hull sections
could lead to ship designs that are optimized from the standpoint of total-fleet production
and support costs rather than class-specific production and support costs.
24 Source: Telephone conversation with senior NOC official, May 16, 2001.
25 A ship’s combat system includes its sensors (such as radars), its computers, software, and
displays for processing sensor data and displaying it, its weapons launchers, and its
NOC has stated that it has now integrated operations at Avondale and Ingalls
and in the future will operate them (and a third manufacturing facility at Gulfport,
MS) as a single shipbuilding entity (Northrop Grumman Ship Systems). Bids for
future work, NOC officials say, will be submitted by this single entity, rather than by
Avondale or Ingalls, and decisions about how to divide work between Avondale,
Ingalls, and Gulfport will be made on the basis of how that work can be best done
collectively by the three sites working together.
Centralized Personnel and Expenditures. Although the NOC-NNS
merger will not create an opportunity to streamline the management and supervision
of nuclear-ship construction, as a GD-NNS merger would have, it might still generate
other savings in the area of centralized personnel and expenditures.
Best Practices. A NOC-NNS merger might present a greater opportunity for
sharing of best practices than a GD-NNS merger would have, since NOC and NNS
were not previously involved in a major joint-production arrangement and thus did
not previously have occasion to share some of their best practices with one another.
(GD and NNS, in contrast, have been involved in a joint-production arrangement for
building Virginia (SSN-774) class submarines since 1997.)
NOC states that it is beginning to apply at Avondale so-called “lean” production
strategies that Northrop and other U.S. aerospace firms adopted from commercial26
industry and applied to military aircraft manufacturing in the 1990s. NOC officials
say that the adoption of lean production techniques at Avondale is beginning to
produce significant reductions in the time needed to manufacture certain portions of
LPD-17 class amphibious ships being built there.27
Potential Total Savings. At the time it announced its merger proposal, and
for several weeks thereafter, NOC did not provide any estimate of the total potential
consolidation-related savings that would result from a NOC-NNS merger, because,
NOC stated, NOC (unlike GD) did not have access to NNS’s books28 and would not
gain access until NNS’s board of directors approved NOC’s bid.29 Industry analysts,
however, reportedly believed that the savings from a NOC-NNS merger would be
less than that from a GD-NNS merger because the NOC-NNS merger would not
create an opportunity for streamlining facilities and management for nuclear-ship
26 Lean production strategies, which are the product of intensive studies of manufacturing
operations, employ new ways to organize production lines so as to simplify tooling, jigs, and
work flows and thereby reduce production times and costs.
27 Information provided by Avondale official congressional staff and CRS during
congressional staff trip to Avondale on February 19, 2002.
28 GD had access to NNS’s books as a result of the definitive merger agreement that the two
firms had signed.
29 Gilpin, Kenneth N. Northrop Grumman Is Long On Defenses Of Its Bid For Newport
News. New York Times, May 10, 2001.
30 Squeo, Anne Marie. Northrop’s Newport News Bid Will Force Bush Administration To
Kent Kresa, the chairman and chief executive of NOC, said in May 2001, “My
initial view is the savings [from a NOC-NNS merger] would not be as high” as those
from a GD-NNS merger.31 Supporters of the NOC-NNS merger proposal did argue,
however, that the savings from a NOC-NNS merger, though perhaps less than those
that would be realized from a GD-NNS merger, would still be significant.
In August 2001, NOC altered its position, stating in a document provided to
DoD and DoJ that, even though NOC still did not have access to NNS’s books, it
now estimated that a NOC-NNS merger would produce $1.9 billion to $2.6 billion
in consolidation-related savings over the next ten years, or an average of $190
million to $260 million per year.32
GD initially estimated that a GD-NNS merger would produce about $2 billion
in savings over 10 years.33 NOC’s August 2001 savings estimate of $1.9 billion to
$2.6 billion over 10 years for a NOC-NNS merger was thus roughly equal to GD”s
estimated savings from a GD-NNS merger.
Following NOC’s August 2001 announcement of its savings estimate, it was
reported that GD’s $2-billion savings estimate was “a figure several officials have
described privately as a conservative, low-ball estimate.... Sources familiar with the
General Dynamics proposal said the company’s $2 billion estimate represents only
the minimum savings that a merger would bring. In private briefings to the
Pentagon, these sources said, the company has projected the savings could be as high
as $3.8 billion.”34 Another report stated that “GD has offered savings of between $2
billion and as much as $3.8 billion over the coming decade, while Northrop
Spell Out Policy. Wall Street Journal, May 10, 2001.
31 As quoted in Gilpin, Kenneth N. Northrop Grumman Is Long On Defenses Of Its Bid For
Newport News. New York Times, May 10, 2001.
32 The U.S. Government’s Decision on the Fate of Newport News: Unprecedented Merger
to Monopoly, Cost Savings Without Reduced Competition, or the Status Quo. Washington,
2001. (Discussion Materials Regarding Alternative Outcomes in the Proposed Acquisitions
of Newport News Shipbuilding for the Consideration of the U.S. Department of Defense and
U.S. Department of Justice, August 3, 2001. Prepared and Submitted on Behalf of Northrop
Grumman Corporation) Tab B, pages 1 and 11. Copies of this 60-page document were
distributed not only to DoD and DoJ, but to press reporters and other observers. NOC
provided a copy to CRS on August 20, 2001. For a press report mentioning the estimated
savings of $1.9 billion to $2.6 billion, see Squeo, Anne Marie. Pentagon Appears To Favor
Newport News Acquisition. Wall Street Journal, August 29, 2001. Another press report
characterized NOC’s estimated savings at $2 billion to $2.5 billion over 10 years. (Lerman,
David. Bidders Float Similar Savings Figures. Newport News Daily Press, August 4, 2001.)
33 For articles citing GD’s $2-billion savings estimate, see Gilpin, Kenneth N. Northrop
Grumman Is Long On Defenses Of Its Bid For Newport News. New York Times, May 10,
2001; Squeo, Anne Marie. Northrop’s Newport News Bid Will Force Bush Administration
To Spell Out Policy. Wall Street Journal, May 10, 2001.
34 Lerman, David. Bidders Float Similar Savings Figures. Newport News Daily Press,
August 4, 2001.
Grumman has offered savings between $1.9 billion and $2.4 billion during the same
A later report stated that “An internal Pentagon review found a General
Dynamics-Newport News combination could save the Navy between $3 billion and
$4 billion during the next 10 years,”36 suggesting that the Pentagon had evaluated the
potential savings from a GD-NNS merger to be substantially higher than those from
a NOC -NNS merger. This, however, does not appear to be the case: On October 12
– 11 days before DoD and DoJ announced their decisions on the GD-NNS merger,
E. C. “Pete” Aldridge, Jr, the Under Secretary of Defense (Acquisition, Technology
and Logistics) – the Pentagon’s chief acquisition executive, and a key participant in
DoD’s review of the mergers – stated that the savings from the two merger proposals
were not substantially different from one another:
“Northrop has a fairly wide range of savings. General Dynamics has been a little
more specific,” he said. Both “are in the ballpark” of what the Pentagon is37
looking for, Aldridge said. “The numbers are pretty close.”
The notion that DoD had concluded that the potential consolidation-related
savings from a NOC-NNS merger would be about equal to those from a GD-NNS
merger was confirmed in DoD’s announcement of its decision on the GD-NNS
merger, presented in the background section of this report.
Although DoD evaluated the potential consolidation-related savings from a
NOC-NNS merger to be about equal to those from a GD-NNS merger, DoD has not
officially stated what those potential savings are in an absolute sense. DoD, in other
words, has not said whether its own estimate of the consolidation-related savings
over 10 years from the NOC-NNS merger (or a GD-NNS) merger will be about $2
billion or some different figure. In 1999, after DoD rejected an earlier proposal from
GD to acquire NNS, it was reported that DoD was able to verify about two-thirds of
GD’s then-estimated savings of about $2.5 billion over 9 years. The other third, DoD
reportedly concluded, was possible but could not be verified.38
35 Muradian, Vago. Aldridge To Decide NNS’ Fate, Continues TO Assess Based On Four
Factors. Defense Daily, August 14, 2001: 5.
36 Squeo, Anne Marie. Pentagon Appears To Favor Newport News Acquisition. Wall Street
Journal, August 29, 2001.
37 Capaccio, Tony. Pentagon Undecided On Newport News Merger Bids, Aldridge Says.
Bloomberg.com, October 12, 2001.
38 CRS Report RL30969, Navy Shipbuilding: Proposed Mergers Involving Newport News
Shipbuilding – Issues for Congress, by Ronald O’Rourke. Washington, 2001. (May 22,
2001) p. 10 (footnote 12); CRS Report RL30251, Navy Major Shipbuilder Ownership
Consolidation: Issues for Congress, by Ronald O’Rourke. Washington, 1999. (May 27,
1999) p. 12-13; Lerman, David. Pentagon Sees Some Savings from Shipyard Merger as
Realistic. Newport News Daily Press, March 16, 1999; Troshinsky, Lisa. Cost-Cutting Deal
Sank Merger, Navy Says. Defense Week, April 19, 1999: 3.
Competition In Shipbuilding
What are the potential implications of shipyard mergers for competition in the
design and construction of Navy ships?
Many policymakers believe that, as a general rule, competition in defense
acquisition can generate benefits for the government and taxpayers by restraining
costs, improving product quality, encouraging adherence to scheduled delivery dates,
and promoting innovation. As discussed in the background section, potential
antitrust implications (i.e., implications for competition) are the principal focus in
DoJ reviews of proposed mergers, and are a principal assessment criteria set forth in
DoD’s directive regarding policy for reviewing proposed defense mergers.
Competition Currently Rare in Ship Construction. Although the Navy
used competition extensively in ship construction in the 1980s and early 1990s,
particularly in the awarding of annual contracts for the construction of surface
combatants and nuclear-powered attack submarines, competition is less prominent
in Navy ship construction activities today.
The Navy recently conducted a competition to design the new Lewis and Clark
(TAKE-1) class Navy auxiliary dry cargo ship (previously known as the ADC[X]39
class). The Navy also recently conducted a competition between two industry
teams for the right to do preliminary and system design work for the Navy’s next-40
generation destroyer, the DD(X). The Navy in the future intends to conduct
competitions to do the detailed design and construction of the first DD(X),41 to design
its next-generation cruiser, the CG(X), and to design a smaller surface combatant
called the Littoral Combat Ship (LCS).42
For major Navy ship programs now in production, however, there is little active
use of competition:
!Nuclear-powered aircraft carriers are a sole-source item — NNS is
the only yard currently capable of building large-deck nuclear-
powered carriers and has built every carrier procured since FY1958.
39 The Navy on October 18, 2001 announced that it had selected GD/NASSCO as the winner
of the competition and awarded the firm a contract to design the TAKE-1 and to build the
first two ships in the class, with options to build another 10 ships in the class. The other
competitors were NOC/Avondale and Halter Marine, a Gulf-Coast shipyard owned by
Friede Goldman Halter.
40 On April 29, 2002, the Navy announced that it had selected a team lead by NOC/Ingalls
as the winner of the competition.
41 The first DD(X) is to be procured in FY2005.
42 For more on the DD(X), CG(X), and LCS, which together form the Navy’s future family
of surface combatants, see CRS Report RS21059, Navy DD(X) Future Surface Combatant
Program: Background and Issues for Congress, by Ronald O’Rourke. Washington, 2002.
(Updated periodically) 6 p.
!Virginia (SSN-774) class nuclear-powered attack submarines are
being jointly produced by EB and NNS under a teaming arrangement
worked out by the two shipbuilders and approved by the
Administration and Congress in 1997 that divides the value of the
work between the two yards on a roughly equal basis.
!Arleigh Burke (DDG-51) class destroyers since FY1994 have been
allocated by the Navy to BIW and Ingalls on an essentially equal
!San Antonio (LPD-17) class amphibious ships are being divided up
by Avondale and BIW — the two yards on the industry team that
won the competition to build the 12-ship class — on a 2-ships-for-1
!Wasp (LHD-1) class large-deck amphibious assault ships are
effectively a sole-source item — Ingalls has produced all of those
procured to date and would be the presumptive builder of any
additional such ships that are procured.
