Buy Better Boats: How Increased Competition Can Fix the Navy’s Procurement Problems

Introduction

In the post-Cold War era, the United States was left standing as the world’s sole superpower. Absent significant threats to its naval supremacy, the U.S. Navy experimented with new ship designs, concepts, and strategies. Witnessing a new era of small-scale conflicts, Navy leadership proposed a new class of littoral combat ships: smaller ships designed for coastal conflicts that promised to move at faster speeds for a cheaper price (Axe 2021).

Unfortunately, these promises never materialized. The littoral ship program is now considered one of the largest failures in modern American naval history: every ship produced costs at least twice the original price and was built several years behind schedule. Many ships are now considered inoperable due to frequent equipment breakdowns and inadequate crew training (Sapien 2023). The Navy was correct in declaring the need for more ships that are small and adaptable, however, their failure to execute on this vision allowed international rivals to catch up, and potentially surpass, American naval power (Shelbourne 2021).

In the coming decade, the U.S. Navy must execute on its plan of building a fleet of smaller, more nimble ships. To do so, the U.S. Navy must end its over-reliance on sluggishly large defense contractors, diversifying its supply chain and increasing healthy competition.

New Ships for New Threats

There is no doubt that the U.S. Navy must adapt its fleet to smaller, less cost-intensive ships. The bulk of maritime conflicts are concentrated in coastal conflict zones as opposed to large open waters. In these areas, small ships are far more effective than large aircraft carriers at intercepting hostile vessels and maneuvering quickly. Small ships are also far cheaper for the Navy to purchase, design, and operate (Bath 2022).

For example, Task Force 59, a U.S. Navy outpost in Bahrain, has experimented with small, unmanned vessels as opposed to traditional large ships. Despite running on an operating budget less than the cost of fuel for some traditional ships, Task Force 59 is widely considered extraordinarily successful in defending the Strait of Hormuz. The main differentiator between Task Force 59 and the rest of the Navy is their reliance on nontraditional local partners. Rather than working with large defense contractors whose unmanned vessel projects are already behind schedule, Task Force 59 enlisted various smaller firms to achieve smaller goals (Lipton 2023).

The Need for New Partners

In sharp contrast to that model, the U.S. Navy relies heavily on a few major defense manufacturers for the vast majority of its contracting. The US Naval Institute (2021) found that all Navy shipbuilding is contracted to just four large suppliers, all of which are traditional large defense contractors. Due to shipyard closures over the past decade, these contractors operate out of just seven shipyards, and due to specialization and limited competition, every ship (except for Arleigh Burke class destroyers) is built with zero competition: only one company can legally build the class of ship that the U.S. Navy is bound by law to purchase (Reed and Inhofe 2021).

This effectively creates an oligopoly: few producers control the entire market and can consequently set prices wherever they see fit. The Navy itself concedes that even though it is the sole buyer of these ships – effectively creating a monopsony – its bureaucracy prevents it from realizing any of the price-setting power or efficiencies that come with this role (Reed and Inhofe 2021).

The problem also stems far deeper than the final product of U.S. Navy vessels. Because the process of becoming a qualified supplier lasts a minimum of 36 months, the market for intermediate shipbuilding parts is dangerously thin. Many shipbuilding parts are only manufactured by a single company, and bureaucratic red tape stifles competition by artificially raising barriers to entry (Cuccias 2017). Moreover, ongoing mergers and acquisitions across the shipbuilding supply chain are only further increasing the issue of consolidation (Katz 2022).

In Task Force 59’s experiment with smaller partners, not only did creating competition increase the quality of parts and reduce the frequency of breakdowns, but the manufacturing timeline, acquisition cost, and operating costs were also significantly reduced (Lipton 2023). Bahrain is not known for entrepreneurship, nor its defense industry–the United States is. Given the resources at the United States’ disposal, making the switch towards smaller, more entrepreneurial providers is certainly possible. To get there, the U.S. Navy must reduce bureaucratic red tape, redesign its procurement system, and increase market competition.

