오늘은 입니다 등록번호: 서울 라-11997(ISSN: 2005-3061) |
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Copyright ⓒ 월간 [해양과조선]
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A U.S. Shipbuilding Regulation Refutation of Current and Emerging International Competition John P. Holmquist University of Ulsan John Patton Florida Institute of Technology |
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In 1948, 36% of the world’s fleet tonnage was under the flag of the United States. By 2005, nearly 38% of all new ship tonnage was built in South Korea and the flagged ships from the U.S. dropped below 2% of the total tonnage. For the U.S., the Merchant Marine Act of 1920 locked all foreign-built or foreign-flagged ships out of domestic transportation in U.S. waters, and has isolated the U.S. shipbuilding industry from the commercial, technological, and economic benefits of real competition. This paper investigates who benefits from this isolationist approach and who loses, and how it has opened the world market for domination by Asian firms, such as Hyundai Heavy Industry, the current largest shipbuilder from South Korea. To show the state of competition in the market, a review of other major players and the entry of new players into the shipbuilding market, such as the China Shipbuilding Industry Corporation, are examined. I. Past Effects of the Regulation of Shipbuilding The Merchant Marine Act of 1920, known as the Jones Act, specified the rights and privileges of American seamen. It also mandated that all ships transporting goods for trade in the United States (i.e., from one U.S. port to another U.S. port) must be built in the U.S., owned by a U.S. corporation, and be U.S.-flagged (Citizens Track, 2006). Essentially, the Jones Act locked all foreign-built or foreign-flagged ships out of domestic transportation in the U.S. waters. In doing so, it has diverged from the ideology of an open and free market, and has isolated the U.S. shipbuilding industry from the commercial, technological, and economic benefits of real competition. Adam Smith is considered the father of economics (Hoaas & Madigan, 1999), and for good reason. His discussions in The Wealth of Nations (1776) argue that the key to acquiring wealth and international power rests in a free market, division of labor, the pursuit of self-interest, and freedom of trade. It stands to reason that the American automotive industry is not the giant global leader it is today as a result of government protection and subsidies, but rather from the influence of the open market as presented by Smith. As expenditures increased and quality stalled across the 1960s and 1970s, the influx of foreign cars (e.g., originating from Germany, Japan) cut into the large profits of Detroit automakers (Juran, 1993), and excess profits no longer lined the executives’ pockets. Instead, the open market dictated that the profits were to be spent on research and design to increase the production quality, and also on developing more lucrative business structures (Juran, 1993) which helped the U.S. automakers bring about the minivan and SUV booms of the 1990s. In the realm of aviation, a similar scenario played out. A monopoly of heavy aircraft was in place in the U.S. and nearly worldwide (minus the Soviet Block countries) in 1997 when Boeing acquired McDonnell Douglas. Yet, in an open market, Boeing was forced to stay economically strong and technologically advanced as Airbus began to cut into the U.S. market share in 2003. Even with the 1992 European Commission─United States (EC－US) Agreement on Trade in Large Civil Aircraft (Rosenberg, Landau, & Mowery, 1992), Boeing and the global economy were driven by the technological and economical guidance and benefits of an open market. The aviation industry experienced another scenario that mirrored the effect of the Jones Act even more closely: the enactment of the Civil Aeronautics Act of 1938, and later on, its removal by the Airline Deregulation Act of 1978 (Brenner, Leet, & Schott, 1985). In 1938, the U.S. government enabled a regulatory organization, soon known as the Civil Aeronautics Board (CAB), which regulated commercial entry into and exit from individual markets as well as fares for passengers and cargo (Heppenheimer, 1995). In late 1978, Congress passed the Airline Deregulation Act, the effects of which included cutting costs (e.g., unprofitable routes), expanding profitable routes, opening new routes, and new competition entering the market. Consequently, passenger fares dropped and profits increased. In sum, the major airlines suffered the transition pains of deregulation the most, whereas new, smaller airlines and the millions of passengers flying gained the most (Siddiqi, n.d.). Again and again, as shown by the automotive and aviation industries and hundreds of other examples in the world markets (see Mueller, 1976; Buchanan, 1993; Mailath & Sandroni, 2003; Witt, 2008), free markets have guided industry to produce the right amount and variety of goods and services for the economy (Smith, 1776). This leads to the following questions: why are government regulations and interventions enacted, even in capitalistic markets？ What good comes from government involvement? And finally, who ultimately benefits from government involvement in free markets？ The objective of this paper is to show historic and comparative evidence that an open market is better for the US shipbuilding market. This paper also reviews the international competition facing the US builders if the Jones Act is removed. II. Deregulation of U.S. Shipbuilding and the Poised Competition Deregulation of the U.S. shipbuilding industry would cause the major U.S. builders to suffer transition pains, but ultimately benefit the industry and the clientele. Yet, there is one major difference between the deregulation of the U.S. aviation and commercial shipbuilding industries: international competition. The passenger airplane construction industry was not regulated in a manner that isolated it from the world market. U.S. aviation companies continued international and domestic sales and flourished internationally (Boeing, 2008) regardless of the CAB. It was not until after the 1970s, with the release of the A320, that Airbus was even noticed by Boeing (Irwin & Pavcnik, 2003). This is not true for the shipping industry. Like the automotive industry, shipbuilding has competitors in places all around the world. As U.S. companies merged and competed for lucrative domestic commercial and military contracts, the U.S. shipping industry has devolved into only two companies: Northrop Grumman and General Dynamics. These two companies continue to keep the U.S.-flagged fleet at approximately 10 million gross tons. In 2006 Northrop Grumman ships generated $5.3 billion and General Dynamics generated $5 billion in sales (Naval-technology, 2009). With the U.S. shipbuilders focused only on the U.S. military and port-to-port market, the international shipbuilders became giants as they expanded their markets worldwide. With 80% of new ship construction in 2005 taking place in South Korea, Japan, or China (Maritime Knowledge Centre, 2008) the goliath of them all is Hyundai Heavy Industries Co, Ltd. (HHI). Founded in 1972, this company alone has a ship production aggregate total exceeding 110 million gross tons, and during its relatively short existence, has produced a fleet nearly 11 times that of the current U.S.-flagged fleet. As the larger of only two major U.S. shipbuilders, Northrop Grumman boasts annual sales of $6 billion and holds backorders of $13 billion (Dickseski, & Mitchell-Jones, 2008). HHI is currently producing annual sales of $27 billion, with another $27 billion projected for 2009 (Hyundai, 2008). Furthermore, Sumitomo Heavy Industries (Japan), Chantiers de l'Atlantique (France), Hitachi, Ltd. (Japan), Odense Steel Shipyard (Denmark), Ishikawajima-Harima Heavy Industries (Japan), Kawasaki Heavy Industries (Japan), Mitsubishi Heavy Industries (Japan), Daewoo Heavy Industries (South Korea), and Aker Finnyards (Finland) have all produced vessels larger than anything coming from U.S. shores (Lloyd, 2008). The international competitors that the U.S. industry must face are primarily located in South Korea, Japan, China, and Europe. Furthermore, Vietnam, a new entry in to the market, may even be price-competitive with China and deserves review. (1) South Korea South Korea is the top producer as of 2008 (Lloyd, 2008). It has several shipbuilders with the three largest being Hyundai Heavy Industries Co., Ltd. (HHI), Daewoo Shipbuilding & Marine Engineering Co., and Samsung Heavy Industries. Against a marketplace with companies that root back hundreds of years, HHI has managed to climb to the top in less than 40 years of existence. In 1984, just ten years after HHI delivered its first large oil tanker, it surpassed 10 million tonnage of ship production. HHI has since maintained its position as a leading shipbuilder in the world, currently accounting for around 10% of the world shipbuilding market (Hyundai, 2008). HHI does not stand alone in South Korea. Even in gaining new ownership in 2009, Daewoo Shipbuilding & Marine Engineering Co. is still a giant. With assets of USD 17.6 billion, new orders at USD 21.5 billion, and current orders valued at USD 40.3 billion (Daewoo, 2008) it remains a major player in the industry. Furthermore, Samsung Heavy Industries, with assets of USD 10.5 billion and sales of USD 8.5 billion in 2007 (Samsung, 2008), maintains its position as the third largest builder in South Korea. The South Korean industry is well established and has shown strong competence in raising its product quality. South Korea, along with Japan, are the largest current threats if the U.S. was to deregulate. They have massive capacity with room to spare. If U.S. orders were allowed to start