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Shipbuilding: Forging Ancient Competitive Development Strategies

This article was originally published on the workbook Ambiente Estratégico 2022: Seguridad, Desarrollo y Defensa Nacional (only available in Spanish).

Summary

The national security and development strategy identifies economic activities that make it possible to direct the efforts of the workload towards national interests. Shipbuilding is an activity within the shipbuilding industry that favors economic development, generates highly qualified jobs, and improves the country’s competitiveness; however, it needs, fundamentally, the participation of the State for its maintenance over time. In the Peruvian case, the Peruvian Navy (MGP) and the Industrial Services of the Navy S.A. function as strategic partners. In this sense, the MGP has plans approved by the National Security and Defense Council for the replacement of its naval units, evidencing as an urgent pending -within the framework of the constitutional functions of this armed institution- the replacement of the current Lupo-type missile frigates by multi-role units. The establishment of the “Executive Board for the Implementation of the Reform of the National Industry through the Strengthening of the Naval Industry in Peru,” by the Ministry of Economy and Finance, is a good sign to face this challenge. Therefore, it only remains to agree and see the sources of financing that materialize its sustainability in the medium term.

Keywords: Industry, Shipbuilding, Strategies, Competitiveness, National Development, National Defense.

Introduction

The Society of Naval Architects and Marine Engineers states that the naval industry has categories, its main ones being design, construction, manufacture, operation and repair. This industry is represented by various firms, companies and shipyards, supported by a group of small businesses that provide related goods and services.[1] Like any commercial activity, it requires a strategic planning process for adequate decision making, which allows avoiding the impact of risks on the business, as well as measuring its goals to achieve the objectives set, using a feedback process to implement changes to business strategies, which are usually highly volatile.

Shipbuilding is one of the activities that has allowed many countries to maintain a strategic industrial capacity, becoming a permanent source of national development. In the case of the construction of warships, it is noteworthy the participation of the State as the main actor in the establishment of policies and plans, as well as the approval of construction programs aligned with national security and defense strategies, which lead to the improvement of technological development and local economic diversification. This mechanism was implemented in Peru during the 1980s with the construction of the Italianate-designed Lupo-class missile frigates at Servicios Industriales de la Marina S.A. (SIMA-PERU S.A.), which generated highly specialized jobs, obtaining a technological transfer of relevance for the time.[2]

The Peruvian Navy (MGP) has considered -within the framework of its strategic plans- the construction of multirole units to replace the missile frigates, an issue that has become an unpostponable pending for the Nation, since they represent the manifestation of national naval power,[3] allowing -in accordance with the Constitutional mandate- to guarantee independence, sovereignty and territorial integrity in the maritime sphere, the raison d’être of MGP. [4] In this regard, this article analyzes whether the national potential for shipbuilding coincides with the experiences of other countries, which have allowed the sustainable replacement of their national squadrons. To this end, initially, this article addresses the strategic vision of Peru regarding the naval industry; Subsequently, the experience developed in other countries with its different nuances is analyzed; and, finally, the structure of the Peruvian shipbuilding model and its impact on national interests is examined.

Forging Steel for a Strategic Vision

The national security and defense strategy establishes the interests that a State seeks, expresses the national strategic vision to achieve its objectives, and proposes to guarantee the integrity of the nation by combating threats, in order to shape a safe environment for development and general welfare. These national interests can exist in the political, economic, social and cultural fields.[5] Today, Peru has a management instrument, promulgated by the Ministry of Economy and Finance (MEF), called the “Executive Board for the implementation of the reform of the National Industry through the Strengthening of the Naval Industry in Peru,”[6] which seeks to promote and propose specific actions that boost the naval industry, for the benefit of the economic development of the country. This is a great step to improve the potential of both ship repairs and national shipbuilding. The next step is the identification of the financing that allows the activity to be fully sustainable over time, as will be seen in the analysis of foreign cases.

The national strategy includes the concept of “maritime strategy,” which considers shipbuilding as an activity that generates development through not only highly qualified labor, but also a set of industrial processes certified with quality standards. In the cases of Australia, the United States, the United Kingdom, among other countries, it can be said that four main criteria are used: (1)naval strategy and long-term plans, industrial basis of shipbuilding; (2) manpower and project management administration, determining that these countries develop their naval fleets through strategy; (3) the long-term vision; and (4) the objectives they pursue and projects resulting from it.[7] Undoubtedly, this expresses a unified and interrelated thinking, which concerns a number of minor economic activities that strengthen national development.

