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3 U. S . MARITIME INDUSTRIES: STATUS ~ TRENDS, AND NEEDS STATUS The U.S. maritime industries (i.e., shipbuilding, ship operating, marine terminals, and coastal and inland waterways shipping and shipbuilding) are in the midst of rapid change as the result of an eroding U.S. competitive position in world shipping and trade, deregulation of the freight transportation industries, and increasing competition for scarce government funds. One consequence of these changes is the oversupply and overcapacity of capital assets, including ships and barges, shipbuilding capacity, and in some cases underutilized marine terminals. Some of the oversupply/overcapac~ty is nominal--too many or too much. In other instances the oversupply/overcapacity is structural--the surplus facilities are too old or poorly sited for modern conditions. The problem of oversupply/overcapacity adversely affects the business climate in the maritime industries. The business climate for U. S.-flag shipping is both depressed and intensely competitive, with excess capacity high on the list of causes. Any time any segment shows signs of profitability, as did the U.S. cruise business several years ago, foreign shipbuilders and the governments that support them produce additional tonnage for virtually any owner. The result once again is oversupply. Given the long list of failures that such a shipbuilding policy has generated, many of the developed countries are reassessing the wisdom of continued support of shipbuilders, with the result that closings are taking place at an accelerated rate. The mounting losses incurred by the shipowners has hit the international lending institutions particularly hard. Recent difficulties of several major shipowners have sent shock waves through the banking industry. It will be increasingly difficult for even the soundest shipping companies to obtain financing in the future. This will lead to further diversification out of the industry. As a defensive move, many European ship operators are "flagging out" existing tonnage or selling off their fleets and chartering in cheaper third-flag vessels. This indicates that time has run out on their efforts at cost reduction for their national flag ships. Given the existing overtonnaging, freight rates have plummeted to a point where any tax or regulatory burden or crew cost differential cannot be 10

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11 absorbed. Hany owners have concluded that neither the available systems nor the technologies exist that can produce sufficient increases in productivity in the short run to offset the cost differential enjoyed by the third-flag carriers. A new generation of 4,000 twenty-foot equivalent unit (TEU) container ships is now servicing the United States. This additional low-unit-cost transportation capacity virtually guarantees that 1986 will be another year of depressed freight rates. The demise of well-established shipping companies is likely to continue. Although the dollar has begun to weaken against the major currencies, the lag time built into foreign trade transactions precludes any substantial change in U.S. trading patterns in the short-to-mid term. For example, there is no recognized forecast indicating any major improvement in the U.S. grain and coal export picture that is essential for a substantial increase in traffic on the rivers. Existing overcapacity also will continue to depress freight rates in this area as will the reduction in the world price of petroleum. The drop in oil prices has also dampened activity in the oil service and supply sectors, and the shipbuilders and repairers that serve that industry. No improvement is in sight. TRENDS The U.S. maritime industries are faced with a continuation of trends already well begun. The most competitive shipbuilding and ship operating companies will certainly survive. The surviving ship operators, in particular, will become part of a highly competitive international industry, but much of their expansionary efforts will be in the intermodal land transportation systems so that the ship itself will continue to be Reemphasized. The domestic fleet will continue to shrink and some changes may take place in the cabotage laws, particularly as they pertain to the requirement that all vessels be U.S. built. Because of increasingly competitive land transport alternatives, the higher cost of some Jones Act services can no longer be passed along to the consumer. At present, the cheaper tug-barge systems are taking over' but some provision for foreign building is inevitable in the future. Many state governments appear to be willing to continue to stimulate port improvement and expansion through the use of state-backed industrial bonds, tax incentives, and subsidies. This will sustain a competitive environment that puts pressure on port costs and at the same time will result in excess port capacity nationwide. There is a growing concentration of cargoes at a smaller number of ports. This concentration is caused by the necessity of improving the utilization of capital-intensive ships, double-stack trains, and modern marine terminals. To increase the number of vessel voyages and unit train round-trips, carriers must limit the number of port and terminal stops. Load centers have developed around high capacity, high service-frequency ports that offer throughput efficiencies. The

