Industry Summary

The military shipbuilding industry has changed dramatically over the last 20 years. In the US alone, military shipbuilding revenues fell by 60% in the ten years following the end of the Cold War as defence budgets were cut and consolidation consumed the industry. However, war in Iraq and instability around the world have revived the fortunes of the industry, as nations have looked to their navies to defend their borders.

In 2006 the global military shipbuilding industry was worth $28.9 million, up by $5 million from 2002. The gross product was $16.4 million, with 302,759 people employed and 1,952 military ships built around the world.

US shipbuilding has nosedived over the last 50 years, cascading from a position of dominance to the current market share of less than 1%. However, they are still world leaders when it comes to military shipbuilding. The US navy accounted for 53.5% of military shipbuilding sales in 2006 whilst North American companies bagged 58.4% of global military shipbuilding revenue. Europe is the second biggest producer of military ships, garnering 26.4% of the market, with North Asia in third with 12.6%.

The Naval Recruitment Market

In the 1980s there were over 200 shipyards in the US but by the turn of the millennium there were just over 80 left. Having grown complacent, US shipbuilders were slow to adopt new technologies that were being embraced overseas and became reliant on navy contracts. When the Cold War ended and defence budgets fell, there was only one option left - consolidation.

For the military shipbuilding industry, consolidation meant consolidation of ownership rather than premises. Until 1995 the six main shipyards in the US - Electric Boat, Bath Iron Works, National Steel and Shipbuilding Co, Newport News Shipbuilding, Ingalls and Avondale - were owned by six different, independent companies. Now they are all owned by either General Dynamics or Northrop Grumman.

As with all other sectors of the defence industry in the current climate, the dominant military aerospace companies compete against each other for contracts but can also find themselves working together, as General Dynamics and Northrop Grumman do on the US navy’s nuclear-powered Virginia class submarines. The other trend affecting the military shipbuilding sector, just as it has other areas of defence, is increased international cooperation.

Traditionally nation states liked to keep defence production within their own boundaries but now, as the drive for greater efficiency gathers pace, it is becoming increasingly common for teams from different countries to work together, as BAE Systems, Northrop Grumman and Lockheed Martin’s US-UK entente demonstrates on the Royal Navy’s future carriers.

The increased cooperation between companies is finance driven. US companies have sought international trade to boost their coffers as their market share of military shipbuilding has tumbled. Conversely, European companies like BAE Systems have strategically targeted the US, as the world’s most lucrative market and bought up smaller US companies to gain a foothold there.

Navy suppliers

As holders of the world’s biggest navy, with 345,000 personnel on active service, 276 ships and 4,000 aircrafts, it is unsurprising that the US is the world’s biggest military shipbuilding market. That market, worth around $15 million in 2006, is dominated by two companies: Northrop Grumman and General Dynamics.

Northrop Grumman is the third biggest military supplier in the world. In 2006 the company achieved revenues of $30.1 billion, 90% of which came from military sales. The company’s ships division, anchored around the Newport News, Ingalls and Avondale yards, generated $5.3 billion. Northrop Grumman currently manufacture nuclear submarines, amphibious assault ships and tankers for the US navy.

General Dynamics is the fifth largest military supplier in the world. In 2006 it sold $24.1 billion worth of product, including $18.8 billion to the military. General Dynamics Marine Systems supply Virginia class attack submarines, Trident ballistic missile conversions and surface combatants to the US navy. In 2006 Marine Systems generated 21% of General Dynamics’ net sales figure of $24.1 billion.

Consolidation has not caught on so fast in Europe. At the beginning of 2007, there were nearly a dozen naval contractors in Europe. However, in February French companies DCN and Thales joined forces to create Europe’s largest military shipbuilding venture. The new company’s annual sales are expected to be in the region of €4 billion.

In the UK, the government’s Defence Industrial Strategy [DIS] has encouraged greater efficiency and cooperation, with the aim of shifting the industry out of its habitual boom and bust cycle. In June 2007 BAE Systems and VT Group, who together account for 85% of UK naval shipbuilding, merged their shipbuilding operations and immediately scooped a $5.8 billion aircraft carrier contract from the Ministry of Defence.

Recruitment

The thawing of the Cold War and a cataclysmic decline in the commercial sector hit US shipbuilding employment prospects hard. Between 1980 and 1997, employment in the industry fell by 60% from 178,000 to just over 98,000. Employment has fallen almost every year since with the latest available figures, from 2004, showing a total 86,224 people on the payrolls of US ship builders and repairers.

The increase in military activity since the turn of the millennium and the consolidation of the big defence companies has triggered an upturn in employment opportunities in the military shipbuilding sector. Since 2002, global employment in military shipbuilding has risen from 295,114 to 302,759, with total wages rising from $11.2 million to $12.8 million. Northrop Grumman Ship Systems currently employs 18,000 people, up 1,000 from 2001.

In the UK, it is hoped that the government’s DIS will bring stability to the employment practices of military shipbuilders. Traditionally, military shipbuilders have tended to build up teams of experts on a project basis, with many jobs cut once a contract has come to an end. However, now that BAE Systems and VT Group have merged their shipbuilding operations, the Ministry of Defence has agreed to provide a minimum level of work over the next 15 years, safeguarding the jobs of the 6,500 people the two companies employ.

The US navy currently employs 345,000 people and plans to increase its number of ships to 313 by 2020, which should lead to further employment opportunities not just within the US navy, but also within the military shipbuilding industry.

However, employment prospects in the Royal Navy do not look as encouraging. Despite the fact the force is operating 2,000 short of its desired strength of 36,700, it was announced in 2006 that the government plans to mothball nearly half of the Royal Navy’s fleet as part of Ministry of Defence cost cuts.

The future

On the face of it, the short to medium term prospects for the industry look good, with the biggest purchasers of military ships, the US navy, set to increase its fleet to 313 by 2020. However, to achieve this an annual ship building budget of $13.5 billion will be required between now and 2020, which is $5 billion more than it was in 2006. With defence budgets likely to be restricted over the coming years as war in Iraq peters out, some analysts are questioning whether this is feasible.

The US’ market share will come under threat from Asia, where military shipbuilding is still relatively new but is increasing at a rapid rate. The Republic of Korea’s navy has undergone a frantic shipbuilding programme, with the aim of becoming a blue water navy by 2020, whilst Japan, who boast the second largest defence budget in the world, gives nearly 60% of its military contracts to indigenous companies.