Canadian Defence Review

 

March 25, 2014

 

Title: A resurgent Davie mulls NSPS contribution

Subtitle: Canada’s largest shipyard is taking a new look at the defence sector

 

There is an expression: “Me and time as my ally against any two men,” which Davie Canada learned the hard way. Two years ago Canada’s largest shipyard, at the time in bankruptcy protection, watched helplessly as competitors snagged umbrella contracts stemming from the National Shipbuilding Procurement Strategy. However according to Alex Vicefield, if that competition, the biggest in Canadian history, had been held a year or two later, the result would have been different. Now he is working to make up lost ground.

 

“Davie is back,” says Vicefield, chairman of Inocea, which took over effective control of the Levis Quebec-based shipyard in early 2013 after raising hundreds of millions of dollars to invest in the facility.  “We are the busiest yard in Canada and thus have huge untapped capabilities as a potential NSPS force multiplier that the Department of National Defence could easily leverage.”

 

Andy McArthur, the former chairman of the Shipbuilding Association of Canada, who is now working as an independent consultant, agrees. “Our initial recommendation to the Canadian government regarding NSPS was for a three shipyard solution (as opposed to two),” says McArthur. “The Davie yard is twice the size as competitor facilities. Its people are an extremely talented group. They thus could easily contribute.”

 

Davie’s current focus is on naval construction, offshore oil & gas equipment and industrial manufacturing. During the past year staffing has shot up from 35 to 850 employees, who are working on a solid order book of supply ships, ferries and numerous other vessels. Now, following a recent teeming agreement with Babcock, Davie officials are preparing to leverage those assets by making a renewed push in the defence sector, starting with a focus on the needs of the Canadian Coast Guard.  

 

“The NSPS scenario of 2010 does not recognize the reality of shipbuilding in Canada today and the renewed capability of the country’s largest and highest capacity shipbuilder,” says Vicefield. “We are the leading shipyard by a variety of measures ranging from steel production to ship handing capacity. We could easily pitch in on numerous fronts including small ship construction and in-service support work. For example we recently filed a proposal to build the Polar Icebreaker on-time and on-budget and have proposed new ideas about how to build the Canadian Surface Combatant more effectively.”

 

NSPS: reeling under a series of blows

Davie’s offer to pitch in on the $35 billion National Shipbuilding Procurement Strategy could not have come at a better time. Late last year the Harper Government was slammed in an Auditor General’s report, for overpromising the number of ships that could be built for the money budgeted. The report also highlighted significant risks regarding lack of competition, performance measures, contingencies and technical challenges. As a result, defence department and Public Works and Government Services Canada officials will almost certainly be looking for creative new ways to get things done more effectively.

 

Recent developments have also left Canada’s policies regarding support ships in shambles. In early March, the HMCS Protecteur, one of the Royal Canadian Navy’s two auxiliary oiler replenishment vessels, was towed to Hawaii after being hit with by a ruinous fire. Damage was so severe that the battered vessel could not be repaired at the Pearl Harbour facility and will thus need to be brought back to Canada.

 

Now questions are being raised as to whether the 45-year old ship will ever see action again. As Rob Huebert, associate director of military and strategic studies at the University of Calgary has noted, this would leave Canada without a crucial naval capability, “the ability to travel independently as a unit.” Experts say that Canada needs at least three supply ships, one on each coast, and a third as a backup, for when vessels undergo maintenance.

 

Strangest of all note industry experts, was the notionally free enterprise-friendly Harper Government’s decision to award de facto monopolies on NSPS combat and non-combat vessel construction (to Irving Shipbuilding and Vancouver Shipyards respectively), a policy which could bind the Canadian government’s hands for the next three or more decades.

 

Vicefield argues that Davie, which is ready to hit the ground running with its existing facilities, could play a role in the process, as other shipyards would require significant upgrades, in order to be able to do so. “Anyone who knows anything about business can tell you that if you only have one supplier prices will shoot up,” says Vicefield. “A more productive shift could involve bringing in more players to compete on individual components when possible. We can get a lot more done, for a lot cheaper, if we work as a team.”

 

Inocea’s opportune investment

Vicefield knows what he is talking about. His main role at Davie’s Monaco-based parent has been overseeing the company’s commercial and technical operations. To do that he brings impressive qualifications to the table, including decades of sector experience and post-graduate degrees in maritime law and ship finance.

 

However it was Vicefield’s extensive ship investment expertise that enabled him to quickly identify and seize on the Davie opportunity. The Levis shipyard is ideally geographically positioned on the south side of the St-Lawrence River, one of the world’s most important shipping lanes, facing the cliffs of Quebec City. Its origins date back almost 200 years, to its founding in 1825 by English sea captain Allison Davie.