Foreign Shipbuilding Strategies

In 2017, the Australian Department of Defense published the shipbuilding plan, where it argues -mainly- the benefits of this proposal (diversification of the local economy, generation of highly specialized employment, among others) and its impact on national development. This plan has been structured in three shipbuilding programs: the first, aimed at front-line warships; the second, to submarine units; the third, to smaller auxiliary vessels. This vision, aligned with its national strategy,[8] openly expresses its interest in economic development through national defense policies, improving the nation’s military capabilities in order to protect it against threats to its security.

According to researcher John Birkler, the Royal Navy of the United Kingdom is the only military customer of the shipyards of the British naval industry, a situation that does not favor the competitiveness of the national industry, since the installed capacity significantly exceeds the demand of shipbuilding, making it –sometimes- unsustainable. This situation is repeated for many countries, so the following question should be asked: Should the shipbuilding industry be extended to other markets, especially as it is an activity influenced by exogenous factors?[9] This requires expanding the national geopolitical strategy to influence allied or national interest countries through the shipbuilding industry. For the British case, Hans Pung, president of RAND Europe, has identified strategic capabilities for the next 30 years, oriented to combat systems, shipbuilding and integration, among others.[10] As can be seen, the prospective concern for the sector is to have sustainability through construction programs as part of its national strategy. This vision coincides with that expressed by the Ministry of Defense of the United Kingdom, which has expressed its ambition to have a strong and solid naval industry, which demands a large local workforce, and that has a great potential for long-term development aligned with national interests, giving confidence to the workforce employed through its shipbuilding plan for the Royal Navy.[11] This is a policy that will be evident repeatedly in the countries of the first world.

Canadians, through the Department of National Defense, argue that shipbuilding should not be considered solely as a concept linked to the simple construction of a hull, but, rather, as a computer with buoyancy characteristics, and that reasons intelligently. This concept is supported by the research of an emerging defense industry, which allows for advanced shipbuilding and design technology, combined with high research and development (R+D) standards to improve productivity locally. The most outstanding aspect of the Canadian model is the transparency it discloses in terms of public spending, which allows generating confidence in the population, and avoiding suspicions of mismanagement and acts of corruption. Likewise, the hiring of shipyards for the renewal of naval units goes through an analysis of their budgetary framework. This is posed by way of question by retired Rear Admiral Ian Mack, who states that the strategy proposed in 2008 was, at the time, bold, despite the business resistance to its implementation, but it is still considered the only viable way out for the moment.[12] Consequently, industry and shipbuilding demand a sustained effort from the State to achieve the national interests and objectives set, as well as economic development and national defense.

The United States, as Christine L. Komoroski has put it, considers that the use of lasers in production and information technology for the internal processes of the industry, bring with them a number of technological advantages, which not only minimize production times and improve efficiency, but also standardize procedures, adapting quickly to the internal bureaucracy of the modern world under a mixed concept between the private and the public.[13] A central aspect of the process will always be that corresponding to human resources, so the researcher Jessie Riposo proposes a balanced strategy between the allocation of the load and the workforce, where strategic decisions are not limited by the laws that dictate when, where and who can perform maintenance or construction;[14] but rather, where there is a compensated system and in perfect balance; Otherwise, sometimes you would have a productive installed capacity and, at others, idle. The Commander of Naval Operations of the United States Navy emphasizes that the plan projected for the next 30 years seeks to have a modern naval force, where shipbuilding is a pillar to sustain national security through the replacement of material that has lost military capabilities in the face of current threats.[15] It is important to highlight this example because it shows the vision of this high military authority, which not only has its sights set on national defense, but also on strengthening the potential of the naval industry, as a strategic binomial of development and national security.

Traditional Peruvian Competitive Development Strategies

In 1999, Law No. 27073, Law on Industrial Services of the Navy S.A., was promulgated, the purpose of which is to promote and develop the naval industry, as well as complementary and related industries, its main reason being those related to the construction and repair of MGP ships,[16] a declaration that shows the importance of the national naval industry for the Peruvian State. This company will continue to operate without major competitors due -mainly- to the global crisis of recent years,[17] a circumstance that does not encourage local competitiveness if the State does not have a direct participation in the matter and, worse, since it leaves the shipbuilding industry without development margins.

