Future PLAN orbat discussion

Jura said:

Andy have you ever heard of "procurement death spiral"?

what you described isn't "the overall picture", but it's the opposite of what happens,

which is after costly development a program is truncated or axed (PR Depts then spin it like 'tremendous amount of data gathered', 'exciting challenge', 'great opportunity to learn' LOL)

your points 1. and 2. are unvarnished sales talk

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If you think about it, the procurement death spiral is not relevant.
Weapons manufacturers are mostly MONOPOLIES or DUOPOLIES, so there is very limited competition.

Eg. In the US, 1 shipyard for nuclear carriers, 2 yards for destroyers, 2 yards for LCS/Frigates, 2 yards for submarines etc etc
There simply is no way for incumbent suppliers to lose much work to a competitor, otherwise the Pentagon ends up dealing with a monopoly which is even worse from the Pentagon perspective.

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The GAO report lists the major in-service weapons programmes with a split between FIXED R&D costs and VARIABLE unit procurement costs.

These systems are already fully developed, so the R&D and procurement costs already include any the cost over-runs.
So if the US Navy wanted to procure 2x as many units, it is only the unit procurement element which increases.

So on average, 2x the procurement would increase costs by 78% rather than 100%.
And that doesn't include economies of scale from buying more units.

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But let's include axed R&D programmes as you say, which haven't produced any operational units.
The US Navy procurement costs remain the same, but you've added a lot more costs from cancelled R&D programmes.

So if the US Navy wants to buy twice as many weapons, the cost increase is even lower than the 78% increase suggested above.

AndrewS said:

If you think about it, the procurement death spiral is not relevant.
Weapons manufacturers are mostly MONOPOLIES or DUOPOLIES, so there is very limited competition.

Eg. In the US, 1 shipyard for nuclear carriers, 2 yards for destroyers, 2 yards for LCS/Frigates, 2 yards for submarines etc etc
There simply is no way for incumbent suppliers to lose much work to a competitor, otherwise the Pentagon ends up dealing with a monopoly which is even worse from the Pentagon perspective.

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The GAO report lists the major in-service weapons programmes with a split between FIXED R&D costs and VARIABLE unit procurement costs.

These systems are already fully developed, so the R&D and procurement costs already include any the cost over-runs.
So if the US Navy wanted to procure 2x as many units, it is only the unit procurement element which increases.

So on average, 2x the procurement would increase costs by 78% rather than 100%.
And that doesn't include economies of scale from buying more units.

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But let's include axed R&D programmes as you say, which haven't produced any operational units.
The US Navy procurement costs remain the same, but you've added a lot more costs from cancelled R&D programmes.

So if the US Navy wants to buy twice as many weapons, the cost increase is even lower than the 78% increase suggested above.

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Andy you didn't disappoint: flushing the Pentagon's development money down the toilet then causes a reduced cost increase of unrelated procurement, well that's one heck of business plan LOL

Nice

Just going back to naval costs because Iron Man had an issue with fuel costs
Fuel does cost the same for both China/USA, but Chinese ships use a lot less because they don't spend endless weeks sailing across the Pacific or Atlantic to get to their operating areas. In any case, the cost studies show fuel costs as 10%-20% of Total Lifecycle Cost for a Burke.

So let's have a quick look at the Arleigh Burke versus a larger Type-55

Cost Element
Procurement: You can buy 2x Type-55 (which are larger) for the cost of a single Arleigh Burke
Labour: 3-4x the cost (reflecting the difference between GDP per capita between USA/China)
Maintenance: A function of procurement and labour costs. After all, it's the same shipyards, shipyard labour, replacement equipment, shipboard labour.
Fuel: Costs the same, but Chinese ships don't spend endless weeks sailing across the Pacific or Atlantic.
Support facilities: The equivalent facilities in the USA cost a lot more to build. My guess is on average 3x-4x more.

