(This article was adapted from the 2001 Industrial College of the
Armed Forces Shipbuilding Industry Study.)
The U.S. shipbuilding industry designs and builds sophisticated
military vessels, yet remains uncompetitive in the commercial shipbuilding
market. The major yards are unable to compete internationally due
to the industrial policies, greater efficiency and lower labor rates
in other countries.
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
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
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
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
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
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
However, with increased government support of foreign military
sales, shipyards could make profitable use of their current excess
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
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
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
The United States cannot compete in the large-vessel market. Korea
can sell a vessel for less than what domestic shipyards pay for
The U.S. government should consider legislation that amends existing
cabo-tage 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