Statement of

Mr. Jerry St. Pe’
Chairman of the Board
American Shipbuilding Association 

Thank you, Mr. Chairman, Members of the Committee, for this opportunity to testify on behalf of the American Shipbuilding Association on the state of naval shipbuilding.

The American Shipbuilding Association is the national trade association that represents the six largest shipbuilders in the United States. They are: Avondale Industries of Louisiana; Bath Iron Works of Maine; Electric Boat of Connecticut; National Steel and Shipbuilding of California; Newport News

Shipbuilding of Virginia; and my company, Ingalls Shipbuilding of Mississippi. 98 percent of the Navy's shipbuilding budgets are spent in these six shipyards.

I would like to take a moment to report on the technological revolution that is underway in my industry. Since 1991, the six major shipbuilders of the United States have been forced to slash their employment roles by 33 percent in response to extremely low rates of ship production. At the same time we have re-engineered our companies to dramatically change the way in which we design and build ships to reduce costs. During this same period, we have continued, as always, to make significant investments in our businesses. In the last six years, we have invested more than $1.3 billion in cutting edge technology, in our facilities, and in training our workforce. These efforts have reduced our overhead costs in spite of historical low rates of ship production. Our achievements in cutting costs, while remaining on the cutting edge of technology, are unparalleled anywhere in the defense industry.

In spite of our on-going achievements in reducing costs while building the most technologically advanced ships in the world, the benefits of our technological and industrial revolution will not be fully realized until stable, higher rates of ship production are achieved.

On January 21, 1999, the Chief of Naval Operations stated, and I quote: "the U.S. Navy's shipbuilding budget must be immediately increased, or the service risks falling below the minimum 300-ship level required to support today's operations."

On February 25th, the Vice Chief of Naval Operations stated: "300 is the absolute minimum we can live with, and we think it will be pretty awful."

Last month, the Navy's fleet numbered 324 ships. From a historical perspective, this is the smallest naval fleet of the United States of America since the beginning of World War I, in 1917. Since that time, the fleet has numbered as many as 6,768 ships in World War II -- with the average falling somewhere between 550 to 950 ships between World War I and today.

From an industry perspective, American shipbuilders employed 1.2 million employees during World War II -- not counting the millions employed throughout our supplier base. Today, there are only six major shipbuilders left in this country building capital ships for the Navy, and we collectively employ 55,000 highly skilled workers. The Nation cannot afford to lose another major shipbuilder, nor the essential core of skilled labor, and still meet the sea power requirements of the nation today and tomorrow.

You, and the military Commanders-in-Chief will determine whether a sea power fleet of 300 is indeed enough. But if you are going to draw the line in the sand at a 300-ship Navy, the time to do that has already passed. The fleet will fall below 300-ships. This is inevitable. The question is -- when? And when that happens, for how long are you going to allow it to remain below 300?

The Nation must act today to increase Navy shipbuilding rates to 10 to 12 ships per year to stabilize a 300-ship build rate. For every year that you delay the increase in the build rate, the greater the annual ship procurement rate grows to make up for the years of deficit ship production. So, today's 10 to 12 ships will grow to tomorrow's 12 to 15 ships.

Let me also state that the Navy's Shipbuilding Research and Development account must also be increased to ensure that we are designing and building the ships to meet the missions of our sea power fleet of tomorrow.

The fiscal year 2000 navy budget request -- for the seventh year in a row -- calls for only six ships. This is essentially half the number required to sustain a 300-ship Navy. This fiscal year's budget of $6.7 billion is also almost half of what is necessary to fund a 300-ship Navy build rate -- $12 billion on average is required.

The most important cost saver in ship production is stability. Large swings in the number of ships ordered is extremely costly to shipbuilders and to the taxpayer. The highly skilled employees of a shipbuilding company take years to train. When production rates decrease, shipbuilding companies must lay off thousands of workers, only to later turn around and try to hire and train new workers when production rates increase. These contractions and expansions have a costly multiplier effect throughout the entire shipbuilding supplier base. As stable, higher rates of ship production result in cost savings, stable annual budgets result in stable shipbuilding production rates. Conversely, budgets with large periodic spikes disrupt stable ship production rates, and negate cost savings.

For example, an aircraft carrier that is bought once every five years requires a one-year budget increase of over $5 billion. The acquisition of a large deck amphibious ship similarly results in a budget spike. Stable production of these ship classes would be realized if the Navy were allowed to spread the funding for these ships over several years during their construction period, rather than pay the entire cost in the year in which they are ordered. Incremental funding in the abstract does not save money -- it merely provides for more level, stable budgets. However, if full funding is not available, funding a ship incrementally can save money if it means avoiding a break in a ship production line. Conversely, full funding of these large capital ships can break other ship production lines due to inadequate budgets. In short, instability in budgets results in instability in ship production, and instability means higher costs.

Multi-year procurement contracting also provides stability, and it results in significant cost savings. A recent example is the $1.4 billion savings achieved through a four-year multi-year procurement contract of 12 DDG-51 class destroyers. This contracting method should be extended to the remaining six DDG-51 ships of the class, to the SSN-774 class of attack submarines, and other shipbuilding programs in the Navy's acquisition plans.

Long-term lease authority, or Charter and Build, is another cost-effective and stable means to finance the replacement of noncombatant ships such as the Marine Corps' maritime prepositioning fleet and other combat service ships. A 25-year lease would allow the government to pay for the services of these ships on an annual basis rather than in one lump sum in the year in which they are ordered to be constructed. This financing method has worked, and worked well, for 13 of the Marine Corps' maritime prepositioning ships, and five of the Navy's T-5 tankers which were leased in the early 1980's. Long-term lease would allow the Navy to replace these and other noncombatant ships with little or no increase to its annual operating budget while providing for stable production.

Based on the Quadrennial Defense Review (QDR), the 300-ship Navy is to consist of 12 aircraft carriers, 12 amphibious ready groups comprised of 36 ships, 116 surface combatants, 50 attack submarines, 14 trident missile submarines, four command and control ships, 16 mine countermeasure ships, and 52 combat force logistic ships and submarine tenders.

The 300-ship Navy does not include combat service ships such as prepositioned ships, hospital ships, or surge sealift ships. These requirements are above and beyond the 300-ship naval force -- and many of these ships are now in need of replacement. To meet the nation's combat service requirements means an increase in the build rate above the 10 to 12 ships for battle force and combat support ships.

Now is the time for Congress and the Department of Defense to embrace best commercial business practices in the way in which ships are bought and financed. Ships, unlike tanks, aircraft and other defense systems, are unique. They take three to seven years to build. Incremental Funding and multi-year contracting is smart financing for battle force ships. Long-term lease is a smart way to finance noncombatant ships.

Industry is doing its part. We are re-engineering our companies to reduce costs. And, we are aggressively pursuing commercial shipbuilding orders to sustain the core defense shipbuilding industrial base while bringing our costs of naval ship production down even further.

But this nation faces a crisis that requires action now. A bare bones minimum of a 300-ship Navy cannot be sustained with a build rate of six to eight ships. It requires 10 to 12. It requires increased budgets. Thank you.

The American Shipbuilding Association has had no grants from or contracts with the Federal Government during the past three years.