How SECNAV’s claims about S. Korean, Japanese shipbuilders do and do not line up

WASHINGTON — In late June, South Korean conglomerate Hanwha, and its shipbuilding arm Hanwha Ocean, announced plans to purchase a controlling stake of Philly Shipyard. And there were likely few people in Washington cheering them on more publicly than Navy Secretary Carlos Del Toro.

Philly Shipyard does not build combatant ships, also called “gray hulls,” for the US Navy’s fleet and in fact, until Hanwha’s bid is finalized, the yard is owned by a Norwegian industrial investment group. Nonetheless, the announcement was welcomed by the secretary, who said he anticipates Hanwha “will change the competitive U.S. shipbuilding landscape.”

Del Toro, in fact, has spent most of 2024 praising South Korean and Japanese shipbuilders and encouraging them to invest in American shipyards, while separately admonishing US industry for failing to invest in their own facilities and accusing them of “goosing” their stock prices.

At a surface level, his support for Asian companies seem warranted. A Hudson report published in May states that Japan (389) and South Korea (231) each built significantly more ships in 2023 than the United States (48). In 2022, it was a similar story.

But, experts tell Breaking Defense, the secretary’s praise obscures a more nuanced reality about the differences between how the US Navy’s staple shipbuilders stack up against the biggest names in Asia. Chiefly, they say, the strict requirements instituted by the Navy combined with the instability of annual congressional budgeting makes a one-to-one comparison apples and oranges.

It doesn’t mean that Del Toro is wrong with many of the points he has made in favor of how America’s allies in East Asia do business. But analysts are skeptical that the secretary’s calls to action would result in the sort of widespread reforms his statements about Hanwha predicted.

“By all accounts South Korean and Japanese shipbuilders are good,” said Steve Wills, a fellow at the Center for Maritime Strategy. “Would they be willing to abide by [US Navy shipbuilding requirements] and would they be able to deliver a product at the same cost as they would if they built it for the South Korean or Japanese Maritime Self Defense Force navies? That’s hard to say.”

Where Del Toro Gets It Right

One of the chief claims Del Toro has made about why Asian shipbuilders outperform their American counterparts focuses on how they’ve incorporated high technology into their facilities — hence, the secretary’s own jabs at American industry for, in his view, not always investing to the benefit of the US Navy. And on this claim, analysts said Del Toro is right.

“Japanese and Korean shipbuilders lead in adopting advanced technologies, such as automation and AI,” Robert Khachatryan, CEO of Freight Right Global Logistics, told Breaking Defense. “These innovations significantly enhance efficiency and reduce production times. Digital twin technology, widely used in Korea, improves design accuracy and maintenance predictability, reducing downtime.”

Del Toro has also praised these shipbuilders’ ability to forecast construction schedules with pinpoint accuracy down to the day a vessel will be delivered. Again, analysts concurred.

One shipbuilding industry source familiar with the Asian markets said that during the height of the coronavirus outbreak, South Korean yards spent extra resources ensuring their commercial programs would stay on track to avoid costly damage claims by international customers; post-COVID, those commercial efforts have continued moving forward. And while some government programs were late, South Korean industry received leeway from their government on account of the problems the coronavirus caused, similar to measures taken by the US Navy and its own contractors.

As for Japan, William Schneider, who served in the Reagan administration as under secretary of state, wrote in the May report published by the Hudson Institute that Japanese commercial shipbuilding is second only to China. He too attributed that to Japan’s “history of revolutionizing shipbuilding technology.”

“The Japanese shipbuilding industry was the first to introduce automation to produce modern merchant ships at scale,” he wrote. “This significantly reduced manning levels, a crucial capability as navies face unsustainable manning requirements with current technology.”

Where The Comparisons Fall Apart

Where most experts took issue with Del Toro’s comparisons were in fundamental differences between how US Navy shipbuilders, focused mostly on building warships, and Asian shipbuilders, who manage both commercial and military programs, do business. (A spokesperson for Del Toro declined to comment for this story.)

In the US, a handful of specialized shipyards take on the lion’s share of the US Navy’s work building warships. While they aren’t precluded from pursuing other business — many have explored ventures in unmanned systems and emerging technologies — it doesn’t alter the fact that their annual bottom lines are made or broken by the combatant ships the government buys that year. And from year-to-year, these shipyards are always subject to the whims of the congressional appropriations process, which can result in ships being added or cut unexpectedly.