!Sealift ships are being built in equal numbers by NASSCO and
Avondale as a result of decisions by the Navy to exercise options to
construction contracts for these ships that the Navy awarded to the
two firms in 1993.
The current limited active use of competition in Navy ship construction appears
to be largely a consequence of two key factors – the relatively low rate of Navy ship
procurement since FY1993, and an apparent unwillingness of policymakers to take
steps that might force any of the six shipyards out of the Navy shipbuilding
business.44 Together, these two conditions make it difficult for the Navy to create
uncertainty about its shipbuilding contract-award decisions — a key requirement for
generating effective competition in ship construction.
Given the limited use of competition in Navy ship-construction activities today,
the issue for Congress and the Administration appears to be what effect the NOC-
NNS merger and previous mergers involving the six shipyards might have on two
potential policy goals:
!preserving competition in ship design and technology development;
43 GD and NOC reportedly are discussing a plan to shift BIW’s LPD-17s back to NOC in
return for NOC shifting some of its DDG-51s to BIW.
44 For a more detailed discussion, see CRS Report 96-785 F, Navy Major Shipbuilding
Programs and Shipbuilders: Issues and Options for Congress, by Ronald O’Rourke.
Washington, 1996. (September 24, 1996) p. 18-19, 60-64.
!the potential for resuming competition in Navy ship construction in
the future, particularly if the Navy ship procurement rate in future
years is increased from current levels.
Competition Implications of NOC-NNS Merger.45
Potential Factors to Consider. In examining the effect that the recent
series of shipyard mergers culminating in the NOC-NNS merger might have on ship
design and ship technology development and on the potential for resuming
competition in Navy ship construction, policymakers may consider several factors,
including the following:
!creation of sole sources,
!resulting market share,
!resulting number of independently owned shipyard in-house design
and engineering staffs,
!resulting share of shipyard in-house designers and engineers,
!resulting share of Navy research and development funding provided
to shipyards, and
!resulting degree of vertical integration.
Creation of Sole Sources. The existence of at least two independently
owned sources for an item is usually a requirement in instances where the
government wants to make use of competition in the acquisition of that item. A
merger that results in the creation of a sole source for an item can thus reduce,
perhaps dramatically, the potential for using competition in the acquisition of that
item. In expressing its opposition to GD’s 1999 and 2001 proposals to acquire NNS,
DoD and (for the 2001 proposal) DoJ noted that such a merger would combine the
nation’s two submarine-construction shipyards under common ownership.
Creation of a sole source does not eliminate entirely the government’s ability
to use competition in the acquisition of that item. The government can mandate the
use of competition among supplier firms in the acquisition of materials and
components that are incorporated into the end item manufactured by the sole source
prime contractor. The government can also make it clear to the sole source that its
end item (in this case, a particular kind of ship) will compete for scarce defense
procurement dollars against other defense end items (such as other types of ships,
aircraft, missiles, ground combat systems, space systems, and command and control
In the view of some observers, creation of a sole source, in addition to reducing
the potential for using competition in the acquisition of that item, can also weaken
or distort competition for other items made by the sole source. Under this argument,
the sole source can leverage its monopoly position on a certain item to negotiate
contracts for that item with high profit margins, which can then be used to cross-
45 See Appendix B for a discussion of the potential implications for competition that might
have resulted from the GD-NNS merger proposal that was rejected by DoD and DoJ in
subsidize bids that the sole source makes for contracts to build other end items where
the firm does face competition from other competitors. Several years ago, for
example, some supporters of EB – but not GD or EB itself – argued that NNS had in
the past used its sole-source status on aircraft carriers to negotiate high profit margins
on carrier construction contracts that were then used to cross-subsidize bids it
submitted in competition against EB for submarine construction contracts.
The NOC-NNS merger preserved two independently owned sources with recent
experience in the design and construction of submarines (GD/EB and NOC/NNS),
surface combatants (GD/BIW and NOC/Ingalls), and auxiliary and sealift ships
(GD/NASSCO and NOC/Avondale). The NOC-NNS merger also did not affect the
situation for LPD/LSD-type amphibious ships, where NOC/Avondale is the one
established source and GD/BIW, if it participates in LPD-17 construction, would
become a second source.
The NOC-NNS merger, however, combined NNS, the longstanding sole source
for large-deck, nuclear-powered aircraft carriers, with NOC’s Avondale and Ingalls
shipyards, which, as discussed in a 1996 CRS report, are the only two yards other
than NNS that could build large-deck, conventionally powered aircraft carriers.46 It
also combined NOC’s Ingalls shipyard, the effective sole source for large-deck
amphibious assault ships, with NNS, the only other shipyard then outside NOC (i.e.,
other than Avondale) that, as also discussed in the 1996 CRS report,47 could build
large-deck amphibious assault ships without need for making major capital
improvements to the yard. The NOC-NNS merger may thus pose an issue regarding
the number of potential future sources for aircraft carriers, the number of potential
future sources for large-deck (i.e., LHA/LHD-type) amphibious assault ships, and the
potential for sole-source-related cross-subsidization of bids.48 Each of these areas is
Aircraft Carriers. Supporters of the NOC-NNS merger can argue that any loss
of potential competition in aircraft carrier construction resulting from the merger is
insignificant because carriers have been a sole-source item since FY1958, because
carriers in future decades (as in recent decades) will not be procured at a rate
sufficient to support meaningful competition between two sources, because the
Navy’s plans for carrier procurement call for future carriers to be nuclear-powered
ships, which Avondale and Ingalls cannot build, and because even if the Navy were
to procure conventionally powered carriers, Avondale and Ingalls would not have
been competitive in bidding for such ships against NNS because of their lack of
46 The potential for Avondale or Ingalls, with capital improvement, to build large-deck
conventionally powered carriers, was discussed in CRS Report 96-785 F, Navy Major
Shipbuilding Programs and Shipbuilders: Issues and Options for Congress, by Ronald
O’Rourke. Washington, 1996. (September 24, 1996) p. 21, 23, 29, 61-62.
47 Ibid, p. 29.
48 Large-deck amphibious assault ships are flat-top ships, about 40 % as large as the Navy’s
aircraft carriers, that are used to embark Marine forces and their equipment, including
Marine helicopters and AV-8B Harrier vertical/short take off and landing (V/STOL) jet
recent experience in building such ships and the technical challenges specific to
building carriers, such as installing aircraft catapults.
Critics of the NOC-NNS merger can argue that the loss of potential competition
in carrier construction is possibly significant because the Navy at some point might
decide to shift carrier construction from large-deck, nuclear-powered designs to non-
nuclear-powered designs that could be built by Avondale or Ingalls, but not by GD’s
two surface-ship yards (BIW and NASSCO). The concept of building smaller (and
potentially non-nuclear-powered) carriers has been examined by DoD in the past and
could be examined again in the future. The NOC-NNS merger, critics can argue, will
preclude the Navy from using competition in the construction of such ships.
Large-Deck Amphibious Assault Ships. Supporters of the NOC-NNS
merger can argue that any loss of potential competition in the construction of
amphibious assault ships is not significant because these ships, like carriers, have
effectively been a sole source item for many years, for at least two reasons: First,
these ships, like carriers, in future years (as in past years) will not be procured at a
rate sufficient to support meaningful competition between two sources. Second,
NNS would not have been competitive in bidding for such ships against Ingalls due
to NNS’s lack of recent experience in building them and the overhead costs
associated with maintaining NNS’s nuclear shipbuilding capability. These overhead
costs would make it difficult for NNS to compete effectively for non-nuclear-
powered ships against yards, like Ingalls, that do not have to incorporate the overhead
costs of maintaining a nuclear shipbuilding capability into their bids. They can also
argue that either of GD’s two surface-ship yards – BIW or NASSCO – can be made
capable, with capital improvements, of building such ships.
Critics of the NOC-NNS merger can argue that the potential loss of competition
in the construction of amphibious assault ships is possibly significant because future
plans for the Navy might call for building such ships in greater numbers or to a new
and significantly different design for which Ingalls’ prior experience in building
amphibious assault ships would not be an advantage, and because the amount of
capital improvements that would be needed at BIW or NASSCO to make these yards
capable of building such ships would dissuade them from competing against Ingalls
for such ships, which would have left NNS as the most likely potential competitor.
They can argue that, in spite of its nuclear-related overhead costs, NNS has been
successful in recent years in competing against non-nuclear yards for non-nuclear
work such as the conversion of existing merchant ships into U.S. military sealift
Cross-subsidization of Bids. Critics of the NOC-NNS merger can argue that
NOC can use its newly acquired sole-source status on aircraft carriers and its
previous effective sole-source status on large-deck amphibious assault ships to
leverage construction contracts for aircraft carriers and large-deck amphibious assault
ships with high profit margins that can then be used to cross-subsidize bids that NOC
makes in competitions against GD for contracts relating to submarines (which NNS
could do previously as a single-yard organization), surface combatants (which Ingalls
could do previously when it was a single-yard organization), LPD/LSD-type
amphibious ships (if GD decides to bid for such work), and auxiliary and sealift
Supporters of the NOC-NNS merger could argue that the government is fully
capable of negotiating profit rates and auditing NOC’s construction costs so as to
ensure that profits on this work are not excessive and that cross-subsidization does
not take place.
Market Share. Current and potential market shares are sometimes examined
to get a preliminary or general sense of whether a proposed merger might produce a
firm so dominant within the market for producing a particular product that
competition within that market might be eliminated or substantially reduced: The
dominance of the leading firm could discourage other firms from attempting to enter
the market for making items made by the leading firm. DoD and DoJ did not,
however, specifically refer to market share in objecting to the 1999 merger proposals
involving NNS or to the 2001 GD-NNS merger proposal.
The six shipyards together account for about 98% of the dollar value of new-
construction Navy shipbuilding work performed in U.S. shipyards, and new-
construction Navy shipbuilding work in turn accounts for an estimated 85% to 90%
of the total revenues of these six yards.49 An examination of the total revenues of
these six yards can thus provide an approximation of these yards’ market shares for
Information on total revenues for each of the six yards is incomplete for some
years, due in part to merger activity, which interrupted the sequence of corporate
annual reports for some years. But data for the years where information is available
for all six yards (1991-1995, and 2000) plus data available for some of the yards in
1996-1999 and 2001 suggest that the three yards now owned by GD in recent years
have tended to account for roughly 40%-45% of the total revenues of the six yards,
while the three yards now owned by NOC in recent years have tended to account for
roughly 55%-60% of the total revenues of the six yards. The division for 2000, the
most recent year for which revenue data is available for all 6 yards, was 43.2% for50
the three GD-owned yards and 56.8% for the three NOC-owned yards. The division
for 2001 could be very similar.51
49 Source for figures: Telephone conversation with the American Shipbuilding Association
(the trade association that includes these six yards, along with a number of other maritime
firms), May 19, 1999.
50 Data taken from [http://www.coltoncompany.com], an internet site that posts information
and news concerning shipyards and shipping. The GD/NOC divisions for 1991-1995 were
40.6%/59.4%, 39.9%/60.1%, 46.0%/54.0%, 45.1%/54.9%, and 43.7%/56.3%. The data on
revenues for some of the yards that is available for 1996-1999 and for 2001 appears
consistent with the data for these yards for 1991-1995 and 2000.
51 Preliminary data for 2001 suggests that the GD/NOC division could be roughly 44%/56%.
This is based in part on a preliminary figure for 2001 revenues for GD’s marine systems
division of $3.6 billion that was reported by [http://www.coltoncompany.com], less about
$300 million for AMSEA, a part of GD’s marine systems division that is not involved in
Navy shipbuilding. (AMSEA’s revenues in 1998-2000, according to
[http://www.coltoncompany.com], were $349 million, $204 million, and $315 million,
suggesting that 2001 revenues might be roughly $300 million.) It is also based on a figure
Supporters of the NOC-NNS merger could argue that such a division of
revenues, though not exactly 50-50, is not so lopsided as to pose a concern. They
could also argue that share of revenues does not, by itself, mean anything – and that
DoD and DoJ tacitly acknowledged this by not mentioning market share in its
analysis of the 1999 and 2001 GD-NNS merger proposals. GD, they could argue,
already builds surface combatants, auxiliary ships, and sealift ships and thus does not
face a choice of whether to enter the market to build ships of this kind. Since it does
not face this choice, supporters of the NOC-NNS merger could argue, the question
of whether the NOC-NNS entity’s market share would discourage GD from entering
the market for these ships would be moot.
