Shipbuilding sector remains uncompetitive: U.S. government should take action to make the nation's shipyards more efficient. (Industrial Perspective).
The U.S. shipbuilding industry represents just 1 percent of the world market for ocean-going commercial vessels, a substantial portion of which is due to the Jones Act. This legislation requires that all vessels operating between U.S. ports be U.S. owned, U.S. operated and U.S. built.
The commercial outlook for U.S. shipbuilders is bleak. They are unable to compete on the global commercial market due to high material and labor costs as well as lower productivity. Labor costs are kept artificially high by continued union resistance to employee cross-training and shipyard reluctance to invest in automated production tooling. Second and third tier shipyards, meanwhile, continue to compete effectively in niche markets on both the domestic and global market.
To make the industry more competitive, the U.S. government should promote what U.S. shipyards do best-military vessels and small/medium commercial vessels. This will require further consolidation of the military industrial base and a stable procurement plan.
Role in U.S. Economy
More than 95 percent of U.S. imports and exports are transported by sea. At over $10 billion in annual revenues and nearly 100,000 employees, the shipbuilding industry plays a significant role in the U.S. economy. U.S. Navy procurement accounts for about 70 percent of the industry's revenue. The commercial side of the industry is less than half the size of the military, but has grown at a faster rate in the last five years. International business accounts for only about 1 or 2 percent of total revenues. However, the survival of the industry is hinged on improving production and management practices as well as increasing foreign sales.
Approximately 250 companies comprise the U.S. shipbuilding and repair industry. But just 10 percent of these firms account for 85 percent of the business. The six largest companies, grossing over a billion dollars annually, are often referred to as the "Big Six." They represent two-thirds of the overall shipbuilding/repair business and 90 percent of the defense work. (Editor's Note-the Big Six now are owned by just two companies: General Dynamics owns Electric Boat, Bath Iron Works and National Steel and Shipbuilding Co. The Northrop Grumman Corp. owns Newport News Shipbuilding, Ingalls and Avondale)
More than 100 of the smaller firms have annual revenues of less than $5 million and represent less than 2 percent of the industry's total revenues.
The Congress appropriates naval ship repair money each year to private shipyards and four publicly owned naval shipyards. Typically, naval repair yards are used for more challenging repair functions. These four shipyards are administered by the Naval Sea Systems Command and accounted for $1.4 billion of the $2.1 billion appropriated for repair work in fiscal 1998, up from the $871 million appropriated the year before.
The Norfolk Naval Shipyard, located in Tidewater Virginia, employs over 6,700 people, while the yard in Pearl Harbor employs about 5,000. The Portsmouth Naval Shipyard, which specializes in repair work for the Los Angeles-class nuclear submarine, is located in New Hampshire, and employs over 3,300 workers annually. The Puget Sound Naval Shipyard, in Washington State, employs 7,700 workers, giving it the status as the largest shipyard on the West Coast. In total, Navy repair yards currently employ about 22,700 workers, which combines both U.S. Navy personnel and civilian employees. The U.S. Coast Guard also has access to its own public facility for ship repair and construction. The Coast Guard yard at Curtis Bay, near Baltimore, has $60 million available for internal revenue and is a full service shipyard."
Even the most cursory review of world shipbuilding statistics and forecasts reveals a major cause of concern for the survivability of America's shipbuilding industry. During the last two decades, world trade by sea has continually increased: 3.3 billion tons of cargo in 1980, to 4.3 billion tons in 1995, to a projected 5.5 billion tons in 2010.
Current levels of ship construction for the past few years and forecasts through 2010 are for 1,500 to 2,000 ships. The building of ships worldwide has increased every year for the last 10 years, or 137 percent from 1988 to 1998. At the same time, cargo vessel market shares have changed dramatically. Western Europe has declined from 33 percent to 18 percent, while South Korea has increased from 1 percent to 29 percent. The largest share of the world total has been held by Japan at over 39 percent. Together, Japan and Korea hold two-thirds of the total world production.
Continued facility modernization and improved labor force productivity are required to compete. The results of increased productivity is readily apparent in Japan, where market share has been preserved, even though the $57 per hour wage rate far exceeds that of a $25 per hour in Europe and $15 per hour in Korea. The United States suffers from high labor rates caused by low rates of productivity. Overseas shipyards build ships more efficiently and are able to keep material costs low due to volume production and efficient production processes.
The U.S. shipbuilding industry faces a number of challenges, including a changing U.S. Navy fleet, excess capacity, increased competition from non-traditional players, increased pace of technology insertion, funding fluctuations that challenge workforce retention, industry shortage of qualified technical resources and an aging workforce.
Changing Navy Fleet-The Navy acquisition budget for the past eight years has been insufficient to meet fleet replacement schedules. The build rate needs to double (to 12 ships per year) to sustain fleet size at 305 vessels.
The same situation, however, can be seen in a different light. A Navy report sent to Congress in June 2000 showed that construction rates within the 2001-2005 period (average 7.8 ships per year), combined with a similar rate through about 2012, can sustain between 305-315 ships. This report also shows that rates of 10-12 ships per year will be needed between 2013 and 2026 to sustain a 301 to 315-ship fleet.
The Deepwater acquisition program of the U.S. Coast Guard is scheduled to begin production in 2003. It could include as many as 40 new vessels and service life extensions of others, representing significant work for the industry.
