    [House Hearing, 110 Congress]
    [From the U.S. Government Publishing Office]

                             [H.A.S.C. No. 110-39]

        U.S. SHIPYARD MODERNIZATION INITIATIVES AND SHIP COST REDUCTION

                                   __________

                                    HEARING

                                   BEFORE THE

                 SEAPOWER AND EXPEDITIONARY FORCES SUBCOMMITTEE

                                     OF THE

                          COMMITTEE ON ARMED SERVICES

                            HOUSE OF REPRESENTATIVES

                           ONE HUNDRED TENTH CONGRESS

                                 FIRST SESSION

                                   __________

                                  HEARING HELD

                                 MARCH 20, 2007

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                 SEAPOWER AND EXPEDITIONARY FORCES SUBCOMMITTEE

                       GENE TAYLOR, Mississippi, Chairman
    NEIL ABERCROMBIE, Hawaii             ROSCOE G. BARTLETT, Maryland
    JAMES R. LANGEVIN, Rhode Island      KEN CALVERT, California
    RICK LARSEN, Washington              TERRY EVERETT, Alabama
    MADELEINE Z. BORDALLO, Guam          JO ANN DAVIS, Virginia
    BRAD ELLSWORTH, Indiana              J. RANDY FORBES, Virginia
    JOE COURTNEY, Connecticut            JOE WILSON, South Carolina
    JOE SESTAK, Pennsylvania
                      Will Ebbs, Professional Staff Member
                     Heath Bope, Professional Staff Member
                   Jenness Simler, Professional Staff Member
                        Jason Hagadorn, Staff Assistant

                                C O N T E N T S

                                  ----------

                         CHRONOLOGICAL LIST OF HEARINGS
                                      2006

                                                                       Page

    Hearing:

    Tuesday, March 20, 2007, U.S. Shipyard Modernization Initiatives
      and Ship Cost Reduction........................................     1

    Appendix:

    Tuesday, March 20, 2007..........................................    37
                                  ----------

                            TUESDAY, MARCH 20, 2007
        U.S. SHIPYARD MODERNIZATION INITIATIVES AND SHIP COST REDUCTION
                  STATEMENTS PRESENTED BY MEMBERS OF CONGRESS

    Bartlett, Hon. Roscoe G., a Representative from Maryland, Ranking
      Member, Seapower and Expeditionary Forces Subcommittee.........     2
    Taylor, Hon. Gene, a Representative from Mississippi, Chairman,
      Seapower and Expeditionary Forces Subcommittee.................     1

                                   WITNESSES

    Brown, Cynthia L., President, American Shipbuilding Association..    25
    Montroll, Dr. Mark L., Professor, Industrial College of the Armed
      Forces, National Defense University............................    31
    Sullivan, Vice Adm. Paul E., Commander, Naval Sea Systems
      Command, U.S. Navy; Allison F. Stiller, Deputy Assistant
      Secretary of the Navy (Ship Programs); Rear Adm. Charles H.
      Goddard, Program Executive Officer for Ships, U.S. Navy; Rear
      Adm. David Architzel, Program Executive Officer for Aircraft
      Carriers, U.S. Navy; Rear Adm. William H. Hilarides, Program
      Executive Officer for Submarines, U.S. Navy, beginning on page.     3
    Teel, Philip A., Corporate Vice President, Northrop Grumman
      Corporation and President, Northrop Grumman Ship Systems, Inc..    29
    Toner, Michael W., Executive Vice President--Marine Systems,
      General Dynamics Corporation...................................    27

                                    APPENDIX

    Prepared Statements:

        Brown, Cynthia L.............................................    52
        Montroll, Dr. Mark L.........................................   122
        Sullivan, Vice Adm. Paul E., joint with Allison F. Stiller,
          Rear Adm. David Architzel, Rear Adm. William H. Hilarides,
          and Rear Adm. Charles H. Goddard...........................    41
        Teel, Philip A...............................................    67
        Toner, Michael W.............................................    82

    Documents Submitted for the Record:
        [There were no Documents submitted.]

    Questions and Answers Submitted for the Record:

        Mr. Taylor...................................................   133
        U.S. SHIPYARD MODERNIZATION INITIATIVES AND SHIP COST REDUCTION

                                  ----------

                      House of Representatives,
                           Committee on Armed Services,
                Seapower and Expeditionary Forces Subcommittee,
                               Washington, DC, Tuesday, March 20, 2007.
        The subcommittee met, pursuant to call, at 2:48 p.m., in
    room 2212, Rayburn House Office Building, Hon. Gene Taylor
    (chairman of the subcommittee) presiding.

     OPENING STATEMENT OF HON. GENE TAYLOR, A REPRESENTATIVE FROM
       MISSISSIPPI, CHAIRMAN, SEAPOWER AND EXPEDITIONARY FORCES
                              SUBCOMMITTEE

        Mr. Taylor. The committee will come to order.
        Today's hearing will focus on shipyard modernization.
        In the previous few years, under the leadership of Chairman
    Roscoe Bartlett, the committee has traveled to shipyards in
    Europe and in Asia. And in almost every instance, I think it is
    fair to say, the committee members were somewhat taken aback at
    the modernization of some of our economic competitors, as
    opposed to the yards that are producing ships for the United
    States Navy.
        This is in no way to question the individual skills of the
    folks working at those shipyards, their dedication to build
    good ships. But I do think it is fair to say when you compare a
    Hyundai to a domestic yard or a Maersk to a domestic yard, we
    saw a great deal of capital investment that we aren't seeing in
    our own nation.
        When we have had the opportunity to raise this question
    with shipyard executives, they point to their dilemma, in that
    they are responsible to their shareholders, that they basically
    have one customer, that, to a certain extent, they have a
    captive audience, and that it is hard for them to justify
    additional expenditures when they don't know from year to year
    how many ships they are going to be building.
        I think that is a fair observation on their part. And so,
    the purpose of today's meeting is to see what we as a nation
    can do as far as investments on the part of our nation to
    stimulate shipbuilding, to stimulate shipyard modernization,
    and to see that this industry is here for decades to come.
        I am pleased that the committee is moving along the path of
    adding several additional ships to this year's budget. But in
    fairness to the taxpayers who are going to pay for them, we
    want to make sure that the citizens get the best possible value
    while the sailors get the best possible ship.
        We are very fortunate today to have Ms. Allison Stiller,
    Deputy Assistant Secretary of the Navy for Ship Programs; Vice
    Admiral Paul Sullivan; Rear Admiral David Architzel; Rear
    Admiral William Hilarides; and Rear Admiral Charles Goddard
    joining us today. We are very, very grateful for your time.
        We are going to have a second panel of distinguished
    representatives of the private sector.
        But before we do that, I would like to yield to my ranking
    member and former chairman of this committee and a guy I have
    learned a heck of a lot from, Mr. Roscoe Bartlett from
    Maryland.

      STATEMENT OF HON. ROSCOE G. BARTLETT, A REPRESENTATIVE FROM
      MARYLAND, RANKING MEMBER, SEAPOWER AND EXPEDITIONARY FORCES
                              SUBCOMMITTEE

        Mr. Bartlett. Thank you very much.
        Good afternoon, ladies and gentlemen. It is a pleasure to
    be here with you today to learn more about the Navy and
    industry's effort to control costs for naval vessel
    construction.
        There are several key elements necessary to achieve cost
    reductions, including commonality of designs at the component
    and system levels, stability in the shipbuilding program,
    sufficient volume to optimize workloads, and shipyard facility
    modernization.
        The chairman and I have traveled around the world to visit
    Europe and Asia's most competitive and efficient yards. We have
    seen the art of the possible and are eager to understand what
    role Congress might play to facilitate the transfer of best
    practices from these yards to the U.S. yards.
        I was struck not only by what I saw on these production
    lines, which was the sight of relatively few handwelding, but
    also what I heard, or didn't hear, which was the relative quiet
    of advanced cutting processes such as lasers and water jets,
    and not the sound of a grinder in all of Hyundai, by the way.
        The contrast to our naval shipyards was stark. I do not
    believe we are taking full advantage of these technologies and
    practices in the construction of U.S. warships.
        How critical is the length between shipyard efficiencies
    and costs? I think we need to look no further than our recent
    experience with the Littoral Combat Ship (LCS).
        While the issues with LCS are not directly tied to shipyard
    modernization, we have clearly seen that, once the modules for
    LCS-1 began to be constructed out of sequence and the ship was
    in the water without the maximum amount of outfitting having
    been completed, the resultant labor inefficiencies
    significantly increased the price of the ship.
        With that said, I must also acknowledge that commercial
    yards have a very different task. Their key competency is
    construction of cargo and passenger ships, which are often
    simpler in design and require less oversight and integration of
    hull, mechanical and electrical systems.
        These yards also benefit from economies of scale derived
    from large commercial orders. Instead, our yards must strive to
    create value for the Navy and their stockholders through a
    balance of strategies, such as industrial efficiency, network
    services and knowledge application.
        As we have seen in foreign yards, industrial efficiency
    creates value by producing standardized offerings at low costs.
    But the Navy is never likely to need standardized, commoditized
    ships.
        Consequently, we must also explore means to position our
    shipyards to connect people and services and to apply
    customized expertise to ship construction. If we were
    successful, we might even find that other nations and other
    customers would be interested in coming to the United States'
    yards for their most challenging, high-performance ship needs.
        I hope that we will learn more about these various
    possibilities in today's hearing.
        I would like to conclude by thanking our witnesses for
    their service to our nation and for being here with us today. I
    truly look forward to your testimony.
        And sadly, I have an appointment to which I must go in a
    couple of minutes. It has been on the calendar for more than a
    month, and it is one that I just couldn't delay. But I will be
    back as soon as I can for the continuance of your testimony and
    the questions.
        Thank you very much, Mr. Chairman.
        Mr. Taylor. Thank you, Mr. Bartlett.
        Do any other members have an opening statement?
        Ms. Bordallo.
        Mr. Courtney, do you have an opening statement?
        Okay. With that, the chair recognizes Ms. Allison Stiller.
        Ms. Stiller. I am actually going to have--Admiral Sullivan
    is going to give our opening remarks.
        Mr. Taylor. Thank you.
        Admiral Sullivan.