Critics of the NOC-NNS merger could argue that something like a 40-60
division of revenue could be lopsided enough to pose a concern, since NOC’s share
under such a division would be half again as large as GD’s. They could also argue
that market share is a potentially important indicator because it indicates a firm’s
potential, relative to its competitors, to achieve improved production economies of
scale and obtain materials and components from supplier firms at lower costs. A
large market share, they could argue, might also make it easier for the firm to secure
financing from lending organizations, or enable the firm to secure it on more
favorable terms. A firm with a large-enough share of the market, it can be argued,
could make it more difficult for the government to achieve meaningful competition
because that firm might be able to generate size-related cost advantages that could
not be matched by other firms with a smaller share of the market. A firm with a
dominant share of the market, it can also be argued, might be better able to attract the
best managers and engineers because those individuals might conclude that the firm
with the dominant share of the market had better long-term business prospects and
could thus offer them better long-term career opportunities. Over time, it could be
argued, such an advantage in recruiting the best managers and engineers could add
to the competitiveness of the firm with the dominant share of the market, making it
more difficult for the government to achieve effective competition.
Critics could also argue that if BIW does not participate in the production of
LPD-17 class amphibious ships (a possibility), then GD could face a choice of
whether to attempt to enter the market against NOC for production of other
amphibious ships, making the question of whether NOC’s market share would
discourage GD from entering the market for these ships potentially relevant.
Number of Shipyard In-House Design and Engineering Staffs. In
addition to building ships, the six shipyards maintain in-house design and
engineering staffs that design Navy ships and develop new technologies for Navy
ships. Maintaining competition in this area may be of greater importance now than
in the past, since the Navy in recent years has shifted more of its ship design and
for 2001 revenues for NOC’s three shipyards of $4.24 billion, using information provided
by NOC to CRS in a telephone conversation on March 27, 2002. NOC stated to CRS that
NNS’s 2001 revenues were $2.0 billion, and that the combined revenues for Ingalls and
Avondale for the latter 9 months of 2001 (i.e., following NOC’s purchase of Litton) were
$1.682 billion. Annualizing this 9-month figure produces a 12-month estimate of about
engineering work out of its own public-sector ship-design and engineering
organizations, and to the private-sector shipyards.
Since innovations in a given area are sometimes made more likely when
separate organizations working in parallel are available to conceive of, and
experiment with, new strategies for addressing a common challenge, a reduction in
the number of independently owned shipyard in-house shipyard design and
engineering staffs might make it more difficult to promote innovation in Navy ship
design and technology, particularly for specific ship types or in specific technology
Alternatively, it can be argued that a merger of previously separate in-house
design and engineering staffs could, for a time at least, improve innovation in ship
design and ship technology development by creating an enlarged engineering staff
that encompassed a greater diversity of talents and ideas. New technologies and
innovations, it can be argued, can sometimes be spurred when members of previously
separate organizations are brought together under common ownership and as a
consequence are permitted to share ideas, “bounce” thoughts off one another, “cross-
fertilize” their thinking, and combine separately conceived and isolated concepts into
a testable new approach. Shipyard mergers, in this view, may create a larger “critical
mass” of design and engineering talent for generating innovations. In this sense,
depending on how the merged firm manages the flow of promising ideas and
concepts between their constituent yards, shipyard mergers might, for a time at least,
increase the likelihood for innovations in ship design and ship technology
If the Navy perceives that the potential for innovation in ship design and ship
technology development has been reduced by the reduction in the number of in-house
design and engineering staffs, it could attempt to compensate by placing ship-design
and ship technology-development contracts with independently owned naval
architectural firms and other entities (such as universities and technology companies)
that engage in activities relating to ship design and ship technology development.
The NOC-NNS merger reduced the number of independently owned shipyard
in-house design and engineering staffs from three to two, but preserved the two
independently owned in-house design and engineering staffs with experience in
submarines and nuclear-powered ships.
Supporters of the NOC-NNS merger can argue that two independently owned
staffs are sufficient for competition, and that any loss associated with the reduction
in the number of staffs would be offset by the creation of a larger NOC design and
engineering staff that will be able to generate significant innovations by combining
people and ideas that were previously separate from one another.
Critics of the merger can argue that having three independently owned staffs
would have been better for competition than having two because having three permits
competition to occur on a program even if one staff decides not to compete. They
can also argue that the benefits for generating innovations of combining previously
separate people and ideas are likely to be temporary rather than permanent.
Share of Shipyard In-House Designers and Engineers. The division
of the shipyards’ total number of in-house designer and engineers resulting from
shipyard mergers is a potentially important measure because designers and engineers
can create new designs and develop new technologies that can be sources of
competitive advantage to a shipbuilding organization when the organization
incorporates the new designs and technologies into bids for future Navy ship
acquisition programs. DoD, in explaining its opposition to the 1999 GD-NNS
merger proposal, noted that a combined GD-NNS entity would include more than52
As discussed above, although a concentration of design and engineering talent
could suppress innovation, it can also be argued, conversely, that new technologies
and innovations can sometimes be spurred, at least for a time, when members of
previously separate organizations are brought together under common ownership and
as a consequence are permitted to share ideas, bounce thoughts off one another,
cross-fertilize their thinking, and combine separately conceived and isolated
The table below shows the approximate sizes of the in-house design and
engineering staffs at the six yards in 2001.
Table 3. Approximate Share of Designers and Engineers
YardDesigners and Engineers
Approximate NumberApproximate Share
GD, of which5,25044%
(EB) (3,400) (28%)
NOC, of which6,75056%
(NNS) (4,600) (38%)
Sources: Data provided to CRS by GD on May 17, 2001. Similar figures can be derived from
McCarthy, Mike, and John M. Donnelly. Worries About Competition Surround Bids For Newport
News. Defense Week, May 14, 2001: 1, 13, 15.
52 Letter from Secretary of Defense to Senator Trent Lott, April 15, 1999.
As can be seen in the table, EB and NNS maintain relatively large in-house
design and engineering staffs, BIW and Ingalls maintain smaller but still substantial
in-house staffs, and Avondale and NASSCO maintain relatively small in-house
staffs. The staffs at EB and NNS are the only two among the six yards that have
extensive experience and resources in the design and engineering of submarines and
As can also be seen in the table, the NOC-NNS merger produced a firm that
accounts for about 56% of the six yards’ in-house designers and engineers, while GD
accounted for the remaining 44%. Excluding the 8,000 nuclear-ship engineers and
designers at NNS and GD, NOC-NNS merger produced a firm that accounts for 54%
of the in-house designers and engineers in 2001 (2,150 of 4,000), while GD
accounted for the remaining 46% (1,850 of 4,000).
Supporters of the NOC-NNS merger could argue that a 56%-44% division of
in-house designers and engineers, though not exactly a 50-50 split, is not lopsided
enough to pose a concern. They can also argue that GD can supplement its own in-
house staff of 5,250 shipyard designers and engineers by drawing on the talents of the
designers and engineers that exist in GD’s information systems and technology and
aerospace divisions. GD’s ability to do this, they can argue, has grown in recent
years as a result of its recent non-shipbuilding acquisitions, including aircraft-maker
Gulfstream, and could grow further in future years if GD acquires additional non-
shipbuilding firms, as some observers anticipate.
Supporters can also argue that GD can further supplement its in-house design
and engineering staff by contracting with some of the 6,000 private-sector ship
designers and engineers that exist in the United States outside the six shipyards.
Hiring outside designers and engineers, they can argue, is an established practice for
shipyards working on Navy non-nuclear shipbuilding programs.
Supporters could also argue that the total number of designers and engineers is
not that important because the potential for innovation in a firm often resides within
a small core of very experienced designers. The bulk of the designers and engineers
at the firm, they could argue, perform routine design and engineering work.
Although the total number of designers and engineers are not evenly divided between
GD and NOC, they could argue, both GD and NOC possess capable core groups of
very experienced designers and engineers. This point of view, they can argue, is
supported by DoD’s interest in recent years in small business firms as sources of
Critics of the NOC-NNS merger can argue that the total number of designers
and engineers can indeed be important, because ships are composed of tens of
thousands of components and the ship-design process gives individual designers and
engineers throughout the firm the opportunity (and responsibility) to seek out
improvements for the part of the ship they are working on. Even small improvements
53 In addition to these in-house staffs, the private sector also includes independently owned
naval architectural and engineering firms that can be hired by shipyards to supplement their
and innovations, if applied to a sufficient number of the ship’s components, can add
up to a significant amount of total-ship innovation, they can argue. A firm with a
larger share of designers and engineers, they can argue, will be able to carry out a
more thorough investigation of the potential for making numerous small
improvements and innovations across the entire ship. This point of view, they can
argue, is supported by DoD’s reference to the share of designers and engineers in its
decision on the 1999 GD-NNS merger proposal.
Critics of the merger can argue that in the 56%-44% division understates the
imbalance because NOC can combine the talents of 6,750 in-house shipyard
designers with those of the designers and engineers in NOC’s large and technically
advanced aerospace and electronics divisions. The resulting combination of nuclear
and non-nuclear shipbuilding technologies, aerospace technologies (including stealth
design and materials technology), and electronics technology, they could argue, could
give NOC a technological edge over GD.
Critics of the NOC-NNS merger can also argue that it would be difficult to
transfer designers and engineers from GD’s information systems and technology and
aerospace divisions into shipbuilding programs, since these designers and engineers
are fully committed to non-shipbuilding programs and lack experience in
shipbuilding design and engineering issues.
Critics of the NOC-NNS merger can also argue that NOC can contract for the
services of ship designers and engineers that work outside the six yards just as easily
as GD could, and that outside designers and engineers might not be able to achieve
as much for GD as NOC’s in-house designers and engineers could achieve for NOC,
for two reasons. First, NOC’s in-house staff works at NOC continuously across a
range of projects, rather than intermittently on a project-by-project basis, as would
be the case for outside designers and engineers working on contract at GD. Second,
NOC’s in-house staff could have more complete access to NOC’s most proprietary
concepts and technologies than contract designers and engineers would have to GD’s
concepts and technologies.
Share of Navy Research and Development Funding. DoD, in
explaining its opposition to the 1999 GD-NNS merger, stated that
over 95% of the Navy R&D investment would exist in a combined General-
Dynamics-Newport News entity. This is because the Navy has historically
maintained a large R&D program funded through its nuclear shipyards; i.e.,
General Dynamic’s [sic] Electric Boat Division and Newport News. If General
Dynamics and Newport News were to merge, we would see a concentration of
that engineering talent – and the technology advantages that may have resulted
from Navy-funded research and development investments in both firms over the54
This concern is similar to the concern regarding the resulting share of the total
number of in-house designers and engineers. Rather than focusing on personnel,
54 Letter from Secretary of Defense to Senator Trent Lott, April 15, 1999.
however, this concern appears to relate to research, development, and design
facilities and technology that may have accumulated at EB and NNS over the years.
Although DoD in 1999 stated that more than 95% of the Navy research and
development investment that goes to the six shipyards would exist in a combined
GD-NNS entity, it did not say how much of this 95% came from GD as opposed to
NNS. Since DoD did, however, say that “the Navy has historically maintained a
large R&D program funded through its nuclear shipyards; i.e., General Dynamic’s
[sic] Electric Boat Division and Newport News,” it might be reasonable to conclude
that a significant share of this 95% came from NNS. If so, then the NOC-NNS
merger might have produced a division of the Navy research and development
funding directed to the shipyards that would be much closer to a 50-50 split than to
a 95-5 split.
Supporters of the NOC-NNS merger could argue that the resulting division of
shipyard-directed Navy research and development funding is relatively balanced
between NOC and GD.
Critics of the NOC-NNS merger could argue that the resulting division
understates the advantages for NOC because NOC will benefit from the very large
amount of research and development funding that DoD has directed over the years
to aerospace firms like NOC. In the case of NOC, they could argue, this includes a
large investment in stealth design techniques, materials, production tooling, and test
facilities established for the B-2 bomber, which NOC designed and built.
