[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

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                     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.]
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                            A P P E N D I X

                             March 20, 2007
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              PREPARED STATEMENTS SUBMITTED FOR THE RECORD

                             March 20, 2007
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[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
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             QUESTIONS AND ANSWERS SUBMITTED FOR THE RECORD

                             March 20, 2007
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                   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

                                  
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