     STATEMENT OF VICE ADM. PAUL E. SULLIVAN, COMMANDER, NAVAL SEA
      SYSTEMS COMMAND, U.S. NAVY; MS. ALLISON F. STILLER, DEPUTY
      ASSISTANT SECRETARY OF THE NAVY (SHIP PROGRAMS); REAR ADM.
     CHARLES H. GODDARD, PROGRAM EXECUTIVE OFFICER FOR SHIPS, U.S.
    NAVY; REAR ADM. DAVID ARCHITZEL, PROGRAM EXECUTIVE OFFICER FOR
     AIRCRAFT CARRIERS, U.S. NAVY; REAR ADM. WILLIAM H. HILARIDES,
          PROGRAM EXECUTIVE OFFICER FOR SUBMARINES, U.S. NAVY

                  STATEMENT OF VICE ADM. PAUL SULLIVAN

        Admiral Sullivan. Good afternoon, Mr. Chairman, members of
    the subcommittee. Thanks for inviting us here to discuss
    shipyard maintenance and cost-reduction measures for our
    warships and how we can modernize our shipyards today.
        As you know, I am the commander of the Naval Sea Systems
    Command, and my organization is a part of the team that is
    responsible for buying, building, maintaining and modernizing
    the ships of the Navy.
        As already stated, the rest of the acquisition team members
    are here today, the three Program Executive Offices (PEOs) that
    build ships and Ms. Stiller.
        Again, thanks for inviting us. And we would like to get,
    quickly, to the questions, so my statement will be short.
        Without objection, we would like to submit our written
    testimony for the record.
        Mr. Taylor. So ordered.
        Admiral Sullivan. Sir.
        As you know, the Navy has submitted the fiscal year 2008
    long-range plan for construction of naval vessels to build us a
    313-ship Navy. And that program is built on stable mission
    requirements, stable shipbuilding program, and stable costs of
    our ships.
        And in order to succeed, that program is dependent on the
    costs of our ships being predictable and executable.
        We are currently embarked on several fronts to decrease the
    costs of our new construction warships by working with our
    industry partners to modernize the ship-production process.
        I will briefly summarize these initiatives, and then we
    will be happy to take whatever questions you have for
    specifics.
        The first is the shipbuilding plan itself. You will not see
    major annual revisions to that shipbuilding plan because both
    pricing structure and production capacity and sequencing depend
    on the stability of that shipbuilding plan.
        But in order to facilitate that, there are things that we
    can do. There are some near-term things that we can do, some
    mid-term things that we can do, I will say out five to ten
    years from now, and some long-term things that both the Navy
    and the industry partner teams should be working on.
        Near term, I think that the Navy should be promoting block
    buy, multiyear procurement, teaming, open architecture and
    commonality. And I will speak a little bit about each one of
    those.
        We need to assign the proper level of experience from our
    side in the Navy and sufficient numbers of people to properly
    steward these shipbuilding programs.
        We need to encourage facility and process improvements at
    our contractor partners through incentives in our contracting
    structure.
        We need to maintain a level workload through program
    stability.
        And we need to act corporately as a navy and think cross-
    program, cross-shipbuilder wherever we possibly can.
        In contrast, or I guess in concert really, our shipbuilding
    partners should benchmark off the best of the business and
    adopt efficiency strategies based on that benchmarking.
        They should reduce the number of components and types of
    components, and that is really a team effort. We should buy
    common parts, such as valves, piping, cabling and electrical
    components.
        I would ask our industry partners to reinvest profits into
    things in their shipyards that will increase their
    productivity.
        We should investigate bulk commodity purchases where we
    can, like steel or pipe.
        Share best practices across shipyards. We only have two
    corporations now, so best practices can be shared amongst the
    big six.
        Act corporately to share resources and leverage materials
    buys.
        Where Congress can help as part of the team is to support
    the stability in our shipbuilding plan as we submit it to you,
    support the multiyear procurement in the instances where we
    request it, and allow some flexibility to contract for parts in
    cross-class and maybe even some cross-contracting parts,
    pooling it so we could pool our purchasing power.
        In the mid-term, again, 5 to 10 years out, I think the Navy
    should further increase use of open architecture past even just
    the combat systems; reduce our combat system baselines and
    surface ships from the current 16 down to 5 or 6.
        We need to introduce commonality in our design tools. We
    should work, as we specify how our ships are built, to adopt
    class-common equipment if it is at all possible.
        We need to promote amongst our industry partners an
    integrated product development environment where there is some
    common ground for interchange of information. Right now we have
    several different systems for all of that.
        Long term, and I am talking past 10 years out, we need to,
    as a navy, try to reduce the numbers of classes of ships. Today
    we have 29 classes or subclasses of ships out there. Every one
    of those has a logistics and operational tail that is
    associated with it.
        We should try to reduce our tight model series, like the
    aircraft piece of the Navy. And in that way, we can build more
    ships of fewer classes and have some standardization of
    processes.
        We need to increase modularity on a much, much grander
    scale than we have today. We have modular construction today.
    We need to expand what we have in LCS to have mission modules
    across all our combatant ships.
        We need to dramatically reduce, in the far term, the
    numbers and types of components that we have in our ships.
        Strive for full data product model interoperability.
        Again, some of these are repeats of what I just said, but
    in the long term we need to be continually working on that.
        And open architecture on not just the combat systems and
    electronics, but also open architecture in a physical sense,
    that the ships can be reconfigured easily.
        As far as modernization incentives for shipyards: common
    parts catalogue. That is a start toward an industry-wide
    ability to purchase out of the same parts catalogue. That needs
    to be expanded.
        The integrated data environment improvements that are on
    the horizon today with the new design tools should be spread
    across our shipyards.
        There are other incentives, such as Hurricane Katrina,
    which Ms. Stiller is prepared to talk about, if you want. That
    is an opportunity to work toward, at least for the Gulf Coast
    yards, to work toward recapitalizing them.
        Other facilities incentives such as capital expenditures
    (CAPEX) and ultra hull facility, and the PEOs can talk to any
    one of those.
        And I think we still need to continue benchmarking, every
    so often, our shipyards against the best in the world, with
    organizations like First Marine International, so we see where
    we are and then go try to close the gaps.
        Both the Navy and the shipbuilders need a comprehensive,
    thoughtful program that works across the industry and across
    all of our class. We need to work better together.
        Again, thank you for the opportunity to present to you. And
    we will stand by to take your questions from here on out.
        [The joint prepared statement of Admiral Sullivan, Ms.
    Stiller, Admiral Goddard, Admiral Architzel and Admiral
    Hilarides can be found in the Appendix on page 41.]
        Mr. Taylor. Thank you, Admiral Sullivan.
        Do any other of our witnesses have an opening statement?
        Admiral Sullivan. No, sir. I think the interchange is
    better.
        Mr. Taylor. Admiral, I very much appreciate your statement.
        The only thing that I didn't hear you mention that I have
    curiosity about would be government-furnished equipment.
        And I realize, between the LCS and the Coast Guard
    programs, a lot of the changes that I think were proposed by
    Secretary Rumsfeld are now--in particular, design-build--I
    think those expertises are once again returning I think to the
    proper place, which is with the United States Navy and with the
    United States Coast Guard, to design the ship and monitor its
    construction. And understanding the needs of the yards to have
    some sort of predictability and an ability to tell their
    shareholders that their investment has been wisely spent.
        What I didn't hear you mention was government-furnished
    equipment and to what extent the experts from the Navy, to what
    extent the experts from the Coast Guard when the case exists,
    do you walk through a yard and say, ``You know, if you had this
    machine,'' be it a laser cutter or a laser welder, a CAD, any
    number of things that we saw at Maersk, any number of things we
    saw at Hyundai that we don't necessarily see at a domestic
    yard, does the Navy ever propose to the private sector the
    furnishing of equipment that would still be owned by the
    government as a means to control cost, knowing that the private
    sector, because of the limited number of ships that are being
    built, doesn't have a very big incentive to go get that
    themselves?
        I am told it is the case for submarines. But I was just
    curious, have you ever made a proposal like that or has Ms.
    Stiller ever made a proposal like that when it comes to surface
    combatants?
        Admiral Sullivan. I will let Ms. Stiller answer that one.
        Ms. Stiller. Yes, sir. And on the government-furnished
    equipment side, there can be some confusion. We tend to think
    of that as our combat systems that we provide.
        But for government-furnished tooling, what you are talking
    about, that typically becomes specified for individual programs
    or classes of ships.
        For example, CAPEX has been used extensively in the
    submarine community. And I am going to have Admiral Hilarides
    give you a little more detail on that.
        We have also embarked with Bath Iron Works recently on the
    ultra hull improvements that I am going to have Admiral Goddard
    allude to, that is toward the end of the DDG-51 class that
    could have benefits on future classes.
        So usually the industry will propose to us things that they
    see specific to individual programs that will help efficiencies
    and productivity. And we have looked at different ways to
    incentivize that and be able to accommodate that.
        And I would turn it over to Admiral Hilarides and then
    Admiral Goddard real quick to give you those two examples.
        Admiral Hilarides. Thanks, Allison.
        The CAPEX program came about as part of the contract
    negotiations for the multiyear procurement of the Hull 6
    through 10 of the Virginia class. And in the negotiations, I
    think it is important to point out that it occurred in
    negotiation for a contract between the government and the
    contractor.
        A piece of the incentive pool was set aside to help
    facilitize the shipbuilder to improve his cost performance.
    That incentive pool was set out there. It is $91 million.
        And the shipbuilders, both of them, Electric Boat and
    Northrop Grumman Newport News, could come forward and propose a
    project that either improved the processes or the facilities at
    their yard that could show an immediate payback to the program.
        And when that business case was accepted and signed up to
    by both the contractor and the government, the government paid
    for half of the cost of the facilitization. The contractor paid
    for the other half.
        When the project was complete, the second half of the
    incentive pool for that project was released. So, in fact,
    government had fully paid for it with the caveat that the proof
    was in the production.
        So the proof was in the next ship to be built. It showed
    either the savings that were promised by the project or it
    didn't. If those savings were proven, then the government let
    the contractor keep the incentive pool that had been put
    forward to pay for it.
        If the savings did not appear--and we had very specific
    metrics for how you measure it--if the savings did not appear,
    the contractor would have to pay back the incentive to the
    government and would, in fact, have to absorb the costs of the
    facilitization that occurred.
        A couple points just to make about the program.
        We had a relatively mature design when we put the CAPEX in
    place. That is, we knew what it took to build the ship. And we
    had a very good idea of what kind of facilities would make it
    less expensive to produce.
        And so I would encourage, as we think about CAPEX projects,
    to wait until our designs are mature and then make it part of
    the contract negotiations, not just something that the
    government would give to the shipbuilders.
        Mr. Taylor. Would you call that program a success, Admiral?
        Admiral Hilarides. Yes, sir. We have seen savings. In fact,
    we have seen savings well before we thought we were going to
    achieve them. Those savings have appeared on earlier ships than
    the ships we negotiated the CAPEX for. In fact, we have seen it
    on the first two or three ships.
        Mr. Taylor. And at what point did you recoup the Nation's
    investment?
        Admiral Hilarides. The business cases that we accepted were
    to pay back over two or three ships. And in general we are
    seeing that payback and sometimes faster, yes, sir.
        Mr. Taylor. With that in mind, it is my understanding that
    we will have built, when the program is terminated, something
    like 50 DDGs, Aegis class. At any time was a similar proposal
    made to those two suppliers? And if not, why not?
        Admiral Hilarides. Sir, I think I will let Admiral Goddard
    address the DDG program.
        Admiral Goddard. A little bit different approach, Mr.
    Chairman, on the ultra hull facility that BIW is moving out on
    with our assistance. Again, as you said, a large program, in
    this case 62 hulls will eventually be built.
        The idea here is to continue to improve the productivity
    improvements that BIW has been seeing, and also to set
    themselves up for the DDG-1000 contract that is coming up.
        And they came forth with a proposal to invest in a facility
    that will allow them to move some more of the pre-outfitting
    work earlier into the construction process and have larger
    units prior to erection than they do.
        So we will see some savings on the tail end of the DDGs.
    And what we worked with them is an incentive for them, if they
    meet their targets, that they will be paid--it is roughly
    around $3.5 million that we have set up in the contract.
        But what they have done for us is they have lowered the
    ceiling prices on the contracts, and they have also lowered
    targets. And if they underrun the targets, we have agreed to
    give more of the money back to them on the share line. So it
    has been a good position for both of us.
        Part of the thing that the government did is we agreed to
    early release of retentions on payments, in order for them to
    free up some cash to go make that investment.
        Now, we won't see those returns for a while. The facility
    doesn't come in until 2008. But a downstream improvement to the
    DDG-1000 is they also lowered their price to us, which we are
    in the midst of negotiating, to account for those efficiencies
    that they are going to see.
        So, for a modest investment on the government's part, in
    terms of incentives and in terms of early release of
    retentions, we are going to get some significant benefits
    downstream on that program.
        Mr. Taylor. Admiral, help me with this. On a cost-plus
    contract, what incentive does the private sector have to come
    to you and say, ``I want to save you some money''?
        Now, I will use the analogy of I am building a house right
    now. I have got a contractor who gets 20 percent on the top of
    everything that I spend. He really doesn't have much of an
    incentive to save me money. It is the only house I am ever
    going to buy.
        On the flip side, we are those six shipyards' only
    customer. And so I am having a little trouble with
    understanding why they would be incentivized to find these
    savings, as opposed to someone from your office making that
    proposal to them.
        Admiral Goddard. I understand, Mr. Chairman.
        In this case, because of the surface combatants, we are
    fortunate that we have two yards to build those surface
    combatants. And so, what this does is this helps to set them up
    to perhaps get better terms downstream when we go to run the
    competition for those follow-on DDG-1000s.
        We have several ideas on how to do that, either a profit-
    related kind of offer that we did on the DDGs, which was very
    successful in keeping the costs down between the two yards on
    those. Or perhaps, in the case of quantity, where we have an
    odd number of ships, the lower-priced yard would get an
    additional ship to go build.
        So those are some of the things, downstream, that help
    incentivize these kinds of investments for us.
        So it is important to maintain competition between yards
    where we can, like we have enough numbers with the combatants.
