Bill. Initially, Shell did not perceive the Omnibus Bill as the proper vehicle for such a request - although obviously,

as we now realize, it was. From the time of this realization every effort has been made to prepare a well-reasoned proposal and analysis for the Committee's consideration. We and Shell apologize for the lateness of our action and thank the Committee for its courtesy in accepting our testimony and these responses.

Sincerely,

H. Chayton Cook Jo

H. Clayton Cook, Jr.

The CHAIRMAN. The next witness is Mr. Andy McNally, general manager, heavy industrial manufacturing and service division, Allis Chalmers.

STATEMENT OF HARRY FALCK, MARKETING MANAGER OF THE HEAVY INDUSTRIAL MANUFACTURING & SERVICE DIVISION, ALLIS CHALMERS, ACCOMPANIED BY JAMES MCCAUL, PRESIDENT OF INTERNATIONAL MARITIME ASSOCIATES

Mr. FALCK. Mr. McNally expresses his regrets. He was unable to arrive here because of the snowstorm. I am Harry Falck, marketing manager of the same division. I would like to read the testimony and answer whatever questions you have.

I would also like to introduce Mr. Jim McCaul who is president of International Maritime Associates which has been retained by Allis Chalmers for studies in the maritime industry.

I am Harry Falck, marketing manager of the_heavy_industrial manufacturing and services division of Allis Chalmers. This is the division of the company presently manufacturing three large_low speed diesel engines for the propulsion of American President Line container ships under construction at Avondale Shipyard.

Allis Chalmers' interest in the omnibus 4769 is directly related to the production of low speed diesel engines for ship propulsion which, prior to the contract I just referred to, have not been manufactured in the United States since the ship production program of World War II.

Last week, we submitted written comments to the committee suggesting changes to the revised draft of this bill based on a very important fact which may not have been fully recognized in the wording of the revised draft.

This is that a U.S. capability to manufacture and maintain ship propulsion machinery is just as vital to our national security as is our ability to build hulls and superstructures.

If we agree on this point, we can agree in the form of the proposed changes so that the final legislation will have a reasonable chance of achieving its stated objective.

I would like to briefly review some of the background and developments which have created the situation we referred to and provide a basis for understanding our position. Since this information is well known to most of you, I will summarize it without reference to the supportive data which would be included in a more detailed report.

Point No. 1, prior to 1973 which marked the start of increased fuel costs, most of all large U.S. merchant vessels were propelled by steam turbine.

Two, the technology for steam turbines was highly developed in the United States and provided competitive machinery from several U.S. manufacturers.

Point No. 3, while the United States was developing the steam turbine, European manufacturers were developing the diesel engine which was suitable to their needs.

Point No. 4, there were characteristic differences between the two propulsion systems. The steam turbine was less efficient than the diesel engine but could operate on a lower grade of fuel and required less maintenance.

Point No. 5, considering the lower fuel costs and the maintenance involved, the steam turbine driven ships were competitive and had approximately the same operating costs as those using diesel engines.

Now, several things have changed. Fuel costs have increased by 15 times and high efficiency diesel engines have been developed which operate very effectively on the lower grades of fuel with a minimum of maintenance.

Since ship operating costs are a major influence on the selection of propulsion machinery, there is now a new and ever increasing demand by U.S. shipowners for these large, efficient, slow speed diesel engines which can burn a variety of lower grade fuels.

Allis Chalmers and other U.S. manufacturers have the capability and facilities to partially manufacture low speed diesel engines, but this in itself is not sufficient to establish a U.S. industrial base. To do this, H.R. 4769 must establish an incentive for U.S. shipowners to place orders for this equipment with qualified U.S. suppliers.

We propose that section 505 and any section granting U.S. Government subsidy financing or other form of Government support require that the ship propulsion machinery be of U.S. manufacture with no more than 50 percent of its contents, components, and/or accessories of foreign origin.

I would like to make an additional statement that was not in my prepared text, and that is that we also feel the industrial base for propulsion machinery should be formed by U.S.-owned companies for it to be effective.

We want you to understand our reason for suggesting that no more than 50 percent of the content of each engine can be of foreign origin. This is a modification to the intent of section 505 of the existing Merchant Marine Act of 1936 which requires 100 percent U.S. content and is entirely different than the 50-percent wording included in the revised draft of H.R. 4769 which would allow complete foreign sourcing of the engine. With the suggested wording, several U.S. manufacturers can immediately enter this new industry with existing facilities without Government subsidy. Once the business potential for slow speed diesel engines has been established, they, the manufacturers, will invest their own capital to expand their capability to produce a larger percentage of the material required and establish an industrial base to better serve their customers.