 

Since then the company has built more than 700 vessels and drilling ships, including more than 35 military vessels during the Second World War. These included including mine sweepers, corvettes and destroyers. More recently Davie played a major role producing three of Canada’s existing surface combatants, the Halifax Class Frigates.

 

World class facilities

The Levis shipyard facilities, which Davie officials bill as among of the biggest in North America, house extensive dry docks and steel cutting capacity, which are impressive even to an amateur observer. They include all the capabilities expected in a world class yard, ranging from metal working, to painting, machining, piping, carpentry, electrical, panel lines, construction berths and a range of slipway options.

 

However plant and equipment don’t build ships, people do. Labour accounts for 40% percent of a ship’s cost, with materials taking up the rest. Therein lies another key Davie advantage. “There is a strong pool of qualified workers in the area,” says Vicefield, who first came to Canada looking for a shipyard to acquire, after Inocea had evaluated numerous facilities around the world.  “Many of our people are third generation ship builders. Ever since we revamped activity, applications have continued to flow in. That’s in strong contrast to the situation said to be facing our competitors on the coasts, who have been forced to bring in workers from outside the country to fill their rosters.”

 

The strong labour pool stems in large part from historical ship industry clustering in the Quebec City region which encompasses suppliers, ship designers, engineering companies, ship owners and other stakeholders.

 

Ironically Davie employees, though unionized, are particularly reasonably priced. “We focus on high-value added vessels that cannot be effectively produced in low wage jurisdictions such as China. We thus need the skilled workers that can be most easily found in Western economies,” says Vicefield. “We initially looked at European yards however labour costs were far cheaper here … in some cases half as much. When we combined that advantage with Davie’s modern systems, high-quality workmanship and labour availability, we got serious about the facility real fast.”

 

In fact the deal looked so compelling that when Upper Lakes Group (Davie Shipbuilding’s former owner) put the yards up for sale (after partners Daewoo and SNC-Lavalin, pulled out of the project in the wake of the failed NSPS loss) Inocea (then known as Zafiro Marine) was quick to step in.

 

A strong partnership with labour

Key to Davie’s rapid success was its partnership with the local union, which played a major role in facilitating operations, and in helping put pressure on Quebec politicians to shift work there to build for two ferries for the Societé des Traversiers du Québec. Union officials have also raised questions about recent free trade deals inked by the Harper Government with the European Union and South Korea, which are putting protective import quotas on certain ship categories at risk, without apparently getting anything for the industry in return.

 

Officials at the CSN (Confédération des Syndicats Nationaux) in particular have been outspoken critics of the federal government’s decision to effectively cut Davie Canada out of large scale naval vessel construction for the coming decades, by excluding it from NSPS. “In the federal strategy, there is no room for a large shipyard in Quebec,” CSN researchers argue in a recent report titled A new beginning for the shipbuilding industry. “This is unacceptable.”

 

The report also recommends that given new realties in the industry that the federal government award NSPS contracts using a tender process that leverages the advantages of competitive bidding and that Seaspan and Irving subcontract work that they cannot handle on-time or on-budget. 

 

New work methods, new markets

That said Davie officials knew from the get-go that for the yard to succeed quickly, attitudes, workflows and other legacy practices would need to change. The company almost immediately diversified its services offering to include the full range of work it now does on ferries, oil and gas equipment, industrial manufacturing and naval ships.

 

One sign of its progress came late last year when Davie sent the Cecon Pride its 717th vessel out for its maiden launch. The 130 meter, dynamically positioned subsea construction vessel, was built to demanding Norwegian North Sea standards. According to Vicefield, the Cecon Pride, the first of three such ships to be built, is the “largest and most sophisticated ship built in Canada in over 15 years.”

 

In fact the Cecon Pride shares numerous characteristics with several projected NSPS vessels, including the Polar Icebreaker, which Davie officials believe would be an ideal fit for their yard. Similarities range from the proposed diesel-electric propulsion to other common machinery and systems.

 

Looking to the future

That said, according to John Schmidt, the company’s vice-president (commercial), who recently joined the company after long stint at Irving Shipbuilding, the magnitude of Davie Canada’s capacity means that generating new business will be a major priority. In September of 2013 alone, the company submitted $1.2 billion worth of proposals and contract bids. The recently delayed Polar Icebreaker will be a key focus.

 

“Canada’s only existing Polar Icebreaker, the Canadian Coast Guard’s Louis St-Laurent, has been in-service for almost half a century,” says Schmidt, who came to Davie along with a slew of Irving executives. “We have the capacity to start building a replacement almost immediately, on-time and on-budget. This would save the government hundreds if millions of dollars.” 

