Charting a New Course: Countering China's Dominance in Global Shipbuilding
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House Foreign Affairs East Asia and Pacific Subcommittee U.S. House of Representatives
Follow its sittingsAmi Bera
And I think the importance of this particular hearing with a focus on some of our friends and allied nations, particularly Korea and Japan, that rank number two and number three in shipbuilding, we don't have to do this alone. Having talked to the Koreans with the chairwoman, but also having visited Japan and talked to the Japanese, there's great interest in helping the United States build ships. We have to figure out the technical details. We have to understand the resource allocations and the resource certainty so that, I applaud the National Assembly and the Koreans for making the decision to invest 350 billion dollars in the United States, 150 billion of which is allocated to shipbuilding. But we have to create some certainties as well.
You want to create those demand signals that say, yes, make those investments here, and here's what we're going to do over the next 25 years to catch up.
And we can do this. And again, I think the advantage we have, where China is doing this on their own, we have allies that we can do this with. We have technical issues that we have to work through. Do all the components of the ship need to be built in the United States? Can you build non-critical components, non-technical components elsewhere in Japan or Korea, do final installation here in the United States?
Again, none of these are easy issues. We'll have to work with our unions and others to make sure we're training up a workforce. Can we get the Koreans to make the big investments, you know, in the Philadelphia shipyards, other shipyards that they've expressed an interest in? If they're going to make those investments, they want to make sure we're building ships there. Can we solve visa issues that allow Korean instructors to come in and perhaps train up that workforce?
And we're not talking about Korean workers building the ships, but we're talking about Korean instructors, Japanese instructors training up American workers to build ships. We should be able to, in a non-partisan way, work through that. You know, there are obviously efforts like the SHIPS Act that are non-partisan. I'm happy to see portions of the SHIPS Act in the NDAA, so I think that is a good thing moving forward. So again, Chairwoman, thank you for the timeliness of this hearing.
It's of critical national security interest, but it also is in the interest of American competitiveness around the world. And I look forward to hearing from the witnesses, and thank you for being here.
Young Kim
Thank you. Other members of the committee are reminded that opening statements may be submitted for the record. And today, we're pleased to have a distinguished panel of witnesses before us on this very important topic. Dr. Matthew Funaiole, the vice president and Dracopoulos Chair in Innovation at the Center for Strategic and International Studies. Mr. Brent Sadler, a senior research fellow for naval warfare and advanced technology in the Allison Center for National Security at the Heritage Foundation.
Mr. James Kim, the program director for the Korea program at the Henry L. Stimson Center. I want to thank all three of you for joining us today. This committee recognizes the importance of the issues before us and is grateful to have you come before us and speak. Your full statements will be made part of the record, and I'll ask each of you to keep your spoken remarks to five minutes in order for the members to ask you questions. So let me now recognize Dr. Funaiole for an opening statement.
Matthew Funaiole
Chairwoman Kim, Ranking Member Bera, distinguished members of the committee and subcommittee, thank you for inviting me to testify. The views I'll express this afternoon are my own. My employer, the Center for Strategic and International Studies, does not take policy positions. China has developed the largest shipbuilding industry in recent history, which it now and increasingly wields as an instrument of national power. We just heard from Chairwoman Kim that China controls over 50 percent of the commercial market and the US is less than 1 percent.
But maybe to put those figures in a little bit more perspective, a single state-owned conglomerate, the China State Shipbuilding Corporation, or CSSC, builds more commercial vessels by tonnage each year than the entire US shipbuilding industry has produced since the end of World War II. CSSC is also the principal builder of warships for the PLA Navy. And this presents both economic and national security concerns for the US and its allies, but I want to focus my comments on the national security implications. China's leaders seek to displace the US as the preeminent power in the Asia-Pacific and to project power far from its shores. And much of that ambition rests on its maritime industrial base.
Over the last two decades, we've seen the transformation of the Chinese Navy, moving from a largely regional defense coastal force into an increasingly modern and capable fleet of over 370 ships and submarines, making it the world's largest navy.
And if you look at the shipyards that are responsible for this ongoing buildup, military production often benefits and shares infrastructure with commercial operations. It's common in China to see warships being built right alongside tankers and container ships. And I've included in my testimony some satellite imagery that illustrates this. I think we might have some to be projected today potentially, and if not, that's okay. But what you'll see in the testimony is that if you look at these dual-use shipyards in China, like Jiangnan Shipyard and there's others throughout it, you'll see container ships and military vessels peppered throughout these massive sprawling facilities.
