Blog

Legislative Hurdles To National Security In The Civil Maritime Domain

Ie.  A *Starting Point* for Maritime Deregulation

Part 2.

3. Commercial Shipbuilding Obstacles Hamstringing Maritime Development

The second area in which existing legislation could be amended in order to affect a significant increase in national economic well-being is related to shipbuilding and maintenance policies.  Over the years, it is clear that the nation has allowed our shipbuilding capability to deteriorate to levels that severely impact our overall national security.  Simply in order to meet the requirements of the Jones Act, a vessel must be flagged in the US and have an all-citizen crew.  Additionally, the ship must have been built in the United States.

Of the 126 active, registered shipyards operating in the United States, only 20 are recognized as capable of building large ships – and as demonstrated by the numbers, 10 out of 12 deep-draft vessels delivered in 2014 were ordered by the federal government.  In fact, taking into account the ongoing long-term Naval and Coast Guard construction and modernization projects, over 70% of total shipbuilding and repair revenues come strictly from military orders.  For further comparison, out of 1067 total shipyard deliveries in 2014, only 11 were made to the federal government.

In short, while there is clearly a robust system for constructing and delivering smaller craft tailor-made to operate in the littoral region and inland waterways of the United States, the national capability to construct large vessels has vastly deteriorated since the second World War.

• As a point of contrast, consider the shipbuilding industry in South Korea. Reviewing a report from 2015, in 2006 the industry employed approximately 150,000 people directly – but that number should be extrapolated higher over the intervening decade considering the increasing number of deliveries.  By comparison, MARAD recorded a little over 110,000 people directly involved in the domestic shipbuilding industry in 2013 (rising to 400,000 when including secondary jobs associated with the industry).  At the same time, for the year 2013, US shipbuilders delivered 227 ships and commercial vessels of which only 28 were above 2000 gross tonnage (GT) (including government orders) – and of those 21 were offshore support vessels or ocean-going barges.  By comparison, South Korean shipyards delivered at least 301 vessels measuring 5000 GT or more each in 2013, including offshore support vessels.  That there are several magnitudes of difference in production in spite of the numbers of employees involved in both cases reflects several issues.

An improvement in the economy of scale is a goal to aspire to for any nation – and while the United States was previously capable of great strides in shipbuilding during specific periods such as World War II with the Liberty and Victory class freighters, at this date, delays and cost overruns are common – both in military and civilian shipbuilding.  A new cargo vessel can cost up to three times as much from a US commercial shipyard as one built overseas, while taking significantly longer.  Additionally, a common belief held by commercial carriers and operators is that US shipbuilders contribute to these factors by refusing to commit to fixed price contracts or delivery by a fixed date.

While these commercial failings are frustrating, they can in turn be attributed in part to  the continuously growing burden of governmental regulations and standards placed on domestic companies, which will be discussed further below.  Traditionally, critics have pointed to lower environmental standards, salaries and costs of living in shipbuilding countries like China and South Korea – but as has been proven repeatedly before, a rising tide lifts all ships and we are rapidly seeing all of those factors approaching the western world – particularly in South Korea.  Simultaneously, examining the governmental policies of South Korea also provides an interesting contrast to the US.  While initially operating on several policies not dissimilar from the US regulations discussed here, by the mid 1980s, the government realized that corporate competition on an international scale was sufficient to allow domestic shipbuilding corporations to operate on their own under free market principles without excessive governmental support – and rescinded several key acts.  Additionally during a recession in the early 90s and periodically since then, the government has recognized the need to make additional capital available for expansions or upgrades of facility but these have been acts of limited duration with the intents of the measures highly specified.  These policies stand in contrast to the domestic regulations discussed here – some of which have been established for over a century and have consequently become that much more ingrained in the political consciousness – and accordingly difficult to address in a reasonable manner.

• The issue of shipbuilding capabilities touches on several specific factors.  To begin with, it is a very capital-intensive industry.  Unlike building construction, which takes place from the ground up at the desired location – often utilizing a wide variety of mobile, easily transportable equipment and tools, shipbuilding requires very large, very expensive pieces of equipment that must be fixed in place (or potentially very costly to move in a limited fashion) in a set location.  In order to incentivize stakeholders to maintain or upgrade – or even develop and build – these facilities, there must be clearly achievable economic benefits to doing so.  Specifically, they must have an expectation of future orders on which to predicate continue operation – and in turn employee manning, secondary and tertiary orders and subcontracting requirements.

