In a recent speech, US President Donald Trump asserted that the United States has fallen behind in shipbuilding, declaring a goal to make more ships “very fast, very soon.”1 The Wall Street Journal has reported that the Trump administration is drafting a new executive order intended to energize US shipbuilding. And a proposed piece of US legislation announced in 2024 (sponsored by a bipartisan group of congresspeople) noted an intent to remedy a current shipbuilding deficit, in which the “US shipbuilding industrial base lacks the capacity to produce oceangoing vessels at scale.”2
Concerns about geopolitical tensions, potential shifts in the balance of seafaring power, and emerging technologies that are expected to enable new types of military vessels could all encourage the United States—as well as other countries around the world—to consider reinforcing domestic shipyards’ capacities and capabilities. Outside of Asia, however, few nations have exhibited recent strength in shipbuilding productivity. US shipyards, for example, produced about 5 percent of the world’s tonnage (about two dozen new ships per year) in the 1970s, but they accounted for only about 0.1 percent of global tonnage in 2023.3 Multiple US military shipbuilding programs have fallen years behind schedule.
This context could present opportunities for the private-capital industry to play a role in modernizing global shipbuilding and improving the efficiency of the world’s shipyards. The private equity (PE) approach to value creation could be well suited to boosting shipbuilding capacity.
A successful shipyard transformation that improves efficiency and productivity could benefit global security efforts. But private-capital involvement could also generate considerable financial benefits by encouraging near-term performance improvements. Shipbuilders could potentially sustain these profits for years because the industry features relatively few customers, high barriers to entry for competitors, yearslong build cycles, and sustained demand for ships and maritime services.
PE organizations can consider undertaking a close analysis of the shipbuilding and repair sectors. They could assess how to apply PE knowledge bases and resources most effectively to meet the shipbuilding industry’s current challenges.
Opportunities for improving output in shipbuilding
A PE approach could bolster shipbuilding capacity by creating supply bases that are better matched to shipbuilding needs; managing costs and performance in ways that increase output derived from the same capital and labor base; investing in capital expenditures that enable crucial updates of facilities, equipment, and technology; and attracting the next generation of talent to the industry.
Building a better supply base
Unlike other major manufacturing sectors, such as the aerospace and automotive industries, the US maritime industry doesn’t currently benefit from the presence of a mature and well-structured supply base. Major shipbuilding “primes”—meaning shipyards that deliver vessels—repair yards, and subcontractors are often forced to rely on a disjointed web of small, mom-and-pop suppliers for both minor components (such as fasteners and connectors) and major services (such as electronics, machining, and fabrication work). This situation increases supply chain complexity and costs, as smaller suppliers are unable to benefit from economies of scale and more time and effort is required to manage the supply base at nearly every level.
The private-capital industry often seeks to amalgamate organizations within a sector and integrate their offerings. In the maritime sector, private-capital companies could potentially find creative combinations of complementary organizations (integrating, for instance, machining, fabrication, and waterfront capabilities). This would increase output by improving supply chain efficiency while eliminating some of the commercial and managerial complexity that major shipbuilding contractors encounter when dealing with a bevy of smaller suppliers.
Controlling costs
Historically, many shipbuilding contracts have been executed on a “cost plus” basis—meaning contractors charge a percentage or fee on top of the cost of materials and services. This approach can help share risks, and it has frequently allowed shipyards to pass on increasing costs of production, repair, and sustainment directly to buyers and still maintain a margin for themselves. One unintended consequence of this model, however, is that costs may bloat because shipyards don’t have strong incentives to keep them in check. In this environment, shipyards could still see revenues increase, even if their operational models remain unchanged and they don’t increase capacity or throughput.
Many shipbuilding contracts are now moving to a fixed-fee model—meaning that a fee is negotiated at the outset of a project and is intended both to cover the contractor’s costs and to provide its margins. In this environment, cost bloat is likely to dilute the profitability of the contract.
The PE sector is known for its rigorous focus on cost management, and control over bottom lines helps maximize the projected value in many PE deals. Within shipbuilding, strict cost management could protect and improve margins for contractors if major buyers, such as navies, continue to pivot to fixed-fee contracts for new builds.
Managing performance
Existing pay structures for shop floor and “deckplate” employees can sometimes encourage less efficient work. Hourly workers aren’t provided with incentive to complete all their work during the week if a slower production pace allows them to work weekend overtime shifts at significantly higher hourly pay rates. Meanwhile, at the management level, executive compensation for shipbuilding contractors is often disconnected from both throughput and profitability.
Better performance management could lead to more output—and therefore more revenue—without increasing cost bases. The gains from improved performance management could be considerable if successful approaches can be found to address current performance shortfalls, such as inefficient asset utilization, low labor productivity, and chronically slipping ship delivery schedules.
PE companies have often placed emphasis on tying individual employee compensation (at all levels of an organization) to performance. In the maritime industry, executives’ bonuses could be linked directly to goals such as meeting project milestones on time and hitting revenue and profitability targets. Hourly workers could be given wage boosts tied to on-time completion of shift schedules instead of receiving higher overtime pay rates. Finding new ways to reward performance, both in shipyards and throughout the supply base, could align organizational incentives in ways that propel efficiency and productivity.
