support policies must be predicated on the construction of ships in American shipyards to American standards by American craftsmen with American products for American owners to serve American interests. The second recommendation, cited in your question, is usually offered in a specious effort to make the first more palatable. It is wishful thinking at best. In the 1950-1974 time span, U.S. shipyards have built a total of 531 merchant ships (totaling 17,800,000 dwt) for American companies or their affiliates for registry under the American flag. During the same period, nearly 2,000 vessels (totaling more than 100,000,000 dwt) were built abroad by American companies or their subsidiaries for foreign-flag registry. Few of these would have been brought under U.S. documentation even if operating subsidies had been available. Even more, this ratio of four to one favoring foreign shipbuilding suggests that, given the option to build abroad as the GAO advocates, American subsidized owners are likely to do just that—especially when foreign shipbuilders offer "bargain" prices below actual cost. The consequences in terms of maintaining an essential industrial base for shipbuilding could be serious: The balance of international payments would be adversely affected Employment for workers in supporting industries in every State of the Sales of domestically manufactured products for ship construction would decrease Tax revenues would diminish Reliance on foreign shipyard sources could only herald the doom of other essential national needs-U.S. ship repairing and U.S. flag shipping among them. "4. You have indicated that there is a large over-capacity in foreign yards. This is primarily a function of the severe depression in the tanker industry. Can those yards which previously concentrated on tanker construction readily change to building dry cargo ships? If not, why will the over-capacity in tanker building facilities depress world prices for dry cargo ships and other types of more sophisicated yard construction? In short, what I am asking is: Will there be a serious attempt by foreign yards to slash prices for other ships as well as tankers?" A building dock or building way can be used for the construction of any type vessel whose dimensional characteristics fall within the physical limits of the facility. It is not unusual for a shipbuilider, in this country or abroad, to build a tanker or cargo vessel in the same dock or on the same ship way. This has been done many times. Because of the recent collapse of the tanker market and the current slump in the dry cargo market, Japanese shipbuilders have indicated plans to adapt facilities heretofore devoted to large tankers for the construction of offshore drilling rigs and smaller vessels, even though these alternatives could result in something less than optimum utilization. The scarcity of market opportunities and all that this adversity foretells in terms of utilization of manpower, shipyard capacity and related production resources, will prompt either (1) unrealistic price cutting, (2) increased government support to offset the difference between price and cost, or (3) both. The purpose will be to capture whatever commercial contracts that may be available in a depressed market which could continue for another two years-whether tankers, dry cargo ships, drilling riggs, or other floating craft-to keep people employed and to avoid the social costs of unemployment. You ask: "Will there be a serious attempt by foreign yards to slash prices for other ships as well as tankers?" My answer is that this undesirable, but understandable, phenomonon is already taking place. Reportedly, foreign prices are being cut without regard to actual costs. In an unanticipated manner, a principal objective of the 1970 Act has already been undermined: to hold the level of Federal support (CDS) for merchant ship construction at 35 percent. The sensitive influence of foreign shipbuilding prices on CDS determinations in this country, I fear, is not sufficiently recognized. "5. On page 46 of your testimony, you recommend that there be a 'restatement of CDS percentage guidelines.' Does this mean that you think the 35% CDS ceiling will have to be raised? If so, what are your reasons?" It is difficult to establish the differential between a domestic and foreign shipbuilding price at any one time with exactness because of the unlikelihood of an absolute comparison: two identical ships being constructed simultaneouslyone in the United States and one abroad-under identical procurement procedures, production conditions and cost accounting methods. The task is further complicated by the price-influencing variations in foreign governmental policies and subsidy assistance. The pattern of shipbuilding economics in other countries thus affects the level of subsidy in this country. As prices move upward in Europe or Japan, for whatever reasons, the amount of CDS paid in this country is reduced. Conversely, as prices are decreased abroad, the CDS rate is increased. In the judgment of government and industry officials, the 35 percent CDS ceiling with respect to negotiated contracting, now mandated by the Merchant Marine Act of 1970, does not reflect the differential between true U.S. shipbuilding costs and artificial shipbuilding prices presently being offered abroad. Because of the sharp decline in ship construction market opportunities worldwide, there is evidence that some foreign builders are actually resorting to desperation price cutting in an effort to obtain urgently needed work and to keep their labor force employed-regardless of true cost. This trend toward "bargain" prices abroad, as indicated, will force the CDS rate above the present statutory ceiling of 35 percent for negotiated contracting. These kinds of