Budget efficiencies can be achieved with stable, high rates of production using multiyear procurement appropriations.
Excess Capacity-Worldwide shipbuilding prices are at historically low levels. Attempts to strike a balance between excess capacity and preservation of the industrial base will be the focal point of discussion should a new round of base realignment and closures (BRAC) be authorized by Congress.
Funding spikes-Unsteady and unpredictable government procurement practices are forcing shipyards to compete based on short-term initiatives.
Funding uncertainty creates an unsteady work environment that causes skilled labor to seek employment in other industries.
Aging workforce--The current nationwide average age of shipyard production workers is 42.1 years, maritime professionals 43.5 years and administrative workers 45.1 years. This trend indicates that the shipbuilding industry is quickly reaching a crisis situation, as replacements are not readily available.
International dimension--The downturn in commercial shipbuilding orders and a dwindling U.S. Navy fleet have led to significant reductions in the shipbuilding industry workforce. The pressure to further reduce the workforce through mergers and downsizing of the shipyards is being mounted in the hope that the industry will adopt policies that would make it competitive.
This approach may not yield the desired results without considering the requirements of the international customers. Because of this posture, the policy of restrictions on technology transfer to potential customers is implemented with the negative effect of driving such customers to European and Asian shipyards, where the technologies are made available to them. The restrictions on this type of technology transfer are inconsistent with globalization trends.
The options available to the U.S. shipbuilding industry include taking advantage of opportunities available in emerging markets, such as in Africa, to engage the excess design and construction expertise, and relaxing restrictions on technology transfer in order to attract foreign acquisitions. In addition, U.S. ship designers would have to consider giving some attention to designs that meet foreign requirements rather than focusing on meeting U.S. requirements for which there will be no customers outside the United States.
Options are also available for U.S. shipbuilders taking on life-cycle support of naval ships to partner with repair facilities overseas. For example, the major shipyards in Singapore are world-class facilities with a robust skilled workforce. Their port infrastructure and third-tier supplier base is highly developed, making replacement parts easy to obtain. Although the U.S. government is not able to form long-term relationships with specific firms due to contracting restrictions, U.S. shipyards with responsibility for life-cycle maintenance of naval ships may be able to enter into strategic partnerships with these yards.
Excess capacity continues to cause industry instability. In particular, redundant capabilities in public and private shipyards warrant further consolidation or closure. Near exclusive reliance on Department of Defense contracts by private shipyards has stifled the required investment and innovation necessary to compete in the commercial markets.
However, with increased government support of foreign military sales, shipyards could make profitable use of their current excess capacity.
The U.S. government is responsible for supporting an adequate naval force and reserve shipping capacity for times of national emergency. Towards that end, two agencies have leading roles: the U.S. Navy for military vessels and the Maritime Administration (MARAD) for commercial interests.
MARAD needs to be committed to capitalizing on existing niches, vice attempting to salvage an entire industry replete with inefficiencies and inabilities to compete on a global scale.
The "Big Six" shipyards collectively have up to 40 percent excess capacity. This capacity is expensive, and its associated maintenance costs are being absorbed by existing ship construction contracts.
Maintenance of that over-capacity has been accomplished through increased overhead charges from each of the major shipbuilders. The policy of competition for the purchase of naval vessels is no longer viable. The existing bilateral monopoly must be recognized for what it is and steps must be taken to achieve cost savings through reduction of excess capacity. The government should give shipbuilders incentives to eliminate unnecessary redundancy and achieve greater efficiencies in construction and design.
In the commercial shipbuilding arena, the United States is simply not competitive in the construction of large vessels. Government subsidies, inexpensive labor and efficiencies of scale have enabled Asian shipbuilders to swallow up the large ship construction market. The United States is, however, competitive in the smaller inland and coastal vessel construction arenas. The U.S. government should pursue these niche markets. Currently, only three of the Big Six shipbuilders are involved in the large commercial vessel ship construction business, with the Jones Act being the primary driver for this expensive market.
The United States cannot compete in the large-vessel market. Korea can sell a vessel for less than what domestic shipyards pay for materials.
The U.S. government should consider legislation that amends existing cabotage laws to afford U.S. owners and operators the opportunity to buy foreign built vessels. To make this fair to those who may have recently entered the Jones Act fleet, this initiative would be phased in over a period of years, and a heavy tariff would be levied on owners pursuing foreign markets for Jones Act ships. Allowing U.S. owners to purchase foreign built vessels at a third of the cost of domestic shipyards is prudent and economically sound. Such an initiative would stimulate the purchase of more vessels and the savings from buying 'foreign' could be passed along to the freight carrier and, in turn, the consumer.
Another Jones Act related initiative that needs positive endorsement by the government is the Title XI loan guarantee program. Though not an enabler for competing with subsidized foreign competitors, this program allows shipbuilders to get the money needed to proceed with contracts for which they might not otherwise receive monetary support. Administered by the Maritime Administration, this program is one of the few that actually returns more dollars into federal coffers than it doles out.
Title XI funding is required to sustain the Jones Act fleet and for cruise ship and container ship projects. Title XI funding has supported $3.8 billion in commercial ship construction since 1994. The proposed presidential budget zeros funding for the Title XI program.
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|Article Type:||Industry Overview|
|Date:||Mar 1, 2002|
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