Potential Risks

There are certainly risks associated with transitioning away from existing shipbuilding procedures. Prior failures have made Navy leadership more cautious to change, and any systemic overhaul is inherently risky (Gilday 2023). However, while it’s true that maintaining the status quo is a low-risk strategy, not changing the current system is equally unsafe. The U.S. Navy’s current shipbuilding and warfare strategy hasn’t been tested in either small-scale fights or modern-day conflicts, so the U.S. Navy cannot assume that a strategy that was proven successful in WWII is still proven successful today.

Others point out that transitioning the U.S. Navy away from its traditional big-ship strategy, and the prestige that comes with it, is politically unpopular. Even the smallest of the U.S. Navy’s current contractors have massive teams of lobbyists, including former representatives, military officials, and even Senate majority leaders (Lipton 2023). It is true that this transition will be met with staunch opposition from certain interest groups. However, this does not reduce its importance for U.S. military competitiveness.

The Path Forward

In the future, the U.S. Navy can learn from Task Force 59, and begin testing its successes on a larger scale. By investing in and partnering with smaller firms, the U.S. Navy can increase competition for its contracts. This, in turn, will encourage honesty when bidding for contracts, as contractors whose projects fall behind schedule are less likely to be selected in the future. Finally, reducing bureaucratic red tape surrounding the certification of parts will allow increased competition throughout the supply chain, and prevent failures like the littoral combat ship program from repeating itself. Revamping the U.S. Navy’s procurement process is not an easy task, nor will it be achieved quickly. But by starting the process, the Navy can ensure that the US continues to compete and project strength around the globe.

The views expressed in this publication are the author’s own and do not necessarily reflect the position of The Rice Journal of Public Policy, its staff, or its Editorial Board.

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References

Axe, David. “The U.S. Navy Wasted a Whole Decade Building Bad Ships.” Forbes, 5 Jan. 2021, www.forbes.com/sites/davidaxe/2021/01/05/the-us-navy-wasted-a-whole-decade-building-bad-ships/?sh=6dfad5a554e9. Accessed 13 Sept. 2023.

Bath, Alison. “US Navy Needs More Small Warships to Counter Russia, Researchers Say.” Stars and Stripes, 20 June 2022, www.stripes.com/branches/navy/2022-06-20/navy-smaller-warships-counter-russia-6395628.html. Accessed 13 Sept. 2023.

Cuccias, Brian. Industry Perspectives on Options and Considerations for Achieving a 355 Ship Navy. 24 May 2017.

Gilday, Michael. CNO Delivers Remarks at WEST 2023. WEST Conference 2023.

Katz, Justin. “Why a Small Shipyard Merger Could Signal Bigger Problems for the US Military.” Breaking Defense, 14 Nov. 2022, breakingdefense.com/2022/11/why-a-small-shipyard-merger-could-signal-bigger-problems-for-the-us-military/. Accessed 13 Sept. 2023.

Lipton, Eric. “Faced with Evolving Threats, U.S. Navy Struggles to Change.” The New York Times, 4 Sept. 2023, www.nytimes.com/2023/09/04/us/politics/us-navy-ships.html.

Reed, Jack, and Jim Inhofe. “To Provide and Maintain a Navy: Understanding the Business of Navy Shipbuilding.” U.S. Naval Institute, July 2021, www.usni.org/magazines/proceedings/2021/july/provide-and-maintain-navy-understanding-business-navy-shipbuilding.

Sapien, Joaquin. “The inside Story of How the Navy Spent Billions on the “Little Crappy Ship.”” ProPublica, 7 Sept. 2023, www.propublica.org/article/how-navy-spent-billions-littoral-combat-ship. Accessed 13 Sept. 2023.

Shelbourne, Mallory. “China Has World’s Largest Navy with 355 Ships and Counting, Says Pentagon.” USNI News, 3 Nov. 2021, news.usni.org/2021/11/03/china-has-worlds-largest-navy-with-355-ships-and-counting-says-pentagon.