We must look upon this as an industry in its infancy which needs to be developed, and the key to this development is volume. The present wording of the omnibus bill provides no opportunity for U.S. manufacturers to obtain this volume, and U.S. shipowners will continue to place their business for this machinery with the established foreign suppliers such as Cegielski of Poland or any of the several Japanese companies with licensed technology.

The omnibus bill must provide an incentive for U.S. owners to buy from qualified U.S. manufacturers so that we can establish the industrial base vital to our national security.

Thank you very much, Mr. Chairman.
[The following was received for the record:]

PREPARED STATEMENT OF ANDREW F. MCNALLY, ALLIS CHALMERS CORP.

Good morning (afternoon). I'm Andy McNally, General Manager of the heavy industrial manufacturing and services division at Allis Chalmers. This is the division of the company presently manufacturing three large low speed diesel engines for the propulsion of American President Line Container Ships under construction at Avondale Shipyard.

Allis Chalmer's interest in H.R. 4769 is directly related to low speed diesel engines for ship propulsion which, prior to the contract just referred to, have not been manufactured in the United States since the ship production program of WW II.

Last week we submitted written comments to the committee suggesting changes to the revised draft of this bill based on a very important fact that may not have been fully recognized, which is "a United States capability to manufacture and maintain ship propulsion machinery is just as vital to our national security as is our ability to build hulls and superstructures." If we agree on this point, we can then agree on the changes to be made so that the final legislation will have a reasonable chance of achieving its stated objectives.

I would like to briefly review some of the background and developments which have created the situation we refer to and provide a basis for understanding our position. Since this information is well known by most of you, I will summarize it without reference to supportive data which would be included in a more detailed report.

1. Prior to 1973, which marked the start of increased fuel costs, almost all large United States merchant vessels were propelled by steam turbines.

2. The technology for steam turbines was highly developed in the United States and provided competitive machinery from several U.S. Manufacturers.

3. While the United States was developing the steam tubrines, European Manufacturers were developing the diesel engine which was suitable to their needs. 4. There were characteristic differences between the two propulsion systems. The steam turbine was less efficient than the diesel engine, but could use a lower grade of fuel and required less maintenance.

5. Considering lower cost fuel and the maintenance involved, the steam turbine driven ships were competitive and had approximately the same operating costs as those using diesel engines.

Now, several things have changed. Fuel costs have increased by 15 times and high efficiency diesel engines have been developed which operate very effectively on the lower grades of fuel with a minimum of maintenance.

Since ship operating costs are a major influence on the selection of propulsion machinery, there is now a new and ever increasing demand by United States shipowners for these large efficient slow speed diesel engines which can burn a variety of lower grade fuels.

Allis Chalmers and other U.S. manufacturers have the capability and facilities to partially manufacture low speed diesel engines, but this in itself is not sufficient to establish a United States industrial base. To do this, H.R. 4769 must establish an incentive for United States shipowners to place orders for this equipment with qualified U.S. suppliers. We propose that section 505, and any section granting U.S. Government subsidy financing, or any other form of Government support, require that the ship propulsion machinery be of U.S. manufacture with no more than 50 percent of its content, components, and/or accessories of foreign origin.

We want you to understand our reason for suggesting that no more than 50 percent of the content of each engine can be of foreign origin. This is a modification to the intent of section 505 of the existing Merchant Marine Act of 1936, which

requires 100 percent U.S. content and is entirely different than the 50-percent wording included in the revised draft of H.R. 4769 which would allow complete foreign sourcing of the engine. With the suggested wording, several United States manufacturers can immediately enter this new industry with existing facilities without Government subsidies. Once the business potential has been established, they, the manufacturer, will invest their own capital to expand their capability to produce a larger percentage of the material required and establish an industrial base to better serve their customers.

We must look upon this as an industry in its infancy which needs to develop, and the key to this development is volume. The present wording of the omnibus bill provides no opportunity for U.S. manufacturers to obtain this volume, and U.S. shipowners will continue to place their orders for this machinery with the established foreign suppliers such as Cegieiski of Poland, or any of several Japanese companies with licensed technology. The omnibus bill must provide an incentive for U.S. shipowners to buy from qualified U.S. manufacturers so that we can establish the industrial base so vital to our national security.

REQUIRED CHANGES TO THE REVISED DRAFT

Re H.R. 4769 "Omnibus Maritime Regulatory Reform Revitalization and Reorganization Act of 1980," revised draft.

Title III amendment to the Merchant Marine Act of 1936-Page 9 per diem subsidy, insert at the end of section 401: "Vessels eligible for per diem subsidy must satisfy the foreign origin limitation specified in section 505 of this Act."