        Mr. Taylor. To what extent can you point to, in the
    aftermath of Katrina, when our nation very generously offered
    to help some of the yards that were damaged by that storm, to
    what extent can you point to the Navy walking through those
    yards and saying, ``You know what, for the future you need to
    be doing this. We are willing to help you with an investment
    for this''--fill in the blank.
        Can you give me any examples of that?
        Admiral Goddard. Mr. Chairman, I am relatively new to the
    Program Executive Office (PEO). Allison Stiller was involved in
    all of those. I am going to pass the question, if you don't
    mind, to her, who did a lot of the selection of those projects.
        Ms. Stiller. Yes, sir. One thing that we are mindful of, in
    the Navy, is that the shipyards understand their processes and
    the production flow in their particular yards better than the
    Navy. We can pass along ideas that we have seen in other yards,
    but they have to apply it to their own yards and their own
    processes.
        What Northrop Grumman Ship Systems, that I am sure Mr. Teel
    can comment on--he is in the next panel--did right after
    Katrina was bring in First Marine International, who had done
    the benchmarking study for the Office of the Secretary of
    Defense (OSD), and hired them to come in and help them in their
    yard to understand what flow, what projects should they be
    investing in for the future based on their yard and the
    projected workload in the future.
        Some of those suggestions manifested themselves in
    proposals that came to the Navy for the Katrina $140 million
    that was specifically carved out, that the Navy ran a
    competition with the affected Gulf Coast yards for.
        Northrop Grumman was selected for three projects under
    that. And one is the panel down at Ingalls, as well as at
    Avondale, and another one was in their Gulfport facility.
        We are in the process of negotiating the final terms of the
    contracts. But we feel very confident that that is going to
    have return on investment for the Navy and for the company.
        There was state investment, as well as corporate
    investment, in those projects as well. They were able to
    demonstrate to us that we will see return on investment.
        And, in fact, the panel line accomplishment at Ingalls, we
    will want to see the returns there, just to verify the return
    on investment before we enter in to the next one at Avondale.
        Mr. Taylor. The chair yields to the gentlewoman from Guam.
        Ms. Bordallo. Thank you, Mr. Chairman.
        I have just a couple of questions.
        I think, Admiral Sullivan, you probably would be the one to
    answer this, or any of the other witnesses: What specific types
    of things can be done to modernize our shipyards? Would these
    things result, then, in lower- or higher-priced warships?
        And why do the shipyards currently not make these
    investments from earnings? What prevents the shipyards from
    attempting to match the world-market standards in automation?
        Admiral Sullivan. Ma'am, why they don't make the
    investment--well, first, they are making some of the
    investments. And you have heard a couple of----
        Ms. Bordallo. Yes, I did.
        Admiral Sullivan. I will turn it over to Admiral Architzel
    to hear what is getting done with the aircraft carriers.
        But I have to say, and you can ask the next panel, but for
    each shipbuilder, they work for a corporation that has
    shareholders, and those shareholders need to see a return on
    investment from the corporate position.
        And they each have the hurdle rate. And if an investment in
    the facility can't make the corporation's hurdle rate, they
    have a tough time selling it.
        And I have been involved in some of those discussions,
    where, at some times, the Navy has been able to supplement or
    through a contract incentive make the difference. Or in some
    cases, the states have kicked in and helped out with capital
    expenditures.
        But there is a lot we can do on the contract, with contract
    incentives, and I would like Admiral Architzel to comment on
    that.
        Admiral Architzel. Ma'am, Admiral Dave Architzel, PEO,
    carriers.
        On the carrier aspect of it, we are in a construction
    preparation contract, and we have been in that since 2004 on
    the CVN-21 program.
        I would like to approach this from three areas, if I could,
    also, to the chairman's question. It comes down to
    incentivizing or how do we incentivize and assist? And there
    are three areas: cost, performance and schedule.
        If I took the first piece, I would say we have a
    construction preparation contract that deals with fixed-fee-
    type awards. Those are, right off the bat, for things like
    long-lead propulsion plant design or long-lead material buys,
    advance construction.
        For example, in 2006 and in 2007, we will look at commenced
    advance construction at--at contract award in 2007, we will
    have fully 25 percent of the hull units for the lead ship will
    be in some phase of some construction.
        And this is where you have gone seven years from the start
    of the last carrier to the start of this carrier. So this is
    really assisting stability and bridging that area for the
    shipyard to bring the workload, to help them with some of that
    as well.
        But it is also learning how to build some significant
    aspects that are different on the 21 program--the lead ship,
    78, as opposed to the Nimitz class.
        So on the second piece, the second area, award fee, is also
    included in the construction preparation contract. That goes to
    encouraging platform design progress, design model products.
        Initially, we started off with awarding the award fee that
    focused on attaining the key performance parameters needed with
    the ship. Those refer to things like manpower reductions,
    sortie-generation rate, electrical power generation, the weight
    and KG critical performance parameters that are desired to be
    key performance. So we had award fee for that to encourage the
    attainment of those threshold values.
        And then, as we went forward, we realized that we also had
    special incentives we wanted to encourage the shipyard, and
    those dealt with two areas primarily.
        The first dealt with our facilities and meeting future
    facilities. We can't buy facilities for the company, but we
    could incentivize to schedule. By that I mean, we looked and
    talked with a company about what facilities did they need that
    were unique for the CVN-21 program that they needed to build in
    their yard.
        They covered a wide range of areas. They came forward with
    a covered maintenance assembly facility, which is a huge
    facility under roof, first time they have had that kind of
    capability.
        Today, if you were to go to that shipyard, you would see
    propulsion plant units from both the carrier and the Virginia
    class submarine program in that facility being constructed.
        In addition to that, we had a need for a heavy steel plate
    facility. This carrier has four-inch plate steel that would be
    plates of steel from me to you, that length, four-inch thick,
    hundreds of tons in weight.
        If you were to take in the old design measures or handling
    measures to turn those steel plates, it could take up to a week
    sometimes or days to turn a steel plate. The machines that we
    bought, in place now, can turn that machine in hours. And you
    can also level the plate. You can also torch the plate and cut
    it to size much more efficiently.
        Then you have the covered maintenance assembly facility,
    which goes to the point I heard before from my other PEO
    colleagues that talked about moving to the berthing dock, the
    Dry Dock 12. We actually have a covered maintenance assembly
    facility there where we can outfit in much higher detail than
    we have previously done, which will reduce the cost on assembly
    of the ship, as you can have higher production units put into
    the actual berthing dock, Dry Dock 12, when you actually build
    the ship.
        Also envisioned in this incentive is the power unit
    assembly facility, which will be where we will build the actual
    propulsion plants themselves, which will be also built adjacent
    to the dry dock so that we can have a crane that can lift it
    directly into the Dry Dock 12.
        To do this, we now have heavier assemblies, recognizing
    that these are not going to be able to be handled by the 900-
    ton gantry cranes presently at Northrop Grumman Newport News.
    So we also looked at: What cranes will you need, and what size
    will you need? Will they need to upgrade that crane to a 1,050-
    ton crane? That is also part of our incentives.
        We incentivize these schedules because they all want to--
    making schedule sooner for our lead ship as we need it. The
    amount that we actually put in incentive was $30 million. The
    company invested around--today that would be somewhere around
    $180 million of capital funds.
        I believe, if we looked at our global sheets projected now
    as we go toward our cost datasheets for the actual contract
    awarded to the ship, you will see that the return on our money
    has already come back. More than our $30 million investment has
    already come back. Today, I would sit at around $58 million
    just on the lead ship alone.
        So these do make sense, these kind of incentivized areas.
        And the second type of incentive would be for--I mentioned
    we had gone after our key performance parameters. And we found,
    over a very short period of time, that we actually were meeting
    thresholds in all our key performance priorities. But where we
    really now had to get to was our cost target for the ship.
        So we changed in this year, 2007, in our construction
    preparation contract, we changed our incentive to be--instead,
    took some of the award fee away from making KPPs, which we were
    already making and we are satisfied with that, and we took that
    money and applied it to an incentive to cost target.
        So we now take and challenge the company to come down from
    where they presently are estimating our contract costs would be
    of delivery of both recurring and non-recurring, and on both
    sides, both on the recurring, which would be the design for the
    whole class of ship, as well as the construction end for the
    lead ship itself, and task them to come up and make progress
    toward those targets.
        And, when they do, they are incentivized by getting
    incentive feedback for that effort. And if they were not to
    make those incentives, then they would lose that incentive.
        And it seems to be working rather well. And we are
    optimistic as we head toward the December 7th contract award.
        Thank you.
        Ms. Bordallo. All right, the other question is: We have
    heard that foreign commercial yards are much more efficient
    than the U.S. yards. At least that is what we sort of saw when
    we toured the shipyards in Asia.
        Are foreign military vessels constructed at these
    commercial yards?
        Ms. Stiller. Yes, ma'am. In some cases--it depends. In some
    of the yards we visited, they did build military ships as well
    as commercial ships. In some cases, those yards had that
    military construction segregated off from their commercial
    construction.
        What we found in the Yokohama yard, IHI, was that their
    surface combatant, price-wise, as they translated it to U.S.
    dollars, was probably comparable to a DDG-51, in a follow-ship
    kind of configuration, although their surface combatant is
    smaller, but if you scale it, it was about the same. And we saw
    that at Hyundai as well.
        And they were building on about the same build cycles as we
    see on our DDG-51 program. A little bit smaller vessel, but
    price-wise, they are about the same.
        And as I recall, most of their discussion on their military
    side was they don't build them in the quantity, both in how
    many you buy a year--a lot of times, theirs was spread out much
    like we spread out our Navy buying.
        Ms. Bordallo. I do remember touring one of the shipyards
    where they did say they worked on military--but I couldn't
    remember which one it was. Was that the one in Hyundai?
        Ms. Stiller. Both of them.
        Admiral Sullivan. It was both IHI and Hyundai.
        Ms. Bordallo. Right, right.
        Okay, now, getting back to the comments you made, Admiral,
    I just can't figure out why we couldn't build into the
    contracts, when we do build commercial ships of any kind, not
    just the carriers--well, you spoke of the carrier, right?
    Wasn't that what you were discussing?
        But when we build the commercial ships, why can't we build
    something into the contract when they contract with us, to set
    aside for modernization of the plants. Could that be a
    possibility?
        Ms. Stiller. Well, in the case of--if a shipyard gets
    commercial work in the yard, where they are building Navy ships
    as well, we certainly see an advantage--you know, an overhead
    reduction and even on the vendor base, in some cases, if they
    can leverage buys.
        We don't have a mechanism to incentivize them, necessarily,
    for commercial work. We can incentivize them to improve
    productivity on their Navy work, which could indirectly
    transfer to their commercial work.
        Ms. Bordallo. Do we ever lose money?
        Ms. Stiller. Do we ever lose money on our ship contracts?
        Ms. Bordallo. Any of the commercial ships?
        Admiral Sullivan. Are you asking, do our shipbuilders lose
    money when they build commercial----
        Ms. Bordallo. Yes, or just break out even, or----
        Admiral Sullivan. They have been all over the map. Some
    have had dramatic losses, and some have had break-even. Most of
    the Jones Act ships are okay.
        Ms. Bordallo. Thank you, Mr. Chairman.
        Mr. Taylor. I thank the gentlelady.
        Now the gentleman from Connecticut, Mr. Courtney.
        Mr. Courtney. Thank you, Mr. Chairman.
        And, Admiral Sullivan, just looking through your testimony,
    on page three where you, sort of, gave the recommendations
    about what Congress can do and the shipbuilders can do, I mean,
    there seems to be, sort of, a common thread there in the
    recommendations, about our job would be to promote stability in
    the shipbuilding program and that the shipbuilders should do
    their best to try and, again, keep some kind of even keel or
    level pattern, in terms of just trying to keep the momentum
    going forward.
        But it just seems to me that, at some point, you know, we
    are kind of stretching the bubblegum to almost the breaking
    point, just in terms of the size of the work that is out there.
        After Admiral Hilarides and others testified a couple weeks
    ago on the submarine-building program, we heard from the
    manufacturers afterwards. And Electric Boat and General
    Dynamics testified that they are pretty much at the tail end of
    running out of repair and maintenance work, which is really
    going to put them in a pretty bad place as far as maintaining
    stability in the workforce that is there.
        And, you know, with the shipbuilding plan that the Navy is
    promoting right now, that they really are going to struggle in
    terms of whether or not the workforce is going to be able to
    hang in there until 2012 when it goes up under the Navy's
    proposed plan.
        And it just seems that the goals of trying to get more
    efficiencies with volume purchases, which Ms. Stiller, you
    know, indicated in the case where you have commercial and Navy
    shipyards, I mean, obviously that is where you get those
    benefits.
        I mean, is this budget enough to really keep these
    shipyards moving in the right direction? Or are they just going
    to limp along and not get the benefit of the economic order
    efficiencies and the volume discounts that they can get for
    materials and maintain their workforce?
        Admiral Sullivan. Yes, sir. Tough question. The budget that
    you see coming in the President's Budget 2008 is more than it
    was in the President's Budget 2007. And that shipbuilding
    program, if we hang with it, will eventually produce us that
    313-ship Navy.
        The stability is important because the shipbuilders need to
    know that they are at least getting that next ship.
        And I guess I am showing my age, because I am coming at
    this from the context of having been a submarine program
    manager during the 1990's when we did not order very many
    submarines at all and trying to get to a stability in the
    Virginia program where we were at least getting one per year.
        So, it is stable. Is it at a rate that I would personally
    like? We would always like more ships. But in the context of
    running a 313-ship Navy and trying to build the classes and
    types of ships that we need to meet the warfighting needs and
    also balance the aviation procurement issues that we have along
    with the operation part of the Navy, that is what the budget
    will bear. And it supports that 313-ship plan.
        Mr. Courtney. I mean, obviously, though, I mean, if we look
    in the recent past, I mean, there was an expectation at one
    point that we were going to be at two ships a year, two boats a
    year, and that kept getting sort of pushed back to 2012.
        And, I mean, obviously, the proposal for this year's
    budget, you know, that is really sort of begging the question