fluctuations in the international market suggest that the ceiling must be raised and that provision should be made for flexibility in the future. "6. Sea-Land has suggested that the construction subsidy be modified so as to provide subsidies above parity with foreign costs. Their contention is that this expanded construction subsidy should largely replace the operating differential subsidy. What is your view on this suggestion?" Taking into account the expanding array of shipping/shipbuilding assistance provided in other countries and economic distortions caused by state-owned fleets, this suggestion may have a certain appeal. Yet, the combination of CDS with ODS or ODS with CDS-might well produce more complexity than now prevails in preserving the parity system on which the Merchant Marine Act of 1936 is based. Such an approach might enable more flexibility in financing for the shipowner/operator, but it would also involve basic policy considerations with respect to capital structure, vessel replacement commitments, governmental control, elimination of restrictions on foreign registered tonnage, among others. If the Sea-Land proposal is to be seriously considered, these, and other, questions that pertain to the appropriate role of government in life-cycle acquisitions of merchant ships need far more examination than has taken place to date. During my November 5 testimony before the Subcommittee on Merchant Marine, you properly stressed the imperative need for data as to the numbers of ships by types and the amount of shipyard capacity that might be required to support a national cargo policy. As promised, I have been searching for valid projections of shipping and shipbuilding anticipations, and find that the Commission on American Shipbuilding devoted considerable attention to this subject in its October 1973 Report. Volume III, Annex IV, pages 847, 848, 849, 852, 968 and 969 contain useful tabulations, and the accompanying commentary is especially helpful in evaluating the impact and potentials of cargo penetration-to serve national interests. I stand ready to provide any additional views or information you might desire. Hon. THOMAS N. DOWNING, EDWIN M. HOOD, President. SHIPBUILDERS COUNCIL OF AMERICA, Chairman, Subcommittee on Merchant Marine, DEAR MR. CHAIRMAN: In view of references to the construction of SL-7 containerships in Europe for Sea-Land Service, Inc. made on September 23, 1975 before your Subcommittee on Merchant Marine, we most respectfully request that the attached October 12, 1972 memorandum from our files be included as a part of the record of these timely and informative "oversight" hearings. Your favorable consideration of this request would be deeply appreciated by our industry, particularly by those U.S. shipbuilders whose bids were solicited in this connection. With best personal wishes, I am MEMORANDUM EDWIN M. HOOD, President. (By Edwin M. Hood, President) The preparation of bids-or the submission of tenders as sometimes described is a marketing functions. In the search for stable operations and fair return on invested capital, it is a normal function of any commercial enterprise. It takes into account all of the usual vicissitudes. Understandably, it is time consuming and involves management judgment plus considerable expense. In the case of shipbuilding, the cost of preparing a bid can range from $75,000 to $100,000 depending on the type and complexity of the ship under contemplation. This cost of doing business presupposes a reasonable prospect of obtaining a contract in a competitive environment. And, it presupposes a sincerity of purpose on the part of the prospective purchaser. These observations provide a background for analysis of the U.S. shipbuilding industry's response to a 1969 invitation for bids covering the construction of five to eight SL-7 containerships for Sea-Land Service, Inc., Elizabeth, N.J. By its own statements, Sea-Land solicited bids "from thirty shipyards in the United States, Japan, England, Italy, France, Sweden, Germany, Holland and Canada ... (and) ... when the bidding was completed only five yards submitted bids: four in Europe and one in Canada." Sea-Land goes on to say that "no American yard bid," but interestingly, fails to mention that no Japanese shipyard-the world's leading shipbuilding nation-likewise declined to bid. Shipyard contracts for eight SL-7's were later awarded as follows: three to Aktien-Gesellschaft Weser, Bremen, West Germany; two to Rheinstahl Nordseewerke, Emden, West Germany; and three to Rotterdam Dockyard Co., Rotterdam, The Netherlands. The best available price data suggests that the equivalent dollar value of these contracts at the time of award was about $250 million. Subsequent revaluations, escalation plus incorporation of certain American components and U.S. Coast Guard standards, could have increased this figure substantially; a total of $400 million has been used in press reports. While an effort is now being made to discredits U.S. shipbuilding in this respect, it might be useful to review certain factors and conditions which inhibited the participation of American yards. Most importantly, the issuance of an invitation for bids on a worldwide basis raises a question of Sea-Land's real desire to place a contract in a United States yard. For years, and even today, higher wages and higher material costs, endemic to the highest standard of living in the world, have placed American yards at a competitive disadvantage with their foreign counterparts on the construction of merchant vessels. With monetary revaluations, improved U.S. productivity, and changing relative effects of inflation, the gap could narrow, but the differential in 1969, on the only subsidized merchant shipbuilding contract placed with an American yard, was 44.8 