And if you look at it over time, you'll see that they're right alongside each other, or they're using the same dry docks, they're using the same gantry cranes. And this is a feature of what China has designed its shipbuilding industry to do. It seeks to fuse together both the military and commercial sides of its operations. Importantly, commercial firms also rely on China for ships. Up to 75% of the ships produced at shipyards owned by CSSC and its subsidiaries are destined for markets outside of China, many of which are US allies and partners, both in Europe and Asia.
And complicating that entire picture is that it is an opaque ecosystem. We don't have a lot of clarity in terms of revenue flows or technology transfers within that system. And so what that means is that these companies, who have few commercially viable alternatives outside of China because capacity is constrained and because Chinese yards can often deliver ships at a lower cost and in less time than competitors, are pouring billions of dollars into Chinese dual-use shipyards. Foreign technology is falling into Chinese dual-use shipyards. And that collectively is helping to strengthen its maritime industrial base, which both helps on it increasing its market share, but also supports those ambitions of the PRC that I mentioned earlier, which seeks to displace the US in the region.
To respond effectively, the US needs to get creative. My personal assessment is the US shouldn't be trying to outcompete China, outbuild China in the commercial sector for commercial hulls, hull for hull. We certainly shouldn't be trying to do that alone, but instead focusing on three interrelated lines of effort. The first is transparency. By focusing on trying to understand what those linkages are between shipyards in China, how they support foreign capital and how they support foreign orders, and how that capital funnels back into building up the maritime industrial base, will help companies make better risk assessments.
The second is to drive investment into high-value maritime components and systems so that the US can compete with China on its own terms. And then finally, and maybe most important for this hearing, working with allies and partners like South Korea and Japan, as well as others, India's a new entrant into the shipbuilding game as well, to both align on long-term objectives and then also to build up allied capacity at scale outside of China. China's advantages were built over the course of decades. It's not something that's going to be easily replaced and it's not something the US can address overnight. But by focusing on those three lines of effort and sustaining that focus for the years to come, the US can compete from a position of strength.
Thank you, and I look forward to your questions.
Young Kim
Thank you, Dr. Funaiole. I now recognize Mr. Sadler for your opening statement.
Brent Sadler
Thank you for the opportunity to speak before you all today. I've got some graphics over the side on this and they're also electronically on the hearing site. So again, good afternoon, Chairwoman Kim and Ranking Member Bera and other members of the committee. Today's discussion, the title, Charting a New Course: Countering China's Dominance in Global Shipbuilding, is timely to say the least, and action is urgently needed.
In my 26 years as an active duty naval officer, most of it in the Pacific on nuclear submarines, and the last six years with Heritage Foundation, this has become a passion project. And the opening statements by the members of the committee that this is a bipartisan, it is a whole-of-nation endeavor. And we have partners and friends overseas that we can also draw on, like you mentioned Japan and South Korea principally, but by all means not limited to them. My message today is we with key allies must forge a united front to China's assault on our maritime industry and national security. Today our erstwhile adversary, the Chinese Communist Party, dominates global shipping, over 20%, shipbuilding, over 63% of deliveries, and controls a global network of over 100 strategically placed ports.
On this commercial foundation, China has built the world's largest navy of over 400 modern warships tasked with being ready to win a war over the fate of Taiwan next year. Without action and assured access to a fleet of over 1,300 commercial ships of various classes, China will be able to control the terms of trade and manipulate markets, some of that we are already seeing. In the immediate future, sustaining a multi-year war relies on shipping to fuel wartime industry and shipbuilding to repair and replace battle losses. China knows this, and deterrence can be enhanced with a viable independent maritime industry. The Cold War required 660 commercial ships to win against the Soviets.
Today the challenge is greater and more complex. Our response to date has been tardy to say the least and incomplete, but the past two years has witnessed a maritime awakening here in DC and with our allies not seen since the early 1970s. It is historic and it is one not to be missed. This nascent national endeavor is a threat to Beijing's bottom line as well as its global aspirations. As such, this generational effort must be protected and nurtured against predatory and nefarious attacks to undermine it, some of which are already happening as we speak.
