GM is Sunk. Just Ask the Merchant Marine

Maritime News
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Washington Post
http://www.washingtonpost.com/wp-dyn/content/article/2009/05/29/AR2009052901551.html
[B][SIZE=4]GM Is Sunk. Just Ask the Merchant Marine.[/SIZE][/B]

By Richard K. Bank
Sunday, May 31, 2009

Once, the U.S. merchant marine included hundreds of ships that regularly transported a significant portion of U.S. imports and exports and employed tens of thousands of Americans at sea and on land. Today, only a handful of such liner vessels plying regularly scheduled routes still fly the Stars and Stripes and employ crews of U.S. citizens. But these ships (including the recently pirated Maersk Alabama), though subsidized by the U.S. government, are actually owned by Danish or Singaporean interests, and U.S. taxpayers enjoy little or no benefit from them. Essentially, the U.S.-owned and -operated merchant marine liner fleet no longer exists. And in its demise lies a lesson for the U.S. auto industry.
Despite the car manufacturers’ critical state, the United Auto Workers are resisting concrete steps to help the industry that has provided their livelihood for 70 years. Instead, they look to the government for subsidies to help their employers survive, at least for the near term. Reports from the annual AFL-CIO conference earlier this year detailed the UAW’s search for support from other unions – primarily the teachers unions – in lobbying Washington for more funds to stave off bankruptcies in Detroit.
Shades of the U.S. maritime industry, which began its death spiral in the 1970s, a time when it was massively subsidized by the federal government and when laws guaranteed that U.S.-flag vessels would carry all government-related cargo. Yet even with these subsidies and guarantees, the dozen or more U.S. companies – including such once well-known names as American Export Lines, Grace Lines and Pacific Far East Lines – failed, one after another, in the face of competition from more efficient carriers as more and more countries entered the international shipping market.
Initially, the unions and their congressional supporters pointed to “cheap foreign competition” as the source of their troubles. But those cries persisted even into the late '70s and ‘80s, when European and Japanese carriers were paying higher total wages per seafarer than U.S. flag vessels. It’s widely believed that along with less-than-stellar management, union demands for ever-higher wages and excess manning levels – such as insisting on crews of 35 or 40 when crews of 18 are sufficient to operate safely – doomed the U.S. flag industry. Even with all the subsidies, even with technical innovations, containerization and other pioneering cargo advances, U.S. companies couldn’t survive the financial burdens of the union demands.
I was frustrated watching all this unfold when I served in the State Department’s Office of Maritime Affairs. Instead of fixing the problem and meeting the competition, industry officials offered excuse after excuse and repeatedly trekked to Capitol Hill in search of more money. They sought protectionism as a remedy. That might have helped the industry, but only at the expense of American consumers and exporters, as it would have resulted in higher, less competitive prices for U.S. exports.
Ironically, all this happened not in a time of economic downturn like today, but over a two-decade period when international trade and shipping were experiencing their greatest growth. The only U.S.-owned liner shipping company that did well during those times, SeaLand, was the one carrier that held out longest without taking subsidies and sought out profitable trade lanes.
The lesson this experience teaches is simple: In an open economy, the most efficient providers of goods or services that are similar in price or quality will succeed, and those with costs that outpace their earnings will fail. The parallels between the auto industry and our departed maritime industry are bright beacons.
Foreign carmakers with plants in the United States, such as Honda, Toyota and Hyundai, have a total average hourly cost of $55 an hour per worker, whereas GM, Chrysler and Ford spend close to double that figure. GM loses money on every car it sells. Sadly, the UAW leadership, now buoyed by the prospect of Washington ownership and control of Chrysler and GM, has appeared reluctant to negotiate in a meaningful way to reduce the companies’ costs.
Although executives who fly private jets in troubled times are not blameless, the UAW, instead of looking for help in its lobbying efforts, should unilaterally announce its willingness to accept the same employment terms as those offered by foreign auto manufacturers operating in the United States. Such an announcement would remove one of the most difficult barriers to restructuring the industry. It could also open a whole new era of U.S. automaking. A positive effect on the stock market and on overall consumer confidence would follow.
The maritime example has shown that trying to keep a whole loaf instead of settling for half a loaf will result in no loaf at all. UAW-management labor negotiations over the past 30 years have (after difficult and strike-threatened periods) ballyhooed the ultimate “partnership” between management and labor. We now see that those pronouncements were window dressing even more illusory than announcements of bipartisan achievements in Washington. As unemployment figures continue to climb, it’s time for the UAW to protect its members, provide a true service to all its workers and become a real partner with Washington in the recovery the entire nation is waiting for.
Or else be prepared to go down with the ship.
[I]Richard K. Bank, president of Millennium International Consultants, LLC, and a longtime international transportation and trade lawyer, was director of the State Department’s Office of Maritime Affairs from 1972-79.[/I]