today, these countries could meet the demand at a fraction of the cost of U.S. builders. (2) Japan The Post World War II economy in Japan led to a rebuilding and resurgence of shipbuilding (Colton & Huntzinger, 2002). Throughout the 1980s, Japanese firms dominated the market and currently have five of the seven largest vessels on the water today (Lloyd, 2008). Currently, Japan’s production is a close second to South Korea (Lloyd, 2008). In addition to high quality and high work standards, the Japanese companies have strong corporate cultures and a diversification of products that help them stave off the lean times of the industry. For example, Hitachi has seven divisions with hundreds of product lines, the Mitsubishi Group consists of over forty-five affiliated and subsidiary companies, and Kawasaki has over seventy affiliates and subsidiaries companies (Hitachi, 2008; Kawasaki, 2008; Mitsubishi, 2008; Zenobank, 2008). The Japanese conglomerate structure and business tenacity has enabled these companies to maintain high quality standards and economics of scale. The Japanese industry is another well established section of global industry that is known for high quality. As a world leader, it stands shoulder to shoulder with South Korea. Together, they already claim nearly half the world market share. They have the excess capacity to be a continuous threat to the U.S. market in the foreseeable future. (3) China In a 2006 statement to the House Arms Service Committee, it was reported that each year, beginning in 1990, the shipbuilding labor costs have surpassed the national inflation rate by 50% (Sullivan, Stiller & Hamilton, 2006). The current pay rates for skilled shipbuilding labor in the United States range from USD 22 to USD 45 per hour (Ameri-force, 2008). Furthermore, the 1996 Industrial College of the Armed Forces (IFAC) Shipbuilding Final Report stated that foreign shipbuilders use fewer workers in the aggregate that are capable of a greater variety of tasks than their U.S. counterparts. Dealy et al. report that “in addition, foreign shipyards have developed a well-trained, motivated, and flexible labor force that…is also committed to an aggressive cross-training program that includes team-oriented assignments to improve process efficiency” (1996). With the formalization of the China Shipbuilding Industry Corporation (CSIC), China formally reentered the international shipbuilding market in 1999. CSIC is an entity directly under the state government with state authorization for investment and capital management. The group has a total asset base of USD 27.54 billion and a workforce of 140,000 (CSIC, 2008). As stated above, all non-U.S. shipbuilders examined have the ability to do more with fewer workers. China’s skilled labor rate ranges from USD 300 to USD 750 per month (Liu, 2008). With this low labor cost and the economics of scale that China brings, they are the overall cost leader of the industry. The CSIC group brought together the Dalian Shipbuilding Industry Co., Ltd., Bohai Shipbuilding Heavy Industry Co., Ltd., Wuchang Shipyard, Shanhaiguan Shipyard, Qingdao Beihai Shipbuilding Heavy Industry Co., Ltd., Dalian Marine Diesel Works, China Ship Research & Development Academy, and China Ship Scientific Research Centre under one nationalized umbrella (CSIC, 2008). Like the South Korean and Japanese companies, CSIC is diversified in different business sectors, such as CSIC Finance Co., Ltd. and CSIC Technology Investment Development Co., Ltd. It has developed and produced hundreds of non-marine products that are used in more than 20 industries and sectors such as aerospace, hydropower, metallurgy, petrochemicals, tobacco, railways, automotive construction, and city construction (CSIC, 2008). As the Chinese sector advances its technical knowledge, its ships are moving from simply the cheapest, into a stage of being well worth the price. China is tomorrow’s threat, not only to the U.S., but to all players in this industry. With the low labor cost coupled with the economics of scale that China brings, it has the potential to become the world leader in the not-so-distant future. (4) European Union The European firms are well established. With an annual turnover of USD 45 billion through 2003 and over half going to exports (LeaderSHIP 2015 High Level Advisory Group, 2003) the European shipbuilding industry prides itself on research and development (Buruma, 2007). While having the oldest, most well established yards in the industry, on average, the European firms use 10% of their profit for research and development. This has helped them maintain their niche, of being the drivers of international technology and innovation in the industry (Buruma, 2007). Europe remains the designer and innovators of the industry (Colton, & Huntzinger, 2002). Based on these competencies, the EU should be the U.S.’s direct competitor. Without the ability to compete on direct price point