Given the scale of the challenge and shared threat, allies are vital. If I can go to the next slide. Together as a united front, given our collective maritime power and capacity for innovation, China will be unable to manipulate our markets or economically coerce us. Recall how China did this in 2010 against the Japanese over rare earths and again to us very recently for political purposes and strategic intent. The nation is at a historical moment and unity on this issue.
Legislation such as your own, the FLEETS NOW Act and the Ships for America Act, are welcome and needed. Actions echoed in executive orders by the President and Section 301 complaints against China make clear the path forward. These are important, but a bias to action is urgently required. Channeling our collective advantages requires a maritime group of nations modeled on the informal structures of the G7, membership to include allies like South Korea, Japan, the Philippines, Greece and perhaps even Taiwan. If we can go to the last slide.
This M, so-called M7, would work to align regulatory and trade policies as well as positions in international organizations for common cause. Moreover, it should enable greater intellectual and skilled labor exchanges, as mentioned earlier, like naval architects, and invigorate our maritime industrial revival. A key element is also at the foreman level, for more on that in questions. And China won't be idle, and here's where the threat is. Effectively countering China's expected attacks requires expanded investigative and intelligence gathering and analytical capacities across departments and agencies.
Thank you.
Young Kim
Thank you, Mr. Sadler. Now let me now recognize Mr. Kim for your opening statement.
James Kim
Thank you, Chairwoman Kim, Ranking Member Bera, distinguished members of the committee, thank you for the invitation to testify. My full statement is in the record. I'll summarize its main points here where my fellow witnesses' testimony covers related grounds in more depth. I'll try to build on their work rather than repeat the same points. My reading of the Chinese leadership's public statements show shipbuilding frequently described as an important part of China's advanced productive capacity and a pillar of its economy linked to a broader national strategy.
The numbers bear this out. At the turn of the millennium, China accounted for less than 7% of compensated gross tonnage in global shipbuilding, while Japan and Korea together accounted for nearly two-thirds of the same. Today, China builds more than half of all commercial tonnage globally, while Japan and Korea's combined shares have fallen. This dominance carries two sets of risks. The first is economic.
If there's no alternative to Chinese shipbuilders, countries have no choice but to accept China's terms for ship orders and critical components. And China's use of economic coercion in this space has already been covered by Mr. Sadler. But even if there is no deliberate coercion, concentrating a critical global supply chain in one country is a structural vulnerability, a lesson the pandemic taught us well. The second risk is national security. My fellow witnesses have documented in detail how China's military-civil fusion strategy blurs commercial and defense shipbuilding.
I'd simply add that even those who come to this evidence with some caution, given the knowledge about the differences in naval and commercial shipbuilding, should still agree the risk warrants serious scrutiny rather than dismissal. If Chinese shipbuilders can squeeze out competitors globally, that capacity for the US and its allies alike shrinks with them. This is where I want to focus the rest of my time, not on the scale of the threat, which my colleagues have laid out, but on the question that ought to follow: why haven't attempts to address this issue not resulted in more ships for us and what stands in the way? The opportunity is very real. Over 94% of the world's ships were built in East Asia last year, more than half in China and the rest in Japan and Korea.
These are proven and capable partners. But turning that opportunity into results requires confronting three concrete challenges which Representative Bera has already outlined. One is labor, the other is supply chain, but the final one is demand. According to many estimates, US shipyard labor turnover runs between 20 to 30% with first-year attrition as high as 60%. Korea's top shipbuilders each draw on thousands of local suppliers.
The US commercial supply chain is much smaller. And on demand, the US had just 12 commercial ship orders on its books last year, compared to over 4,000 in China. Japan and Korea have each moved to help, though at different speeds. Prime Minister Takeichi has made shipbuilding central to Japan's economic security agenda, and the two governments signed a formal memorandum of cooperation last October. But translating Japan's $550 billion investment pledge into actual maritime allocation remains unresolved.
South Korea has moved boldly with Hanwha's acquisition of Philly Shipyard to the MASKA initiative, dedicating $150 billion shipbuilding allocation and establishing a partnership center in Washington.