Vertical Integration. Vertical integration refers to the existence, within a
single firm, of operations pertaining to different stages of the production process for
a particular item – a process that, in its entirety, begins with raw materials and
component manufacturing, continues through assembly of subsystems, systems, and
other intermediate components, and finishes with final assembly and total-system55
integration and testing. The potential concern is that vertically integrated firms can
undermine competition in various stages of the production process by relying on their
own in-house capabilities for performing work rather than bidding the work out to
other firms engaged in that stage of the production process.
NOC is one of DoD’s leading radar makers and combat system integrators, and
competes against other radar makers and combat system integrators, such as
Lockheed and Raytheon. NOC is also a maker of Navy ship propulsion equipment.
NOC’s April 2001 purchase of Litton’s Avondale and Ingalls shipyards thus posed
a question of vertical integration, since it combined a maker of military platforms
(i.e., surface combatants, amphibious ships, and auxiliary and sealift ships) with a
55 Horizontal integration, in contrast, refers to the existence within a single firm of
operations in certain stages of the production process for producing significantly different
end products. In a simplified example, a firm that takes raw materials in one end and
produces fully complete end items (such as ships) at the other end, performing all the
manufacturing, assembly, integration and testing steps in between, is said to exhibit
complete vertical integration, while a firm that specializes in certain stages of the production
process for significantly different products (such as manufacturing of components for, or
final assembly of, ships, aircraft, and land vehicles) is said to exhibit horizontal integration.
maker of radars, combat systems, and ship propulsion equipment that could go onto
those platforms. The NOC-NNS merger extended this question to the two remaining
major categories of Navy ships – aircraft carriers and submarines.
Critics could argue that NOC-NNS merger created a firm with an undesirable
degree of vertical integration. NOC, opponents could argue, could decide to install
its own radars and combat systems on the ships it makes, rather than competing its
in-house capabilities in this area against the other radar makers and combat system
integrators such as Lockheed and Raytheon. This, opponents could argue, would
make it difficult for the Navy to achieve effective competition in the acquisition of
ship radars and combat systems. A weakening of competition between system-
integration firms, they could argue, would be particularly significant in light of the
government’s increasing reliance on system-integrator firms as sources of design and
technology innovation in Navy shipbuilding.
Supporters of the NOC-NNS merger could argue that it is unlikely that a NOC
would exclude Lockheed and Raytheon from NOC shipbuilding projects, because
radars and combat systems on ships are different in many ways from radars and
combat systems on aircraft, and NOC’s experience in radars and combat systems is
associated more with aircraft, while Lockheed and Raytheon are the two leading
makers of radars and combat systems for Navy ships. Supporters could argue that
it would be self-defeating for NOC to exclude both Lockheed and Raytheon from its
bid in a competitive ship-acquisition program, since that would leave GD free to
include one or even both of these firms in its own bid, making it much more likely
that the Navy would judge the GD bid superior in terms of proven experience in
shipboard radars and combat systems.
Potential for Bundled Competitions. The formation through mergers of
two shipbuilding organizations that are each capable of building various kinds of
Navy ships may create a potential for the Navy to use bundled competitions to restore
the use of competition in the awarding of Navy ship-construction contracts even
during times when the procurement rates of individual shipbuilding programs are
insufficient to permit meaningful competition on an individual-program basis. Under
the concept of bundled competitions, the Navy would group together some or all of
the ships procured in a given year or two, compete the bundle between GD and NOC,
and award a larger share of the bundle to the winning bidder.
Even during periods of relatively low rates of ship procurement, bundled
competitions could permit the government to restore some uncertainty in its contract-
award decisions – a key requirement for meaningful competition (i.e., competition
that generates bargaining leverage for the government). In particular, bundled
competitions could help ensure that GD and NOC make maximum use of cross-yard56
efficiencies in their shipbuilding operations.
56 For a press article discussing this proposal, see Lerman, David. Plan Could Bring More
Shipyard Competing. Newport News Daily Press, January 20, 2002: B1.
What effect will shipyard mergers have on shipyard employment levels?
Members of Congress are often interested in the effect that defense mergers and
acquisitions might have on local or regional employment levels. Shipyard mergers,
particularly if they are to produce savings, can lead to reductions in the total number
of white-collar workers (i.e., headquarters and central administrative workers, and
possibly designers and engineers) employed at the yards being brought under
common ownership. As mentioned in the section on potential savings, bringing more
than one shipyard under common ownership can provide opportunities to the parent
firm to combine and streamline the total number of workers in these areas.
Shipyard mergers are unlikely to lead to significant changes in the total number
of blue-collar production workers employed at the yards, since that number is
determined primarily by the total amount of production work being done at the yards.
Shipyard mergers, however, can lead to changes in the distribution of work being
done at the yards being brought under common ownership, which can in turn alter the
distribution of the total number of blue-collar workers among the yards.
The managers of a multi-yard organization can rephase work at certain yards,
or shift work from one yard to another, so as to avoid or minimize potentially
expensive fluctuations in the workload at individual yards or take advantage of the
ability of one yard to perform certain elements of work at lower cost. For
shipbuilding organizations with facilities in multiple localities or regions, which both
GD and NOC are, such changes in the distribution of blue-collar workers across the
yards can lead to local or regional increases or reductions in blue-collar shipbuilding
In discussing the potential local employment impacts of shipyard mergers, the
potential employment impact of not having participated in a merger arguably should
also be considered. It is possible, for example, that not merging might have left a
yard in weakened competitive position relative to other yards that did merge. In the
long run, this weakened competitive position could have reduced the amount of work
awarded to that yard, and thus the number of employees sustained there. A nearer-
term reduction in employment that might result from a merger might not be as
significant as a longer-term reduction that might have resulted from not merging.
During the time that the NOC-NNS merger proposal was being reviewed by
DoD and DoJ, NOC stated that it had no plans to close any facilities following a
NOC-NNS merger.57 NOC has taken steps to integrate operations at Avondale and
Ingalls (and a third nearby NOC-owned production facility at Gulfport, MS). This
integration gives NOC the ability to distribute available work across these sites in a
manner that takes advantages of production facilities and available workers at these
facilities. NOC is already doing this for production of components for LPD-17 class
ships. The ability to distribute work across these three facilities could help to
stabilize employment levels at each facility, reducing the frequency or size of layoffs
57 Source: Telephone conversation with a senior NOC official, May 16, 2001.
or new hires. When facilities and available workers at these three sites are not in
balance, however, there can be other effects: NOC is currently busing about 150
Ingalls employees to Avondale four days a week. These workers are currently not
needed for work at Ingalls but are needed for work at Avondale.
NOC will continue to perform nuclear shipbuilding work at NNS. Upon
completion (around October 2003) of the period during which NOC will operate
NNS as a separate business division, NOC will integrate NNS into its ship systems
division, which now includes Ingalls and Avondale. This could give NOC the option
of shifting certain elements of surface-ship construction work between NNS and the
two other yards, which could increase or reduce the blue-collar employment level at
each of the three yards. Ship sections produced at NNS, for example, could be
barged to Avondale or Ingalls (or vice versa) to undergo final assembly along with
ship sections produced at the final assembly yard.
The following instances of potential or actual cooperation or work sharing
between these three yards can also be noted, though their value in predicting the
future distribution of workload at NOC’s three yards is open to debate:
!In September 1997, Avondale and Ingalls announced that they
had signed an agreement establishing a framework for entering into
teaming arrangements to bid for work on future Navy and
commercial shipbuilding programs. Under the terms of the
agreement, “teaming and specific details of the teaming
arrangements (including sharing of work) will be determined on a
program by program basis as business opportunities develop.” In
making the announcement, the two yards announced that they had
already entered into teaming arrangements to compete for the Navy’s
new ADC(X) auxiliary dry cargo ship program (now called the
Lewis and Clark, or TAKE-1 class program), a program to build a
new fleet of Coast Guard cutters, and a program to build commercial
crude oil tankers for major oil companies.58 (As it turned out, Ingalls
did not join the Avondale-led team on the Coast Guard project.59)
!In 1996-1997, NNS and Ingalls teamed together to bid for the
contract to design and build a proposed Navy surface combatant
58 Avondale & Ingalls Execute Agreement to Pursue Shipbuilding Projects. Business Wire
news service, September 4, 1997; Ingalls and Avondale Agree to Team for Future Programs.
Ingalls News, September 4, 1997; Shipbuilders Announce Pact. Associated Press wire story,
September 4, 1997; Ingalls, Avondale Form Shipbuilding Alliance. Aerospace Daily,
September 5, 1997: 351B; Schweizer, Roman. Ingalls, Avondale Agree to Pursue
Commercial, Navy Work Together. Inside the Navy, September 8, 1997: 4; Bender, Bryan.
Ingalls, Avondale Shipyards Sign Teaming Agreement. Defense Daily, September 8, 1997:
59 This project is the Coast Guard’s Integrated Deepwater System program, which is an
effort to acquire an integrated system of cutters, aircraft, and command and control systems
for the Coast Guard’s deepwater operations. See CRS Report 98-830 F, Coast Guard
Integrated Deepwater System: Background and Issues for Congress, by Ronald O’Rourke.
Washington, 1998. (November 8, 2000) 14 p.
(since canceled) called the arsenal ship or maritime fire support
!In 1995, NNS and Ingalls teamed together to bid (unsuccessfully) for
the contract to design and build the first three San Antonio (LPD-17)
class amphibious ships.61 Under the teaming arrangement, if NNS
and Ingalls won this competition, NNS would have built the aft
section of each ship, which would have been transported to Ingalls
and joined to the Ingalls-built forward section of each ship.62
!In 1992-1993, NNS and Ingalls submitted separate (and
unsuccessful) bids for contracts to design and build new-
construction sealift ships under a loose teaming arrangement
between the two yards. Under the arrangement, if either yard won
this competition, that yard would sub-contract some of the work to
the other yard. NNS would have built the forward section of each
ship, and Ingalls would have built the aft section. The winning yard
would receive the section of the ship built by the other yard and then
carry out final assembly of the ship.
!In the 1980s, Avondale and Ingalls shared work in the program to
modernize and reactivate the Navy’s Iowa (BB-61) class
In theory, NOC at some point in the future might determine that its commitment
not to close any shipyards following the NOC-NNS merger (i.e., as a direct
consequence of the merger) had been fulfilled, and that NOC was now free to close
shipyards for reasons unrelated to the merger. A decision to close a shipyard
completely, however, might be very unlikely because it would likely cause a
controversy in the community and state affected, and because closing a site would
reduce the geographic base of support for NOC’s shipbuilding programs. A decision
60 See CRS Report 97-455 F, Navy/DARPA Arsenal Ship Program: Issues and Options for
Congress, by Ronald O’Rourke. Washington, 1997. (April 18, 1997) p. 31. The arsenal
ship program was terminated in October 1997; see CRS Report 97-1044 F, Navy/DARPA
Maritime Fire Support Demonstrator (Arsenal Ship) Program: Issues Arising From Its
Termination, by Ronald O’Rourke. Washington, 1997. (December 10, 1997) 6 p.
61 The contract to build the first 3 ships in this class was instead awarded to a team led by
Avondale that also included BIW, Hughes Aircraft Company of Fullerton, CA, and
Intergraph Corporation of Waynesboro, VA. The Ingalls-NNS team also included NASSCO
(for pre-construction support and post-construction overhaul work) and Lockheed Martin’s
Government Electronic Systems Division of Moorestown, NJ.
62 Ingalls To Team With Other Companies To Bid For New Navy Ship Contract. Associated
Press wire story, October 24, 1995; Walsh, Mark. Second Team Will Bid For LPD-17.
Defense Week, October 30, 1995: 3; Walsh, Edward J. Shipbuilders Plan Computerized
Design for New Amphib. Sea Power, February 1996.
63 Ingalls and Avondale noted their sharing of work on this program in announcing their
September 1997 agreement on future teaming arrangements.
to significantly reduce the amount of production work (and employment levels) at a
site while still keeping it open might be more likely.