And if you look at Total Lifecycle Cost studies:
1. Procurement and Maintenance account for the majority of cost.
2. Fuel is a minor element for both China and the USA as per the US cost studies.

So on all these measures (barring fuel) - this example more than supports the use of the consumer PPP multiplier of 2x.

We see the same dynamic play out with other surface warships with the USA where we have somewhat comparable ships and cost figures. eg. LCS, Frigates, Amphibs
And with Chinese conventional submarines as well with Germany and Japan.

Thus we can see a broad pattern across the Chinese navy which supports the use of the consumer PPP multiplier, because it likely underestimates the military PPP multiplier.

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Then we have an Australian academic study which looked at the Chinese military overall, which came to the same conclusion on military PPP.
And a consultant to the Pentagon cost analysis team who outlined a framework and the reasoning (in layman's terms) to support this as well.

The govt is in a strange place where they can just arbitrarily set the price of any ship they want because they own the whole supply chain. They can pass off costs to the shipyard’s running cost itself which doesn’t show up as the ship’s cost.

So it’s not reliable to look at the stated price, as it could have been heavily reduced.

A better way of seeing how much platforms actually cost is by looking at export price. But this doesn’t tell us about how many China itself can make, only what China values the weapons to be.

Biscuits said:

The govt is in a strange place where they can just arbitrarily set the price of any ship they want because they own the whole supply chain. They can pass off costs to the shipyard’s running cost itself which doesn’t show up as the ship’s cost.

So it’s not reliable to look at the stated price, as it could have been heavily reduced.

A better way of seeing how much platforms actually cost is by looking at export price. But this doesn’t tell us about how many China itself can make, only what China values the weapons to be.

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Not exactly.

Yes, the shipyards are stated owned, and the military is government owned as well.
So you're correct in saying they can set the price to whatever they want, because it is just transferring from one pocket to the other.
But why would they distort and unnecessarily subsidise the cost of a warship and make it cheaper for the Navy?

1. Remember each shipyard is its own profit centre - so each shipyard would want their warships to be priced "fairly" to cover their costs and produce some profit.
2. From the military (buyers) perspective, they don't need to generate a profit and would just ask for more funding.
They also want a healthy and sustainable industrial base to produce warships for the long-term.
If the military underpays the shipyards, the military knows this is going to cause problems in the future.

China is also in a situation where most ship classes are produced in only 1 or 2 shipyards.

So in summary, each shipyard has a monopoly/duopoly, so the shipyards do have a lot of power to set the price of their product, and the military would have to agree if the cost was deemed reasonable.

So I reckon the ship costs in China are broadly accurate.
IIRC, someone here mentioned the shipyards are paid on shipyard costs + small profit margin. Which would exclude government funded equipment like radars etc

As for export cost figures, we have to be careful as:
1. The Russians make the export versions of their SAMs a lot more expensive than what they pay for internally, for example.
2. Sometimes weapons exports are at "Friendship" prices

But what we do know of export prices for Chinese Frigates, Corvettes and Submarines - looks to be representative of what the Chinese military pays.

AndrewS said:

...

So in summary, each shipyard has a monopoly/duopoly, so the shipyards do have a lot of power to set the price of their product, and the military would have to agree if the cost was deemed reasonable.
...

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I think it's irrelevant what a Chinese shipyard says is the price for the PLAN in the sense that a Chinese shipyard is assigned a contract in the way so that the potential of Chinese shipbuilding industry is used AS A WHOLE in an optimal way
Oct 20, 2019

Jura said:

now just not to forget a factor which favors China though in a naval buildup (if there's such thing),

which is in the US shipyard workers are hired and fired again and again
Jun 20, 2018


while I expect China to distribute orders between naval and merchant vessels

(I wouldn't write about planned economy, socialism with Chinese characteristics and other ideological stuff, but this is what's in play here -- I hope my wording is careful)

and this way I guess China keeps its workforce in place, and its shipyards up-to-date

(last year I read some tragicomic info about 1930s lathe still in use in some US public shipyard etc., in short tens of billions are needed, not sure if the Pentagon has them)