    about whether or not that commitment is going to be there to
    get us to that next level of economic order efficiency, because
    that is really a future Congress that this budget sort of
    leaves that question to.
        So I am just sort of looking to see where, you know, our
    support of the President's plan achieves the goal of supporting
    stability in the shipbuilding plan. Because the real tough
    choice is really further down the road, the way it has been
    presented, isn't it?
        Admiral Sullivan. Yes, sir. Getting to two a year in 2012,
    that represents a significant investment.
        I would like Allison to talk about what the Navy has done
    and will be doing to try to smooth that out.
        Ms. Stiller. Going to two a year in 2012, we also
    submitted, as part of this year's budget, a legislative
    proposal to do multiyear procurement for the next block buy on
    Virginia-class submarines. And that includes submarines between
    fiscal year 2009 and fiscal year 2013.
        In the legislative analysis for that, it is clear that we
    will have to go to two a year. And our plan is, in the
    shipbuilding plan, is to do that in 2012 with advanced
    procurement money in the budget in 2010 and 2011.
        So we submitted the multiyear request this year, as opposed
    to waiting for next year with the budget, so that we show the
    commitment that we, the department, are serious about a
    multiyear procurement for this next block of submarines.
        So I think, yes, the budget has to come to fruition later
    on. But right now the multiyear procurement legislation request
    is setting the stage for that.
        Mr. Courtney. And so, that is how we can respond to Admiral
    Sullivan's suggestion in his testimony----
        Ms. Stiller. Yes, sir.
        Mr. Courtney [continuing]. That we promote stability?
        Ms. Stiller. Yes, sir.
        Admiral Sullivan. Yes, sir.
        Mr. Courtney. I guess the other question I have is that, as
    far as trying to maintain the stability in the workforce, I
    mean, it really does seem up there right now that the repair
    and maintenance work, there is almost a cannibalistic sort of
    atmosphere of building up amongst the shipyards there. And I
    just wonder if you could comment on if there are ways of sort
    of using that as a bridge.
        Admiral Sullivan. Yes, sir. And the fact of the matter is
    the submarine in particular, the submarine repair workload, is
    going down. We are at peak and starting to go down the other
    side of the peak of these submarine--the Los Angeles-class and
    the Ohio-class submarine refueling overhauls.
        And when those are done, we won't be refueling those ships
    again. And that represents less work for the entire slate of
    shipyards, both public and private, that do repair work on
    submarines.
        So what we have tried to do is come up with a comprehensive
    plan to balance the remaining submarine repair work across the
    public and private sector with a set of priorities: We would
    like to overhaul the submarine in home port wherever possible,
    and look at the workload of each particular shipyard and try to
    decrease the bumps or the peaks and valleys in the workload.
        And that is an overall shipyard business plan that I would
    be happy to share with you at another session.
        Mr. Courtney. Great. Thank you.
        Thank you, Mr. Chairman.
        Mr. Taylor. I thank the gentleman.
        Ms. Stiller, I am curious: In 2007, what kind of
    recommendations, as far as government-furnished equipment, did
    you make? Specifically, you talked about the panel line at
    Avondale.
        I guess I will preface that by saying, at least for the two
    Gulf Coast yards, I know that there is a reluctance on the part
    of management in two ways: Some of them fear that if the
    numbers of shipbuilders go down, that they will lack the
    political clout that it takes to fund these ships. I get this
    secondhand.
        The one I have heard firsthand is the return on investment
    to their shareholders, and that they have to explain to
    corporate that this is not a highly profitable thing, that it
    is important to the future of the yard.
        But, to the first point, with Hurricane Katrina and the
    shortage of labor in the region, the yards really did have an
    opportunity to modernize without laying off a single worker. To
    what extent did your office take advantage of that situation?
        Ms. Stiller. Mr. Chairman, well, we looked at the proposals
    that came in under this Katrina 140, I call it--$140 million.
    We specifically asked to understand what efficiencies we would
    see in the yard as a result of the projects that were proposed,
    the return on investment that we would see by these
    efficiencies and to our programs, and also the level of
    commitment, either corporately or state or locality.
        So all of those proposals--we also wanted to understand,
    you know, how that would apply in the future as well as return
    on investment, immediate.
        We got proposals well beyond $140 million. And so we had to
    make some hard choices in how we went about it.
        But in some cases--and I would ask that you pose this to
    Mr. Teel, too, when he is up next--but Ship Systems, for
    example, have proposals that they intend to fund through their
    corporate measures, as well as through some of the proposals
    that we selected through this Katrina money.
        There is a comprehensive plan that we have seen from Ship
    Systems that shows all the investment they intend to make
    within their yard post-Katrina and how that feeds into the
    ships that are laid into the Navy's budget so that they can
    effect the cost savings into those ships over time.
        So there is a broader investment, not just from the Navy,
    in this Katrina 140, that the shipyards are also doing. And Mr.
    Teel can certainly elaborate on that.
        Mr. Taylor. How much of your 2008 prospective budget do you
    plan on allocating for shipyard modernization funds?
        Ms. Stiller. We have no funds that are set aside directly.
    But as Admiral Hilarides and Admiral Goddard talked about,
    there are program funds with existing contracts where--and
    Admiral Architzel as well--where the programs are incentivizing
    the yards in different ways. Because it is important for us to
    be able to see how we are going to see those improvements in a
    particular program so we understand the savings and that we can
    account for them.
        So we tend to attack this problem program by program,
    although we do try to look and share across, for example, if
    there are multiple--for example, Newport News, where submarines
    and carriers are being constructed, the two PEOs share
    incentive ideas. And, as Admiral Architzel said, an investment
    that he made in the carrier program also has benefit to the
    submarine program.
        So we try to make sure we see that, but we want to tie the
    program dollars into the return on investment so that we can
    see the savings and capture the savings as well.
        Mr. Taylor. So you do not have a dollar amount in mind?
        Ms. Stiller. I don't know, by program, what we have done.
    No, sir, I don't have that in mind.
        Mr. Taylor. Would any of you other gentlemen?
        Admiral Architzel. Mr. Chairman, I think there is, in
    addition to things like the CAPEX or incentives, as I mentioned
    when I talked about how we worked for schedule incentives to do
    that, there are also other areas where we have worked with a
    company, from my case, from Northrop Grumman Newport News--two
    concrete examples.
        One would be the building of the new pier, Pier 2, at
    Northrop Grumman Newport News. That pier, we can't give dollars
    to do that, but we did work with the company that established
    the need for the pier, established the need for how we would go
    about doing this, and worked with them to say how we could get
    them some business relief or waivers to accelerate a
    depreciation, that made the business case more attractive for
    them to build that pier.
        That pier is built. It will be used for the 70 or the 77 as
    we go down and now use that pier. It is a double-decker pier.
    It keeps things out of the weather. It has much more
    efficiencies in line as we go forward at that yard.
        In addition, with the 70, we needed some additional shore
    steaming equipment that was not there. And we used program
    dollars, where they are appropriate, to come in and assist on
    that facilitization, very specifically to shore steaming.
        So two examples, also, that it has done, sir.
        Mr. Taylor. Okay.
        Admiral Hilarides. Sir, if I could on that, I would say
    that there are tens of millions of dollars still available in
    the CAPEX program. That program hasn't played all the way out,
    and the shipbuilders are evaluating other ways to continue to
    use that incentive.
        So there are additional resources. They were set aside as
    part of the total contract, but they are still available.
        Mr. Taylor. Under your 2007 funds.
        Admiral Hilarides. Yes, sir.
        Mr. Taylor. This year.
        Admiral Goddard. There are other vehicles also, Mr.
    Chairman, that we use, like National Shipbuilding Research
    Program (NSRP), where we work with the shipyards. And we
    collectively have contributed to that program with them, where
    they come forth with some proposals that will benefit all of
    us.
        The common parts catalog that you heard about is one of
    those initiatives that was undertaken under NSRP. And we also
    have another one that is under way with common data exchange to
    get at this. If we don't have common tools, at least let's have
    common data that we can pass back and forth.
        Mr. Taylor. Admiral Sullivan, you were talking about
    modularity for future ships. To what extent will the DDG-1000
    be modular?
        And I have to express my personal frustration when the Navy
    retires a ship at 17, 18, 19 years. And I would sure hate to
    see the DDG-1000 fall into that category because we weren't
    planning ahead.
        Admiral Sullivan. Yes, sir. It is modular to a very large
    extent. I will let Admiral Goddard talk to that, because he has
    got the ship and he was also the program manager that designed
    the ship.
        But to take that one step further, Mr. Chairman, and say,
    okay, we now have a stealthy, medium-sized surface combatant
    hull form, hull structure, electric and propulsion machinery
    physical plant that now, if at all possible, should be used as
    the infrastructure that supports future surface combatants
    beyond DDG-1000. That is where I would like to take the Navy in
    the far term.
        Now, in terms of the specifics of how modular is the ship
    itself, I would like to turn that over to Admiral Goddard.
        Mr. Taylor. Admiral.
        Admiral Goddard. It was one of the first ships that we had
    an open architecture requirement on. So the software has been
    developed with that in mind.
        Additionally, how we put the electronics in are enclosures
    that were meant to be modular, so we can easily upgrade and
    refresh the blade servers, for example, on a total ship
    computing environment.
        We took a look at the BLS cells, which are a modular form
    of deploying weapons, and looked at growth capability in those,
    in order to position ourselves for missile defense downstream
    and how much growth we might need to put into those cells to be
    able to go do that.
        It has a very large aviation facility in order to stay pace
    and look at different options in terms of what we want to
    deploy from air vehicles from that platform.
        So there is a lot of thought given to those kinds of things
    in terms of modularity, as well as the growth piece that
    Admiral Sullivan talked about in terms of positioning that ship
    to be modified to be a future cruiser, if that turns out to be
    the right path.
        Mr. Taylor. What about electrical power generation? What
    sort of excess capacity will the ship have?
        Admiral Goddard. Sir, that ship has 80 megawatts of power.
    It uses that power only under very rare circumstances,
    essentially when it is going as fast as it needs to go, 30
    knots-plus, plus is going to use all its weapons and so forth.
        So the majority of its operational profile, it has a lot of
    excess electric capacity that can be used for growth. And that
    was part of the reason that we switched to the integrated power
    system on that ship, to position ourselves for some future
    weapons.
        Mr. Taylor. And that translates to what in percentages?
        Admiral Goddard. When it is normally operating around,
    let's say, in a 5-, 10-knot type of loitering position, it is
    only using roughly 20, 25 percent of its power.
        Mr. Taylor. Okay.
        Admiral Sullivan. There is an equivalent example in the
    aircraft carrier world. Admiral Architzel can tell you about
    the upgradability of that ship for the future and how much
    excess power that has, if you would like.
        Admiral Architzel. Mr. Chairman, on the 03 level, which is
    the gallery deck for the carrier, in the past, when you would
    come in and deploy a carrier your combat system resides on the
    03 level.
        And every time you would make a deployment, we would come
    in and change that whole combat suite out. And it involves
    welding, cutting--very disruptive overhauls to the ship every
    time you do that.
        The CVN-21 program and the lead ship, the 78, are designed
    with a flexible infrastructure on the 03 level for about a
    hundred frames on the 03 level, about 400 feet.
        That will allow you to then take in-deck mounting systems
    which will allow for adaptive installation of what is required
    for furniture, more cots adaptation. It also has ducting in the
    floor, so you don't have to come in and change ducting every
    time you modify space.
        Electrical zonal distribution, which will bring electric
    power to the space and allow it for distribution within there.
        So a much more adaptive architecture for the future, as we
    go forward, to allow that kind of change without having to go
    in and cut and weld every time you want to make those kind of
    changes to the ship.
        You mentioned electrical distribution. This carrier will
    have 2.5 to 2.7 times the electrical capacity of the Nimitz-
    class. And it will also have zonal distribution. And the
    electrical distribution itself is distributed, such that we
    have much more power available on the 03 level than the Nimitz
    design, where you might have even had power but you couldn't
    distribute it to where you needed it.
        Mr. Taylor. The chair recognizes the gentleman from
    Pennsylvania, Mr. Sestak.
        Or would you prefer I go to the ranking member? Whichever
    is easier for you.
        Mr. Sestak. I am sorry. Say again, sir?
        Mr. Taylor. Are you ready, or would you prefer if I went to
    the ranking member?
        Mr. Sestak. I will defer just for a moment. Thank you.
        Mr. Taylor. The chair recognizes the ranking member.
        Mr. Bartlett. Thank you very much.
        Mr. Chairman, we have talked in the past of a conflict that
    our shipyards have had that is not of their making and not of
    ours either but is just a reality today.
        When I repeat the ``Lord's Prayer'' and I come to that part
    that says ``Lead us not into temptation,'' I have some concern
    about some of the things that we do in the Congress, like
    putting young men and women together on ships, as an example.
        But I want to chat for just a moment about a conflict that
    we have in shipbuilding. We have these shipyards that have, in
    effect, a captive audience, as you pointed out. We are their
    only customer. In reality, the only people that build ships for
    us is them, and the only people they build ships for is us. And
    so, we really are kind of captive to each other.
        But they have a fiduciary responsibility to their
    stockholders, which means that since there is really hardly
    enough work to go around, it doesn't make a whole lot of sense,
    with your commitment to your stockholders, to invest a lot of
    money in upgrading the shipyards, because you are going to get
    the work anyhow.
        That is just the reality of where we are. We have so few
    ships to build and so few people building them. And, looking to
    the future, we might get by now with less shipyards, but what
    if we had a surge? And with nobody there to build the ships, so
    from a national security perspective, we appropriately make the
    argument that, ``Gee, we have got to keep all these shipyards
    alive.''
        And I have used the analogy before that we are very much
    like the farmer with seven horses and enough food to keep five
    really healthy. We keep moving the food around to the horse
    that looks the worst.
        And how do we get by this?
        And I know that people that run our shipyards want to do
    two things very well. They want to do the best thing they can
    for the country and the taxpayer, and they also have a
    responsibility to their stockholders. And these two things are
    in real conflict.
        And absent real competition, which is where we want to get,
    is there another way around this? Or do we just have to get to
    real competition, no matter what, to get us out of this dilemma
    we are in?
        Admiral Sullivan. Mr. Bartlett, volume of work always
    helps. Volume of work is what we can provide in the context of