We must, however, also recognize and address some real vulnerabilities. The recent US-China agreement suspending Section 301 port fees shows that much of our leverage against China rests on tools that the administration can potentially trade away in a broader negotiation. A durable strategy cannot rest on only one such measure. My written testimony offers several recommendations, including converting our allies' investment pledges into binding, milestone-based commitments tied to actual demand, support for commercial shipbuilding, worker skill development, encouraging increased allied cooperation on export controls and combating Beijing's coercive tactics, and leveraging allied capacity for near-term procurement through the Maritime Action Plan's so-called bridge strategy. I'd also note that all three of us, in our written statements, working independently, arrived at a similar conclusion that there needs to be a designated accountable coordinating mechanism within the government.
Revitalizing the US maritime industry while countering China's market dominance is a significant challenge. But the United States does not need to do it alone. Japan and South Korea are allies with a proven track record of delivering world-class ships on time, at cost, and at scale. My recommendations are also not the only path forward, but they reflect the reality that the status quo is not sustainable and continued inaction carries real risks to our national interest. Chairwoman Kim, Ranking Member Bera, I'd like to thank you for the opportunity to testify.
I'll be happy to respond to any questions that you or the members may have.
Young Kim
Thank you, Mr. Kim, and to all our witnesses, thank you for your opening testimonies. I now recognize myself for five minutes of questioning. And I want to start with Mr. Sadler. Can you talk about how much of China's commercial shipbuilding infrastructure is dual-use, meaning it can pivot immediately to naval manufacturing during wartime, right? Can you talk about that?
Brent Sadler
Well, the easy answer to that, Chairwoman Kim, is all of it, because the way the Communist Party, it's a state-controlled economy, even the labor cost, it's driven by principles that are not free markets, Marxist valuation of labor calculations. And in with the civ-mil fusion, they've made it explicit that even a ship that is built for commercial standards has to also be ready to be utilized for military purpose. An old shipmate, sailor, common shipmate was Tom Shugart's been looking at this with car ferries, with hardened decks, and now new ones being built with the ability to sustain amphibious operations. And also as mentioned earlier by Dr. Fanell, he also mentioned about how you have a very large shipyard where one side is building tankers and the other side is building destroyers. The labor also moves between there.
So the competencies and the modern techniques they get, for example, to build next, you know, future very capable niche commercial ships can then be show up in their submarines, can also show up in their destroyers and their aircraft carriers. And we see that. We've seen that.
Young Kim
So to address some of those issues, should Congress implement targeted tariffs or port entry fees on Chinese-built commercial vessels to level the global playing field? What about sanctions on Chinese state-owned shipbuilders like CSSC?
Brent Sadler
Well, clearly we need to do a lot more on that front. But... sure, I would like both of you to answer if you can. Yes. Yes, so I think the fees are one tool. Tariffs are another tool that could be used to the same end.
Again, the 301 complaint gives a very strong case for a host of economic tools that can be brought to bear, and all of those should. As far as specific entities, specific shipbuilders, I mean, there's lots of these activities that are being blacklisted by the Pentagon because of their affiliation with the People's Liberation Army. And that needs to be continued. It needs to be perhaps constantly monitored because one thing's true with the Chinese business model is it's very fluid.
One day one company is named something and the next day they change their name and their business model just enough to get off the sanction list. We have to be very fluid, which is why we need a very much more adept maritime intelligence kind of focus, both in the economic forensics, but also in the pure intelligence gathering.
Matthew Funaiole
I'd add on, I certainly agree on the better need for intelligence into what's going on because things in China can shift pretty quickly. But on the fees itself, you know, I think any effort to try and shift the market needs to be paired with building up capacity, right? So if fees are implemented and there is not an increase in capacity outside of China, you're going to see increasing costs. And where are those costs going to get passed on to? And I think that's something that really needs to be worked through and understood because at the end of the day, if it's increasing costs on US consumers, you might be having, you know, ancillary unintended consequences on the industry itself.
In the vein of of penalties or penalizing companies for buying ships from China, I also think it's important to focus on future behavior rather than past behavior. You know, I mentioned in my oral comments and also in my written testimony, this is a difficult ecosystem to really understand what's going on. And so if that information is out there and transparent and companies are able to better formulate their risk assessments, that changes their calculus based off of what they do in the future rather than they ordered five ships from China five years ago and they're just now getting delivered today. So I think it's really important to think about what the cost implications are for any measures in that vein.