High-ship shipbuilding in Peru still has several problems unresolved, the main one being the loss of its influence in the South Pacific region. In Peru, only SIMA-PERU S.A., at its headquarters in Callao, allows high-board shipbuilding of more than 2,000 DWT, deadweight.[18] On the other hand, there is no sustainable policy that guarantees the continuity of shipbuilding over time, generating low levels of productivity, technological outdatedness and high turnover of human resources to other more profitable activities. In this regard, Professor Jorge Benzaquen describes some proposals to develop high-ship shipbuilding. First, there is the State’s interest in participating in this activity and aligning it with other national strategies; then, to have strategic alliances with international shipyards that allow it to improve its production capacities; Finally, define a strategic supplier of inputs of national production -such as naval steel-, which will allow to have a competitiveness to develop the Peruvian naval industry in the medium term,[19] as happened in previous years during the construction of the missile frigates.

In addition, shipbuilding has a close relationship with the strategic location of countries. In the Peruvian case, its geographical situation in the region is potentially competitive, with an exit through the central part of the South Pacific and its extensive coast; however, it has a large gap in its infrastructure, production lines, R+D, among other aspects, where the participation of the State today is minimal.[20] This does not allow to exploit the characteristics of Callao as a hub port for the growth of the naval industry and its related activities, as proposed by Mario Alor in his design of a maritime cluster that houses the shipyards within the framework of the National Maritime Policy,[21] and where SIMA-PERU S.A. is the most representative entity of the national naval industry.[22] Likewise, for Iván Talavera and Juan Velarde, the remunerations that the naval industry must offer must be in accordance with the technical and technological specialization of the activity.[23] This, in the case of SIMA-PERÚ S.A., is a great challenge to achieve, since belonging to the National Fund for the Financing of State Business Activity (FONAFE) has certain restrictions on salary scales that prevent it from offering better remuneration than those of the local market, a situation that slows down the competitiveness of the company.

In recent years, SIMA-PERÚ S.A., through its SIMA-Callao headquarters, has built the B.A.P. “Pisco” (AMP-156) and the B.A.P. “Unión” (BEV-161), while the new B.A.P. “Paita” is under construction. Also pending is the replacement of the 2,600 DWT missile frigates, front-line warships that are reaching the end of their useful life in naval service. Two of these ships were built in the stands of SIMA-Callao, at which time the highest peak of competitiveness and investment in training in the history of Peru was reached, bringing with it a high demand for standards in shipbuilding, which allowed to have a state-of-the-art technology and a change of paradigms in naval doctrine and the employment of the national squadron. Undoubtedly, technology shapes the doctrine and tactics of a Naval Fleet.[24]

Finally, MGP – as a strategic client of SIMA-PERÚ S.A. – is an entity that commissions projects within the framework of its shipbuilding programs. This interdependence requires assuming certain risks and strategic decisions when both parties are intimately linked, as already described. Therefore, the strategy for the replacement of the national squadron must be established, as considered in the strategic plans of the MGP and approved by the National Security and Defense Council (COSEDENA) since 2014.[25] Although this situation represents an advantage for the public management of investment projects, it does not have the budgetary framework for its implementation. This is where the challenges have to be taken with an optimistic approach to see the issue as an opportunity to find sources of financing that align with public policies and the current legal framework. The norm for the “Executive Board for the implementation of the reform of the National Industry through the Strengthening of the Naval Industry in Peru”, approved by the MEF on September 6, 2022, is a milestone that begins a better future for this industrial sector and for National Defense.

Conclusions

Shipbuilding in Peru should be considered as a productive activity at the highest level of the State, through the strategy of national security and defense. This will establish mechanisms to improve the country’s capabilities and competitiveness, using strategic alliances in the short and medium term with internationally renowned shipyards for the production of quality goods and services that allow the closing of existing technological gaps. Likewise, foreign models confirm that, without the participation of the State, the shipbuilding industry cannot be sustained over time, since it has to maintain a balance between strength and workload, making shipbuilding one of the activities of local economic development that directly benefits national interests and objectives. Undoubtedly, the establishment of the Executive Board by the MEF is a good sign to face the national problem and understand the true potentials of the naval industry, considering that the strategic plans of the MGP are approved by COSEDENA, and that they show that the replacement of the national squadron is an urgent pending for the Nation. . Now it only remains to agree and see the sources of financing that materialize its sustainability in the medium term.