Shipyards and Shipbuilding in the Political Process
What affect will shipyard mergers have on the shipyards and shipbuilding in the
Navy shipbuilding competes in the DoD and congressional budgeting arenas for
limited DoD procurement dollars against other DoD defense procurement priorities,
such as space systems, aircraft, missiles, land-warfare systems, and defense
communications and electronics. Shipyard mergers since 1995, by incorporating
shipyards into larger defense firms with business activities in multiple defense
sectors, can affect shipbuilding’s place in this competition in at least two ways –
overall strength of representation and system-of-systems acquisition programs.
Overall Strength of Representation. In the competition for limited
defense procurement funds, the six shipyards individually are not the largest
competitors. As can be seen in Table 2, the six yards in December 2001 employed
a total of 51,463 people, or an average of about than 8,600 people per yard, in most
cases at one primary site (two sites in the case of EB). In contrast, Boeing employs64
more than 180,000 people in its military and civilian business activities in 26 states,
while Lockheed Martin employs a total of 125,000 people in its military and civilian65
business activities at 939 facilities in 457 cities and 45 states.
Shipyard mergers since 1995 have incorporated shipyards into firms that have
larger total numbers of employees and greater geographical distribution around the
United States. GD currently employs a total of about 52,000 people (including about
about 100,000 people (including about 32,000 at its three shipyards) in 44 states.
Other things held equal, this can strengthen the position of the shipyards relative to
other defense contractors in the political process.
Shipyard mergers can also lead to more unified and coordinated lobbying and
public-relations efforts among the yards, which can also strengthen the position of
the yards in the political process. When the six shipyards were owned by six separate
organizations, the lobbying and public-relations efforts of some of the yards might
contradict or undercut some efforts of other yards. Now that ownership of the six
yards has been consolidated under two firms, this possibility appears to have been
reduced. In Congress, shipyard mergers can encourage Members of Congress who
represent individual shipyards to find common interests with Members who represent
other shipyards owned by the same parent firm.
64 Source for figures: [http://www.boeing.com/companyoffices/aboutus/brief.html] .
65 Source for figures: [http://www.lockheedmartin.com/about/ataglance.html] .
66 Source for figures: [http://www.generaldynamics.com/overview/] .
67 Source for figures: [http://www.northropgrumman.com/news/new_faq_main.html] .
For advocates of increased spending on Navy shipbuilding, the increased overall
strength of representation can be viewed as an advantage. For certain other parties,
such as policymakers involved in establishing and executing certain policies and
programs relating to Navy shipbuilding, or advocates of increased spending on
programs other than Navy shipbuilding, this increased strength might pose
Shipbuilding in System-of-Systems Acquisition Programs. DoD
relies primarily on defense firms (rather than on itself) to design and act as system
integrators for complex individual weapon systems. 68 As a recent extension of this
practice, DoD is now relying on large defense firms to design and act as integrators
for large “system-of-systems” acquisition programs that involve complex
combinations of various “platforms” (i.e., aircraft, ships, other vehicles), sensors and
other C4ISR equipment,69 and weapons. Examples of system-of-system acquisitions
include the missile defense program and the Army’s Future Combat System (FCS)
Relying on large defense firms to design and act as system integrators is now a
necessity for DoD, given the limits on DoD’s own in-house system design and
integration capabilities. It also permits DoD to take full advantage of the skills and
creativity in the private sector to solve complex defense problems. Such creativity
can be particularly important in system-of-system acquisition efforts, where there can
be a wide array of possible solutions.
Relying on large defense firms to act as system integrators, particularly in
system-of-systems acquisitions, however, can create a potential for the firms to
influence U.S. defense policy by suggesting the preferred technical approach to be
taken for solving a certain defense problem, or by concluding that a certain policy
problem can (or cannot) be solved through the acquisition of a new weapon system
or system or systems.
Having U.S. defense policy influenced by industry conclusions about the
preferred general technical approach to be taken or whether a certain problem can be
solved through a new weapon acquisition program can be helpful to U.S.
policymakers by clarifying the potential feasibility, costs, and risks of adopting
certain defense policies. A large defense firm, however, might structure its
recommendations or conclusions in these areas in ways that suits its own self
68 System integrators ensure that the many systems, subsystems, and components that
together make up a complex weapon system operate together as intended, so that the weapon
system as a whole performs effectively and efficiently.
69 C4ISR stands for command and control, communications, computers, intelligence,
surveillance, and reconnaissance.
70 In addition, the Coast Guard is using industry for a system-of-systems acquisition effort
for its Deepwater program for replacing its current deepwater-capable cutters, patrol boats,
and aircraft. See CRS Report RS21029, Coast Guard Deepwater Program: Background
and Issues for Congress, by Ronald O’Rourke. Washington, 2002. (updated periodically)
interests as a firm that has business activities in some kinds of defense systems but
not others, or higher rates of profitability in some defense activities than in others.
The potential issue for Congress, in the wake of shipyard mergers since 1995,
is whether shipbuilding in general or certain types of ships will receive appropriate
emphasis in the technical approaches proposed by large defense firms in system-of-
system acquisition efforts. Will firms that do (or do not) own shipyards, or whose
shipbuilding activities are more (or less) profitable than its other business activities,
give excessive (or insufficient) emphasis to shipbuilding in general or certain types
of ships in its system-of-system proposals?
Movement of Officials Between DoD/Navy and Industry
How might shipyard mergers affect the risks associated with movement of
senior-level officials between DoD/Navy and industry?
Movement of senior-level employees between DoD and the defense industry is
common and can be beneficial in terms of improving DoD understanding of industry
concerns, importing efficient industry business practices into DoD, and improving
industry understanding of DoD goals, procedures, and concerns. It also, however,
has the potential to create questions regarding potential conflicts of interest for senior
DoD officials involved in making decisions about major weapon acquisition
programs or regulatory issues that affect the defense industry, particularly if those
officials are potential candidates for post-DoD employment with a defense firm.
Shipyard mergers since 1995 have contributed to the general consolidation of
defense firms and have reduced in particular the number of major defense firms that
might hire a former DoD or Navy official specifically on account of that person’s
background in Navy shipbuilding programs. Until 1995, for example, a DoD or
Navy official with such a background who was anticipating or hoping for a post-
DoD/Navy career in the private sector knew there were 6 major naval shipbuilding
firms (plus several other major contractors involved in shipbuilding programs)
available as potential employers. Now, in contrast, there are only two firms that own
shipyards that build major ships for the Navy (GD and NOC) and a smaller number
of other major defense contractors involved in shipbuilding programs (e.g., Lockheed
Martin and Raytheon).
A potential issue for Congress is whether and how shipyard mergers since 1995,
by reducing the number of potential post-DoD/Navy employers for persons with
shipbuilding backgrounds, might affect decisions made by current senior DoD and
Navy officials with responsibility for Navy shipbuilding programs or regulatory
issues affecting the shipyards. With fewer firms available as potential post-
DoD/Navy employers, will DoD/Navy officials involved in shipbuilding programs
be willing to make decisions that might strongly disappoint one or more of those
firms? Potential questions that Congress may consider include the following:
!What are the potential benefits and risks of regular movement of
senior-level employees between DoD/Navy and industry? How have
these benefits and risks been affected, if at all, by shipyard mergers?
!Are the regulations and procedures now in place to protect against
the risks associated with senior-level employee movement between
DoD/Navy and industry appropriate in light of the more
concentrated defense industry structure created by recent shipyard
mergers? What, if anything, should or can be done to reduce the risk
that post-DoD/Navy employment considerations might influence the
decisions of senior DoD/Navy officials on issues affecting firms
involved in shipbuilding programs?
Reviewing Mergers on “Savings vs. Competition”
Is DoD’s process for reviewing of proposed defense mergers best summarized
as one that weighs the potential savings of mergers against their potential
affects on competition?
Discussions of DoD’s review of the 2001 NOC-NNS merger proposal and other
defense merger proposals sometimes described that process as one that weighed the
consolidation-related savings that could result from the proposed merger against the
effects the merger might have on competition. The notion of a “savings-vs.-
competition” review framework might have arisen from the language of DoD
Directive 5000.62, or from the inclinations of some participants in the debates over
proposed mergers to focus on one of these factors or the other. Supporters of
proposed mergers, for example, often focus on the savings that they say will result,
while opponents often focus on the effects on competition.
The savings-vs.-competition framework for summarizing DoD’s merger-review
process, though concise, may not be the most accurate or useful framework, for two
reasons. First, it tends to separate the idea of savings from that of competition and
put the two ideas into opposition with one another, even though competition can
itself be a powerful source of savings.
Second, savings are only one of several ends that the government seeks to
achieve in defense-procurement programs, and competition is only one means of
achieving those ends. In addition to cost constraint, the government in defense
procurement seeks to achieve product quality, product innovation, and production
schedule adherence. And in addition to competition, the government can employ
regulation, audits, and incentive payments to achieve these ends. The “savings-vs.-
competition” framework can obscure these other ends and means.
For these reasons, DoD’s merger-review process might be characterized not
simply as one that weighs savings against competition, but rather as one that assesses
how proposed mergers might affect the ability of the government to achieve cost
constraint and other desired defense-procurement goals through use of competition
or other available means.71
71 See also the discussion in the background section of this report, in a footnote to the sub-
section entitled “DoD and DoJ Reviews,” of the 1997 revision to the DoJ/FTC Horizontal
Merger Guidelines, which, as summarized in CRS Report RS20241, imply that “a merger
DoD As “Sole Customer” In Merger Reviews
Is DoD the sole customer whose interests are affected by defense mergers
involving firms whose products are purchased solely by DoD?
DoJ discussions of the process that it followed in reviewing GD’s and NOC’s
2001 proposals to acquire NNS sometimes noted that DoJ would weigh DoD’s views
quite heavily, if not defer to DoD’s views on the matter, since NNS’s primary
products – new aircraft carriers and new submarines – are purchased solely by DoD,
making DoD the sole customer whose interests were at stake.72
From a Congressional standpoint, the notion that DoD was the sole customer
with a stake in the issue may be of some interest, because it may not be the only way
to view the situation. An alternative view is as follows:
!U.S. taxpayers, not DoD, are the customer, since is their tax dollars
that pay for NNS’s products, and the products are ultimately used for
that is, on balance anticompetitive, will not generally be ‘saved’ by claimed or actual
efficiencies, nor likely be approved by the reviewing agencies ([section] 4).”
72 One article, for example, paraphrased Deputy Assistant Attorney General R. Hewitt Pate,
a senior DoJ official involved in the merger-review process, as noting in an October 25,
2001 DoJ briefing on its decision regarding the GD-NNS merger proposal for Senators John
Warner and George Allen (with reporters also present) that a DoJ lawsuit opposing NOC’s
merger proposal was unlikely, given DoD’s decision to not oppose the merger. The article
also quoted Hewitt as saying, “We’re not going to get very far in a trial if the only customer
is not complaining.” (Lerman, David. Justice Hints OK For Bid By Northrop. Newport
News Daily Press, October 26, 2001.) Another article based on this briefing paraphrased
Pate as saying that DoJ would have been unlikely to oppose the GD-NNS merger if DoD had
supported it. (Eisman, Dale. General Dynamics’ Plan Raised Concern Over Antitrust Law.
Norfolk Virginian-Pilot, October 26, 2001.)
An earlier article stated: “While staff attorneys at the Justice Department’s antitrust division
have raised concerns about the potential loss of competition, people close to the situation
say the department would be hard-pressed to block a General Dynamics-Newport News
transaction if the Pentagon, as the only buyer of such ships, didn’t share its concern.”
(Squeo, Anne Marie. Pentagon Appears To Favor Newport News Acquisition. Wall Street
Journal, August 29, 2001.)
Another article, however, reported that the process has worked differently in some cases,
with DoJ influencing DoD’s views prior to DoD announcing its decision. A case in point,
the article stated, was the 1998 Lockheed Martin-NOC merger proposal: “In that instance,
sources have said, while the DoD had concerns that the combination would have raised
competition concerns across a series of markets, the Pentagon was moved to oppose the deal
– despite the backing of the individual military services – in large part because senior Justice
officials during meetings with their defense counterparts expressed grave reservations about
the deal.” (Muradian, Vago. Aldridge To Decide NNS’ Fate, Continues To Assess Based
On Four Factors. Defense Daily, August 14, 2001.)