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Apples to Oranges: A poor analogy Part 1

     Thursday, June 4th, 2009

by Joseph Keefe

  [I]Richard K. Bank insists in his Washington Post OPED that GM’s current woes only mirror the fate of the U.S. Merchant Marine. He couldn’t be more off-base.[/I]

In his May 31st editorial, Richard K. Bank tells his readers that “GM Is Sunk. Just Ask the Merchant Marine.” He then goes on to tell us why GM’s financial problems can be compared with the current plight of the U.S.-flag merchant fleet and then claims, “And in its demise lies a lesson for the U.S. auto industry.” We can all no doubt learn a lot from the slow death of a once-mighty domestic auto manufacturer. Using the U.S. merchant marine as a model for that collapse, however, is beyond ludicrous. It’s also unfair.

Bank starts out by explaining that the U.S. merchant marine once included “hundreds of ships that regularly transported a significant portion of U.S. imports and exports and employed tens of thousands of Americans at sea and on land.” Then, he goes on to state that “only a handful of such liner vessels” are still in service. It is here, however, that his analysis goes astray. His supposition that “the U.S.-owned and -operated merchant marine liner fleet no longer exists” could not be further from the truth. Beyond this, he uses the contraction of the U.S-flag deepsea shipping fleet as the perfect example of what is wrong with the U.S. auto industry today. He is wrong and here’s why:

It is true, as Mr. Bank asserts, that many U.S.-flag ships, although subsidized by the U.S. government, are actually owned by foreign interests. To say that the U.S. taxpayer enjoys little or no benefit from them is a matter of opinion. Bank, who says that he was [I]director of the State Department’s Office of Maritime Affairs from 1972-79[/I], also conveniently leaves out the fact that although only a tiny percentage of the world’s merchant fleet is today under U.S. flag, a much larger percentage of that collective fleet is owned by American interests. The reasons why are actually quite simple: it’s just too hard to do business here and make a buck. And, that’s got nothing to do with the cost of maritime labor or the competence of American shipmanagers.

The cost of doing business here is onerous. Taxes, labor laws, Balkanized environmental rules; you name it. You need to look no further than the recently defunct Hawaii Superferry to see that metric in play. The cruise operators know it, too. That’s why they register their vessels under every conceivable flag of convenience while making token stops at obscure foreign islands, and making millions of dollars in what is essentially a coastwise U.S. trade by any other name. Meanwhile, the failure of the U.S. Congress to recognize that the Harbor Maintenance Tax (HMT) as it affects shortsea shipping is crippling American infrastructure, polluting the air and adding to the cost of everyday goods. Make no mistake about it: an entire fleet of U.S.-flag carriers could prosper in the shortsea markets, absent the ball-and-chain of the HMT. Blaming that on shipping managers or their employees misses the point altogether.

(See next post for Part 2)

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Apples to Oranges: A poor analogy Part 2

As domestic automakers sink deeper into the collective financial mess that some will not recover from, Bank correctly points out that the labor component of that equation – represented by the UAW – is “resisting concrete steps to help the industry that has provided their livelihood for 70 years.” Indeed, as much as $2,000 of the cost of every vehicle produced by Detroit today is represented by legacy labor costs. To be fair, the automaker’s management negotiated and agreed to those terms over the years. Nevertheless, other autoworkers today, working for foreign corporations here in the United States, make quite a good living without imposing such costs on the eventual consumer. It can be done.

Switching our attention back to the maritime labor component of our “sinking ship,” the metric that Bank hopes to connect two situations is nowhere to be found. Unlike Bank, I actually went to sea in the 1980’s and so I speak from a position of authority from the standpoint of seafarer’s compensation. My first year’s wages of about USD $51,000 as a Third Mate with the Military Sealift Command in 1980 was considered good money by any standard in those days. Today’s Third Mate, by comparison, with the ink still wet on his or her license, can command a starting salary of USD $70,000 or more. It all sounds good, but the buying power of that money pales in comparison to 1980’s dollars.

