US Shipbuilding + Jones Act

In today's geopolitically tense environment, there have been a growing number of calls to revitalize the US shipbuilding industry.

As a rough rule of thumb, today the cost to build a vessel in the United States can run as much as five times the cost of building the same vessel in South Korea, Japan, or China. While this makes US-built vessels uncompetitive in the international market, there are two sources of demand which keep US shipbuilders in business: (1) commercial vessels compliant with the Jones Act and (2) vessels that will be put into service on behalf of the US government.

One interesting element of the Jones Act is that while it requires all waterborne trade between two US ports utilize vessels that are US-owned, US-flagged, US-crewed, and US-built, it does not require that the shipyard that builds the vessels be US-owned.

Three of the major US shipyards that are building Jones Act and US government vessels today are subsidiaries of foreign corporations:

· Philly Shipyard (subsidiary of Norwegian parent Aker ASA)

· Austal USA (subsidiary of Australian parent Austal Limited)

· Fincantieri Bay Shipbuilding (subsidiary of Italian parent Fincantieri S.p.A.)

Additionally, the US Secretary of the Navy is currently engaging Japanese and South Korean shipbuilders, potentially adding to the existing foreign investment into US shipyards to help revive the sector.

While each shipbuilding player is driven by capitalistic motivations aligned with the United States, the indirect costs borne by American taxpayers (for government vessels) and consumers (for commercial Jones Act vessels) due to the increased shipbuilding prices are far removed from their respective home countries.

To quote the late investing great Charlie Munger, “show me the incentive, and I’ll show you the outcome.” Shouldn’t the greatest incentive to drive innovation and cost efficiencies in US shipbuilding be coming from American stakeholders?

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Disclosure: I am a shareholder of Philly Shipyard ASA as I believe the company is undervalued given its strategic importance to the US, material order backlog, and potential to be involved in M&A activity.