=economics =industry =military
the Constellation-class frigate
Last month, the US Navy's Constellation-class
frigate program
was canceled. The US Navy has repeatedly failed at making new ship classes
(see the Zumwalt, DDG(X), and LCS programs) so the Constellation-class was
supposed to use an existing design, the FREMM
frigate used by
Italy, France, and Egypt.
However...
once the complex design work commenced, the Navy and Marinette had to make vast changes to the design in order to meet stricter U.S. survivability standards.
Well, ship survivability is nice to have, but on the other hand, this is what a single torpedo does to a destroyer. So how does that requirement creep happen? Here's an admiral saying "DO NOT LOWER SHIP SAFETY STANDARDS" and linking to this document but the document doesn't have any hard rules, it just says "here are some things to consider doing" and "you must evaluate whether there are cost-effective survivability improvements to make". People say "I'm just following the rules" whenever they get criticized, but it's actually a judgment call from the leadership, and the leadership has bad judgment. This post says:
Shock-hardening for near-miss torpedo protection, a chemical, biological, and radiological (CBR) citadel, thicker bulkheads for Arctic operations, and the decision to install the heavier SPY-6 version 3 radar instead of the FREMM’s lighter system all contributed to the bloat. Engineering modifications show the hull stretched 7 meters and the beam widened 0.6 meters, yet commonality with the parent design has crashed from 85% to barely 15%.
I heard there were also requests to duplicate and reroute pipes and wires for more redundancy. Anyway, the US Navy can't figure out how to design a new ship, but there's a larger underlying issue: US shipbuilding is very expensive, yet there's also a backlog of US Navy orders. A new Burke-class destroyer is more than $100/lb. That's about as much per mass as a new Lamborghini Temerario, and 25x as much as the biggest cruise ship. There's a bunch of expensive equipment on them, but still, Korea's copy of the same (inefficient) design is 1/3 the cost.
US shipbuilding
What's the
problem with US shipbuilding, then? Well, I've recently seen a few super
helpful articles, like
this:
Amid the recent wave of optimistic headlines about American shipbuilding, one challenge continues to cast a long shadow: how to attract young, ambitious workers to an industry where entry-level wages can start as low as $35,000 a year. Yet for those who stick with it and build their skills, earnings can climb to five times that amount or more.
Aha! American labor costs are just too high! But wait...it says America has 105k shipbuilding workers now? So...
- USA: ~105k
workers
- Korea: ~140k workers
- Japan: ~72k
workers
So, Korea and Japan are building
over 100x as much ship per worker-year as the US. Yeah, that article is
propaganda: it's a PR piece that amounts to "give us more money, we promise
to use it to make good jobs for americans". By the way, that low pay for
entry-level workers is because the union screws over new people to maximize
pay for people with seniority. Aircraft pilot unions do the same thing.
Why is US shipbuilding so much less efficient? That's because it's using
worse processes and equipment, of course, but what exactly are the
differences?
The modern approach to ship construction is to make
slices inside a building, use a big crane to lift them to a big drydock, and
weld them together. Here's a
timelapse of that basic approach being used in Korea. For comparison,
here's a
timelapse of the USS Gerald
Ford in a drydock. Note that the cranes lift relatively small
pieces, and that it sits in a drydock for 4 years.
So, why can't US
shipyards do that? Obviously, the Korean approach requires large buildings,
heavy cranes, and large drydocks. Maybe US shipyards fell behind on capital
investment, but if they get money specifically for shipyard upgrades,
presumably they can catch up. Well, that's what Congress figured, and
the US government has already put a bunch of money into shipyard upgrades,
partly with the $21 billion Shipyard Infrastructure Optimization
Program.
("SIOP")
For comparison, the market cap of HD Hyundai Heavy
Industries is about $31 billion. (And if you were wondering, its debt/equity
is low.) Also,
NAVSEA has an
annual budget of ~$30 billion and more personnel than Japan has
shipbuilders. So there was plenty of money to build shipyards with far more
output than the US has now - but SIOP started in 2018, there was other
federal money for shipyards before that, and somehow it hasn't solved the
problem. Perhaps because the people who got that money don't want to solve
the problem - and also don't know how to, but that's a secondary issue.
Corporate executives want to cut costs in the short term and move to a
better job before longer-term impacts hit. That's what Jack Welch did
repeatedly at GE. Unions want to maximize pay for senior members and ban
automation that reduces their paid hours. That's what the US port worker
union
did.
