Quotulatiousness

May 27, 2013

The economic and technical issues with domestic ship-building programs

Filed under: Cancon, Economics, Military — Tags: , , , — Nicholas Russon @ 12:44

The Royal Canadian Navy is supposed to be getting some new ships (eventually), at a proposed cost of $25 billion. But the best way to get the most bang for our buck is not the way the government is going about it … building these highly specialized vessels in Canada does two things: it guarantees that we’ll pay far more money for fewer hulls, and it briefly raises employment in certain fields (metalworking, electrical work, welding, etc.). What it doesn’t do is create a viable industry for building naval or coast guard ships for other countries — because most other countries can either build their own (France, Germany, the UK, and the US) or have the economic sense to buy from friendly countries that can build efficiently at reasonable cost. Even if we pay a significant premium to build frigates or destroyers in Canada, once that job is over the shipyards will close down and most or all of the workers will be looking for new jobs.

Michael Whalen has more:

Given the above, the second, far more strategic, issue to be discussed is: Should we in fact be building warships in Canada at all? What is the long-term benefit to Canada?

The immediate answer from politicians of all stripes is, interestingly, not great ships, but jobs, jobs, jobs. However, the jobs they are talking about may well be far less valuable than we imagine.

There is no standard breakdown of the costs of building a warship, but a recent study by the South Australian government (as part of its input to that country’s proposed 30-year, $250- billion naval shipbuilding strategy) suggests the actual shipbuilding represents much less than half of the cost of a warship, perhaps 30 per cent to 40 per cent.

The rest comes from the design, armament, engines, electronics, etc., which will largely be procured outside of Canada, certainly outside of Nova Scotia. The benefits to Nova Scotia and to Canada will be in largely blue-collar jobs such as shipwrights, welders, electricians and general labour. In a job-poor province such as ours, these are nothing to sneeze at. This massive expenditure will not, however, create a sustainable long-term industry for our province.

To put it bluntly, there is no market for Canadian-built warships. The major buyers, the Americans, the British, the French, the Chinese, etc., build their own. They will never buy a ship from Canada.

Our governments, federal and provincial, will spend billions establishing a small, inefficient industry for which there is no market outside the government of Canada.

There are economies of scale to consider: for a dozen ships, it makes no sense to essentially create an industry from scratch. For a hundred ships, the costs start to be reasonable (but we don’t need that many, couldn’t crew that many, and nobody will buy them from us). We have an infamous historical test of this, too:

There is something of a parallel here with the aircraft industry. John Diefenbaker has been condemned for nearly 60 years for cancelling the Avro Arrow, Canada’s last attempt at building a warplane.

In retrospect, he was right. Instead of spending billions on a jet for which there was no market, subsequent governments invested in companies like DeHavilland and Canadair (both ultimately purchased by Bombardier) and Pratt and Whitney Canada which focused on the growing market for commercial aircraft, particularly small airliners serving regional markets.

Today this country has a vibrant aerospace industry that is among the world’s largest. Canadian-built aircraft fly on every continent and jobs have been created across the country, including many here in Nova Scotia.

Large parts of this industry resulted from the identification of a sustainable, growing niche market (regional airliners) and investing in the components (e.g. airframe design, small turbine engines, landing gear) required to meet that demand. There is no evidence that kind of strategic thinking has gone into Canada’s shipbuilding program.

4 Comments

  1. Welcome to the problem of media perception. If the Federal government spends $20 Billion overseas the media cries and moans and does not see a value for dollar. They see money that the government didn’t funnel to “Canadian buisness”. This happens for all military spending, because it is the largest and highest profile. So instead of actually just doing what is best, the government must pander to the media who drives public opinion.

    Comment by Dwayne — May 27, 2013 @ 14:45

  2. Oh, this is also quite true. Any major equipment purchase for the armed forces brings out the “Buy Canadian” crowd in earnest. Even when the government of the day manages to place an order with a non-Canadian firm, there’s usually some pork-barrel “offsets” to push a bit of the money to well-connected Canadian companies. Maybe we should set up a special legal category for them … we already have “Crown corporations”, so these others would logically be “Crony corporations”.

    Comment by Nicholas — May 27, 2013 @ 14:50

  3. This is policy at Industry Canada

    http://www.ic.gc.ca/eic/site/042.nsf/eng/h_00020.html

    I don’t recall which government brought it in, but it has been around for quite a while now.

    Comment by Dwayne — May 27, 2013 @ 16:01

  4. And we wonder why military equipment is so expensive…

    Comment by Nicholas — May 27, 2013 @ 16:06

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