SJR 171

Joint Subcommittee Studying Economic Incentives for Virginia's Shipbuilding Industry

October 5, 1998, Richmond

The joint subcommittee is directed to determine whether, and at what level, tax benefits or other economic incentives would be effective tools in ensuring the continued health of the Commonwealth's maritime industries.

State of the Industry in Virginia

While shipbuilding has long been a mainstay of the regional economy, its contribution has been waning as the industry has continued to decline. Total private and government employment in Virginia's shipbuilding industry has declined by about one-third, from approximately 45,000 to fewer than 30,000, since 1990. Much of the downturn has been attributed to defense downsizing. Navy work is expected to become increasingly scarce as the size of the Navy is expected to decrease. At the same time, the Navy is perceived as protecting its remaining shipyards, including the Norfolk Naval Shipyard. However, employment at the Norfolk Naval Shipyard in Portsmouth has declined over the past decade from 12,500 in 1988 to 7,000 in 1997.

The impact of the shipbuilding and repair industry in Virginia extends beyond the number of direct employees. The Hampton Roads Planning District Commission (HRPDC) has estimated that private employment in the ship- and boat-building and repairing industries in Hampton Roads was 26,000 in 1997. Based on direct employment, modeling by HRPDC staff projects that the industry's total employment impact on the region, which includes indirect and induced employment, is 46,017 jobs. The personal income impact of the industry's private employment is approximately $1.8 billion. The industry's impact on the region's economic output is estimated at almost $4.1 billion.

If the 7,000 government employees at the Norfolk Naval Shipyard are added to the number directly employed in the private sector, the ship- and boat-building and repair industry's impact on employment in Hampton Roads increases to 58,407 jobs. The output impact of the combined public and private yards is estimated to be nearly $5.2 billion. Hampton Roads is home to 20 shipyards and ship repair facilities and another 100 subcontractors that work in those facilities. The 120 companies that rely on shipbuilding and repair have a combined 37,000 jobs, $1.2 billion in annual sales, and $941 million in employee earnings.

National Industry Trends

Since the federal government ceased providing subsidies to private U.S. shipbuilders in 1981, and other nations simultaneously increased their subsidies, the shipbuilding industry has been in decline nationally. During the 1980s, many shipyards were forced out of business because they were at a competitive disadvantage in the international commercial shipbuilding market. Thousands of U.S. workers were laid off, and by 1988, U. S. private shipbuilders no longer competed in the growing international commercial shipbuilding market. In order to stay in business, the remaining shipyards relied almost exclusively on the shipbuilding needs of the Navy. Military construction continues to dominate the workload at U.S. yards, in some cases constituting more than 90 percent of total revenues.

Unfortunately, the pace of that activity has gradually declined. The Navy's active fleet was cut from 541 ships to 354 ships between 1985 and 1997. While the Navy plans to build 48 ships at a cost of almost $40 billion between 1998 and 2003, this program represents an average of 5.8 ships per year, which compares to the average of 19 ships per year during the 1980s.

Cuts in the Navy's shipbuilding and ship repair budget have forced the remaining private shipbuilders to compete for a share of a declining market. Employment in U.S. private shipyards for 1997 is projected to be lower than any level in the past 47 years. Total U.S. shipbuilding and repair revenues peaked in 1990 at $10.7 billion. From 1990 to 1995, revenues have declined steadily, with 1995 revenue at less than $9.6 billion.

Outlook for Virginia's Shipbuilding Industry

Several recent developments illustrate that Virginia's shipbuilding and ship repair industries are in an era of uncertainty. First, in order to ensure its position as the only shipyard capable of designing and building major aircraft carriers, Newport News Shipbuilding has initiated development of a 230,000 square foot aircraft carrier design research center in downtown Newport News. In 1998, the General Assembly appropriated funds for the construction of the center, which is envisioned as the base for development of a radically different class of aircraft carriers, referred to as the CVX. The Navy announced in May 1998 that instead of forging ahead with a radical departure in carrier design it would scale back plans to develop the CVX by 2006. The Navy's decision makes it likely that design work on the CVX will be scaled back. However, the decision also makes it probable that at least the first CVX will be nuclear-powered. As Newport News Shipbuilding is the only U.S. yard currently able to build nuclear carriers, it would be assured of building the first CVX.

A second major development is the sale of Norshipco to San Diego-based Southwest Marine, Inc. Norshipco, with approximately 1,800 employees, is the largest private shipyard in South Hampton Roads. The new company will be the largest non-nuclear ship repair firm in the nation, with an estimated $400 million in annual revenue and 3,800 employees. The deal may provide Norshipco with the capital and lobbying power needed to win Navy repair contracts.

A third development involves dissatisfaction by ship repair firms with Navy policies for allocating ship repair work to public and private-sector shipyards. The GAO will examine these practices and determine whether the Navy has been following its policies in recent contract awards and assignments. Private yards are concerned that the Navy is sending a large majority of its ship repair work in the harbor to the Norfolk Naval Shipyard, though the cost of doing the work in the Naval Shipyard is reportedly more than that of private-sector yards. The Navy's stated goal has been to match its shipyard's workload with its 7,000 employees. Federal law currently provides that private yards may receive not more than 50 percent of the Navy's workload, and that public facilities will maintain a work effort of not less than 50 percent of the workload. However, there is no cap on the percentage of work that the public yards may undertake. For fiscal year 1998, 74 percent of the Navy repair work went to Norfolk Naval Shipyard, and 26 percent went to private sector yards.

Despite a cutback in naval spending due to the end of both the Cold War and the resulting naval buildup, the Hampton Roads Planning District Commission reports that the outlook for the shipyards in Hampton Roads is optimistic and that the future for military work in the yards of Hampton Roads is positive. After several disappointing years that included the failure of some businesses, local shipyards are described as recently being in recovery. However, others are contending that the industry has significant excess capacity and that that the landscape of the ship repair business is beginning to change, with a trend clearly toward companies getting bigger.

State Efforts to Assist the Industry

The Existing Industry Development Division of the Department of Business Assistance, through its industry visitation program, serves as the Commonwealth's principal point of contact and communications with business and industry. The division visited 2,207 firms in fiscal year 1998, and received over 4,800 requests for assistance. The division, which provides existing businesses with advice referrals and ombudsman services, reported that the three most popular categories of assistance requests were worker availability/training, financing, and export development.

The division visited 23 of the Commonwealth's 49 shipbuilding and repair firms (SIC Code 3731) in 1998. The categories of assistance requested by these firms tracked the results of all companies, with the most frequent categories being workforce availability (30 percent) and financing (26 percent), followed by defense downsizing and marketing assistance (15 percent). Types of assistance and information provided to shipbuilding firms include defense outplacement referral service, Capital Resource Directory, and the Defense Conversion Revolving Loan Fund.

Next Meeting

The joint subcommittee will hold its next meeting in Hampton Roads, during which it will visit shipbuilding and repair facilities and receive recommendations from industry representatives.

The Honorable Stanley C. Walker, Chairman
Legislative Services contact: Franklin D. Munyan