    the 313-ship Navy. And that is where our budget is, or the
    Shipbuilding & Conversion (SCN) portion of the budget, is going
    up.
        Commercial work would help, because it provides volume. It
    provides the flexibility to share overhead, and that helps
    some.
        Mr. Bartlett. But unless they become more efficient and do
    it cheaper, we are not going to get the commercial--it is kind
    of a chicken-and-egg thing. Where do you start?
        Admiral Sullivan. Yes, sir.
        Mr. Bartlett. Clearly, clearly, if our yards were
    modernized to the extent of some of the foreign yards we saw,
    if they had the efficiency out there, they could be getting
    commercial work.
        But if they are not going to get the commercial work, then
    the argument for making those investments just is extremely
    difficult when their only customer is us.
        Admiral Sullivan. I agree, sir. It is very tough.
        And when you were out of the room, we talked about some of
    the measures we had been taking. Some are contract incentives
    that the three PEOs talked about. In some cases, there are ways
    that, if an improvement does not meet the hurdle rate of the
    corporation, that the Navy and the state have come in.
        And the instance I can think of is graving docks at
    Electric Boat, where the state helped and the Navy helped, and
    that got those two docks modernized.
        And that is exactly what you are talking about, that surge
    capacity. Because for the workload that Electric Boat has in
    submarine construction, they don't need those two graving
    docks. But it is a good thing to have for the United States
    Navy, so we all came out winners on that one.
        More of that needs to be done, but it is really on a case-
    by-case basis for each facility's improvement.
        Mr. Bartlett. Yes, I am convinced that everybody in the
    shipbuilding area and everybody in the Navy is doing the best
    they can under the circumstances. It is just that we are in a
    very difficult situation where we are where we are because of
    where we are. And if we are going to move off of that,
    something has to give. And that is why we made these visits to
    all of these shipyards around the country.
        But I think everybody agrees where we are now is not fair
    to the stockholders, it is not fair to the workers, it is not
    fair to the taxpayers. And we just have to find a way around
    this, and I appreciate very much your commitment to try to do
    this.
        Thank you, Mr. Chairman.
        Mr. Taylor. Thank you, Mr. Bartlett.
        The chair recognizes the gentleman from Pennsylvania,
    Admiral Sestak.
        Mr. Sestak. Thank you, Mr. Chairman. I apologize for coming
    in at the last minute.
        Admiral, I have a question. There was a study done by the
    Deputy Under Secretary of Defense for Industry Policy a couple
    years ago, and I know it received a mixed review within the
    Navy.
        My question is, though, that what I was most struck by in
    that study was how it talked about the need for collaborative
    initiatives between industry, the Navy, Congress, and other
    government departments. But there were words in it like ``gain
    a more in-depth understanding, work with industry, review the
    acquisition rules with them, stabilize ship acquisition,
    improve incentives, continue to support them with
    improvements.''
        Has there been any thought given to--in my limited
    understanding of kind of watching it from here is, watching
    people come and go, there always seems to be these groups, but
    I have yet to really see a group that involves this type of a
    collaborative approach.
        I am wondering if there is not something that can be done
    more in that line along the area of bringing--and this will
    also be your area, too, but if you didn't mind, Admiral, for
    yours, and then step over to her area.
        We talk about this a lot and studies have talked on it and
    I probably dismissed it, but it just seems as though there are
    at least three or four principal partners here, of which
    Congress obviously is one and industry is and the Navy is, to
    bring it together in much more than a, ``Yeah, we talk to one
    another,'' but a much more almost formal type of an approach to
    this, as this study talks about.
        Admiral Sullivan. Yes, sir, excellent question. And I agree
    with you. There is a lot that can be done.
        And I mentioned some of those things earlier in my
    testimony----
        Mr. Sestak. And I apologize.
        Admiral Sullivan [continuing]. Where we should be thinking
    cross-class, buying by commodity, buying off the same parts
    list, trying to figure out a way within the law and within the
    ability that we can in the contracting world, sharing the load,
    if you will, across working with our shipbuilders on our
    various programs.
        And in that light, Ms. Stiller started a series of meetings
    last year with the PEOs, and I have joined in in the last
    couple, to start working as a group to try to figure out what
    are the policy changes that are needed, how do we collaborate
    together and how do we work across contract. And I would like
    her to talk about that.
        Mr. Sestak. If I could, Admiral, though, Admiral Owens
    always used to say, ``There are enough studies out there.''
    And, you know, is it time to just formulate it?
        And, yes, now we have got PEO talking with NAVSEA within
    the Navy, and I gather that is an accomplishment. Is it really
    important that we now get in the industry in that same room and
    Congress in that same room?
        Because, I mean, two years ago, you could have heard the
    same question come up here from Mr. Taylor or the other ones.
        Is it time we actually formalized that and moved out on
    that?
        Admiral Sullivan. I would say we have got the first two. We
    have formalized and we are moving out on NAVSEA PEOs and
    industry with a thing called Joint Executive Management (JEM),
    and Allison will talk to that in a second.
        Involving Congress as a formal entity, we have not done
    that yet, and that is something maybe we should explore.
        Mr. Sestak. But you have involved--but industry is----
        Admiral Sullivan. Yes, sir. And if Allison could elaborate,
    that would, I think, help.
        Ms. Stiller. Yes, sir. When I first came into the job, it
    was apparent to me, not just at the PEO level but at the
    program manager level, within the Navy, that because they are
    so focused on their program, that we didn't have a lot of
    opportunity to share ideas across multiple programs.
        So I started, informally at first, meetings just so the
    program managers across the three PEOs would get to know each
    other and know what the other ones were working on.
        As a result of that, we have come out with some specific
    actions that we have taken together on how we deal corporately,
    as a better corporation, in dealing with our industry partners.
        One of the outgrowths that didn't start from this forum but
    that Admiral Architzel and Admiral Hilarides have instituted
    and we have been working in for a while is this Joint Executive
    Management Group, which is a partnership with Newport News,
    because there are cross-implications in submarines and
    carriers. So we have begun to expand that, in working with
    industry.
        We also have continuous dialogue with our industry
    partners, probably more on an informal level than you have
    alluded to. But I think there is really good dialogue,
    especially with all of the industry partners.
        We understand their needs on stability, and we have been
    working very hard within the department to stabilize the
    shipbuilding plan, to get at that requirement.
        We have also encouraged industry corporately to look at
    corporate ways to leverage across their yards, in material buys
    or in workload sharing and that sort of thing. And we have seen
    some of that.
        So I would agree with Admiral Sullivan. We have started in
    certain areas. Have we involved the Congress? No. Can we and
    should we? Absolutely.
        Mr. Sestak. I guess the reason I ask--and I don't really
    know the acquisition side that well, but I can remember--I
    mean, it is important, and, Admiral, you have to correct me,
    but I think the submarines had an HF sonar or something that
    ended up being used on the DD--what is it called now?
        Ms. Stiller. DDG-1000.
        Mr. Sestak. DDG-1000. But initially that wasn't going to
    happen. I mean, it was because the Navy--and I gather you did--
    brought them together that all of a sudden we got a good buy on
    this, because the sonar could go over to the other ones.
        And my take on it has been that NAVSEA has tried to talk
    about common chassis, for instance, more cutting across.
        But I have also wondered about industry just saying,
    ``Well, do you really need that rearview mirror up there, where
    you push the button''--and you know the example I am going to
    give--``and, boy, it just automatically, if some light comes
    in, focuses itself--do we really need that?''
        And the thing about bulk buying and stabilization is that
    we have been there. But the other thing about designing for
    production and things like that, isn't that where industry
    really has a hand to help us, if we get them inside the room,
    to much better bring this cost into something that is aligned
    along the ideas of what I understand NAVSEA has talked about,
    of there are maybe only three common chassis or something for
    our future.
        Do you know what I am talking of?
        Admiral Sullivan. Yes, sir. We need more of that. I think
    we explored that to a great distance when we worked on the
    design of the Virginia-class.
        That was industry driving the government, ``Do you really
    want to buy this,'' for instance, ``hydraulic valve that is a
    one-of-a-kind valve, has a very stringent acoustic and shock
    requirement, when its commercial equivalent made on the bench
    next-door costs one-fourth the same cost, and if you can just
    figure out a way to design it into the ship a little bit
    better, you can buy the cheaper valve?''
        And we went a long way down that road. We need to continue
    that across all of our classes and allow industry to drive us
    more.
        Mr. Sestak. Could I ask the following? Can I get a copy, if
    you have, what are these meetings you are talking about, so I
    have an idea of a little bit more the formality of it and the
    participants?
        Because I know there are these informal ones and getting
    together, but these studies have been going on for quite some
    time. And then you have whatever, every ship class. I don't
    mean just LCS, but it has almost become an issue.
        And I am curious about how far those have gone down the
    road in the sense of bringing it together, if you didn't mind
    providing that.
        Ms. Stiller. Absolutely no problem. Would be happy to.
        Mr. Sestak. The only other question, which--Aker Shipyard
    would be Philadelphia. Do you find what they have done up there
    in Aker Shipyard is of some potential where the cost of the
    ship has gone down from 13 times what they would make it
    overseas to, potentially, with the new buy, down almost three
    or four more ships, one to one, because of how they have gone
    about their buy as a model?
        Are you familiar with Aker?
        Ms. Stiller. I am. I have not visited the yard, but I am
    familiar with their model. And it is like what you see in most
    yards in the European yards and in the Asian shipyards. It is
    volume-dependent. And, also, they are able to leverage their
    buys not just in the U.S. but internationally, as well.
        And, Admiral Sullivan, maybe you----
        Admiral Sullivan. I have been there. And they build vastly
    simpler ships than the Navy builds to a standard, proven design
    with zero change environment.
        Mr. Sestak. I guess my question was more of the investment
    that they put in to do it like they do in Korea. That is more
    what I was taken with. They made a decision that what was going
    to built, the right toolings and everything would be there,
    that initial upfront investment. I thought that is what really
    drove them down, not just the bulk buy. Because, up until
    recently, they had gotten down to two or three times the cost,
    but that has only been with two or three ships.
        But it has been that investment. And I gather it might not
    be, but I would have to--not too dissimilar to what we do for
    aircraft, when we decide to build a new F-22, but there is that
    initial investment in the infrastructure to make sure that you
    have the correct toolings in order to then go off and build the
    ship.
        Admiral Sullivan. Yes, sir. I would agree with that, and
    they did make that investment upfront, and it has paid
    dividends.
        Again, though, when the principal function of the shipyard
    is to assemble steel plate and one or two standard sizes of
    pipe with one or two standard sizes of fittings, you are
    talking an order of complexity about one-hundredth of what you
    are talking about for a warship.
        And the same thing goes for the aircraft industry. And I
    know the airplanes cost a lot of money, but the jigs and
    fixturing that are put together to go do a long production
    build of many, many units in an aircraft are somewhat
    translatable to our part of the business. And we need to keep
    working on that.
        But I would caution that there is so much, I will call it,
    custom work in a warship that, if you are only building, let's
    say, six or seven of a class or even 10 to 15 of a class, you
    can't get the economic rate of return that you can because it
    is so complex and because the production run is small and
    because there are large, long distances in time between each
    ship and the next.
        Mr. Sestak. Admiral, then what does it say about the
    prospects for achieving nirvana of trying to have these costs
    be something that would permit us to afford a 308-ship Navy? I
    mean, if that is the case, are we really just whistling in the
    dark?
        Admiral Sullivan. I don't think we are whistling in the
    dark. We need to continue with all the things we have discussed
    here today.
        But in even those most efficient yards that we have
    visited, the cost of their combatants is about the same as the
    cost of our combatants, even the yards that the Philadelphia
    yard cannot compete with. In their commercial business, they
    are number one in the world, let's say, but their warships cost
    the same as our warships.
        Mr. Sestak. But the Congressional Budget Office (CBO) says
    that the cost of our shipbuilding program will be 35 percent
    more than what we estimate, based upon how we have always done
    things. Is that realistic?
        I mean, we predicate our ability to have that size fleet
    based upon no increase in cost of what we have estimated for
    the fleet.
        Many of these issues here are ones that have been around
    for a decade or so. I mean, do you think we have got it now?
        Admiral Sullivan. Let me talk about the CBO estimate.
        The CBO--and we talked to them; we passed them our numbers
    and our assumptions. And a lot of this has to do with how do
    you budget for risk. The CBO doesn't have to budget for a
    shipbuilding program that has to also be balanced with an
    aviation program, with personnel and with fleet operations. So
    when they do their calculations, the range of costs that they
    see for our ships, they will do that on the conservative side.
        The Navy necessarily budgets to a much more aggressive
    number than what the CBO is, and I think that is the
    difference.
        Mr. Sestak. Aggressive means optimistic?
        Admiral Sullivan. No, I would say more aggressive. The CBO
    tends to go toward worst-case analysis. If the Navy budgets for
    the worst case, that is hard to do across everything that you
    are buying in the Navy on a given year.
        Mr. Taylor. Admiral Sestak, I hate to do this, because this
    is a great line of questioning. Unfortunately, we have a hard
    stop in 28 minutes, because the full committee will be meeting.
        Mr. Sestak. That is fine.
        Mr. Taylor. And so, in fairness to the next panel.
        Mr. Sestak. Thanks very much.
        Mr. Taylor. We want to thank this panel for being with us
    today.
        The chair now calls the second panel: Mr. Mike Toner,
    Executive Vice President of Marine Systems Group of General
    Dynamics; Mr. Phillip Teel, the President of Northrop Grumman
    Ship Systems; Ms. Cynthia Brown, the President of the American
    Shipbuilding Association; and, Dr. Mark Montroll, Ph.D.,
    Professor of the Department of Acquisition at the National
    Defense University.
        And we want to recognize a number of his students that are
    here with us today. And thank you for being with us.
        Ms. Brown, are you going to be first?
        Ms. Brown. That is fine.
        Mr. Taylor. If I could, Ms. Brown, I hate doing this to
    you, but we really do have a hard stop now in 27 minutes. So if
    we could limit each of you to six minutes. That way you can get
    your statement in, and we will supply written questions for the
    record.
        Ms. Brown. And, Mr. Chairman, please give me a high number
    when the six minutes is up here.
        Mr. Taylor. Okay. The machine is on.
        Ms. Brown. I will try to be brief.
        Mr. Taylor. The chair recognizes Ms. Cindy Brown of the
    American Shipbuilding Council.