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~2 growing.number of container double-stacked unit-trains has benefited the U.S. carriers that introduced them by substantially reducing inland costs. The concentration of ship operating activities is hardly good news for some shipbuilders. The largest shipbuilders are sustained with Navy work; the smaller shipbuilders must develop new markets or go out of business. NEEDS "AND OPPORTUNITIES Even in this depressed climate, there are a number of opportunities for improvement that could add to the overall profitability of segments of the U.S. maritime industries. Shipbuilding Given the lack of any significant commercial market, the principal beneficiary of increased efficiency or improved shipbuilding and ship repair techniques is the U.S. Navy. A number of worthwhile projects are being undertaken to accomplish this. These projects constitute a collaborative effort within the industry, with government sponsorship. Despite such efforts in process technology (where benefits accrue to the government in the form of reduced costs for building and overhauling naval vessels), U.S. shipbuilders have just begun to scratch the surface of opportunities that could be created through market research, development of new products, and entry into new markets. An example of this is the industrial plant and floating plant market, which is already creating employment for some U.S. shipyards. Private collaborative opportunities to exploit the foreign market for these units are available through the use of export trading companies and foreign trade zones. Without government support it will be difficult for the U.S. shipbuilders to be internationally competitive within the foreseeable future. U.S. government assistance in international marketing and in low interest financing of foreign sales is appropriate and necessary. The absence of any international demand for American-built ships, together with high U.S. labor costs, greatly restricts the available market and guarantees an insurmountable price differential. Ship Operating Improved utilization of the seagoing work force leading to more effective manning and possibly crew reduction offers a real opportunity for future savings and is being undertaken with the cooperation of some of the U.S. labor unions and the U.S. Coast Guard. A number of the European maritime nations and Japan are well ahead in this effort. Several major U.S. shipping companies are transferring the effective manning technology of Europeans and others

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13 into their operations. A MarAd-sponsored R&D program with industry and labor has facilitated advances in this area. The technical basis still needs to be developed for revising maritime education and training curricula and for making manning and licensing changes in the context of U.S. maritime safety regulations. Long-term efforts relating to energy efficiency are being successfully undertaken by European diesel engine manufacturers and their Asian licensees. Given the limited U.S. market, there is little incentive to undertake independent research in this country; however, U.S. ship operators (and shipbuilders) are monitoring overseas developments and should consider participating in future developments. Marine Terminals No significant technological limitations impede marine terminal operations. Most modern container terminal operators are aware of and use the latest technologies when their use is cost-effective. The two most promising areas for productivity improvement in the next five years are advances in automation of information flow within marine terminals, and improvements directed to the performance of the human element, including management and labor. As in other sectors of the maritime industries, technology development and application in marine terminals is healthiest in certain Asian and European countries. Any shortcomings in performance in U.S. terminal operations compared to foreign operations of similar capability is due more to the performance of the human element--management, dockside labor, organization, and work practices--than it is to a need for new technological development. Generally speaking, labor has not impeded the technical development and application of most competitive technology in U.S. marine terminals. However, in East and Gulf Coast ports, long standing labor/management agreements have denied much of the cost-saving benefits of new technologies to the terminal operator; this has impeded full utilization. Manning levels of longshore gangs in these areas are two to three times the size of those in most areas of the world' and crane productivity in U.S. terminals is less than that of the most productive terminals in the world. Tn spite of this disadvantage, terminal operators have continued to innovate, albeit with a resultant squeeze on profitability. In contrast to other economic sectors of the maritime industries, there is healthy competition in the marine terminals industry between ports, between terminals, and between labor unions. As a result of relocation of ports and creation of new marine terminals, the traditional labor union alignments are being challenged by newcomers to the longshore industry. High labor costs are creating an opportunity for new approaches and organizations and its growth is bound to continue.

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14 Inland Waterways Since all basic waterway improvements are government sponsored, the lack of funds and time-consuming procedures for approval of waterway projects are major barriers to improvements in operating conditions and business opportunities. Nevertheless, incremental operational improvements that modestly reduce cost and increase service can reasonably be expected, based on past performance. Opportunities for improving the productivity of vessel operations are to be found in advances in the engine room, hull design and materials, improved maneuvering, personnel safety and health, training of personnel, better communications, and eliminating burdensome regulations. OTHER CONSIDERATIONS Given the depressed earnings in the maritime industries, any real interest in technology development and application on the part of the industry will only be to identify short-term opportunities for cost saving or market segment enhancement. Additionally, with continued government emphasis on the eventual elimination of all direct subsidies for the maritime industry and reduced federal investment in ports, only projects that further these short-term goals can be expected to have federal support unless they can be presented as essential to national security.