 

Another big prize on the defence front is the more than $2 billion worth of new smaller ship construction, expected to be handed out to during the coming years. With the two NSPS winners tied up on the larger vessels, Davie officials are bullish about their chances on smaller vessels going forward.

 

Schmidt was particularly surprised by the fact that the Canadian government awarded Vancouver Shipyards an additional un-tendered $3.3 billion contract for the construction of 10 new vessels, whose final size has yet to be determined, given that the government admitted that the yard was unable to deliver on its existing seven vessel commitment (two Joint Support Ships, one Offshore Oceanographic Science Vessel, three Offshore Fisheries Science Vessels and the Polar Icebreaker). 

 

A coherent maritime policy?

“We are lacking a coherent maritime policy,” says Vicefield. “Countries such as Canada, which benefit from unique regional environments, and maritime challenges such as those presented by Arctic conditions and the potential of the North-West passage opening further to international shipping, are also well placed to pioneer new technologies to cater to those local conditions.”

 

One element of a potential Canadian maritime policy, could be a streamlining of existing workflows and inefficiencies to take advantage of new conditions on the ground. Vicefield notes that Davie, which during the NSPS competition was operating on a skeleton staff and backed by uncommitted owners (who would later pull out), only had a few weeks to prepare a bid. Despite lacking the operational systems, procedures and human resources needed to compete properly the company nevertheless came within just a few points of actually winning.

 

“Without a well thought-out, long-term maritime policy, NSPS will merely serve as short-term government stimulus,” says Vicefield. “With two shipyards wholly reliant on governmental contracts, they will experience great difficulty in adapting to commercial vessel construction for export.” 

 

“It should be obvious that a process (NSPS) which would decide the fate of the federal shipbuilding for the coming three decades, and which came about at a time when Canada’s largest, highest capacity and oldest shipbuilder was not in operation and was unable to put together a fair bid, does not represent the most cost effective solution for the Canadian taxpayer,” says Vicefield. “We think it is time to take a new look at the situation, based on existing realities.”

 

If that involves Davie Shipbuilding extending a helping hand, the company is more than happy to do its share

 

*******

 

Sidebar A: Davie at a glance

 

Name: Davie Canada

Parent company name/information: Inocea (Zafiro Marine)

Key contacts: John Schmidt, vice-president (commercial), Alex Vicefield (Chairman of the Inocea Group). 

Services offered: naval construction, offshore oil and gas exploration and production, industrial manufacturing

Number of employees: 850

Phone: 418-837-5841

Web-site: http://www.davie.ca/

Locations (Canada): Lévis Quebec

Export markets: Europe

 

 

 

Sidebar B: Possible areas Davie can add value to NSPS

 

Arctic sovereignty and the Polar Icebreaker

Many of the world’s navies regard Canada’s north as a cold Indonesia, which they can traipse through at will. The Polar Icebreaker could thus arguably be regarded as one of the country’s most important naval priorities. Davie officials claim the fact that its yard is already in production mode positions it well to produce the ship in short order. This would save Canada an estimated half a billion dollars that current program delays are expected to cost. 

 

In-service support

Davie’s spare capacity, impressive capabilities and two century history as a ship repair facility, position the company well to become an in-service support center of excellence for Canadian naval vessels. Davie Shipyard is expected to draw increased attention during coming months as Canada evaluates maintenance, repair and overall options related to the Arctic Offshore Patrol Ships and the Joint Supply Ships.

 

The Canadian Surface Combatant

The breadth of Davie’s capacity coupled with its experience building three of Canada’s Halifax Class Frigates position the yard well to do work on the Canadian Surface Combatants which will be built to replace them. One possible scenario would see the evolution to an “alliance” type model, through which Davie and Irving would partner to share prime contractor responsibility. The ships could thus be built in pre-outfitted sections by a range of Eastern Canadian suppliers and then erected in the given strategic supplier’s facility. Experts say that this would reduce costs, speed delivery, reduce technical risks and better spread the economic benefits.

 

Small ship construction

Davie’s covered slipway, which provides protection and can handle multiple simultaneous ship construction projects, could be leveraged to streamline small ship construction, a highly exportable capability. Canada needs to build more than a hundred such vessels during the coming years. Company officials argue that bundling key construction categories with Davie as prime could create a learning curve that would improve quality and generate significant economies of scale.

 

Sidebar C: Highlight this quote:

 

“We are the busiest yard in Canada and thus have huge untapped capabilities as a potential NSPS force multiplier that the Department of National Defence could easily leverage.”

Alex Vicefield, Chairman of Davie Canada

 

peter@peterdiekmeyer.com

 

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[1] Data from site as at August 6, 2014 http://www.multpl.com/shiller-pe/


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