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Wednesday 23 Aug 2017 | 00:49 | SYDNEY
Wednesday 23 Aug 2017 | 00:49 | SYDNEY

Three destroyers for the price of four

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30 October 2009 10:42

Last Tuesday I asked ASPI for some help in making sense of an article which seemed to show that South Korea is paying an absurdly low US$286 million each for new destroyers, when Australia is set to spend A$8 billion for three seemingly similar ships.

ASPI's Andrew Davies didn't ignore my cry for help, but he wanted me to wait until the launch of his new paper today before I published his thoughts on the matter. Pages 19 and 20 are particularly relevant for this discussion.

The first thing to say is that, according to Andrew, the US$286 million figure is likely to be for the hull only, and does not include the US$400 million cost of the AEGIS combat system, and millions more for weapons. That brings the price of the two classes of ships a lot closer, but there's still a huge gap, and that's because we insist on building the ships in Australia. Says Andrew: 'The bottom line is, we are getting three ships for the cost of four.'

Andrew supplied me with a couple of paragraphs from a talk he gave on this subject last year:

Let’s look at the example of building air warfare destroyers in Australia. I have written—and have been criticised for it in some circles—that there is a large premium, of order 30-40%, for building them here. The riposte I received is that the only differential between Australian shipyards and overseas ones is the cost of labour. Everything else, the argument runs, is purchased at market prices—the commodity steel, copper wire, through to the Aegis system. When you do the sums, you conclude that the differential is closer to 5%.

But that misses a fundamental point. That sort of argument will give the right answer only when both production lines are mature. When we set out to build AWDs, we incur a whole bunch of fixed costs before we start cutting steel, and the first vessels are at the start of the learning curve and therefore significantly more expensive than later ones. Of course, we then stop at three (or maybe four)—well before the benefits of learning mature. When you factor all of that in, you get my answer, which I stand by.

Image courtesy of the AWD Alliance.

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