Endnotes:

  1. Thomas Lamb, “Ship Design and Construction”, The Society of Naval Architects and Marine Engineers (2003), 3-16, http://www.highlightcomputer.com/NArch%20502%20%20Ship%20Design%20and%20Construction.pdf (accessed August 20, 2022). ↑
  2. John Rodríguez Asti, “Las fragatas Lupo: Una breve mirada retrospectiva y perspectivas”, Marina Magazine, year 95, no. 3 (Peru: July-December 2002), https://issuu.com/historianaval/docs/las_fragatas_lupopdf/1 ↑
  3. IEHMP, “Fundamentos de doctrina marítima”, Institute of Historical-Maritime Studies of Peru (December 2012), https://archivohistoricodemarina.mil.pe/product/fundamentos-de-doctrina-maritima/ ↑
  4. Congress of the republic, “Constitución Política del Perú”, Edition of the Congress of the Republic (May 2016), https://www.congreso.gob.pe/Docs/files/documentos/constitucion1993-01.pdf, (accessed August 20, 2022). ↑
  5. Rubén Herrero de Castro, “El concepto de interés nacional” in Evolution of the concept of national interest, Higher Center for National Defense Studies (Madrid: April 2010), 19, https://publicaciones.defensa.gob.es/media/downloadable/files/links/m/o/monografia_115.pdf (accessed August 20, 2022). ↑
  6. Ministry of Economy and Finance, “Resolución Ministerial n.° 170-2022-EF/10, conforman la ‘Mesa Ejecutiva para la implementación de la reforma de la Industria Nacional a través del Fortalecimiento de la Industria Naval en el Perú’”, El Peruano (July 13, 2022), https://busquedas.elperuano.pe/download/url/conforman-la-mesa-ejecutiva-para-la-implementacion-de-la-re-resolucion-ministerial-n-170-2022-ef10-2086219-1 (accessed August 20, 2022). ↑
  7. Andrija Ljulj, Vedran Slapnicar and Izvor Grubisic, “Current Approaches to the Management of Naval Shipbuilding Projects”, Brodogradnja Vol. 72, n.º 1 (2021), http://dx.doi.org/10.21278/brod72105 (accessed August 20, 2022). ↑
  8. Australian Government, “Naval Shipbuilding Plan,” Department of Defence (2017), https://www.defence.gov.au/sites/default/files/2020-05/NavalShipbuildingPlan.pdf (accessed August 20, 2022). ↑
  9. John Birkler, et al., “Differences between military and Commercial Shipbuilding: Implications for the United Kingdom’s Ministry of Defence,” Rand Corporation (California: 2005), https://www.rand.org/content/dam/rand/pubs/monographs/2005/RAND_MG236.pdf (accessed August 20, 2022). ↑
  10. Hans Pung, et al., “Sustaining Key Skills in the UK Naval Industry,” Rand Corporation (California: 2008), https://www.rand.org/content/dam/rand/pubs/research_briefs/2008/RAND_RB9349.pdf (accessed August 20, 2022). ↑
  11. Ministry of Defence, “National Shipbuilding Strategy: The Future of Naval Shipbuilding in the UK”, National Shipbuilding Strategy (2017), https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/643873/NationalShipbuildingStrategy_lowres.pdf (accessed August 20, 2022). ↑
  12. Ian Mack, “Emerging Lessons from the National Shipbuilding Procurement Strategy”, Canadian Global Affairs Institute (March 2019), https://d3n8a8pro7vhmx.cloudfront.net/cdfai/pages/4134/attachments/original/1555640628/Emerging_Lessons_from_the_National_Shipbuilding_Procurement_Strategy.pdf?1555640628 (accessed August 20, 2022). ↑
  13. Christine L. Komoroski, “Reducing Cycle Time and Increasing Value through the Application of Knowledge Value Added Methodology to the U.S. Navy Shipyard Planning Process”, Calhoun Naval Postgraduate School (California: 2005), https://calhoun.nps.edu/bitstream/handle/10945/376/NPS-AM-06-003.pdf?sequence=1&isAllowed=y (accessed August 20, 2022). ↑