Still, Bank persists: “Even with all the subsidies, even with technical innovations, containerization and other pioneering cargo advances, U.S. companies couldn’t survive the financial burdens of the union demands.” He also bemoans the call for more seamen on board vessels and claims that crews of 18 are sufficient to operate safely. In reality, reduced manning has done nothing but reduce safety on board these vessels. Bank has it right when he says that “European and Japanese carriers were paying higher total wages per seafarer than U.S. flag vessels.” In fact, the majority of those foreign seamen do not pay taxes on that money if they spend six months and a day outside their home country. This perk, long afforded in one form or another to ex-patriot U.S. workers overseas, is still denied to U.S. seamen.

In way of comparison to a bailed-out Detroit auto machine, Bank turns his attention to what he characterizes as ships “massively subsidized by the federal government,” and “laws guaranteed that U.S.-flag vessels would carry all government-related cargo.” As someone who served with the U.S. government during the early 1970’s, you might think that he would be somewhat familiar with the concept of sealift capability as it relates to carrying on a foreign war. The “Death Spiral” he refers to as the American merchant fleet declined in the aftermath of the Viet Nam war was to be expected. It occurs in the wake of every foreign conflict as demand for those carriers goes away.

It is stylish, from time to time, for everyone to criticize American cabotage laws and the requirements for government cargoes to be carried on U.S. bottoms. But these requirements are not unique to this country. Arguably, they represent an important part of the national defense picture. The Jones Act may be flawed in certain ways, but in its purest form, it represents good value for the American consumer. Connecting the dots isn’t always easy.

The U.S. maritime industry has many warts, but comparing its supposed demise to the crisis now ongoing in Detroit is, at best, a stretch. The cost of building a ship in America (like the auto industry, in some cases) far exceeds that which it would take to build a similar product in the Far East because of the vertically integrated nature of the Asian steel and shipbuilding industries. Overseas, these yards can decide where to take their losses; in the shipyard or at the steel mill. At one time, most of the big U.S. shipbuilders took their roots from steel, as well. No more. Add this to the repressive environmental and domestic regulatory schemes in place here, and it is no wonder we can’t compete. Again, that’s got little to do with the management of domestic shipyards.

In a perfect world, the “open economy” that Richard Bank alludes to is a nice goal. In reality, we’ll never get there. NAFTA is an appropriate example of why. Open trading borders with Canada, at least in theory, make a lot of sense. For myself, I fail to see what advantage can be reaped from extending the same privilege to our southern neighbors where pay scales remain in the gutter, environmental standards are non-existent and the cheaper goods that flood one-way (north) across the border as a byproduct of this agreement do nothing to balance the playing field and everything to further the demise of American industry. In the face of all of that, I think the Jones Act is a small price to pay for American consumers. And frankly, I find “the parallels between the auto industry and our departed maritime industry” that Bank touts as “bright beacons” to be obscured in a heavy shroud of foggy nonsense.

Like Bank, I too look forward to seeing UAW labor and its leadership become a real partner with Washington in the financial recovery. As potential equity holders in a new GM, they might not have any other choice. On the other side of the equation, maritime labor has long since been on board with the program. Rather than making unreasonable demands in a situation that clearly requires restraint, the seafarers and the unions that represent a good portion of them have, for decades, been a part of the solution.

Unlike our Washington OPED writer, I’m not yet “prepared to go down with the ship.” In fact, I see a robust future for American flag interests. The ongoing shortage of qualified labor – even in these tough times – to man these vessels in the blue water, brown water, oil & gas and offshore sectors is ample testimony to that. Like most people, I don’t know if (or in what form) GM or any of the other domestic automakers are going to survive. On the other hand, I invite Mr. Bank back down to the waterfront at some point to get a better look at “our departed maritime industry.” It’s still alive and hardly on life support. At some point and with a bit of tweaking to eliminate just a couple of regulatory barriers, it might make a full recovery. – [B][I]MarEx.[/I][/B] [I]

Joseph Keefe is the Editor in Chief of THE MARITIME EXECUTIVE. He can be reached with comments on this editorial at jkeefe@maritime-executive.com. Join the Maritime Executive ‘Linked In’ group at by clicking http://www.linkedin.com/e/gis/47685> [/I]