Lay Off the US-Build Requirement!

by Tim Colton, coltoncompany.com

Michael Hansen, of the Hawai'i Shippers Council, wrote an article recently in the Hawai'i Free Press entitled "US-Build Requirement for Ships Imposes Dilemma on Non-Contiguous Jurisdictions". His problem is with the "prohibitively high cost" of US-built ships and the impact of those costs on freight rates. The high costs of other aspects of a US-flag operation, such as the cost of an over-manned US-citizen crew with all its fringe benefits, get no mention.

There is no doubt that US-built ships cost more than foreign-built ships. US shipyards are not internationally competitive. This is not new. They have not been internationally competitive since the days of wooden hulls, when we were clearly the world leaders. That is why the Merchant Marine Act of 1920 - the "Jones Act" - was passed in the first place, as well as the Shipping Act of 1916, the Merchant Marine Act of 1936 and various others. Unlike the US-flag shipping industry and unlike the US port industry, our lack of competitiveness is not a function of labor contracts: once you get past the "big six" naval shipbuilders, there are hardly any unionized shipyards. Likewise, it is not a function of our capital investments: U.S. yards do not compare with the big Korean yards, certainly, but they are fully comparable with European yards and much more advanced than most Chinese yards. And it is not a function of our lack of specialization either. Building a variety of types and sizes is certainly less efficient than building a long series of identical ships but it is a rational strategy for survival in an industry with a pronounced long-term business cycle. For the same reason, the big Koreans and Japanese yards don't specialize either, although they do get to build a lot more ships of a particular design. The Chinese yards specialize and you will get to see many of them folding over the next ten years.

So what is the cost of the US-Build requirement? Let's say, for the purposes of discussion, that a new containership costs $120 million in the US and $40 million in Asia, a differential of $80 million. Finance that differential over 20 years at 5% and you get an additional annual cost of about $6.4 million. (If you don't like my choice of numbers, use your own.) Matson had gross revenues last year of about $1.05 billion, or an average of about $80 million per ship, so the incremental cost of US-Build today is about 8% of revenues. Put another way, for a 3000-TEU ship making 24 round trips a year that's about $90 per TEU on a one-way basis. Is that a lot? In November, Matson announced an increase in its Hawai'i westbound rate for 2012 of $175 per TEU. Over the past eight years, Matson's annual increases in its Hawai'i westbound rate have totaled $880 per TEU. I did not hear the Hawai'i Shippers Council screaming about that.

Yes, US-Build adds to the cost of shipping goods to the non-contiguous states and territories. It has done for over a century. But it is not the only factor, or the most significant factor. The Jones Act operators would not last a week in competition with the big international container lines, as we saw recently, when both Horizon and Matson tried it, so why would you expect US shipbuilders to be internationally competitive? And our port facilities are small, antiquated and inefficient compared to the major ports of Asia.

The Jones Act tanker operators have renewed their fleets and passed on the cost to the consumer. I don't hear any screaming. Matson has built four new ships in recent years, TOTE two and Pasha one, with another on the way. Both Matson, with eight old ships, and TOTE, with three, still have more to do, but the real problem is Horizon Lines, with 15 dreadful old clunkers and not enough financial capability to build a new outhouse. The Hawai'i Shippers Council might be better employed looking for someone with money and brains to take over Horizon than throwing brickbats at the shipyards.

There's another problem that Mr. Hansen doesn't mention. Suppose that the US-Build requirement were to magically go away tomorrow. A new operator could then enter the trade with Chinese-built ships and it would have a huge commercial advantage over the existing operators. Would that be fair on Matson, TOTE and Pasha? Perhaps the Hawai'i Shippers Council would be willing to compensate Matson, TOTE and Pasha for their investments in US-built ships. No?

If I lived in Hawai'i, I would be outraged by what things cost, but I think that there are two parts to the problem. First, if we don't need the Jones Act any more, we should do away with the whole thing: it would be grossly unfair to single out one sector of our maritime industry for punishment. Second, if we did elect to do away with it, we would need to have a very carefully thought out plan for the transition. February 11, 2012.

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Related:

US-Build requirement for ships: Dilemma for Hawaii, Guam, Alaska, and Puerto Rico

Guam should join Hawaii, Alaska and Puerto Rico for Jones Act reform