  14. Jessie Riposo, et al, “U.S. Navy Shipyards: An Evaluation of Workload – and Workforce – Management Practices,” Rand Corporation (California: 2008), https://www.rand.org/content/dam/rand/pubs/monographs/2008/RAND_MG751.pdf (accessed August 20, 2022). ↑
  15. Office of the Chief of Naval Operations, “Report to Congress on the Annual Long-Range Plan for Construction of Naval Vessels for Fiscal Year 2023”, Department of Defense US (Washington, DC: April 2022), https://media.defense.gov/2022/Apr/20/2002980535/-1/-1/0/PB23%20SHIPBUILDING%20PLAN%2018%20APR%202022%20FINAL.PDF (accessed August 20, 2022). ↑
  16. Congress of the republic, “Ley n.° 27073. Ley de Servicios Industriales de la Marina S.A. SIMA-PERÚ S.A.”, Industrial Services of the Navy (March 26, 1999), https://www.sima.com.pe/transparencia/mapafonafesp/1210_SIMAPERUSA_2013_LeyN_27073.pdf (accessed August 20, 2022). ↑
  17. Diana Feria, et al., “Planeamiento Estratégico para Servicios Industriales de la Marina – Callao”, CENTRUM Graduated Business School (Peru: May 2016), https://tesis.pucp.edu.pe/repositorio/bitstream/handle/20.500.12404/14726/FERIA_IPANAQUE_PLANEAMIENTO_MARINA.pdf?sequence=1&isAllowed=y (accessed August 20, 2022). ↑
  18. Jan Babicz, “Wӓrtsilӓ Encyclopedia of Ship Technology”, Wӓrtsilӓ Corporation (Helsinki: 2015), https://www.wartsila.com/docs/default-source/marine-documents/encyclopedia/wartsila-o-marine-encyclopedia.pdf (accessed August 20, 2022). ↑
  19. Jorge Benzaquen, “La Industria Naval en el Perú”, CENTRUM Revista Strategia, n.° 42 (Peru: September 2016), https://docplayer.es/59223642-La-industria-naval-en-el-peru.html (accessed August 20, 2022). ↑
  20. Alexander Chui, et al., “Situación general de la industria de la construcción naval de Bajo Bordo”, in Viva Amazon Culture Magazine, Vol. 1 No. 2, Private University of Pucallpa (July – September 2016), https://revistas.upp.edu.pe/index.php/RICCVA/article/view/25/17 (accessed August 20, 2022). ↑
  21. Ministry of Defence, “Decreto Supremo n.° 012-2019-DE. Aprueba Política Nacional Marítima 2019-2030”, El Peruano (December 20, 2019), https://busquedas.elperuano.pe/download/url/decreto-supremo-que-aprueba-la-politica-nacional-maritima-20-decreto-supremo-n-012-2019-de-1839591-1 (accessed August 20, 2022). ↑
  22. Mario M. Alor Hurtado, “Propuesta de diseño de la Política Nacional Marítima para promover el desarrollo de un clúster marítimo en el Perú para el período 2020 al 2050”, Naval War College (Peru: 2019), https://repositorio.esup.edu.pe/bitstream/20.500.12927/279/3/ALOR.pdf (accessed August 20, 2022). ↑
  23. Iván R. Talavera López and Juan C. Velarde Pretel, “Análisis estratégico de la competencia del SIMA en el sector de reparaciones navales”, University of Piura (December 2021), https://pirhua.udep.edu.pe/bitstream/handle/11042/5360/MDE_2126.pdf?sequence=2&isAllowed=y (accessed August 20, 2022). ↑
  24. Wayne P. Hughes Jr., Fleet Tactics and Coastal Combat Second edition (Annapolis: Naval Institute Press, 2000). ↑
  25. Ministry of Defence, “Resolución Suprema n.º 654-2014-DE. Aprueba los Planes Estratégicos del Ejército, Marina de Guerra del Perú y Fuerza Aérea del Perú”, El Peruano (November 5, 2014), https://busquedas.elperuano.pe/download/url/aprueban-los-planes-estrategicos-del-ejercito-marina-de-gue-rs-n-654-2014-de-1160510-6 (accessed August 20, 2022). ↑

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The ideas contained in this analysis are the sole responsibility of the author, without necessarily reflecting the thoughts of the CEEEP or the Peruvian Army.

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