Dear Editor;

As regards the upcoming referendum to fund ferries in San Francisco, it is worth remarking on a potential benefit of a ferry system in the Bay Area; the work that would be produced by local construction of the vessels themselves.

The build-out of the ferry fleet will require about 2,000 man years of trade labor. This may not seem like much, but this work is the key to significantly more work; super yachts are very similar as regards processes and techniques and a number of builders (notably Derecktor, in Mamaroneck, NY) have successfully combined ferry and yacht construction in the same shipyard.

The super yacht market is rapidly exploding worldwide. As of September 30, 2003, there are 507 yachts over 80 feet long under construction worldwide, totaling 62,000 linear feet of boats. This is up from 279 projects as recently as 1998, and is only growing faster; one builder in Washington state alone wrote $30 million of orders at the recent Fort Lauderdale Boat Show in October, nearly doubling their order book. Other builders have done equally well. In fact, the market for such vessels is so large that there is a secondary trading market for building slots for super yachts. The U.S. is in second place as a builder of these craft with 76 projects totaling 8,406 linear feet (Italy is first with 189 projects at 21,000 feet). Most builders will tell you that they can sell as many yachts as they can build. In addition, the current regulations regarding operation of these vessels make it favorable to flag these vessels under the MCA in a British Commonwealth country, but there may soon be changes in admeasurement rules that make U.S. flag registration (and thus construction) favorable. Since 58% of such yachts are U.S .-owned, it may become very desirable to build these craft in the U.S. , which would increase the market for US builders even more.

Many people would believe that the high U.S. wage rates, and the higher Bay Area wage rates and business costs, would make construction of any such vessels prohibitive, but this is not the case. Other leading builders of large yachts are northern EU nations (the Netherlands, the UK, Germany, and Denmark are in the top nine) with higher wages than in the U.S., especially considering the high employment costs associated with EU mandated benefits and taxes. Derecktor is in the inner New York City suburbs, which may be less expensive than the Bay Area, but not by much. However, the potential improvements in productivity from the best production practices allow even more gains.

Shipyard productivity is measured in compensated convention gross tons. A convention gross ton is approximately 25% of the internal volume of a ship in cubic meters. A factor is used to compensate the gross tonnage for size and complexity. Large vessels are easier to build and more complicated ones are more difficult, so there is an international standard factor based on ship size and type, ranging from 0.3 for large tankers to 10 for medium sized combatant naval vessels. Ferries have a factor of 2.5 and small miscellaneous vessels a factor of 5. The very best shipyards in the world build a compensated gross ton of ship for as little as eight man hours, and I have benchmarked a U.S. builder of aluminum workboats and ferries at 13. Some third-world yards build large vessels at 150 or more. This means that a more productive yard can afford more than ten times the wage rate of a less productive one. This also means that a highly productive shipyard could pay an average wage over thirty dollars an hour and still make substantial profits on super yachts at their current market prices.
What is required to achieve this high level of productivity? This is where the Bay Area has great potential. One important part of shipyard productivity is highly effective use of computer technology, especially Computer Aided Design/ Computer Aided Manufacturing. The major bottleneck in implementing the best of such technology in the super yacht industry has been the shortage of IT qualified individuals. This might not be as much of a problem in the Bay Area. Other issues include engrained habits and practices left over in established shipyards. A “green field” (actually probably “brown field”) yard will not have to “break rice bowls” to implement best practices. Another benefit is weather. Heat/humidity induced productivity loss annualized in the Gulf Coast amounts to a 40% or greater productivity loss. The annual heat profile in the Bay Area results in nearly zero loss. Loss due to cold is less severe, but it does exist, and the Bay Area is also zero here. Workforce productivity is also related to education, and the average manufacturing worker in the Bay Area has an AA degree. There are numerous other productivity improvements, most relating to ways of organizing work rather than use of expensive equipment, that have been shown to improve productivity by amazing amounts. A new shipyard could “leapfrog” to world class productivity by simply embracing the techniques that are already well known and documented.

What about the business case? This is what gets exciting. Virtually all small U.S. shipyards are family- held firms, established a few decades ago by a single individual or two partners. Small ship building is like building construction in that a lot of money passes through a firm with relatively little fixed investment. Some small ship owners have actually built large fishing vessels and tugs essentially on their own, in a vacant lot, assembling a “virtual shipyard” of subcontractors just for a single project. A small shipyard might have a book value as little as $2-4 million or even less. Such a facility consists of rented space, a few relatively simple large tools (a large bending brake, a medium sized gap press and a often yard made English wheel), a bridge crane and a fork lift and a larger number of smaller tools such as welding machines, computer workstations and worker’s portable tools. Most of the items requiring sophisticated machinery (like heavy machine tools or CNC metal cutters) are made by subcontractors. This small investment and large cash flow means that returns on investment exceeding 100% annually are possible. (So are proportionately large losses, however, so knowing what you are doing is important.)