MARITIME 2000
Are American Shipyards Competitive?
U.S. YARDS OPTIMISTIC ABOUT THEIR FUTURE
By John J. Stocker, President
Shipbuilders Council of America
It had been assumed by many
observers that, with the termination
of construction subsidies in 1981,
American shipyards could not win
competitively placed commercial
ship orders. But current trends indi-
cate that American yards are begin-
ning to pay attention to the com-
mercial market and to the potential
that market has for future orders.
Overview
In 1981, the Office of Manage-
ment and Budget (OMB) began ef-
forts to terminate subsidies to the
commercial shipbuilding industry
and to freeze existing operating sub-
sidy contracts for U.S.-flag opera-
tors. These actions were undertaken
because the Reagan Administra-
tion believed that government
should not be in the business of
market interference. But, this philo-
sophical argument was an ideologi-
cal overlay for the real argument
that OMB was advancing.
First, it was argued that Ameri-
can shipyards were hopelessly non-
competitive. Some owners/opera-
tors complained that a 50-percent
subsidy was insufficient to match a
subsidized U.S. price with the
world's price levels.
Second, OMB believed that there
would never be a revitalization of
the commercial shipbuilding
market, either in the U.S. or abroad,
because speculative demand in the
1970s would lead to severe overton-
naging for decades. OMB argued
that since shipbuilding capacity was
outstripping demand, the United
States as a high-cost producer,
should reduce excess capacity.
Third, internal OMB papers
made it clear that it was cheaper for
the U.S. Government to allow U.S-
flag operators to take advantage of
foreign subsidy practices, rather
than try to compete with those for-
eign governments in a subsidy war.
Since the 1981 termination deci-
sion, American shipbuilders have
seen their commercial market col-
lapse. Ten years ago, 112,000 pro-
duction workers were employed by
110 firms engaged in new construc-
tion and repair. Today, that number
is down to 72,000 production work-
ers in 60 firms.
The irony is that this decline has
come in the face of the greatest
peacetime naval construction build-
up in our history.
Current Period
The termination of construction
subsidies drew American shipyards
into the military shipbuilding and
repair markets. Throughout the
1980s, there was a continuous
growth in the share of workload
dedicated to Naval contracts as op-
posed to commercial contracts. In
1990, it is expected that more than
90 percent of the industry's work-
load will be performed for the U.S.
Government.
And, although some observers be-
lieved that the Jones Act would be a
basis for commercial market devel-
opment, it has not. In fact, since
1984, only eight oceangoing Jones
Act vessels have been ordered.
In addition, no U.S.-flag operator
engaged in the foreign trade has
ordered tonnage in the United
States since 1981.
So, American shipyards are faced
with virtually no commercial orders
and a Navy market that is forecast
to decline by 30 percent.
Key Events
And, yet, in this environment,
four recent developments give rise
to some hope for American ship-
yards.
First, despite a slight dropoff in
the third quarter 1990 data, the
international shipbuilding commu-
nity has its largest backlog in 13
years. This boom comes in an inter-
national market where shipbuilding
capacity has been cut back by about
one-third in the last 10 years.
Second, the Shipbuilders Council
campaign to end foreign shipbuild-
ing subsidies practices (through ne-
gotiations at the Organization for
Economic Cooperation and Devel-
opment) is beginning to have some
effect, with some of the most bla-
tant of subsidy practices being re-
strained.
Third, with the growth in world-
wide demand, the tightening of
shipbuilding capacity, decline in
Navy work and the scrutiny of for-
eign government subsidy practices,
American shipyards are becoming
more interested in the commercial
market. In fact, the Navy argues
that to maintain the size of the cur-
rent industry throughout the 1990s
will require about 30 new commer-
cial ships to be ordered each year.
The level of commercial ship repair
work in U.S. shipyards has in-
creased, and there is a growing num-
ber of reports hinting at discussions
between owners and yards about po-
tential projects.