    STATEMENT OF CYNTHIA L. BROWN, PRESIDENT, AMERICAN SHIPBUILDING
                              ASSOCIATION

        Ms. Brown. Let me begin by thanking you for this hearing.
        Persistently low and unstable rates of Naval ship
    production have taken a tremendous toll on the shipbuilding
    industrial base that is vital to our national defense.
        Let me just say that, in 2001, we had a fleet of 341 battle
    force ships. It has now plunged to a 90-year low of 276 ships
    today.
        This has given tremendous challenges to our shipyards in
    trying to manage the schedule, workload, and to sustain their
    skilled engineering workforce, their production workforce, and
    having the ability to make investments in their facilities and
    processes, and in managing the day-to-day operations of their
    business.
        Put simply, there is no substitute for volume production in
    reducing the cost of every ship we build and maximizing capital
    investments by the industry.
        Even though we have struggled in a very anemic production
    environment, these shipyards have made major investments, large
    investments in their capital and their facilities.
        I will name just a few examples, where over a billion
    dollars in recent years has been invested. These investments
    include automated design tools, covered facilities, automated
    steel cutting facilities, facilities for constructing larger
    modules, cranes for increasing lift capacity for larger
    modules, laser cutting equipment, state-of-the-art panel lines,
    new and expanded power grids, and heavy moving equipment, just
    to name a few.
        If asked, every shipbuilder would tell you that more
    capital investment in processes and facilities would increase
    efficiency and further reduce cost.
        Their ability to do so, however, depends on their cash
    flow, work projections and profits to demonstrate a return on
    such investments to their corporate parents. The current
    business environment for shipbuilding makes the corporate
    return-on-investment business case very difficult to make.
        Corporate investment dollars favor the facilities that have
    the largest profit margins and that show the growing order
    book. Where shipyards may not be able to make the corporate
    return-on-investment business case, there are many investments
    that could be made in the shipyards that would show a very
    favorable return on investment to the government.
        To make such investments possible, the American
    Shipbuilding Association (ASA) asks you to consider legislation
    that would require the Navy to expand the use of special
    incentive fees in all Navy shipbuilding contracts for the
    purpose of investing in facilities and process improvements
    where such favorable returns on the investment are there for
    the Navy.
        The legislation we ask you to consider is a modified and
    expanded version of the current capital expenditure program, or
    CAPEX for short, that has been included in the Virginia-class
    contract that you discussed today. I won't describe it further;
    I will give you just a couple of examples.
        An incentive fee award of $7 million to Newport News
    Shipbuilding to invest in a second modular outfitting facility
    will result in estimated savings of approximately $34 million
    in the construction costs of the Virginia-class program. An
    investment of $9 million by Electric Boat in a new coating
    facility at its Quonset Point shipyard will save an estimated
    $140 million in the program.
        We commend the nuclear Navy for their efforts to expand
    incentive fees for capital investments.
        ASA recommends that the Navy include, in all of its
    programs, money for incentive fees for the purpose of capital
    investments if the contractor makes a business case that,
    number one, the savings through changes in the design, material
    use, technology or production process would result in savings
    in the ship program or, two, a proposed investment itself would
    result in savings in the shipbuilding program or programs.
        The proposed legislation recommends a 2008 authorization of
    $100 million as seed money for incentive fees across all
    shipbuilding contracts. It would require the Navy to report
    back to you no later than May 1 of 2008 on how the Navy has
    distributed or plans to distribute the $100 million provided in
    fiscal year 2008 for specific capital expenditures by a
    shipbuilding program.
        And it further provides that the Navy would annually budget
    money in its shipbuilding programs to provide incentive fees
    for the purpose of the capital investment beginning in fiscal
    year 2009.
        Funding requested for incentive fees for this purpose would
    be required to be identified by the Navy by ship program,
    concurrent with future budget submissions to the Congress.
        The legislative proposal would reduce the cost to the Navy
    by emphasizing designs that translate into ships that are
    easier to produce, as you talked about today, helping to
    control non-value requirement changes that add costs but are
    not operational necessities, and reducing the cost of ships for
    target investments.
        I would like to also bring to your attention another
    practice which is hurting our efficiency, and this is where the
    Navy is withholding and retaining payments owed to the six
    shipyards.
        Today, day-to-day operations, cash flow is essential to
    operating the business, as well as to paying your vendors in a
    timely fashion. Today, more than $300 million is being withheld
    or retained in payments that are owed to the six shipyards in
    compliance with the terms of their contracts.
        I would ask that the committee direct that the Navy cease
    this practice so that that money can be there and available so
    that all the shipyards can operate more efficiently and pay
    their vendors in a timely fashion.
        I am asked often, ``Why don't the shipyards go to court?''
        Mr. Taylor. Ms. Brown.
        Ms. Brown. Okay.
        Mr. Taylor. We very much appreciate your statement.
        Ms. Brown. Thank you.
        [The prepared statement of Ms. Brown can be found in the
    Appendix on page 52.]
        Mr. Taylor. Who would like to go next?
        Mr. Toner. I would like to.
        Mr. Taylor. Okay, Mr. Mike Toner.