!DoD is simply an agent acting on behalf of the taxpayers;
!DoD is not the only agent acting on their behalf in this matter –
Congress acts on behalf of the taxpayers as well; and
!Congress, and not DoD, arguably is the primary agent acting on
behalf of the taxpayers, since it is Congress that (1) is empowered by
the Constitution “To provide and maintain a navy,”73 (2)
appropriates the taxpayer funds needed to finance the construction
of the ships, (3) oversees DoD – Congress’ delegated agent – to
ensure that those funds are used efficiently in building the ships, and
(4) is held directly accountable by the voters at election time for its
appropriation and oversight activities.
The alternative view that Congress, and not DoD, is the primary agent acting on
behalf of U.S. taxpayers in the purchase of defense products raises the following
potential questions for Congress:
!How, if at all, does the executive branch view of DoD as the sole
customer affect views in DoD or elsewhere regarding Congress’ role
in defense procurement?
!Does DoJ’s process for reviewing proposed defense-related mergers
and acquisitions adequately take into account Congress’ status as an
elected agent acting on behalf of taxpayers, particularly in cases
involving firms whose products are purchased solely by DoD?
!To what degree should DoJ defer to DoD’s views in reviewing
proposed defense-related mergers and acquisitions involving firms
whose products are purchased solely by DoD?
Building Non-Nuclear Submarines At Ingalls For Export
What effect will the NOC-NNS merger have on potential plans for building non-
nuclear-powered submarines in a U.S. yard for export to Taiwan or other
The Bush Administration announced in April 2001 that it had decided to sell
eight non-nuclear-powered submarines to Taiwan as part of a package of arms
intended to modernize Taiwan’s armed forces. Press reports identify NOC’s Ingalls
shipyard as a leading contender to build the ships.74
73 Article I, Section 8.
74 Ingalls built nuclear-powered submarines for the Navy until the early 1970s. (The last
Ingalls-built nuclear-powered submarine was the Parche [SSN-683], which was
commissioned in 1974.) Since the early 1990s, Ingalls has pursued a plan to build two non-
nuclear-powered submarines for export to Egypt. In April 1994, the State Department
approved an export license application permitting Ingalls and the German submarine
Prior to the Administration’s April 2001 announcement, the U.S. Navy had
strongly resisted the idea of building non-nuclear-powered submarines in a U.S.
shipyard for export to foreign buyers on the grounds that such a program would
create a risk of transmitting (even if only inadvertently) highly sensitive U.S. nuclear
submarine design and construction know-how to foreign countries.75 Navy concerns
on the issue, however, may have abated or been overruled by the Administration, at
least with regard to submarines intended for Taiwan.76
building firm HDW (Ingalls’ joint venture partner at the time) to develop a technical and
price proposal for building two HDW-designed Type 209 submarines for Egypt. The plan
appeared to fall through in 1996 when Egypt could not secure enough financing to cover its
30% share of the cost of the submarines, which were to be financed partially by funds from
the U.S. Foreign Military Sales (FMS) program. In March 1997, the State Department
reportedly approved an export license application to another U.S.-led business consortium
seeking to build two submarines for Egypt. The license reportedly was granted to Southwest
Marine International Navy Consortium, a 14-company group led by Southwest Marine
(SWM) of San Diego, CA. (SWM later that year was acquired by the Carlyle Group to
become part of the Carlyle-owned U.S. Marine Repair shipyard organization.) The
consortium reportedly proposed build the submarines at Atlantic Dry Dock, of Mobile, AL,
using a design developed by the Spanish firm Bazan. (Duffy, Thomas. State Dept. Grants
U.S. Group Export License To Build Diesel Subs For Egypt. Inside the Navy, March 24,
75 The Navy’s concerns were detailed in a 1992 report to Congress that was required by
Section 1014 of the FY1992 defense authorization act (P.L. 102-190/H.R. 2100). (U.S.
Department of the Navy. Secretary of the Navy. Report to Congress. Washington, 1992.
[Secretary of the Navy, May 1992] 9 p.) Other observers have speculated that the Navy’s
opposition is additionally, or even primarily, grounded in a fear that the establishment of a
non-nuclear-powered submarine building program in a U.S. yard could eventually lead to
the Navy being compelled by others to purchase non-nuclear-powered submarines for its
own use – something Navy leaders do not desire.
76 One article, for example, stated the following:
Bowing to the Bush administration’s desire to help Taiwan and to the political
and commercial pressures, the Navy has shifted ground. In public statements, the
Navy now says it is willing to countenance the possibility that diesel submarines
will be made in this country for export. “While the U.S. Navy does not have a
requirement for diesel submarines, we do not object to U.S. industry
participation in the diesel submarine market,” said Lt. Cmdr. Cate Mueller, a
Navy spokeswoman. The change is not just one of public relations. Inside the
U.S. government too, the Navy has changed its tune. “The Navy is on board
now,” asserted one surprised U.S. official a few weeks after Bush’s
announcement. ‘It seems a decision has been made to be supportive.’ (Mann,
Jim. U.S. Promised Subs To Taiwan It Doesn’t Have. Los Angeles Times, July
A more recent press report, however, quotes a “person close to the Pentagon” as stating that
Navy officials remain “very, very nervous,” about the proposal to build non-nuclear
submarines in a U.S. yard for export to Taiwan, on the grounds that it could lead to the Navy
being pressed to purchase such submarines for its own use in lieu of nuclear-powered
submarines. Gertz, Bill, and Rowan Scarborough. Inside the Ring. Washington Times,
Navy leaders argued in the past that the technology-transmission risk would be
particularly great if non-nuclear-submarines were built at yards that were also
building the Navy’s nuclear-powered submarines (EB and NNS). For this reason,
supporters of the idea of building non-nuclear-powered submarines in a U.S. yard for
export to foreign buyers have focused on the possibility of building them in another
yard, particularly Ingalls.
Supporters of the idea of building non-nuclear-powered submarines at Ingalls
for export to foreign buyers had argued before 2001 that Ingalls is not involved in the
Navy’s nuclear-powered shipbuilding program and no longer retains any sensitive
U.S. Navy submarine design and construction know-how that could be transmitted
to a foreign buyer, but has facilities that are capable of building non-nuclear-powered
submarines that are based on foreign (e.g., European) non-nuclear-powered
submarine designs incorporating no U.S. submarine design know-how.
The question is how these arguments may have been affected by the NOC-NNS
merger. As a result of this merger, NNS and Ingalls now have a common owner, and
following the initial period (ending around October 2003) during which NOC will
continue to operate NNS as a separate division, NOC will integrate NNS into its ship
systems division, which includes Ingalls (and Avondale). In addition, NOC in 2001
argued against the GD-NNS merger proposal in part on the grounds that the merger
would deny NOC access to NNS’s submarine-related technologies. Some of these
technologies, NOC argued, will become more important in the future for surface
combatants and NOC therefore needed to have access to them to ensure the
competitiveness of its future surface combatant designs against designs developed
by GD. One implication of this argument is that NOC may transfer submarine-
related technologies from NNS to Ingalls.
Opponents of building non-nuclear-powered submarines at Ingalls for export to
foreign buyers could argue that NOC’s acquisition of NNS, and particularly NOC’s
plan to integrate NNS into NOC’s ship systems division, reduces the separation of
Ingalls from the Navy’s nuclear-powered-submarine shipbuilding activities at NNS
and thereby increases the risk that a non-nuclear-powered submarine building
program at Ingalls could, even if only inadvertently, transmit U.S. submarine design
and construction know-how to a foreign buyer.
Supporters of building non-nuclear-powered submarines at Ingalls for export to
foreign buyers could argue that the technology transmission issue can be addressed
by establishing a firewall (i.e., an administrative separation) between Ingalls and
NNS on all issues and personnel relating to submarine construction. They can also
argue that some press reports since April 2001 suggest that Navy opposition to
February 22, 2002: 8. (Item entitled “Taiwan diesel subs”) See also Jaffe, Greg, and Anne
Marie Squeo. Pentagon Widens Ties To Taiwan In a Move Likely to Tweak China. Wall
Street Journal, April 10, 2002.
participation by NNS (or EB) in a program to build non-nuclear-powered submarines
may have abated, at least with regard to submarines built for Taiwan.77
77 See, for example, Lerman, David. Offer To Sell Diesel Subs To Taiwan Missing A
Manufacturer. Newport News Daily Press, February 9, 2002; Fabey, Michael. Northrop To
Bid On Subs For Taiwan. Newport News Daily Press, January 24, 2002; Woods, Randy.
U.S. Navy Pushing Ahead With Plans To Provide Diesel Subs To Taiwan. Inside the Navy,
December 17, 2001; Lague, David. Coming About. Far Eastern Economic Review,
December 13, 2001; Koch, Andrew, and Wendell Minnick. USA Seeks Help To Deliver
Taiwan Sub Promise. Jane’s Defence Weekly, November 21, 2001; Oz Firm Eyed As
Taiwan Sub Source. Far Eastern Economic Review, September 6, 2001.
Appendix A: DoJ Lawsuit on GD-NNS Merger
This appendix reprints the lawsuit filed by the Department of Justice in October 2001 to block
GD’s proposed acquisition of NNS.
Appendix B: Competition and GD-NNS Merger
This appendix reprints, with some modifications (e.g., changes to verb tenses),
the section of CRS Report RL30969 of May 22, 2001 outlining potential arguments
that could be made supporting and opposing GD’s proposed acquisition of NNS in
terms of its potential effects on competition in Navy ship acquisition. The arguments
presented here can be compared with those presented in the Department of Justice’s
October 2001 court filing reprinted in Appendix A.
Potential Factors to Consider
As mentioned earlier in this report, in examining the effect that shipyard
mergers might have on competition in Navy ship acquisition, policymakers may
consider several factors, including the following:
!creation of sole sources,
!resulting market share,
!resulting number of independently owned shipyard in-house design
and engineering staffs,
!resulting share of shipyard in-house designers and engineers,
!resulting share of Navy research and development funding provided
to shipyards, and
!resulting degree of vertical integration.
Creation of Sole Sources
The GD-NNS merger proposal would have transferred the existing sole source
for aircraft carriers (NNS) to GD and created a second sole source by bringing the
nation’s two submarine shipyards under common GD ownership.
Competition in Submarine Construction. Supporters of the GD-NNS
merger proposal could argue that competition has not been used in the awarding of
contracts to build submarines since the Navy awarded to EB the contract to build
SSN-22, the second Seawolf (SSN-21) class submarine, which was procured in
FY1991. Since EB had previously been awarded the contract to build the lead ship
in the class (SSN-21), many observers believed that EB could use its experience in
building SSN-21 and SSN-22 to out-compete NNS for the contract to build the third
Seawolf-class submarine (SSN-23) and any subsequent Seawolf-class boats (of
which there were none).
Supporters of the GD-NNS merger proposal could argue that this de facto
suspension in the use of competition in the awarding of submarine-construction
contracts was reinforced by Congress’ decision in 1997 to approve a plan proposed
by the Navy, EB, and NNS to have EB and NNS build the first 4 Virginia (SSN-774)
class submarines under a joint-production arrangement, and further reinforced by
Congress’ decision in 2000 to extend the joint-production arrangement to the
following 5 ships in the program (i.e., through the ninth ship). These decisions to
adopt and extend the joint-production arrangement, they could argue, reduced the
chances of resuming competition in the awarding of contracts to build submarines at
some point in the future, because doing so would require separating the now-
entangled submarine construction activities at EB and NNS from one another and
possibly reestablishing certain elements of the submarine production lines at one or
Opponents of the GD-NNS merger proposal could argue that although the joint-
production agreement would make it more difficult to resume competition in
submarine construction, a GD-NNS merger would further reduce the chances of
resuming competition at some point in the future because doing so would likely
require GD to sell either EB or NNS to another company – something GD might not
be willing to do.
The potential for resuming competition would also depend on future submarine
production rates. The current production rate of 1 boat per year is insufficient for
achieving meaningful competition between two independently owned submarine
builders. Opinions differ on the minimum procurement rate needed to support
meaningful competition. In 1996, however, the Navy testified to Congress that a rate
of 1.5 boats per year would be sufficient for staging biennial competitions. At this
rate, the Navy explained, the Navy every other year could combine two years’ worth
of procurement (3 boats), allocate one boat to each yard, and have the two yards
compete for the third. The Navy in its testimony presented three options for
conducting biennial competitions at annual rates of 1.5 or 2 boats per year.78 A
higher procurement rate, such as 3 boats per year, would be needed to support
competition on an annual basis.
