(Sept 21): In any high-stakes military conflict with China, the US Navy will be critical to winning. But America’s shipbuilding industry is far from able to support what the Navy needs.

Enter South Korean shipbuilding powerhouse Hanwha Ocean Co. The company is buying a former Navy shipyard in Philadelphia and recently secured Korea’s first ever contract to overhaul a US naval vessel. These steps pave the way for the company to play a bigger role in the US naval shipbuilding sector and could herald the start of a new wave of investment.

America’s shipbuilding industry has virtually collapsed over the last generation, with years-long delays and cost overruns making it hard for the Navy to build the ships and submarines it needs. In contrast, China’s navy — supported by the world’s largest shipbuilding sector which produces more than half of merchant ships globally — is rapidly growing and now has a larger fleet than the US.

“Look at the difference in shipbuilding between the United States and China — deeply concerning,” Deputy Secretary of State Kurt Campbell said a July testimony to a Senate committee. “We have to do better in this arena or we will not be the great naval power that we need to be for the 21st century.”

To address this shortfall, the US is seeking investment from allies, particularly South Korea and Japan. Their companies are the world’s biggest shipbuilders outside China and can produce both commercial and naval vessels more quickly and cost-effectively than American firms.

Secretary of the Navy Carlos Del Toro visited Japan and South Korea in April, where he toured Mitsubishi Heavy Industries Ltd’s shipyard in Yokohama, as well as Hanwha’s and HD Hyundai Heavy Industries Co’s facilities. He praised their efficiency and technology, and encouraged them to invest in America.

Hanwha was one of the first to respond to the plea. In June, it announced the acquisition of Philly Shipyard in a deal valued at US$100 million (RM420.3 million). The following month, it secured an agreement with the US Navy that allows it to handle maintenance and repair projects for Navy vessels, leading to its first contract.

Local rival Hyundai was also licensed in July to provide those services, adding to the possibilities for future cooperation.

Speaking at a christening ceremony for a new ship at the Philly Shipyard last week, David Kim, executive vice president at Hanwha Defense USA, said the purchase of the shipyard will “help the government with some of its priorities with respect to the Navy and the plans that it has going forward.”

“We think it’s an opportunity to help the company grow, help invest in the workforce, create more jobs, be a part of the community,” Kim told Bloomberg News on Sept 9.

Yet the recent furore over Nippon Steel Corp’s takeover bid for United States Steel Corp may make some foreign firms think twice about investing in the US, especially if it could raise national security concerns. President Joe Biden is set to block the steel deal, threatening to strain relations with Japan, a key ally.

In Hanwha’s case, its purchase of Philly Shipyard is likely to be approved partly because South Korea is an ally, according to Colin Grabow, associate director at the Cato Institute, who focuses on trade.

“It would be a total black eye” for Del Toro and the administration if the deal were blocked after they’ve encouraged foreign companies to come, Grabow said, adding that Italy’s Fincantieri SpA and Australia’s Austal Ltd already build ships for the US Navy.

Even with support from Hanwha and possibly other Asian firms, it would take the US years to build up its capacity and drive down costs significantly enough to improve an industry that remains a tiny fraction of China’s. At the beginning of 2023, China had orders for 1,794 large commercial ships, South Korea had 734, and Japan had 587. America had just five.

US shipbuilding is heavily shielded by laws such as the Jones Act, a century-old regulation that requires vessels moving goods between US ports to be built, owned and crewed by Americans. While it has seen amendments over the years, the Act remains popular as it’s seen as promoting national security and preserving jobs. Critics argue that it stifles competition and inflates costs, contributing to the inefficiencies that the industry faces today.

The gap in US-China maritime power has implications for the world’s biggest economy and national security. Despite 80% of global trade and over 90% of military supplies and fuel traveling by sea, the US shipbuilding industry accounts for less than 1% of the world’s commercial vessels. As the top importer and second-largest exporter, the US is heavily reliant on foreign companies for shipping, port access and shipbuilding.

Hanwha has a lot of work ahead as it looks to build ships at Philly Shipyard, including securing contracts for new commercial or government vessels. Chief executive officer Kwon Hyek Woong meet with Senator Jack Reed in August, and executives urged Reed to quickly approve their plans.

To ramp up production, Hanwha will need to make substantial investments and hire more staff. This will be a “great thing” as it brings jobs, money and modern technology, said Louis Agre, president of the Philadelphia Metal Trades Council, a labor union representing the 1,700 or so workers at the yard.

But solving the skills shortage won’t be easy. Training a worker to become a proficient welder can take about five years, said Shawn Jenkins, a welding instructor who has worked at the shipyard for 12 years.

The shipyard has also been struggling financially, with reports as early as 2019 warning of potential bankruptcy. Since then, its finances have not improved, with losses reported in five of the last six years.

Shipbuilding and shipping are increasingly viewed as critical to US national security, with signs that Washington will step up both support and protections for the industry.

The US, Canada and Finland announced a plan in July to jointly build icebreakers to compete with Russia and China in the Arctic ocean. In April, Biden’s administration opened an investigation into alleged unfair Chinese practices in shipbuilding and maritime logistics, which could result in duties on Chinese-built ships calling at US ports.

China slammed the probe, saying the US has “made one mistake after another” and is blaming Beijing for its own industrial problems. “The US shipbuilding industry has lost its competitive advantage many years ago due to overprotection,” the Ministry of Commerce said.

Tokyo and Seoul have been deepening ties with Washington under the Biden administration to counter threats from China and North Korea. The allies formalised plans in July for regular military training, information sharing and senior-level policy consultations, binding their security cooperation so tightly ahead of the US election in November that it would be hard to unravel.

The Pentagon is looking to set up military repair hubs in the two East Asian countries, as well as Australia, Singapore and the Philippines, Nikkei reported this month. That could benefit Hanwha and its competitors in South Korea and Japan. India is also encouraging them to invest in its domestic shipbuilding industry.

US Ambassador to Japan Rahm Emanuel voiced his support for leveraging the capacity of allies’ yards to repair US ships, saying in an August op-ed that it provides a “smart way out of this mess” that is an atrophied American fleet.

“Since the United States, Japan and South Korea train and plan together, it makes sense that we also maintain and repair together,” Emanuel said.

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