Investing in infrastructure
The infrastructure of American and European shipyards is aging after a multidecade period of low volumes. To meet projected increases in demand, a large portion of shipyards’ existing equipment might need to be replaced or overhauled. Much of the supply base that provides components and services lacks the funding to execute investments necessary for a quick ramp-up in volumes, and many suppliers are too small to leverage sophisticated financing vehicles that could help pay for new equipment and facilities.
Many shipyards particularly lag behind in digital infrastructure, continuing to manage workflows using pen and paper. This can cause substantial inefficiency in a sector in which highly synchronized activities require flawless coordination across miles of shipyards and dry docks. Switching to digital workflows, while requiring major investments in new systems, could result in substantial efficiency improvements.
The PE sector has historically been able to deploy large amounts of capital for high-ROI initiatives. An infusion of private capital could deliver sorely needed funding for investments that update infrastructure and modernize digital capabilities. Because shipyards are highly interconnected, targeted infrastructure investments into bottleneck areas (such as blasting, machining, painting, and steel fabrication) could considerably increase output, operational efficiency, and labor productivity, which could potentially result in outsize ROI.
Attracting talent
The shipbuilding industry has faced declining talent pools, especially at the management level, over the past few decades. Shipyards are complex facilities with many interdependencies across production shops. Experienced managers often tap into deep institutional knowledge built over long careers. Given the low volumes and long cycle times in shipbuilding and ship refitting, the next generation of managers could face challenges if they attempt to ramp up quickly without being afforded the opportunity to see a complete construction cycle. Incoming managers will need to be comfortable with technology to implement and leverage digital solutions required for managing builds end to end.
The PE playbook often prioritizes sourcing and retaining top talent for portfolio companies. Hiring capable leaders—in some cases, ones who’ve gained experience in adjacent industries—can be a means of introducing novel ways of working and best practices that have proven effective in other contexts that present similar challenges. Shipbuilding has, in the past, tended to promote from within. Drawing on a fresh set of relationships could help PE companies attract new talent to the sector.
Potential upsides of investing in shipbuilding
In assessing whether and how to invest in shipbuilding and ship repair companies, PE players might wish to consider several industry-specific characteristics that could potentially boost future ROI.
Expected volume increases offer growth opportunities
To meet the scope of the demand projections for new vessels to at least the mid-2050s, shipyards would need to produce vessel tonnage at a rate 50 percent higher than the prior ten-year baseline rate.4 The rate of production of nuclear-powered submarines, in particular, would need to increase considerably.
To alleviate capacity constraints, prime shipyards have turned to small and medium-size shipyards and steel fabrication companies to supply modules for vessel construction. As this model continues to mature, there may be opportunities for investment that enable the building of increasingly complex and higher-cost modules.
Current inefficiencies create potential for quick wins
A 2024 article by the Associated Press reported on “backlogs in ship production and maintenance.”5 Shipyards have struggled to deliver new construction and repair work on time and within budget, often demonstrating bottom-quartile operational performance and lean maturity relative to other heavy industries. Through a recent targeted operational transformation program (including operating system redesign and frontline performance management), and with zero capital expenditure, one US shipyard was able to achieve a sustained productivity increase of more than 60 percent in a critical production facility within six months. PE firms that can deploy expertise and disciplined focus to achieve efficiency and productivity gains could find similar opportunities to create value through rapid operational improvements.
Development of flexible capabilities could ensure steady utilization
Given the high, fixed overhead costs required to operate a shipyard, having the flexibility to fulfill contracts for services beyond new-vessel construction—such as repair and overhaul work, ship modernization, decommissioning, and disposal—is crucial for maintaining steady shipyard utilization. With military and commercial fleets expected to expand through new construction and service-life extensions for older vessels, the demand for maintenance, repair, and overhaul (MRO) services can be expected to increase accordingly. Profit margins for MRO work could be two to four times higher than for new-vessel construction. PE firms can enhance shipyards’ flexibility by equipping them with modern automation and additive technologies that efficiently expand the scope of shipyard service offerings (such as manufacturing replacement parts instead of buying them from suppliers).
Long-horizon demand could provide stable, predictable revenue
The primary customer of shipbuilding and ship repair in the United States is the US government. This is a customer with desirable creditworthiness and professed long-term demand. As evidenced by the proposed bipartisan SHIPS for America Act announced in December 2024, the US government is actively eyeing investments in America’s maritime industrial base. (This bill would be an additional commitment beyond announced plans for funding America’s submarine industrial base.)
Large shipbuilding programs typically run for decades after they enter production, resulting in relatively stable and recurring revenue. For example, Arleigh Burke–class destroyers have been in production since the late 1980s, with 73 ships still in service in 2024.6 Plans regarding forthcoming Constellation-class frigates involve acquiring at least 20 ships, with procurement of up to 58 ships possible over the program’s life cycle.
In the shipbuilding industry’s quest to meet rising demand and fulfill national-security-mission needs, it could benefit from reinvigoration. PE companies’ involvement in the sector could accelerate the supply chain simplifications, operational transformations, infrastructure upgrades, and talent infusions that are necessary to improve its efficiency and output while also yielding substantial ROI.