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and a shipyard's director has nothing to do with was already envisioned by related ministries and of course approved by the Politburo; such a director would just have to do his/her best, with the budget scrambled accordingly and watched closely

-- a total contrast to squeezing the Pentagon for money and piling up promises by the US shipyards; involved Senators; SECNAVs; and USN brass, in the situation when none of those would face any consequences except accordingly getting extra funding; reelected; praised; and promoted, no matter how much a project was delayed and over budget (LOL I guess the more, the better) --

in short China uses a modification of the Soviet model (in which S. G. Gorshkov wouldn't mean much without B. Y. Butoma -- please don't comment if you don't know who they were)

Jura said:

I think it's irrelevant what a Chinese shipyard says is the price for the PLAN in the sense that a Chinese shipyard is assigned a contract in the way so that the potential of Chinese shipbuilding industry is used AS A WHOLE in an optimal way
Oct 20, 2019


and a shipyard's director has nothing to do with was already envisioned by related ministries and of course approved by the Politburo; such a director would just have to do his/her best, with the budget scrambled accordingly and watched closely

-- a total contrast to squeezing the Pentagon for money and piling up promises by the US shipyards; involved Senators; SECNAVs; and USN brass, in the situation when none of those would face any consequences except accordingly getting extra funding; reelected; praised; and promoted, no matter how much a project was delayed and over budget (LOL I guess the more, the better) --

in short China uses a modification of the Soviet model (in which S. G. Gorshkov wouldn't mean much without B. Y. Butoma -- please don't comment if you don't know who they were)

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Couple of points.

Point 1. My read is that Jiangnan and the other shipyards now producing warships aren't really assigned commercial vessels.

Remember that just 12 years ago, there were barely any military warship orders.

So the shipyards mainly lived off commercial contracts, for which they had to compete against rival shipyards inside China and also outside of China.
And in the commercial market, the vast majority of orders are placed by foreign companies - not Chinese companies.
So it would be difficult for the Chinese government to start assigning commercial contracts to specific yards and dictating prices.

But yes, for military vessels, there is a lot more government and political involvement.
After all, the military and ministry want to see a sustainable shipbuilding industry.

Point 2. Cost control and market discipline

Doing commercial work means Chinese "military" shipyards have to price ships accurately, build to budget, and produce a profit.
So there is a system in place to control and reduce costs - because of competition from other shipyards

So shipyard directors do have a lot of say in the budget.
And in general, budgets in China do not change once they have been set. Going over budget is a really, really big deal

Point 3. The Soviet model is not really relevant

With the Soviet Union, there never was a competitive civilian shipbuilding industry which had to compete on a global marketplace against shipyards in Japan and Korea for example.
Quantities and prices were fixed in most? cases in the Soviet Union.
But China's industrial input costs are predominantly set by flexible market mechanisms.

And I doubt the Chinese Politburo get involved in the minutiae of which shipyard gets which orders.

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Summary
So I would say the relationship between the Chinese Navy and Chinese military shipbuilders is more akin to situation which exists in Sweden or Japan for example. These are countries with very collective beliefs, social structures and long-term rational planning like China.

In Sweden, Saab/Kockums is nominally a private military conglomerate, but operates so closely with the Government/Military that there isn't much difference between them.
Ditto in Japan, with nominally private shipbuilders like Mitsubishi. Plus Mitsubishi does a lot of commercial work.

And in China, the military shipyards are explicitly state-owned and do a mix of commercial and military work.

So no new type 071 and type 075 spotted yet. What are they going to do with the idle capacity? This is crazy waste of resources.

Peter2018 said:

So no new type 071 and type 075 spotted yet. What are they going to do with the idle capacity? This is crazy waste of resources.

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90% capacity of human resources is needed for planning, only 10% for building. They are planning new submarines, new propulsion systems, new carriers and so on. They are very busy. There is no waste of resources for sure.