Again, the US Navy has a backlog of orders, which means none of the
shipbuilders can have their orders reduced if they do a bad job, which means
there's no competition. And when there's no competition, the only options
are:
1) start
buying from other countries so there's competition again
2) offer deals
to foreign shipbuilders that get them to operate in the US
3) nationalize
the shipbuilders, and try to find competent management (so, not NAVSEA)
4) get bad results at high prices, leaving you right at the edge of not
buying anything
Or, they could give someone like
me a billion dollars to make a new shipyard, but let's be semi-realistic
here. The US government has been going with (4) but concerns about China and
Taiwan now have it considering (1), and (2) is already
happening.
In addition to China and Taiwan, there's another reason this is an interesting time for the shipbuilding
industry: welding. A lot of the power of shipbuilder unions comes from the
expertise of their welders being hard to replace quickly. But as this
video notes, while new laser
welders are EXTREMELY DANGEROUS, you can train people to get good welds with
them very quickly compared to traditional methods. They also weld stuff much
faster. I think this makes shipbuilding unions relatively vulnerable now.
business cultures & corporate governance
Compared to US executives, Asian business leadership has been much more
willing to make big long-term investments. I think this is related to
managers staying at the same place longer, and higher cultural valuations of
managers having engineering knowledge. But culture is complex; the
immediately visible aspects are only the tip of an iceberg consisting of a
self-sustaining network of interactions. Trying to explain cultures in terms
like "more individualist" or "longer-term thinking" is like the parable of
the blind men and the
elephant. Well,
Americans think Asian cultures can be weird, Chinese and Japanese think the
same thing about American culture, and you could say everybody's
right.
So, if you ask
how you can make US
management more like Asian
management in some particular way, but not other
ways, the answer is that you
can't, it's just in a different equilibrium.
But there are some kinds
of capital investment that US businesses have been downright eager to make,
so let's consider those. Specifically, I'm thinking of:
- datacenters
for cloud services
- datacenters for AI
- Tesla "gigafactories"
-
big software projects
What's the difference between
datacenters and shipyard upgrades or factory equipment? I think it's transparency to investors.
When companies buy billions of dollars of AI chips, lose money continuously,
and keep getting investment, what are investors looking at? Some investors
are looking directly at the amount
of AI chips owned, while most capital investments are too complex and thus
opaque.
As for Tesla, some investors seem to have trust in Elon Musk
personally, that if you give him money he'll use it to build stuff that
makes sense. Similarly, Mark Zuckerberg still has voting control of Meta,
but investors don't seem to mind that he can do whatever he wants with the
whole company.
In theory, investors are supposed to vote for
corporate boards who figure that stuff out and make transparent reports +
incentive mechanisms, but in practice nobody has an incentive to do that:
- For
individual investors, their vote barely matters and isn't worth paying
attention to.
- Hedge funds aren't going to hold the stock long-term; if
they have a problem with management they'll just sell the stock.
- Big
activist investors would generally rather take companies private so they can
make a big difference than try to fight over board elections.
- Index
funds have no incentive to vote in good ways, because every vote they make
affects their competitors equally. This might lead to US corporate
governance gradually getting worse than it is now.
Then, there's software. How is a company making software different from making big investments in factories or shipyards? Personally, I think it's largely about headcount. Managers like having a lot of people working under them, because it's a legible metric used for prestige and pay. There's also the fact that, for historical reasons, office workers who might have their work replaced by software are less unionized than people in heavy industry. I'm not sure how much credit I can give to the management here; rather than US software projects being planned well, it seems more like, if you hire enough programmers and have a suitable corporate culture you just end up with some sort of software products.
Nippon Steel
One thing
ships use a lot of is steel, and Nippon Steel recently bought US
Steel.
That implies 2 things:
- They think
it's worth making steel in the US; their advantage wasn't just being in
Japan.
- Nippon Steel had better management than US Steel.
I don't generally think of
Japanese companies having good management in general. In my experience,
Japanese individuals and contract workers are quite professional and
interested in improving their work-related skills. Probably more so than
Americans. Yet, Japanese wages are (on a per-hour basis) much lower than US
ones, and I think that's largely because the management culture is overall
even worse than in America. (And partly because of some large-scale
embezzlement from Japanese corporations involving corrupt contracts to
private companies, but that's beyond the scope of this post.) But in heavy
industry like steelmaking, things involving these big long-term capital
investments, Japanese companies seem to have a relative advantage, and I do
think that's because of management culture leading to longer time horizons
and more emphasis on engineering.
By the way, a lot of Americans have
the impression that Japanese work much longer hours, but that's
not
the
case
anymore. Government efforts have substantially reduced unreported overtime,
too; that's probably no higher than in America these days. (You can see
Germany at the bottom of that chart; GDP per hour worked is actually higher
in Germany than the USA. Feierabend ist wichtig!)