The biggest names in South Korea and Japan have the advantage of building for both the military and commercial markets, which necessarily eases the workforce management issues faced by many American yards that must threaten layoffs if the Navy lets production lines go cold. They also enjoy routine subsidies from their governments that are not as systemic or consistent in the US.

“The volume that the Koreans and the Japanese get on their order books also makes the investments that they do make make more sense,” said Paula Zorensky, vice president of the Shipbuilders Council of America. That volume results in “economies of scale” that are rarely seen by American shipbuilders, she added, particularly from US Navy orders which usually consist of one or two ships per year.

Another issue sources brought up was that American military shipbuilders have to follow the lead of Naval Sea Systems Command, the service’s primary agency for buying, designing and building warships. Marine engineers have previously told Breaking Defense those regulations are unlike any other fleet in the world and that is partly due to the decades of experience — and numerous sailors’ lives lost — the service has in combat zones.

“Each regulation by itself was certainly well-intended,” said Wills. “The combination of these regulations and requirements however creates unintended complexity costs in building the ship, and potential delays in construction of which the Navy may not be fully aware.”

To demonstrate how Navy regulations can increase costs, Wills pointed to the Royal Danish Navy’s guided missile frigate Iver Huitfeldt, which had a rough cost of $355 million. For comparison, the US Navy’s first Constellation-class guided missile frigate is expected to cost more than $1 billion.

“That’s pretty amazing for a guided missile frigate,” Wills said of the Iver Huitfeldt. “What we later discovered was that the Danes built some of the ship in Poland, used recycled materials and weapon systems, and did not perform all of the combat systems integration until after the ships were commissioned. The [US Navy] pays for all of that up front.”

These kinds of differences in the details, experts said, is where Del Toro’s comparisons were not giving US industry a fair shake.

“We aren’t making excuses for anything. We work in the environment that we work in. We have to work with the regulations that are quite onerous, that are thousands of pages of regulations and compliance, and we’re happy to do that,” said Matthew Paxton, president of the Shipbuilders Council of America. “We work in the environment that we have to build in, so I think the comparisons [are] a little bit off.”

Where Do Investments Go From Here?

The bottom line of much of Del Toro’s praise for Asian shipbuilders has been that he wants them to invest in American shipyards, one component of what he calls “maritime statecraft,” a theory that proposes American and allied maritime power depends both on commercial and naval shipbuilding. But, experts said, it’s unclear whether the American market even offers the right opportunities for companies, like Hanwha, that are willing to bite.

Bryan Clark, a fellow at the Hudson Institute who has recently spoken to several Korean and Japanese shipbuilders exploring the American market, said the US has a dozen shipyards focused on building commercial vessels, or what he called “the Jones Act Fleet.”

The Jones Act is a law that dictates goods shipped between American ports must be transported on US-built vessels and operated by American crews. Clark said the types of ships that make up this fleet go through generational recapitalization, and the current cycle is close to ending.

“So the US shipyards that build ships for this fleet, the Jones Act Fleet, are all looking at sort of the end of that business and wondering, ‘Okay, how am I going to keep going until the next cycle?’” Clark said. “There’s about a decade where they really have to come up with alternative orders for their order books.”

And that is the position of Philly Shipyard, the yard currently owned by Norwegians and poised to be taken over by South Korea’s Hanwha. Assuming its bid passes regulatory muster, Clark predicted Hanwha will use its new US-based shipyard to compete for work rebuilding the Ready Reserve Fleet, a group of auxiliary ships the Navy and other government agencies rely upon for non-combat tasks, at least until the next tranche of commercial contracts building Jones Act ships comes around.

What success Hanwha has in that time could prove to be a test case for whether it will continue investment in American facilities. It could also influence the company’s interest in reviving its failed bid to purchase Australian shipbuilder Austal, whose subsidiary Austal USA is a key shipbuilder for the US Navy. (While the takeover bid was rejected, both companies appeared to leave open the possibility of future discussions.)

Clark added that while he agrees with Del Toro’s premise of maritime statecraft — that both naval and commercial shipbuilding will play a key part in American maritime power — the secretary’s solutions are where things get “muddy.”

“He’s arguing that these companies — these foreign shipbuilders should then invest in the US. It’s unclear what the benefit of that is. It’s unclear why they would do it from a business perspective,” Clark said.

“The level of interest these foreign shipbuilders have in the US is, I think, driven mostly by a desire to, on their government’s behalf, to improve relations or maintain strong relations with the US more so than these companies individually seeing the business case,” he added.