percent. This differential clearly illustrates that U.S. shipbuilding could not hope to receive this most desirable contract on the basis of price, and it can be logically concluded that American yards, on reflection at the time, could see no reasonable prospect of obtaining a contract, and none, for sound reasons, were willing to spend $75,000 or more in a futile estimating exercise. There is no evidence that Sea-Land actively considered, or pursued, an application for Federal construction differential subsidy assistance (1) to offset the cost disadvantage of American yards, or (2) as evidence of its desire to have these ships built in the United States. But, factors in addition to price must also be recognized. Certain of the provisions in Sea-Land's proposed Pro-Forma Contract would have imposed inordinate risks beyond those normally contained in a ship construction contract and require terms and conditions beyond those prevailing in normal commercial practice. Moreover, a number of discrepancies, conflicts and errors in the original Specifications submitted by Sea-Land to the shipyards were uncovered during preliminary review. These circumstances, standing alone, would have in all likelihood resulted in contingencies which would have equated to prices higher than reasonably anticipated under a more realistic form of contract, and in combination with the price advantage of foreign shipyards no doubt further convinced American builders of the futility of bidding. Within industry circles, there is a strong suspicion that the contract terms and conditions signed by Sea-Land with three European shipyards differ significantly from the Pro-Forma Contract on which bids were solicited. Comparison of European ship construction documents in recent years leads to a firm conclusion that contractual terms and conditions abroad are much more favorable than those imposed in the United States. Of themselves, these variations equate to cost differences of as much as several hundred thousand dollars per ship. Another point needs to be mentioned. Availability of adequate building positions on a realistic sequential basis to meet required delivery dates must also be considered at the time of bidding. A hindsight review of shipyard capabilities, load factors and anticipated work in 1969 indicates that several yards were proscribed from bidding on the Sea-Land containerships because of tentative commitments previously made in other' directions. One can only speculate-again from hindsight-that the availability of construction subsidy, some flexibility in design, contractual and specification requirements, and a more congruous delivery schedule may have generated a somewhat different response on the part of U.S. shipbuilders. While bids were invited on the basis of quick deliveries "Fall of 1971"-and presumably contracts were placed accordingly, the first and second SL-7's are only now being readied for initial operations-approximately one year later than the originally stipulated delivery. And Sea-Land's latest statements reveal that delivery of the eighth ship will not take place until November 1973, or approximately two years later than originally anticipated. These revised delivery schedules plus unverified reports of cost overruns of considerable magnitude raise further questions as to why Sea-Land-three years after the event is going to such lengths to disparage the American shipbuilding industry. Could it be purposed to distract attention from the fact that foreign built SL-7's will, under present statutes, immediately qualify, after documentation under the American flag, for carriage of U.S. defense cargoes? Could it be an endeavor to neutralize rapidly developing opposition from American flag operators who vie for U.S. defense cargo movements with American built ships? [Whereupon, at 11:50 a.m., the subcommittee recessed, to reconvene at the call of the Chair.] CONSTRUCTION SUBSIDY PROGRAM TUESDAY, NOVEMBER 11, 1975 HOUSE OF REPRESENTATIVES, SUBCOMMITTEE ON MERCHANT MARINE, COMMITTEE ON MERCHANT MARINE AND FISHERIES, Washington, D.C. The subcommittee met, pursuant to call, at 10:07 a.m., in room 1334, Longworth Office Building, Hon. Thomas N. Downing (chairman of the subcommittee) presiding. Mr. DOWNING. Good morning. The Subcommittee on Merchant Marine will please come to order. This morning we continue with respect to the construction subsidy element of our current oversight hearings. Our witness today is the man charged by the Congress with the responsibility of implementing the building program provided by the Merchant Marine Act of 1970-Hon. Robert J. Blackwell, Assistant Secretary of Commerce for Maritime Affairs. Mr. Blackwell, welcome to the committee. STATEMENT OF HON. ROBERT J. BLACKWELL, ASSISTANT SECRETARY OF COMMERCE FOR MARITIME AFFAIRS, DEPARTMENT OF COMMERCE Mr. BLACKWELL. Thank you, sir. Mr. DOWNING. I see you have a written statement. You may proceed as you see fit. Mr. BLACKWELL. May I proceed, Mr. Chairman? Mr. BLACKWELL. Mr. Chairman, we have prepared a rather lengthy statement which has been submitted to the committee, as well as a summary of that statement, which has also been submitted to the committee. With your permission I will proceed with the summary statement. Mr. DOWNING. Without objection your full statement will be placed in the record, and you may proceed with your summary. [The full prepared statement of Mr. Blackwell follows:] STATEMENT OF ROBERT J. BLACKWELL, ASSISTANT SECRETARY OF COMMERCE FOR MARITIME AFFAIRS I. INTRODUCTION United States shipbuilding for foreign trade depends upon the Construction Differential Subsidy (CDS) program mandated by Title V of the Merchant Marine Act, 1936, as amended. A significant part of the U.S. shipbuilding industry is dependent on this program. 62-989-76-61 (953) |