Fourth, recent competitions be-
tween American and foreign ship-
yards indicate that U.S. yards are
closing the gap in some market
niches. Southwest Marine's $75-mil-
lion conversion contract with Royal
Caribbean Cruise Lines to double
the cabin capacity on the Viking
Serenade is the first major commer-
cial export order in 30 years. Avon-
dale has been awarded a contract to
do a contract design and production
proposal for the Phoenix World City
project. Avondale's initial price esti-
mate for this 5,600-passenger cruise
ship newbuilding project was one-
third lower than that of the Euro-
pean competition. Finally, Trinity
Marine-Halter's bid on the British
Columbia ferry project was the low-
est (when Canadian tariffs were fac-
tored in) of all international bidders
including Mitsui of Japan, Masa
Yards of Finland, and Brodosplit of
Yugoslavia. In any event, the high-
est bidding Canadian shipyard was
given the contract, thereby making
a mockery of Canadian adherence to
the Free Trade Agreement. But, the
point is, the American yard was the
low bidder.
How Competitive?
The Council believed two years
ago that in a nonsubsidized market,
there were market niches in which
U.S. yards could be immediately
competitive. Thus, the first baseline
requirement was to discipline for-
eign subsidy practices.
U.S. shipyards have seen the cost
of the factors of production stabilize
or decrease in the U. S., while world
pricing levels are beginning to ap-
proach something closer to true pro-
duction costs. In fact, Japanese
sources continue to say that VLCC
prices need to go up by another 20
to 25 percent to return Japanese
yards to profitability.
Despite recent press comments,
U.S. costs are no longer twice as
high as the rest of the world. Labor
rates in the U.S. now rank eighth in
the world. For example, Germany's
rate is $6/hour higher, while Japan
is approaching $2/hour higher than
comparable U.S. wage rates (about
$14.50/hour, including benefits).
Even South Korean wages are above
$8/hour compared to $2.50/hour in
1986.
There is considerable debate
about the cost of material, since it is
likely that with the constraints on
the international market in the sup-
ply of marine equipment, there will
be price increases as demand accel-
erates. In addition, some foreign
yards tell us that the cost of U.S.
Coast Guard-approved systems
adds 15 to 20 percent to the cost.
The Coast Guard denies this, but
this is an area where further investi-
gation is warranted.
Despite the debate over produc-
tion and material costs, it is clear
that the competitiveness of U.S.
yards in complex, high-outfit ships
is improving. We should be cost-
competitive when it comes to the
export of military vessels as well.
But, saying this does not ignore
the necessity with moving ahead
with analysis and product develop-
ment of new ship designs where
series production has its learning
curve pay-offs. This includes inno-
vative double-hull tankers and self-
unloading bulkers, where there is
already some initial work being
done in U.S. yards.
The Future
For American Shipyards
Given nonsubsidized market
niches, the answer is yes, American
shipyards can build high-outfit
ships at competitive prices. But, we
cannot simply be satisfied with a
single market niche. A single market
niche is a prescription for down-
stream market maintenance prob-
lems. The world shipbuilding
market goes to that industry capa-
ble of responding to standardized
demand. And, in meeting that po-
tential demand, a transitional effort
will need to be undertaken—such as
the Sealift program and meeting
double-hull tanker requirements—
where we can bring investment,
training, and product development
to bear on the larger market issues
facing us. This transitional period of
about three-to-five years will give us
time to structure innovative and
creative ship finance mechanisms
and help us move out of the Navy
and high-outfit, complex market
niches into the mainstream com-
mercial shipbuilding market.
There is a future for American
shipyards in the post-Cold War pe-
riod and that future lies in the com-
mercial shipbuilding market. Fur-
ther, it is that unthinkable of un-
thinkables, where the potential for
growth and success lies—the inter-
national market—that the real fu-
ture of American shipbuilding can
be seen.
December, 1990 17
Digital Wave Publishing