with the Asian builders, the U.S. industries should review the European model of participating in the global shipbuilding market. (5) Vietnam A new entry to the shipbuilding market is Vietnam Shipbuilding Industry Corporation (Vinashin) from Vietnam. Even though the Vinashin Shipbuilding Union has been in existence since 1972, it was not formalized by the government to seek international business until 1996 (Vinashin, 2008). In total, Vinashin has 52 subsidiaries with an approximate labor force of 15,000 employees (Vinashin, 2008). With the ability to accomplish more with fewer workers, and a skilled shipbuilding labor rate starting at low as USD 300 per month (Runckel, 2008) in Vietnam, Vinashin, backed by Hyundai Heavy Industry, is entering the market with a huge cost-savings competitive advantage. However, Vinashin is not entering the market without its growing pains. It only has the advantage of low labor cost (Pham, 2008). Technology is imported from South Korea (e.g., HHI), China, and others. Vinashin is trying to develop design work, but is struggling to make a transition from a plan that is controlled by and centered around the government and central decision-making, to new western/American management style in order to keep up with the high pace of international business. Human resource is a current challenge, both in quality and quantity (Pham, 2008). Yet, Vietnam’s plan is to develop a shipbuilding industry whose technological level equals those of other regional nations by the year 2010. To get there, they are planning to increase domestically made products by 60 to 70 percent, effectively promoting exports and creating good conditions for the nation’s other industries to develop (Vinashin, 2008). These issues Vinashin is facing now raise the topic of what will arise for the U.S. industry when and if they come into direct competition with the international shipbuilders. Having the cheapest labor force in the industry is Vietnam’s only real market advantage, but if it continues to expedite its acquisition of knowledge through employee exchange and partnership with the South Korean and Chinese firms, it can soon become a key player, in accordance with its 2010 goal. Yet, in the timeframe of shipbuilding and acquisition, this is not far off. Even if it is not until 2020 that Vinashin truly becomes competitive, it remains a viable opponent. III. Economic Insight As of 2009, no cruise ships, Oil carriers, or international cargo ships (SEC, 2009) are on order to be built in the USA. Additionally, no military vessels are on order to be build for foreign buys by the US shipbuilders. The 2008 figures place the heavy shipbuilding industry as a $150 billion market. Before the Jones Act took effect in 1922, the U.S. was the worlds largest shipbuilding location, producing in excess of 380 large international capable ships (>2,000 GT) per year after World War I (SNAME, 1948). During World War II 60% of the world industry was being produced in the USA. If the Jones Act was not in place and the USA was able to maintain only 33% of the industry, $50 billion in export sales would be incoming to the USA over zero from this industry. In addition to the loss of income for exports is the loss of savings from importation of smaller vessels. Between 1998 and 2010 $4887MM will have been spent by operators for port to port ships (SEC, 2009). These orders are for ten relatively smaller USA builders. Ten builders should give a competitive bidding process keeping profits from being over inflated, yet is it expected that prices would still be 10 to 15% low if international competition was part of the equation (Dang, 2009) IV. Discussion In light of the September 2008 financial crisis, the philosophy of mercantilists such as Jean-Baptiste Colbert ring true: a country importing more than it exports will begin to suffer monetarily (Ames, 1996). The Jones Act has caused the industry with the largest possible exportable item, heavy ships, to turn away from exporting, and instead focus on a government-imposed monopoly of U.S. ports. This internal, domestic port-to-port view has not only rendered the U.S.-flagged fleet stagnated for 50 years while the rest of the world expanded exponentially, but it left the U.S. shipbuilding companies out of the modern supertanker and transport markets. Under the auspices of the Industrial College of the Armed Forces, an industry study seminar performed by Alberto et al. (2005) reported that "U.S. commercial shipbuilding has been completely surpassed by the global shipbuilding industry to the point where it survives only to fulfill the niche market of the protected Jones Act Fleet. At the same time, the unit cost of United States naval vessels is so high that the U.S. Navy cannot afford the fleet it says it needs." The report further warns that the U.S. shipbuilding industry is in danger of losing "the industrial base necessary to design, build, and