More to the point of this paper – once a company becomes insolvent or determines that the shipbuilding portion of their portfolio is no longer economical, mothballing or shuttering operations is a decidedly final step for equipment and facilities.  Without constant use or maintenance much related equipment – particularly dry-docking facilities or cranes – rapidly deteriorates, and the prime waterfront real estate these facilities occupy can be disposed of equally efficiently.  At this juncture, given the political realities – taking into account environmental regulations, particularly with finding an appropriate location, it would likely be very difficult to build, establish and open a new shipyard domestically without expending an extremely large amount of capital.

As previously stated, there are well over 100 shipyards currently operating in the United States and many of them operate on a much smaller scale.  The geography of the United States with its myriad rivers and lakes, supports a broader, shallower base of smaller vessels that must still be built to detailed specifications in order to meet Jones Act requirements – which in turn do employ large numbers of employees.  Korea in contrast, builds virtually exclusively for blue-water operations, taking into account that over 90% of deliveries were for international buyers.

Which consequently introduces the second issue regarding shipbuilding in the United States – to put it bluntly, there is no competitive advantage whatsoever for a corporation to construct a ship domestically.  Even if a company wanted to order large cargo vessels domestically in order to participate in Jones Act commerce, the turnaround time for almost any order would be significant, measured in years at a minimum.  This assumption is predicated strictly on the limited numbers of available domestic shipyards capable of actually constructing a large, ocean-going vessel.  One report commissioned by the US Navy in 1991 estimated that from conception to delivery, a new 42,000 DWT single shaft commercial cargo vessel would take approximately 57 months.  Of those numbers, the 12 month concept development window is the portion that would most likely be reduced – significantly – by the various technological advances that have taken place since the report was generated.  The 15 month contracting period and the 30 month construction period still appear largely accurate under the current industrial environment – although if the vessel was constructed in a shipyard owned by a parent corporation, that would probably result in a reduction in time as well.  While that situation is not rare to see in South Korea, at this date, none of the current US flagged shipping operators maintain their own shipyard facilities – although given the numbers involved, it is clearly not a surprise.

While MARAD does run a number of incentive programs offering competitive loans and even grants for shipyard and port modernization and fleet upgrades to private corporations, it is telling that only a limited number of carriers reported direct experience with these loans, and that the surface consensus appeared to be that approval was overly complex.  Similarly, the official website for the Small Shipyard Grant program hasn’t been updated since 2013 and as of its last update, reported nearly $10 million in outstanding grant funding.

(*NOTE*: site has been updated since this article was drafted in 2015 and reports there is no funding currently available – yay – and frankly – who really wants to be on the hook to Uncle Sugar?)

4. Onerous Tax Burdens

• One other legislative antique is the Ad Valorem duty on overseas ship repairs for US flagged ships – associated with the Tariff Act of 1930.  In short, for any repair work conducted on a US flagged vessel beyond emergent work necessary for safe operation – that is to say, routine overhaul maintenance or upgrades involving rebuilding more than a certain percentage of the superstructure or replacement of equipment measured in tonnage, must be conducted in a US shipyard or else face a 50% tax on the dollar value of the work.  While this measure was established to direct more work to US shipyards and US jobs, it is difficult to see at this juncture what its value is to the overall economy.  Indeed shipping companies report that even after paying the Ad Valorem duty, they are still saving a significant amount of money over the amount they would pay for the work to be conducted domestically.  This is to say nothing of the time involved waiting for an available shipyard to open up.  With so few large shipyards capable of handling larger cargo vessels, it becomes increasingly difficult to schedule availabilities in a timely manner.  [NOTE:  From my Navy experience the past 7 years, including multiple maintenance periods two of which were in dry-dock (both of which ran multiple months longer than originally scheduled) – this is an understatement if anything.] Different companies have different maintenance standards and while some may schedule repairs and refurbishments in advance of actual faults, in accordance with the tight budgets and timeframes of the shipping industry, others will gladly continue operation until forced otherwise.  In these cases in particular, the lack of an immediately available, affordable shipyard is a key factor in deciding to conduct necessary work overseas.

 

Part one here