The Other Side of Canadian Shipbuilding

Ernest Chong

Wednesday’s $35 billion in shipbuilding contracts has been widely proclaimed as a long-term commitment to the future of the Royal Canadian Navy and the Canadian Coast Guard. The selection process was celebrated as being free from political interference and regional favouritism. So far, with the exception of expected grumbling from Quebec, the process seems to have been a success.

But critics argue that awarding the contracts to Halifax’s Irving Shipbuilding and Vancouver’s Seaspan Marine is also a reaffirmation of Ottawa’s long-standing preference to keep Canadian dollars at home. Such has been the history of Canadian military procurement – an arguably well-intentioned process that has become laden with lengthy encumbrances more focused on deriving domestic industrial benefits than buying the right equipment for the military.

Critics say these future ships – particularly the naval vessels – can be procured offshore from Canada’s allies. The insistence on building them in Canada could cost some 20% more than purchasing them internationally. There are doubts that the final bill will be $35 billion, as the costs of the Navy’s Upholder submarines and Sea King replacement helicopters can attest. They are convinced that the whole exercise is a forlorn effort to resurrect an economically unviable industry to build over-priced ships.

But is it really?

The general argument for offshore military procurement is that buying from industry leaders ensures a high-quality product without the associated R&D costs or the maintenance of domestic production capabilities. Economies of scale will also offer lower prices, and often the products are immediately available, ready to be purchased “off the shelf”.

It is true that many of Canada’s allies are in the midst of modernizing their navies with new frigates and pocket destroyers. Canada’s recent track record of buying offshore has also been quite good – a streak of luck in catching Leopard main battle tanks on sale, jumping in on existing C-17 and C-130J production runs, and finding superb mine-resistant armoured vehicles for Afghanistan. With limited defence industrial capacity at home, the Canadian Forces often goes abroad to procure equipment.

While this may be possible for ground vehicle fleets or even aircraft, there is no Wal-Mart for warships. In modern warship production, the design is tailored to individual client specifications from the keel up. The ‘bespoke’ nature of construction and the inherent costs of building a large combat vessel mean that no shipyard keeps an ‘overstock’ of hulls. Moreover, production almost never reaches serial economies of scale – the one peacetime exception being the United States Navy’s ubiquitous Arleigh Burke-class destroyer.

Canada is thus left with two options: pay for a brand new design and construction run, or buy into an existing production queue of warships. The actual inter-national political feasibility of these options aside, there are a number of considerations that make buying offshore less attractive than first believed.

First, the options are far more limited than we think. We must distinguish between commercial ship construction and warship production – South Korea and Japan are the world’s commercial shipyard leaders, but are not leading producers of warships. Canada is unlikely to purchase any military equipment from the remaining leader, China, especially if ethics and construction quality are taken into consideration, to say nothing of the security issue with the United States. Canada’s options are thus largely confined to European projects or American designs that are both heavily export-controlled and astronomically expensive.

Second, there is no guarantee that any current projects will meet Canadian requirements. Warships in production now were likely designed nearly a decade ago, making them comparatively inferior in terms of technology and capability to a vessel designed from the keel up today. Warship specifications are also dictated largely by the client nation’s naval doctrine and its operating environment. Australian ships are meant for a sub-tropical Pacific, littoral environment, whereas the Canadian Navy operates in the Atlantic, Pacific, and the Arctic, in both blue and littoral waters. European navies are designed mostly for the relatively short ranges of the Mediterranean. Canadian ships require global nautical range.

Third, there is no guarantee that purchasing offshore will net any savings from the cost ‘premium’ of building in Canada. An accurate comparison of costs, especially when there are two differently-designed and –equipped ships, is difficult. Many European yards have had decades of consistent national subsidization, while Canadian shipyards – until now – have not. Some estimates by foreign builders look at ‘sail away’ costs, in comparison to the costlier ‘life cycle’ costs used in Canadian procurement. The large shipbuilding cost reductions – material and Asian labour – are largely irrelevant because of the specialized application of military hardware and the lack of viable Asian warship options respectively. The labour costs are likely to be similar between Europe and Canada. There is also no indication that offshore shipyards do not suffer from the same (or worse) procedural, fiscal, and design maladies that can delay the Canadian process.

Indeed, cost overruns – no one reasonably expects such a gargantuan undertaking not to – in Canada can at least be partially recovered since the money will circulate in Canadian coffers. It will ultimately mean that Canadian taxpayer dollars are being recycled into Canadian pockets, not lost overseas. Aside from quantity-centric industrial regional benefits, offshore purchases do not contribute any lasting effect to the Canadian economy in general or Canadian defence industries in particular. Building domestically would mean the majority of funds spent would go directly to Canadians in the form of sub-contracts and employment, and indirectly in the form of increased regional spending and spin-off effects.

This is not to say that a built-in-Canada approach is without its own issues. Significant obstacles remain. The Canadian shipbuilding industry itself will require time and resources to revitalize the infrastructure and rebuild the human capital lost over 15 years of inactivity. A cooperative relationship must be established between government, the military, and industry to ensure a clear process for ship design and specifications, allowing for adequate construction time and reasonable cost fluctuations. Shipbuilding will have to share the fiscal pie in an age of austerity with other military priorities, procurement and otherwise, as well as non-military federal spending priorities more generally.

It remains to be seen whether a revitalized Canadian shipbuilding industry – commercial or military – can compete internationally. While the challenge is certainly daunting, the prospect remains that Canada has some 15-25 years to carve a niche for itself. The National Shipbuilding Procurement Strategy intends as much. There are merits to building the next generation of Canadian warships at home. It would be premature for us to applaud or dismiss it so early in the process.

Ernest Chong graduated from the Master of Public Policy program at the School of Public Policy and Governance in 2011. He also holds a Master of Arts in War Studies from King’s College London. He is currently an affiliated analyst for Polaris Strategies, a Washington D.C.-based consultancy start-up. His areas of interest focus on defence and security issues in Canada, the United States, and Pacific Asia.

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