    STATEMENT OF MICHAEL W. TONER, EXECUTIVE VICE PRESIDENT--MARINE
                 SYSTEMS, GENERAL DYNAMICS CORPORATION

        Mr. Toner. Thank you, Mr. Chairman and members. I am Mike
    Toner. I am the Executive Vice President of Marine Systems for
    General Dynamics.
        I want to thank especially yourself, Mr. Chairman, and
    former Chairman Bartlett for the time that you spent in our
    shipyards in August this summer. I think you saw a number of
    the things that we are going to talk about.
        I have provided a written testimony for the record, but I
    would like to go and talk about three basic items.
        I think there are some slides that I have asked that you
    have and take a look at.
        And if you could look at the first one, which is identified
    as the global shipbuilding industrial base slide, this comes
    out of the FMI study, which was provided to Congress, like I
    said, in the first part of January 2006.
        If you look at this chart, it is in four basic sections.
    The first section is steel work. The second section of three
    areas is really the outfitting, manufacturing and erection,
    that is the delivery of the ship. The third section is the
    shipyard layout. The fourth section is how you engineer and
    plan and how you procure material, et cetera.
        If you look at the majority of these things--the General
    Dynamics shipyards, which are in green; the U.S. average
    shipyards, which are in yellow, which is the compilation of
    both the General Dynamics and the Northrop shipyards; and the
    international yards, which is in gray--it pops out to you right
    away that the process that we use for outfitting, manufacturing
    and delivering ships were either world-class or equivalent to
    them anyway in that aspect.
        And that is our philosophy of driving work to the left,
    getting the ship complete, minimizing the time in the water,
    and getting it to sea and ultimately delivered.
        There are two areas where we are a little bit behind.
        One is the steel work area, which you would expect in the
    submarine yard, where we don't have a lot of steel, per se. It
    is big, it is bulky, but it is not plate forms and shapes. Our
    issue there is to go work at NASCO to improve that part. And we
    have made significant improvement in that area from 2000. We
    are not quite there yet, and there is more happening in there.
        Significantly, in the yard layout, you would expect the
    three General Dynamics yards, which are very small yards
    relatively speaking, that that would be the issue. In reality,
    the numbers would show you that the Bath and Electric Boat
    yards are equal to or equivalent or better than world-class.
    The NASCO yard, however, is far behind. And that is where we
    are focusing in NASCO.
        When you were out there in August, you saw some pieces
    moving around, and we were looking for space. Well, we have
    knocked down a bunch of buildings. We are getting more space,
    and we are making space for our blocks as we prepare to do
    commercial work.
        At the end of the day, the three yards: Electric Boat is in
    a low rate of production. We are trying to get to two
    submarines a year. BIW has low rate of production coming on
    with DDG-1000. NASCO, we have a commercial project in-house of
    five of what we sell, PC-1 product carriers, and an option for
    four others, so a potential of nine ships.
        Low rate production, by its nature, develops the CAPEX
    program, and you have heard about the CAPEX program from the
    submarine side. It is a program that is good. It has worked for
    us at Electric Boat, and a form of it we used up at BIW in
    order to put into the ultra hull.
        I would ask that you turn to the next page, which is an
    interesting document in that it shows the amount of labor hours
    versus material in each of the three major projects that I have
    in the shipyard.
        The labor hours and investments that we have made in
    material--oh, by the way, since the late 1990's to today, we
    have invested over $600 million in these shipyards. That is
    equivalent to about 25 percent of the earnings that we made in
    those shipyards over that same period of time.
        Each one of these projects, we have taken at least a
    million man-hours out of the ship construction; in the case of
    Virginia, 2 million; in the case of T-AKE, about 1.2 million on
    the first or second ship; and on DDG-51, from the first ship on
    the land level facility to the ship that we are building today,
    it is about 1.5 million to 1.6 million.
        The interesting thing here is that the material is the
    major portion of this program. What we just talked about was
    what we did in the shipyard labor side. The material portion is
    a big chunk of the business.
        I ask you to go to the next slide, and you look at the
    standard chart that you see a number of times that has the
    shipbuilding budget over the last three decades.
        I would ask you not to look at that, but to instead look at
    the line between 1983 and 1995. Take out the two blips, the two
    peaks, and you see what is happening to our vendor base. Our
    vendor base is deteriorating. It has been deteriorating for a
    long period of time.
        We go into the 1990's, low rate production exists. We go
    into the late 1990's and start of the 2000s and we have lead
    class ships coming on, high material, high labor use, because
    the labor hours go up on the first of a class ships. And the
    number of first-of-a-class ships that we have seen is
    uncharacteristically high for this timeframe. And, as a result
    of that, you see the costs skyrocket up.
        The issue here, as we get past the first-of-a-class ships,
    we will control the hours. Our issue is going to be, what do we
    do with the vendor base? And I think there are three things for
    it.
        I think stability has started. We have only got a year,
    year and a half of it, but it looks like it is going to start.
        I think you have a method to measure the ability of the
    yard in the studies that we do, in the benchmarking processes.
    And I think you have a way to incentivize us if we are in low
    production. But we need volume, and we have to work together to
    work that volume to get that vendor base back.
        Those are my comments, all I have to say, and thank you for
    your time.
        [The prepared statement of Mr. Toner can be found in the
    Appendix on page 82.]
        Mr. Taylor. Mr. Toner, thank you very much.
        Mr. Phillip Teel, Northrop Grumman Ship Systems.

    STATEMENT OF PHILIP A. TEEL, CORPORATE VICE PRESIDENT, NORTHROP
       GRUMMAN CORPORATION AND PRESIDENT, NORTHROP GRUMMAN SHIP
                             SYSTEMS, INC.

        Mr. Teel. Thank you, Chairman Taylor, Ranking Member
    Bartlett. I appreciate being here today.
        And today I represent all of Northrop Grumman's corporate
    shipbuilding capability, Newport News and Ship Systems.
        I have submitted a written statement for the record, and I
    would ask that be included in the record.
        Mr. Taylor. With unanimous consent.
        Mr. Teel. Before I talk specifically about modernization, I
    want to make a couple of points that I believe are important
    and germane.
        Obviously, we believe, and as the others have testified
    today in your line of questioning and discussion, that the
    objective is to build ships with capabilities that meet the
    Navy and Coast Guard's requirements, but at a lower cost than
    we are building them today. Sometimes, frequently, we, I think,
    think about our objectives being different. And we certainly
    want to focus on just that.
        Another issue is I really believe we need to recognize that
    facility modernization alone will not achieve the objectives. A
    major portion of it, but that alone won't do it. And some of it
    has been touched today, and I will try to touch on that some
    more.
        It has to occur in combination with process changes:
    process changes that we in the shipyards make and process
    changes that we make in conjunction with our customers and, in
    some cases, process changes that we make in conjunction with
    our customers and Congress.
        And, again, some of those have been talked about today, and
    I will cycle back to that a little later.
        We have done a very detailed analysis of commercial
    shipbuilding around the world, as I know you have. We have had
    several of our people, over the course of the last few years,
    spend time in these shipyards, as Ms. Stiller mentioned.
        We have also hired FMI directly after the storm to work
    with us arm-in-arm, actually using the study that Mr. Toner
    referred to as the mechanism to begin to look at how we would
    improve our capability relative to the benchmark location we
    found ourselves compared to foreign commercial yards.
        In the process of that analysis--and we would, at any time,
    be more than happy to share that with the entire committee--
    what we have come to learn is that commercial shipbuilders have
    an intense focus on design for production.
        In addition to all of the facilitation that is apparent and
    automation that is apparent through any walkthrough, they also
    are very focused on cost-effective designs, reduced complexity
    through the whole of the shipbuilding system, from the vendor
    base all the way to the ship in the water.
        That notion of design for production dominates the global
    commercial market. It is not apparent in the U.S. military
    market.
        Commercial builders focus on design for production results
    in standard designs, proven systems and subsystems, standard
    components and parts, and limited customization.
        To illustrate, and Admiral Sullivan mentioned it earlier,
    if we just look at the different part types, there are at least
    ten times the number of part types in a surface combatant that
    you will find in a commercial vessel and you can go through
    every system and subsystem in the ship and find the same thing.
        Second, most commercial suppliers produce a much greater
    number of ships. Much has been said about that. Obviously, we
    don't see that happening in Navy shipbuilding, but I will talk
    some more about how that applies later.
        And not only are the numbers greater, but, also, the cycle
    times are much shorter, the intervals between ships within a
    given class build.
        The DDG program, for instance, within our yard, the average
    interval is about 200 days between units, with as much as 400
    days between units. Best in class commercial yards, it is about
    40.
        Now, clearly, volume drives that, but I think there are
    other issues that can deal with that, as well.
        That combination of standard capabilities, standard parts,
    standard everything, combined with far fewer changes, which is
    the third item, in the case of commercial ships, you may see
    240 changes between the first ship of a class and the second.
    Within our LHD program, between number one and number two,
    there were 3,500 changes. And between that ship getting to
    the--from the time it was designed until the first ship was in
    the water, there were 5,700 changes. You may see 240 in a
    commercial ship and only two from ship to ship.
        So between those three different items, the facilitization
    of automation fits the commercial world so much better than it
    does the world that we operate in.
        Now, the results of the lessons that we have learned from
    our activities in the commercial yards tell us that we have got
    to develop techniques and we have learned some of those
    techniques from those shipyards and we have begun to put them
    in place as we redesign our yards on the Gulf Coast.
        Those things can only go so far, and we strongly recommend
    that there be, as Congressman Sestak mentioned earlier, a very
    focused effort between the U.S. Navy, Coast Guard, the Congress
    and the shipbuilders, which would include some from the vendor
    base, to actually begin a detailed focus, not study, we know
    the items that need to be addressed, to look at how we address
    those items to bring some of that change and variability out of
    naval vessel systems.
        [The prepared statement of Mr. Teel can be found in the
    Appendix on page 67.]
        Mr. Taylor. Thank you, Mr. Teel.
        The chair now recognizes Dr. Mark Montroll, professor at
    the National Defense University.