maintain the most capable naval vessels in the world" (Alberto, 2005). In 2006 (Broughton, et al) this was reiterated by another Industrial College of the Armed Forces Final Report, stating, “This (the U.S. shipbuilding industry) is currently in crisis”….and that “prices are exorbitant” within the U.S. shipyard for Naval vessels. Therefore, the U.S. industry has not only priced itself out of the global market, it has now out-priced the ability for the U.S. government to buy the vessels needed to equip the Navy. The Jones Act has left a conundrum. As it tried to protect the U.S. capability to build and maintain ships by domesticating the local portage ships, it shrunk the heavy industry capability to a backlog of Navy orders with only two suppliers. Northrop Grumman is not projecting sales. The Navy is waiting for backlogged orders to start, while internationally competitive builders, such as HHI, are doubling Northrop Grumman’s performance and comfortably moving forward. A move must be made to open this industry to the benefits of open market competition, yet unlike aviation, the international competition is larger, better equipped, and ready for the U.S. market. In their current state, without the Jones Act, the two U.S. shipbuilding firms could not compete in open bidding with HHI and the other international giants. Yet, the precedent was set by the automotive industry to not only survive a transition to a market with strong foreign competition, but also to flourish in innovation and partnership. Currently, billions of dollars could be saved if U.S. buyers were allowed to purchase from the international competition. Yet, the example that the U.S. shipbuilding industry should follow is that of the automakers in the 1980s, and that is innovation. As the SUV and minivan entered the U.S. market, the U.S. soon became a major player in the global market. Billions of dollars could be brought to U.S. shores if its builders could become competitive. Without the economics of scale and low cost labor utilized by the Asian builders, the U.S. industry must look to its strengths in innovation and technology to build the Cadillacs of the sea. It is recommended that if the U.S. cannot build the cheapest, that it instead focuses on building the best. V. Conclusion The two American firms sharing the Jones Act monopoly would need to trim the excess profit margins to become competitive in an open market. Northrop Grumman and General Dynamics are multi-divisional defense industry contractors (Dickseski & Mitchell-Jones, 2008; General Dynamics, 2008). This diversification gives a large advantage over the Detroit automakers that survived as a single industry producer. The U.S. builders are corporately tied into military and aerospace. This multidisciplinary expertise could be the key to the innovation and advancement needed to make the U.S. companies internationally competitive. The technological advances in Asia, especially South Korea and Japan, are starting to erode the Europeans’ niche of technically-oriented and high-end ships (Colton, & Huntzinger, 2002), but as it does so, the labor forces of these countries are expected to demand higher compensation for their expertise, thereby raising their costs and therefore, prices. It is an assumption that the highest expertise will demand a premium for their services; therefore, regardless of where the most technically advanced and innovative ships are produced, they will continue to demand a premium price. The U.S. builders’ primary strategy should be to enter from the technological apex of the market while it is still technologically at the top of the industry. In recessionary times, budget cuts often start with the exact research and development that is needed to keep the U.S. on top. As foreign currencies strengthen, their excess earnings will enhance their R&D in this critical time, thereby narrowing or even closing whatever competitive advantage the U.S. builders currently have. As for the U.S. buyers, the opening of foreign shipyards would give drastic savings across all needed ship types. Furthermore, the opening up of foreign shipyards would also help to overcome the backlog of needed ships in U.S. fleets, fulfilling the transportation needs of the current economy. The influence of the free market in the 1970s corrected the errors of the Detroit automakers. Furthermore, in the 1990s, this same influence prevented the American aviation industry from replicating the automakers’ mistakes of the 1970s. The policy regarding the Jones Act’s restrictions on shipping in domestic waters originated from an era that is far removed from the current needs of the U.S. economy and political stability. The findings of this review illustrate how the Jones Act is a hindrance on the modern shipbuilding industry and abolishes the basic principles of open markets and free trade. ■ References |
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