Supporters of the GD-NNS merger could argue that future submarine
procurement rates might not increase significantly from the current rate of 1 boat per
year, particularly given the relatively high procurement cost of submarines and
competing demands for defense procurement funding. Opponents of the GD-NNS
merger proposal could argue that rates of 2 or more boats per year are very possibly,
if not likely, in coming years, given the need to maintain the submarine fleet at levels
set forth by DoD officials.79
78 U.S. Congress. House. Committee on National Security. Hearings on National Defense
Authorization Act For Fiscal Year 1997 – H.R. 3230 and Previously Authorized Programs,thnd
890, which refers to the FY1996 DDG-51 class destroyer solicitation, a combined
solicitation for the 6 DDG-51s procured in FY1996 and FY1997); U.S. Congress. Senate.
Committee on Armed Services. [Hearings on] Department of Defense Authorization for
Appropriations For Fiscal Year 1997 and The Future Years Defense Program (S. 1745),thnd
Govt. Print. Off., 1997. [S. Hrg. 104-532, Pt. 2] p. 130.
79 Assuming a 33-year life for attack submarines, maintaining the attack submarine force at
the planned level of 55 boats over the long run will require a procurement rate of two or
more submarines per year starting in the near term and extending for the next 15 or 20 years.
For discussions of the rates of submarine procurement needed to support planned submarine
force levels, see Statement of Ronald O’Rourke, Specialist in National Defense,
Congressional Research Service, Before the House Armed Services Committee,
Competition in Submarine Design and Technology Development.
In 1997, supporters of the joint-production proposal argued that it would be
acceptable from a competition standpoint because EB and NNS would continue to
compete for secondary Navy contracts for submarine design and submarine
technology development work. The use of competition between the two firms, they
argued, would thus be preserved in the important area of generating new ideas and
technologies for future submarines.
For example, at March 18, 1997 hearing before the Military Procurement
subcommittee of the House National Security Committee80 that focused on the
acquisition strategy for the Virginia class (then known as the New Attack
Submarine), John Douglass, then-Assistant Secretary of the Navy for Research,
Development, and Acquisition – the Navy’s acquisition executive – discussed the
Navy’s plan for inserting new technologies into the Virginia-class design, and stated:
We use the term “technology opportunities” because we wanted to make
sure that our contractors understand this is not a done deal. We want them to
compete for these technologies. We want their engineering teams, which are
hungry for work, to know that we are going to take the best engineering ideas
from either yard and try to inject them into the boats as soon as possible and part
of this competition for ideas, competition for technology is based on some of the
principles that this committee has put forward.
But this is our commitment, Mr. Chairman,81 and as long as I am there, I am82
going to do the very best that I can to get us to stick to it.
The issue came up again later in the hearing in this exchange:
[Representative Patrick Kennedy:] I want to just ask perhaps one question
with respect to how we get R&D into the process, and that is how, Secretary
Douglass, do you plan to encourage competition between the yards with respect83
to new technology and how also can you explain what role Newick [sic] will
have in that process, as well, and how they would be kept in the loop.
Subcommittee on Military Procurement Hearing on The Navy’s Proposed Shipbuilding
Program For FY2003, March 20, 2002, pages 27-33; and U.S. Congress. Congressional
Budget Office. Increasing the Mission Capability of the Attack Submarine Force.
Washington, 2002. (A CBO Study, March 2002) 41 p.
80 The House Armed Services Committee was known as the House National Security
Committee during the 104th and 105th Congresses (i.e., 1995-1998).
81 The subcommittee chairman was Representative Duncan Hunter.
82 U.S. Congress. House. Committee on Armed Services. Hearings on National Defense
Authorization Act for Fiscal Year 1998 – H.R. 1119, and Oversight of Previously Authorizedthst
Programs. 105 Cong., 1 Sess., Title I – Procurement. Washington, U.S. Govt. Print. Off.,
83 This was a reference to the Naval Undersea Warfare Center, or NUWC, an acronym that
is pronounced, and was transcribed here phonetically, as “Newick.”
Secretary Douglass: Well, from the – in the first part of your question, how
do we plan to get the yards involved and stimulate technology and engineering
work. We are making the yards fully aware of how much money we are
requesting from the Congress, not only next year but in the out years, and we
have asked them to go and look at that budget and give us their proposals for
what they think their research and development involvement should be....
Now, within the theme that our [subcommittee] chairman, Congressman
[Duncan] Hunter, is going to put on this competition for ideas, the prize is that
if we select the technology suggestion of one yard or the other yard, they get to
do the engineering work to flesh that idea out and turn it from just an idea into
a real piece of equipment or a change to the submarine and then it gets
incorporated into that central design and then both builders will build it and
incorporate it in the submarines from whatever point that is injected into the84
production line forward.
Secretary Douglass’s written statement for the hearing similarly stated:
New innovation will not be stifled, but encouraged as more open lines of
information exchange are developed between the two shipbuilders, and between
the shipbuilder team and government. The teaming arrangement has specific
provisions to enhance and upgrade future New Attack Submarines – these efforts
may be joint or developed individually by the shipbuilders. Our process is
designed to allow industry and the shipbuilders to compete for research and
development funds based on innovative ideas for improving [the Virginia-class85
design’s] capability, producibility and affordability.
Earlier at the same hearing, another Navy witness – a captain involved in the
management of the Virginia-class acquisition program – in explaining the various
reasons why the Virginia class would be affordable, talked about how the modular
construction process for the Virginia-class design would allow new technologies to
be inserted into the design over time:
Now, one of the things that this [modular construction process] affords us
is the opportunity as we go along to adjust the design of these individual modules
as the two companies compete for technology insertion, to bring that additional86
innovation to bear as we complete the construction of the submarine.
Similarly, at an April 8, 1997 hearing before the Seapower subcommittee of the
Senate Armed Services Committee on submarine programs, Secretary Douglass, in
his opening presentation to the subcommittee, discussed the proposed teaming
arrangement for the Virginia class, stated:
It is also important to remember that if you want to keep your industrial
base viable, as you put it, sir, you must do more than just build things. You have
to have an engineering force that can look forward into the future and constantly
improve the product. This teaming arrangement is going to make that
84 Ibid., p. 298-299.
85 Ibid., p. 328.
86 Testimony of Captain Burgess. Ibid., p. 244.
substantially easier to do. In a competitive [construction] environment, it is
extremely difficult to get the two competitors to share their best ideas.
Regarding this teaming arrangement, there is evidence that they are already
over that hurdle and are sharing their ideas. We have a common technology
insertion plan that will come into effect – as I will show you on the next couple
of charts – in which we are allowing the shipbuilders to become involved in the
future designs of these submarines in a way we have never done before. They87
sit on a Submarine Technology Oversight Council that Dr. Paul Kaminsky and
I co-chair. The presidents of the two shipyards sit with us. There is a very strong
and keen competition for ideas about how to improve these submarines. For
example, whichever yard brings us the best technology ideas will be the yard to
take that idea and get it into the detailed design process. Then they will both88
build to that new innovative design.
The issue came up again later in the hearing in this exchange:
[Senator Joseph Lieberman:] But my question is this: Some have raised this
question about the teaming concept, which is that we lose all the benefits of
competition as a result of the teaming. I wonder if one of you, maybe Secretary
Douglass, would answer that or begin to answer that, which is[:] does the
teaming agreement eliminate all competition from the submarine construction
Mr. Douglass: No sir, it does not eliminate all competition. There is still
considerable competition down at the subcontractor level, at the second, third,
and fourth tiers of the industrial base in which we have two or more suppliers
who have other businesses that they do in addition to supplying us so that we
could compete between them.
Also, while you were out, I discussed the competition of ideas that will be
in effect in which the engineering teams at both shipyards will be, in a sense,
competing against each other to keep themselves in business. We are going to
pick from the ideas that come out of those two shipyard engineering teams the
very best ones to insert into future boats. So there is a technology competition89
there, as well.
Supporters of the GD-NNS merger proposal could argue that competition in
submarine design and technology development could still take place within a
combined GD-NNS entity through the creation of two or more industry teams under
GD’s supervision that are “firewalled” (i.e., administratively separated) from one
another and contain team members from other firms. Under this arrangement, the
other firms would each belong to one team and not the other. Thus, although GD
87 Dr. Kaminsky was then the Under Secretary of Defense for Acquisition and Technology
– DoD’s top acquisition executive.
88 U.S. Congress. Senate. Committee on Armed Services. [Hearings on] Department of
Defense Authorization for Appropriations for Fiscal Year 1998 and the Future Yearsthst
Defense Program. 105 Cong., 1 Sess., Part 2, Seapower. Washington, U.S. Govt. Print.
Off., 1998. (S. Hrg. 105-37, Pt. 2, march 19, April 8, 22, 1997.) p. 166.
89 Ibid., p. 189-190.
would have engineers on both teams and would stand to gain whichever team wins
the competition, other firms contributing to the teams would stand to gain only if the
team to which they contributed engineers wins the competition. The concept is
somewhat similar to using competition among suppliers and component
manufactures when competition at the level of the final-assembly firm is not
This kind of arrangement, supporters of the GD-NNS merger proposal could
argue, was recently used with success in the Navy/Defense Advanced Projects
Research Agency (DARPA)-managed submarine payloads project, which was aimed
at generating new and innovative ideas for significantly increasing the number and
variety of weapons and sensors carried by the Navy’s attack submarines. GD
participated on both of the industry teams that were organized to compete under
Navy/DARPA supervision, but the teams were firewalled and (except for participants
from GD and a couple of other firms) consisted of members of firms that provided
participants to only one of the two teams.90 This project, supporters could argue,
succeeded in generating ideas that, if developed and implemented, could completely
transform the design and capabilities of the Navy’s attack submarines.91
Opponents of the GD-NNS merger proposal could argue that NNS has done
substantial work on submarine design and technology development since 1997 as part
of the ongoing effort to improve the Virginia-class design, and that a GD-NNS
merger would prevent the Navy from maintaining full competition in this area. They
could also argue that using firewalled teams might not be as effective as an
arrangement using teams whose members included participants from two separate
submarine-building firms, particularly for generating innovations – such as those that
might permit submarine missions to be performed by significantly fewer submarines
or by platforms other than submarines – that might threaten the value of GD-NNS’
status as the sole source for building submarines.
Cross-subsidization of Bids. Opponents of the GD-NNS merger proposal
could argue that a GD-NNS entity could use its sole-source status on aircraft carriers
and submarines to leverage carrier and submarine construction contracts with high
profit margins that could then be used to cross-subsidize bids that GD-NNS would
make in competitions against NOC for contracts relating to surface combatants,
amphibious ships, and auxiliary and sealift ships.
Supporters of the GD-NNS merger proposal could argue that the government
would be fully capable of negotiating profit rates and auditing GD-NNS’s
construction costs so as to ensure that profits on this work were not excessive and
that cross-subsidization would not take place.
90 The two teams were led by Lockheed and Raytheon.
91 For a brief mention of the Navy/DARPA submarine payloads project, see Statement of
Ronald O’Rourke, Specialist in National Defense, Congressional Research Service, Before
the House Armed Services Committee Subcommittee on Military Procurement Hearing on
Submarine Force Structure and Modernization, June 27, 2000, p. 20. The second phase of
the project, now under Navy (rather than joint Navy/DARPA) supervision, is progress.
Using the available figures on shipyard revenues discussed earlier, a combined
GD-NNS entity would account for about 70% of the combined revenues of the six
major Navy shipbuilders. NOC would have the remaining 30%.92
Supporters of the GD-NNS merger proposal could argue that share of revenues
does not, by itself, mean anything – and that DoD tacitly acknowledged this by not
mentioning market share in its analysis of the 1999 GD-NNS merger proposal. NOC,
they could argue, already builds surface combatants, amphibious ships, and auxiliary
and sealift ships and thus does face a choice of whether to enter the market to build
ships of this kind. Since it does not face this choice, supporters of the GD-NNS
merger proposal could argue, the question of whether the GD-NNS entity’s market
share would discourage NOC from entering the market for these ships would be
Opponents of the GD-NNS merger proposal could argue in turn that market
share is a potentially important indicator because it indicates a firm’s potential,
relative to its competitors, to achieve improved production economies of scale and
obtain materials and components from supplier firms at lower costs. A large market
share, they could argue, might also make it easier for the firm to secure financing
from lending organizations, or enable the firm to secure it on more favorable terms.