       STATEMENT OF DR. MARK L. MONTROLL, PROFESSOR, INDUSTRIAL
        COLLEGE OF THE ARMED FORCES, NATIONAL DEFENSE UNIVERSITY

        Dr. Montroll. Chairman Taylor, Representative Bartlett, I
    am a professor at the Industrial College of the Armed Forces
    National Defense University.
        I have served as the director of the shipbuilding industry
    study class for the past nine years. I am delighted that my
    current class could be here today to be part of this important
    hearing.
        Each year, the class's task is to study the industry and
    assess its ability to support our national security strategy
    requirements. This has given me an opportunity to observe
    shipbuilding practices throughout the world.
        The most striking difference that I observe among shipyards
    are their physical size, use of automation and proximity to
    their supplier base. It is often the combination of these three
    elements that give shipyards their competitive advantage in the
    global marketplace.
        World-class shipyards tend to optimize around high-volume,
    low-cost production processes. Production processes and
    practices that make commercial shipbuilding extremely
    efficiently are not always the best choices for the
    construction of warships.
        While each new commercial ship may have unique, leading-
    edge interior design features contributing to commercial
    differentiation, the basic hull and machinery systems tend to
    be mature technologies. And once the purchase contracts are
    signed, the owners rarely request engineering or design
    changes.
        Warships present a higher level of complexity than even the
    most elaborate commercial cruiser cargo ships. Tightly
    integrated, leading-edge weapons, sensors, fire control and
    communications systems, coupled with ship, crew and system
    survivability, as well as ship maneuverability, sea-keeping and
    station-keeping, provide the strategic advantage to warships
    operating in the battle space.
        The necessity to simultaneously integrate and balance all
    of these attributes contributes to the inefficiencies
    associated with construction of warships.
        The battlespace is constantly evolving, and if ships under
    construction are not able to keep up with real-world
    requirements, they may lose their competitive edge even before
    they are placed into action.
        It is unreasonable to expect or desire that the Navy will
    ever produce a cluster of ships that are absolutely identical
    and for which no changes are allowed during the construction
    process. It would, therefore, seem to make sense to promote a
    design and construction process that acknowledges that changes
    will be made and efficiently accommodates them.
        As the best and newest shipyards in the world continue to
    become more and more efficient at mass-producing high-volume,
    low-cost, standard-design ships, U.S. shipbuilders have an
    opportunity to set the world standard on mass customization of
    low-volume, reasonable-cost, flexible-design ships.
        Although the combination of low volume, reasonable cost and
    flexible design would have been impossible to achieve even a
    decade ago, in today's modern, networked world, the theories,
    tools and processes exist to make this a reality.
        The shipyards cannot do this alone. The infrastructure
    investments necessary to achieve this goal can be justified
    across the Navy's shipbuilding enterprise, but may not be
    justified across any single ship contract or single yard's
    expected order book.
        While my class was analyzing the global shipbuilding
    industry last spring, another one of the Industrial College's
    seminars was analyzing the state of advanced manufacturing
    around the world. In their report, they wrote, ``To ensure that
    the Department of Defense (DOD) leverages the private sector's
    investment in manufacturing technology, policymakers should
    apply digital thread technologies to all DOD system acquisition
    programs which link all aspects of the system together from
    computer-aided design to computer-aided manufacturing to
    operations, support and logistics.''
        This is precisely the path I am suggesting we pursue.
        When I spoke before this subcommittee last year, in
    response to the questions asked of me, I suggested that in
    order to stimulate and stabilize the demand for U.S.-built
    ships, we should fund the Chief of Naval Operations (CNOs)
    long-range plan for construction of naval vessels in a stable
    fashion, support the U.S. Maritime Administration's (MARAD)
    shipping initiative, and fund their Title XI and other Federal
    ship financing programs.
        I continue to stand by these suggestions and am delighted
    to see that there has been great progress in stabilizing the
    Navy's shipbuilding plan.
        If we also invest in the production infrastructure that
    enables our shipyards to set world standards for mass
    customization in shipbuilding, our Navy will continue to
    operate the finest, most advanced ships the world has ever
    seen. Our sailors deserve no less.
        Thank you very much for allowing me to be here today. I
    look forward to your questions.
        [The prepared statement of Dr. Montroll can be found in the
    Appendix on page 122.]
        Mr. Taylor. Thank you.
        The chair yields to the gentleman from Maryland.
        Mr. Bartlett. When I look at the first chart, global
    shipbuilding industrial base, and deficiencies only in two
    areas, steel work and yard layout, I might conclude that, with
    a little improvement there, that we ought to be able to compete
    globally. Or is process not included in these?
        Mr. Toner. Process is, sir, in there.
        Mr. Bartlett. So what this says is, then, is that if you
    improve your yard layout and your steel work, you should be
    able to compete internationally.
        See, we represent 25 percent of the world's economy. We
    represent essentially none of the world's commercial
    shipbuilding.
        When I drive into work, I see Komatsu and Hitachi heavy
    earth-moving equipment competing side-by-side with heavy earth-
    moving equipment made in this country. I drive down the road
    and I see foreign-made and American-made automobiles. If we can
    compete in heavy earth-moving equipment and in automobiles, I
    am not ready to admit that we can't compete in shipbuilding.
        We are the most creative, innovative society in the world,
    and, Mr. Chairman, we just ought to be able to compete, and
    there isn't any reason that we shouldn't.
        We compete in these other areas, and we ought to be able to
    compete in commercial shipbuilding. And to the extent that we
    can do that, the necessary upgrade of our yards will then be
    something that the chairman of the board can readily promote.
        But how do we get over this hurdle? Because what this graph
    tells me is that, with a little improvement in those two areas,
    you are as good as anybody in the world. Is that right?
        Mr. Toner. That is right.
        Mr. Bartlett. So, then, why can't we compete commercially
    with anybody in the world?
        Mr. Toner. The fundamental problem is there isn't the
    volume and the cost of material. If you look at my yard today
    that is doing commercial work probably in man-hours a factor of
    three higher than what some of the international yards for a
    similar-type ship.
        Now, I think I can get that down, and we will work that
    through process and some facilitization that we are doing. And
    it is part of the layout process. But the fundamental reason
    remains that the foreign national yards will produce a ship for
    what it cost me for material. I haven't figured out how to do
    it with nobody.
        Mr. Bartlett. The Chinese are planning to build, what, the
    largest shipyard in the world, and as of now, they have no
    customers. And I suspect that when they build that shipyard,
    they will be able somehow to acquire the customers so that they
    will have the base so that they can purchase the steel and so
    forth at competitive prices.
        How are they going to be able to do that and we can't?
        Mr. Toner. We don't have the volume of ships to build.
        Mr. Bartlett. They will?
        Mr. Toner. If you went back into the early 1980's, prior to
    the removal of subsidy for shipbuilding, we built about 10
    percent of the world's ships and a few years back, that was
    about 2,000 ships a year and 10 percent would have been 200
    ships. Could you imagine what 200 ships would mean for this
    industry?
        Mr. Bartlett. We would be in hog heaven, wouldn't we?
        Mr. Toner. How about 25 ships?
        Mr. Bartlett. I understand.
        Mr. Toner. That is where it is. And my concern is the
    activities that we have put in place, that Phil and I talk
    about, we will get the hours down, we will get the hours to
    where they are going to be. The problem is going to be the
    vendor base behind us, the material. And you need volume to go
    get that.
        I don't have a magic pill for that. I don't know. I need
    more ships; I guess that is the name of that tune.
        Mr. Bartlett. The Chinese have nothing now, and they are
    going to build the biggest yard in the world.
        Mr. Toner. The Chinese are building ships now, and they
    don't have nothing.
        Mr. Bartlett. We went to their shipyard, and, I will tell
    you, they pay their people $5,000 a year and they have
    essentially no automation. They were swarming over that ship
    that was vastly different from the one in South Korea.
        And they were losing money, by the way, and he didn't seem
    all that distressed by it. He was kind of smiling when he
    mentioned how much money they were losing because the price of
    steel went up.
        Mr. Toner. Well, we are not really in the business to lose
    money. I don't think that is something that you want us to do.
        Mr. Bartlett. I guess in a socialist system, it doesn't
    matter.
        Thank you, Mr. Chairman.
        Mr. Taylor. In the brief time remaining, the chair yields
    to Admiral Sestak.
        Mr. Sestak. I guess my question, sir, is, without the
    volume, can you continue to make a profit?
        I mean, it is not----
        Mr. Toner. Well, this is for my yards, I can speak for my
    yards, okay. We have been, since the middle-1990's, if you
    looked at that third chart--and I believe you were out of the
    room at the time.
        Mr. Sestak. Yes, sir, I apologize.
        Mr. Toner. But that third chart, we went into what we call
    low rate production. We have been at low rate production for
    submarine facilities for a number of years. The only repair for
    that, or the fix, is to get to two submarines a year. And I
    think we are very close to being in that arena.
        The commercial yard that I have out at NASCO is--we went
    through a very difficult time in bridging--between the late-
    1990's to the start of the T-AKE, we took on some commercial
    work and we took on two tote ships, which are like row-rows for
    Alaskan trade, and four large oil tankers----
        Mr. Taylor. Mr. Toner, I very much apologize, but under the
    rules of the House, this subcommittee cannot meet while the
    full committee is meeting, and the full committee just began a
    meeting.
        So I am going to have to cut you off. We do very much
    appreciate your being here.
        Mr. Toner. Thanks for your time.
        Mr. Taylor. We very much regret that this second meeting
    was called after this meeting was already scheduled, but we
    have to abide by the rules of the House.
        The subcommittee stands adjourned.
        [Whereupon, at 4:33 p.m., the subcommittee was adjourned.]
    =======================================================================
                                A P P E N D I X

                                 March 20, 2007
    =======================================================================
                  PREPARED STATEMENTS SUBMITTED FOR THE RECORD

                                 March 20, 2007
    =======================================================================

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
    =======================================================================
                 QUESTIONS AND ANSWERS SUBMITTED FOR THE RECORD

                                 March 20, 2007
    =======================================================================

                       QUESTIONS SUBMITTED BY MR. TAYLOR

        Mr. Taylor. Is there any way to increase the amount of commerical
    work ongoing at US shipyards? To what extent is it the Navy's
    responsibility to facilitize the shipyards to compete for commerical
    work?
        Admiral Sullivan. While the major shipyards are not competitive in
    the commercial arena, the second tier yards are active in commercial
    work. We currently have a number of incentives available to all U.S.
    shipyards to improve their ability to compete for commercial work.
    These include the Title XI Ship Loan Guarantee program, contract
    incentives, and Shipbuilding Capability Preservation Agreements. All of
    these programs work to enhance the shipyard's ability to compete for
    commercial work.
        While the Navy would welcome increased commercial work at the
    shipyards, as it would lower the costs to the Navy, the Navy has no
    control over the shipyard's business strategies. Recent forays into
    commercial work by the major U.S. Shipyards have proven unsuccessful,
    as the skill sets and equipment required on military vessels tends to
    be different than those required on commercial vessels.
        Mr. Taylor. Foreign commercial yards are reportedly more efficient
    than US yards. Are foreign military vessels constructed at these
    commercial yards? If not, how do foreign military yards compare to US
    yards in terms of competitiveness? How do these yards maintain their
    competitive edge?
        Admiral Sullivan. In January 2006, the Secretary of Defense
    submitted an independent study to assess the overall effectiveness of
    the Navy ship construction program to the Congressional Defense
    Committees. An independent shipbuilding consultancy firm, First Marine
    International (FMI), completed the assessment and wrote a report,
    entitled First Marine International findings for the global
    shipbuilding industrial base benchmarking study.
        In general, foreign yards are more efficient than the U.S. yards,
    however U.S. trends have improved in key areas. Three major findings of
    FMI's report were:

        1.   The six major private U.S. shipyards have made progress in
    improving shipbuilding best practices since a previous round of
    benchmarking was conducted in 1999. However, more emphasis should be
    placed on production design and engineering, quality control, and
    information technology (enterprise resource planning systems).

        2.   U.S. Naval vessels appear to have more work content than
    comparable international vessels.

        3.   In addition to the overall benchmarking assessment, FMI also
    produced company proprietary benchmarking results for each individual
    shipyard. These individual results offered shipyard-specific
    recommendations of discrete actions for each U.S. shipyard. The
    investment requirements necessary to implement these plant improvements
    are supportable based on U.S. shipbuilder profit margins. It was the
    Secretary of Defense's expectation that the U.S. shipyards will use
    their own resources if they choose to pursue these improvements.

        In some foreign shipyards, both commercial and military vessels are
    constructed. This military construction's often segregated from the
    commercial construction. These foreign yards are roughly equivalent to
    U.S. shipyards in terms of performance on their military vessels. For
    instance, at the Yokohama yard, IHI, we found that their surface
    combatant was comparable pricewise to a smaller version of a DDG-51, in
    a follow-ship kind of configuration. If you were to scale their
    combatant, the cost would be about the same. Hyundai shows a similar
    result.

        Foreign commercial yards maintain their competitive edge by:

        1. Receiving governmental subsidies
        2. Higher commercial ship production rates