Page 21 section 505 paragraph B(3) change to read: "propelling machinery, other machinery, parts and installations critical to the safe operation of the vessel must be of United States manufacture, but each item may contain up to 50 percent parts or material of foreign origin; provided that the United States manufacturer of such items shall be owned and controlled by citizens of the United States; and provided further that if such items are manufactured under foreign license, the United States manufacturers must be licensed to build the complete item and possess complete manufacturing drawings for future maintenance repairs and servicing as may be required in time of National Emergency."

Page 23 paragraph (8) section 510 new paragraph (C) insert in paragraph (b) after the words "be applied upon the cash payments required under this chapter," the following: "Vessels constructed or converted using funds or credit resulting from the acquisition by the Secretary of Commerce of any vessel under the terms of this section shall be subject to the foreign origin limitations specified in section 505 of this Act."

Page 23 section 511 is amended by inserting at the end of paragraph (b): "Vessels constructed or converted using funds withdrawn from any construction reserve fund shall be subject to the foreign origin limitations specified in section 505 of this Act." Page 23 paragraph (9) section 512 insert after the words "component manufacturer efficiency": "unless existing United States shipyards or manufacturing facilities with the required available capacity, capability, and efficiency are already available."

Page 34 new paragraph (7) section 607 insert at the end of paragraph (a) the following: "Vessels constructed or converted under any agreement entered into under this section shall be subject to the foreign origin limitations specified in section 505 of this Act."

Page 40 add new paragraph (D) section 901 of the Merchant Marine Act of 1936 (46 U.S.C. 1241) is amended by inserting after the words "under the laws of the United States for a period of three years" in paragraph (b)(1), the following: "Provided, however, vessels contracted for after January 1, 1980 will be considered built outside the United States unless all requirements specified in section 505 of this Act are satisfied."

Page 47 section 306 new paragraph (1) insert after the words in section 1101 paragraph (b) "which are or will be documented under the laws of the United States": "and fulfill the foreign origin limitations specified in section 505 of this Act.'

The CHAIRMAN. You and I discussed with, I guess it was Mr. McNally, the problem of manufacture wholly within the United States of a slow-speed diesel unit.

Mr. FALCK. Yes, sir.

The CHAIRMAN. It really came down to one major part that we do not have the capability to manufacture, is that right?

Mr. FALCK. That is correct.

The CHAIRMAN. What part is that?

Mr. FALCK. The crankshaft.

The CHAIRMAN. The crankshaft, and that is what? Fifty percent of the cost?

Mr. FALCK. No. The crankshaft itself is not that large a cost. The difficulty has to do with the forging equipment required to forge those large pieces. Since our discussion, I have been looking at several alternatives to that, and there are possibilities that crankshafts could be made in this country but they would not be competitive to the Japanese who make, I think, 80 percent of the large crankshafts in the world.

The CHAIRMAN. Until you got probably orders of what? The magnitude of 20, 30, 40?

Mr. FALCK. We are thinking of that magnitude, yes.

The CHAIRMAN. If you got to the magnitude, then you could be competitive?

Mr. FALCK. That is our belief, yes.

The CHAIRMAN. With three, as your present order book stands, you just could not compete with that manufacture of crankshafts. Mr. FALCK. There would be no ability to invest in machinery that was necessary to produce that.

The CHAIRMAN. But your ability to produce the rest of a diesel engine, slow or medium speed, with your work force and your technical ability is all there.

Mr. FALCK. Yes. With our present capability, we are able to produce approximately 50 percent of an engine in our facilities with tools and people as they exist. To increase that beyond the 50 percent requires investing in tooling that expands that capability but has to be justified by a market, and if the market is small, it is difficult to justify those investments.

The CHAIRMAN. Well, I think the market is going to increase. Are we going to reach a point, though, where the diesel cost is going to, let us call it the curve, is going to cross with a steam engine cost?

Suppose we come in with these new propeller designs and some of the R. & D. things that MarAd is recommending, is there going to be a point where slow-speed diesel and steam turbine become competitive again?

Mr. FALCK. Well, the competitiveness of the slow-speed diesel with the steam turbine is not directly related to its cost, although that is a factor. It has more to do with the efficiency of the engine in its operation. The low-speed diesel, particularly the diesel burning lower grades of fuel, operates with a much lower operating cost which makes it more effective over its payout period.

I am not absolutely certain of the facts, but I would suspect that a low-speed diesel is more expensive than a steam turbine. I am not an expert in that total packaging area so I would qualify that somewhat.

The CHAIRMAN. What speeds?

Mr. FALCK. The speed of a low-speed diesel operates at about 100 rpm with some variations to it, and it is normally directly connected to the propeller without going through a speed changer. The CHAIRMAN. What knot speed would that be for the vessel?