Note: The following article first appeared in the January 2006 edition of the monthly newsletter Naval Forum UK, published by AMI International, which I edit.

Done the Strategy, now the hard bit

Written: 20 December 2005.
Added to this site:  26 February 2006

Mid-December saw a wave of announcements by the British government that will have a major impact in the future of the UK’s naval shipbuilding industry. Perhaps the most important of these was the Defence Industrial Strategy (DIS).

Published on the 15th of December 2005, the DIS offers a strategic view of future Ministry of Defence (MOD) defence capability requirements (including new projects) and the industrial capabilities that it wishes to see retained in the UK for defence reasons.

Lord Drayson was only appointed as the Minister of Defence Procurement last May, but managed to deliver on his promise to publish a strategy by the end of 2005 - although some work had been done long before that. The DIS is also rather more useful and relevant than some other recent and pointlessly verbose MOD policy and strategy documents, but Lord Drayson now faces the difficult challenge of actually implementing the strategy.

History shows that few defence related strategies are ever fully followed through by UK governments; they tend to “fade away” in the middle age rather last until the end of their originally intended time horizon (10 years in the case of DIS). But it does seem very likely that the DIS will have a considerable impact in the UK shipbuilding industry between now and the next general election, likely in 2009.

The DIS is less than complementary about the current situation in the industry – “The UK maritime business is characterised by high and increasing overheads, and has a skills base spread across too many entities. Procurement strategies and commercial arrangements have not adequately incentivised or enabled rationalisation and efficiency improvements. The sector has failed consistently to deliver satisfactory performance, with several high-profile maritime projects encountering delays and cost increases. … The current situation is unsustainable and places huge pressure on the future programme.”

The DIS defines the following core or key naval industrial capabilities and objectives for the UK:

• To retain the suite of capabilities required to design complex ships and submarines, from concept to point of build; and the complementary skills to manage the build (at least for first of class), integration, assurance, test, acceptance, support and upgrade of maritime platforms through-life;
• For the foreseeable future, retain all of those capabilities unique to submarines and their Nuclear Steam Raising Plant, to enable their design, development, build, support, operation and decommissioning. MOD and industry must demonstrate an ability to drive down and control the costs of nuclear submarine programmes;
• Retain on shore (i.e. in the UK) a number of specific key maritime system capabilities and technologies, including the ability to develop and integrate into platforms complex maritime combat systems.
• Retain the ability to maintain and support the RN.

The DIS also identifies a number of immediate actions:

• The MOD will negotiate with the key submarine companies to achieve a programme-level partnering agreement with a single industrial entity for the full life cycle of the submarine flotilla, addressing key affordability issues. The aim is to achieve this agreement for award of the fourth and subsequent Astute Class submarines (expected late 2006).
• For Surface Ship Design & Build, the MOD aims by May 2006 to have reached a common understanding with industry on the core load required to sustain high-end design, systems engineering and combat systems integration skills.
• For surface ship support, the MOD will negotiate with the industry with the aim of exploring alternative contracting arrangements and the way ahead for the next upkeep periods, which start in the autumn of 2006.
• Key Maritime Equipment industrial capabilities will be supported by the production of a sustainability strategy by June 2006.

Key companies mentioned in the submarine sector are Babcock Naval Services Ltd, BAE Systems, KBR (including DML) and Rolls-Royce Marine, while key companies in the complex surface warships and Royal Fleet Auxiliary sector are Babcock Engineering Services Ltd, BAE Systems, KBR (including DML), Thales, and VT. Swan Hunter is not mentioned, despite being the lead yard for the Bay Class auxiliary landing ships.

A major issue highlighted in the strategy is the long-term industrial capacity required by the MOD. The current shortfall in work is not mentioned, but the DIS claims that it is expected that the Future Aircraft Carrier, Type 45 Destroyer, Astute and MARS projects will keep the UK shipbuilding industry fully employed for the next ten year years. However it is stated that from around 2016 the MOD’s “steady-state” demand will be significantly lower, and “as a customer, we cannot afford and do not need to maintain the current pace of successive new platforms once the new ships are in service”.

In the past the MOD has specified that all warship hulls should be built in the UK, but this will no longer be the case - “In a change to the previously stated Defence Industrial Policy, there is no absolute sovereign requirement to construct all our warship hulls onshore. …. We need to build onshore to the extent that it sustains the ability to design and physically integrate complex warships. Furthermore, since warships are rarely prototyped, we need to ensure that we retain the ability to learn and adjust designs whilst the first of class is being built”. The DIS says that provided that key capabilities are being maintained, in future the need for work to be done in the UK will be judged on a case by case basis. This change in strategy clears the ground for the hulls of some or all of the MARS tankers to be ordered from foreign commercials shipyards, and even allows some blocks for the new carriers to ordered from overseas.

The DIS assesses the current UK shipbuilding industry to be fragmented, and wants it to consolidate and refocus around a Core Work Load which will be promised by the MOD, and which will be sufficient to sustain the key capabilities and represent a viable business. The DIS also considers that system engineering capabilities are currently being duplicated and sub-optimised across several companies, and that potential synergies with support business are not being realized - “There is a clear need to streamline the businesses, making them more efficient and profitable, removing duplication and establishing clear centres of excellence”. The DIS emphasise that the MOD will not pay a premium for utilising any UK capacity in excess of that required to deliver the Core Work Load.

(MOD)

UK shipbuilding industry is expected to now begin restructuring and streamlining itself in order to improve its performance - building upon the industrial alliance arrangements being put together for the CVF programme. The MOD will work with industry to address the fundamental issues of affordability and productivity. The DIS also asks ‘industry’ to maximise the relationship between in-service support and upgrade, and size itself based upon mirroring MOD’s future needs and a realistic assessment of military export potential - “The future for UK shipbuilders lies in high value design, systems and sub-system assembly and integration; plus specialist and novel hull construction capability, particularly where there is a high outfit to steel ratio, as exhibited in complex warships.”

The DIS implies that in future the use of competition by the MOD will be less common for major and complex naval projects, “for example, one fully loaded allocated stream of surface ship build might offer better value for money than several partially loaded streams in competition”.

The MOD’s largest single supplier, BAE Systems, has welcomed the DIS, and said that it shares the view that there will be benefit from consolidation in the maritime sector based the substantial forward core work load on complex surface ships, submarines and their support. “The company recognises the challenge to deliver affordable platforms and support – especially on submarines.”