Navy secretary blasts defense industry’s stock buybacks

SAN DIEGO—Defense contractors are too focused on stock buybacks and other gimmicks that line their pockets and not enough on investing in shipyards or shoring up the defense industrial base, Navy Secretary Carlos del Toro said Thursday. 

“Overall, many of you are making record profits, as evidenced by your quarterly financial statements,” Del Toro told the crowd at the AFCEA West conference here. “You can't be asking for the American taxpayer to make greater public investments while you continue to goose your stock prices through stock buybacks, deferring promised capital investments, and other accounting maneuvers.”

He said such antics give the impression that certain contractors are seeking to “prioritize stock prices that drive executive compensation rather than making the needed fundamental investments in the industrial base at a time when our nation needs us to be ‘all ahead flank’. We need to work together, government and industry, to develop the shipbuilding industrial base. You need to deliver ships, aircraft, and submarines on time and on budget. And you need to innovate.”

The Navy is already looking to “ensure that we will leverage all legal means at our disposal to ensure that the American people are getting what they paid for” via its general counsel’s office and a tool called the Taxpayer Advocacy Project, he said. 

Del Toro focused heavily on shipbuilding capacity, an area where China far outpaces the United States. That is the result of decisions made decades ago, he said.

“In the early 1980s, someone decided that it's a wonderful idea to leave naval shipbuilding to the marketplace. And it worked. The marketplace took over and China started investing in naval shipbuilding, commercial shipbuilding, and they had all the advantages. Cheap labor, no regulation. They can make a decision tomorrow and a new shipyard would be constructed. And they actually capitalized the entire market,” he said.

Del Toro said commercial shipbuilders in the United States tried to keep pace, and U.S. allies Korea and Japan also stepped in with their own shipyards. 

“But we have to, as a nation,  get to a better place if we have any expectation that we will actually build the…commercial ships that will be necessary to have in conflicts, in addition to growing a bigger Navy for our United States”

The sheer size of the shipbuilding gap—last year, the Office of Naval Intelligence implied that China’s shipyards could produce 232 times as much as U.S. yards, as measured by gross tonnage per year suggests that while the United States might narrow the gap but won’t be able to close it completely. 

Defense One asked Del Toro if the United States might be better served by doubling down on a strategy of more easily-manufactured unmanned systems to cut the time for full-scale deployment down from a decade-plus. 

The secretary called the idea “nonsense.”

“I mean, just because we have a significant challenge between our shipbuilding industry and the PRC, shipbuilding industry, does not mean that we shouldn't do anything. Right? We need to recapture that,” he said.

Del Toro said that “of course” the United States has to invest in unmanned technology but he pointed to legislative tools that could incentivize domestic shipbuilding. 

“I discovered a law, that's Title 46, where the Secretary of the Navy and the Secretary of Transportation today have the authorities, actually, if we deem that a particular ship has dual-military use, to be able to provide a set of funding for that. So if a ship costs, say, $100 million to build here and it costs $80 million to build overseas, we could actually incentivize that U.S. shipbuilder with $20 million of investment so they can be built here with American jobs. That's just one small example.”