A firm with a dominant share of the market, they could be argue, could make it more
difficult for the government to achieve meaningful competition because that firm
might be able to generate size-related cost advantages that could not be matched by
other firms with a smaller share of the market. A firm with a dominant share of the
market, it could also be argued, might be better able to attract the best managers and
engineers because those individuals might conclude that the firm with the dominant
share of the market had better long-term business prospects and could thus offer them
better long-term career opportunities. Over time, it could be argued, an advantage
in recruiting the best managers and engineers could add to the competitiveness of the
firm with the dominant share of the market, making it more difficult for the
government to achieve effective competition.
Number of Shipyard In-House Design and Engineering Staffs
A GD-NNS merger would have reduced the number of shipyard in-house design
and engineering staffs from three to two. Supporters of the GD-NNS merger
proposal could argue that two independently owned staffs are sufficient for
competition, and that any loss associated the reduction in the number of staffs would
be offset by the creation of a larger GD design and engineering staff that would be
able to generate significant innovations by combining people and ideas that were
previously separate from one another.
92 As discussed earlier, available data suggests that GD’s three yards account for roughly
40%-45% of the total revenues of the six yards. The data also suggest that NNS accounts
for 26%-31% of the total revenues, giving a merged GD-NNS entity a combined 66%-76%
share, and that Ingalls and Avondale together account for 27%-32% of the total revenues.
Critics of the merger proposal could argue that having three independently
owned staffs would have been better for competition than having two because having
three permits competition to occur on a program even if one staff decides not to
compete. They could also argue that the benefits for generating innovations of
combining previously separate people and ideas are likely to be temporary rather than
Share of Shipyard In-House Designers and Engineers
A GD-NNS merger would produce a firm that, on the basis of the data shown
in Table 3, would have more than 80% of the six yards’ in-house designers and
engineers. NOC would have less than 20%.
Supporters of the GD-NNS merger proposal could argue that the 80%
significantly misrepresents the situation because 8,000 of the 9,850 designers and
engineers at a combined GD-NNS entity – the 3,400 designers and engineers at EB
and the 4,600 designers and engineers at NNS – would have been nuclear-ship
designers and engineers dedicated exclusively to nuclear shipbuilding and overhaul
programs at EB and NNS. These nuclear-ship designers and engineers, they could
argue, would not have been available to work on non-nuclear shipbuilding programs
where a combined GD-NNS would face competition from NOC. Any transfers of
nuclear-ship designers and engineers from nuclear to non-nuclear shipbuilding
programs, they could argue, would have been rare and insignificant occurrences.
Subtracting out these 8,000 nuclear-ship designers and engineers, they could argue,
would leave GD with 1,850 designers and engineers to work on non-nuclear
shipbuilding programs – a figure somewhat smaller than NOC’s 2,150 in-house ship
designers and engineers.
Supporters of the GD-NNS merger proposal could also argue that NOC could,
if it desired, supplement its own in-house staff of 2,150 shipyard designers and
engineers by contracting with some of the 6,000 private-sector ship designers and
engineers that exist in the United States outside the six shipyards, and by drawing on
the talents of the many in-house designers and engineers that exist in the aerospace
and electronics divisions of NOC.
Supporters could also argue that the total number of designers and engineers is
not that important because the potential for innovation in a firm often resides within
a small core of very experienced designers. The bulk of the designers and engineers
at the firm, they could argue, perform routine design and engineering work.
Although the total number of designers and engineers are not evenly divided between
GD and NOC, they could argue, both GD and NOC possess capable core groups of
very experienced designers and engineers. This point of view, they can argue, is
supported by DoD’s interest in recent years in small business firms as sources of
Opponents of the GD-NNS merger proposal could argue that the total number
of designers and engineers can indeed be important, because ships are composed of
tens of thousands of components and the ship-design process gives individual
designers and engineers throughout the firm the opportunity (and responsibility) to
seek out improvements for the part of the ship they are working on. Even small
improvements and innovations, if applied to a sufficient number of the ship’s
components, can add up to a significant amount of total-ship innovation, they could
argue. A firm with a larger share of designers and engineers, they could argue, will
be able to carry out a more thorough investigation of the potential for making
numerous small improvements and innovations across the entire ship. This point of
view, they can argue, is supported by DoD’s reference to the share of designers and
engineers in its decision on the 1999 GD-NNS merger proposal.
Opponents of the GD-NNS merger proposal could argue that designers and
engineers involved in nuclear shipbuilding programs at EB and NNS can be – and
have been – made available for temporary assignment to non-nuclear shipbuilding
programs, where their experience in working on shipbuilding programs and their
general design and engineering skills can be of value. Opponents could point to a
press report which stated: “GD Electric Boat spokesman Neil Ruenzel said that some
of the [EB] engineering staff has worked from time to time on surface combatant
tasks on behalf of GD’s Bath Iron Works of Bath, Maine.”93 They could also note
that NNS in the 1990s signed contracts to design and build several conventionally
powered 46,000-deadweight-ton double-hulled commercial petroleum tankers.94
Opponents of the GD-NNS merger proposal could also argue that even if
nuclear-ship designers and engineers are not reassigned to non-nuclear shipbuilding
programs, some of the technologies they might develop in support of nuclear
shipbuilding programs could still be applied to non-nuclear shipbuilding programs
to gain a competitive advantage in those programs. The ability to apply technology
developed at EB and NNS by nuclear-ship designers and engineers to a non-nuclear-
shipbuilding program, they could argue, was recently demonstrated in connection
with the Navy’s program for developing electric drive/integrated power systems – a
technology that can be applied to either nuclear- or non-nuclear-powered ships:
When the Navy in the second half of the 1990s began to express a growing interest
in the idea of shifting from the use of traditional mechanical-drive systems for its
ships to advanced electric-drive/integrated power systems, beginning with the
planned DD-21 destroyer (a conventionally powered ship),95 the only two U.S. firms
of any kind that mounted efforts to propose designs for fully integrated electric-
93 McCarthy, Mike, and John M. Donnelly. Worries About Competition Surround Bids For
Newport News. Defense Week, May 14, 2001: 1, 13, 15.
94 The NNS effort to reenter the commercial ship construction market began in 1994 with
the signing of contract with a Greek shipowner for the design and construction of two of
these “Double Eagle” tankers. This was the first time since 1957 that a foreign buyer had
contracted with any U.S. shipyard for the construction of an ocean-going commercial ship.
By 1996, NNS had contracts to build up to 14 of the ships for various buyers. In March
1998, however, NNS determined that it would not be able to earn a profit building the ships
and announced that it was withdrawing from commercial ship construction. A total of 5
Double Eagle tankers were eventually built, the last being delivered in 1999.
95 The DD-21 program has now been superceded by the DD(X) program for building a
family of next-generation surface combatants, including a destroyer-like ship (DD[X]), a
cruiser-like ships (CG[X]), and a smaller Littoral Combat Ship (LCS). These ships, like the
DD-21, are to be conventionally powered.
drive/integrated power systems (as opposed to specific components of such a system)
were GD (including EB) and NNS.96
Opponents of the GD-NNS merger proposal could argue that it would be
difficult for NOC to transfer designers and engineers from these divisions into
shipbuilding programs, since these designers and engineers are fully committed to
non-shipbuilding projects and lack experience in shipbuilding-related issues. They
could argue that it is inconsistent to maintain that it would be difficult for GD-NNS
to temporarily transfer nuclear ship designers and engineers to non-nuclear
shipbuilding programs, but that it would not be difficult for NOC to temporarily
transfer aerospace designers and engineers to shipbuilding programs.
Opponents of the GD-NNS merger proposal could also argue that a GD-NNS
entity could contract for the services of ship designers and engineers that work
outside the six yards just as easily as NOC could, and that outside designers and
engineers might not be able to achieve as much for NOC as GD-NNS’s in-house
designers and engineers could achieve for GD-NNS, for two reasons. First, GD-
NNS’s’s in-house staff would work at GD-NNS continuously across a range of
projects, rather than intermittently on a project-by-project basis, as would be the case
for outside designers and engineers working on contract for NOC. Second, GD-
NNS’s in-house designers and engineers could have more complete access to GD-
NNS’s most proprietary concepts and technologies than the contract designers and
engineers would have to NOC’s concepts and technologies.
Share of Navy Research and Development Funding
As noted earlier, DoD in 1999 noted, in expressing its opposition to the 1999
GD-NNS merger proposal, that “over 95% of the Navy R&D investment would exist
in a combined General-Dynamics-Newport News entity” and that this could result
in a concentration of “the technology advantages that may have resulted from Navy-
funded research and development investments in both firms over the years.”
Supporters of the GD-NNS merger proposal could note that DoD in 1999 did
not define in its public statements what it meant when it referred to “Navy R&D
investment,” or what basis it used to calculate the 95% figure. They could also argue
that the 95% figure, if accurate in 1999, could now or in the future be lower as the
Navy shifts significant R&D funds into non-nuclear shipbuilding programs such as
the DD-21 (now DD[X]) surface combatant program, and as design activities related
to the Virginia-class submarine program begin to wind down now that the Virginia-
class design has entered production.
Supporters of the GD-NNS merger proposal could also argue that the Navy
research and development funding that goes to the six yards is only a small portion
of the total amount of research and development funding that the Navy spends each
year. The vast majority of the Navy’s annual research and development budget, they
96 For more on the Navy’s electric-drive/integrated power system program, see CRS Report
RL30622, Electric-Drive Propulsion for U.S. Navy Ships: Background and Issues for
Congress, by Ronald O’Rourke. Washington, 2000. (July 31, 2000.) 65 p.
could point out, goes to entities other than the six shipyards – such as aerospace
firms, electronics firms, laboratories, and universities – for research and development
on things other than ships, such as aircraft, missiles, electronics, and basic science
and technology, to name just a few.
Opponents of the GD-NNS merger proposal could argue that even if the 95%
figure from 1999 is no longer accurate, a combined GD-NNS entity would still
account for a very large share of the total amount of the Navy research and
development funding that goes to the six shipyards. They could argue that the GD-
NNS entity could receive a significant share of DD-21 (now DD[X]) research and
development funds. They could also argue that submarine-related research and
development funding might increase if the Navy decides to implement submarine-
design proposals generated under the Navy/DARPA submarine payloads project, and
that research and development funding related to aircraft carriers could increase as
the Navy continues to develop its next-generation CVNX aircraft carrier.
Opponents of the GD-NNS merger proposal could also argue that it is of little
significance that the Navy research and development funding that goes to the six
shipyards accounts for only a small share of the Navy’s total research and
development budget, because the issue is how Navy funding provided to the yards
sustains the activities of designers and engineers at the yards. If most of that funding
– whatever share it might constitute of the Navy’s total research and development
budget – goes to a combined GD-NNS entity, they could argue, then the GD-NNS
entity would be better able than NOC to generate new in-house ship design concepts
and technologies that could be incorporated into bids the firm submits for future ship
Supporters of the GD-NNS merger proposal could argue that it did not raise any
significant issues concerning vertical integration, since both GD and NNS are
involved in the same stages of the shipbuilding process – ship design and
engineering, as well as construction, final assembly, integration, and testing of ships
at the shipyard level. A GD-NNS merger, they could argue, would not combine a
shipyard with either a major supplier of basic shipbuilding materials and components
or a major supplier of ship combat system equipment. A combined GD-NNS entity
would continue to get these items from other firms.
Opponents of the GD-NNS merger proposal could argue that although GD is not
currently a major provider of shipbuilding materials or a major combat system
supplier for Navy ships, GD does make a few Navy ship components (such as part
of a fire control radar installed on Aegis ships) and includes, in addition to its marine
systems (i.e., shipbuilding) division, an armaments division that makes guns and
ammunition, an information systems and technology division that makes
communications equipment, and an aerospace division (Gulfstream) that makes
corporate jets. Opponents could argue that, in the future GD might seek to expand
its role as a supplier of components for Navy ships.