Young Kim
Sure. You know, so all of you know that the FLEETS Now Act is introduced and it proposes the creation of Maritime Group of Nations. This will be a dedicated multilateral platform for the United States to work with our top shipbuilding allies in commercial building. And we're going to try to do more fleet expansion, industrial base resilience, and maritime workforce development. So, Mr. Faniola, can you talk about how this multilateral platforms like that can be even more focused on like talk about also the trilateral shipbuilding alliance with South Korea and Japan that we talked about?
And then section 204 in the FLEETS Act authorizes the exchange program specifically to bring skilled shipbuilding workers to the US for training and knowledge sharing purposes. So can you address that? And then I would like Mr. Kim, hopefully we have some time for you to talk about the exchange area.
Matthew Funaiole
Yeah, I'll I'll keep my comments brief. The the most important part in any effort in that vein to me is aligning on what the long-term objectives are and making sure that any agreements that are put into place are robust enough that they are going to be maintained for years and decades to come, right? This is not something that can be solved in five years or ten years. We're talking about a several decade time horizon in order to address some of the concerns that we're facing now. Part of those efforts also need to identify where it is we're going to compete with China and where are areas that maybe aren't necessarily valuable to compete with China, right?
There's a whole value chain in shipbuilding and are we talking about container ships where the value and profitability is much lower, or are we talking about LNG tankers where the profitability is much higher, but there's also much more complexity that goes into it? So for me, the most important initial component is a shared risk assessment of what it is that we're talking about and identify what the niche areas are where the US in the short term can start to build up capacity and drive towards those long-term objectives.
Young Kim
I know my time has gone up, but Mr. Kim, if you'd like to address it in 30 seconds, I would love.
James Kim
I'll just very briefly and say that on issues like export control coordination, trilateral mechanism can be a very useful tool, as well as on dealing with coercive tactics by Beijing to absorb or offset the costs incurred for those tactics.
As you know, because Hanwha's subsidiaries were cooperating with the USTR on Section 301 investigation, they've been sanctioned by the Chinese government. So there's precedence for this and there needs to be some kind of an offset mechanism for that. On the jobs exchange front, that can work both ways, but there are clear benefits to be had through the worker skill upgrades in the US. Raises wages. It also allows these workers to stay on the job.
And frankly, South Korea is also very short on labor, so these workers cannot be tied down here. They need to go back to their yards.
Speaker 6
Thank you very much. Thank you. I would like to recognize Ranking Member Bera for your questioning.
Ami Bera
Thank you, Madam Chairwoman. So it does occur to me that by ourselves we won't catch up to the Chinese. It'll take us a long time, but in conjunction with our like-valued allies and others, recognizing the unique skill sets that Korea might have, Japan, maybe the Indians, Australia, others, that we can together catch up. I guess, Mr. Kim, we chatted briefly about the MOU that the United States signed with Finland. Again, we recognize part of the strategic economic playing field is going to be the Arctic region as global warming melts the ice and new routes of passage, new natural resources potentially pop up as well.
That MOU authorizes, I believe, Finland to build 11 new Arctic security cutters for us. Negotiations for similar deals with Canada and Norway are underway. What are the positives about this, the negatives? Does this give us a pathway to address other areas?
James Kim
I think the first thing we need to be clear on is that this is about investment of the capacity build-out at home. That's number one. And secondly, it's about job creation here at home as well. So the question is, how do we do that while we have this immediate near-term need for vessels of different types, whether it be commercial or even naval vessels? And if the allies are far better at producing these ships at cost and on time at scale, then perhaps maybe we could have them reproduce some of that success here.
But that takes time. That takes a lot of investment and time. And so in the near term, essentially what you have is an arrangement like the Finland arrangement, which the Maritime Action Plan calls for, it calls it the bridge strategy. It would be a staged process, multi-ship block order, where in the near term, first few ships are going to be built in our foreign yards while the capacity build-out and the investments happening here at home. And as that capacity is building at home, in the second phase of this process, the some parts or even modular build-outs of hulls would happen in a foreign yard and the internal components, piping and electrical work, among others, propulsion systems can be retrofitted here in the domestic yards.
Ultimately, at the end of the day, what you want to do is transition to the third phase where the build-out happens from start to finish at a domestic yard by American workers. And so this would be a phased or staged process.
Brent Sadler
Yeah, so I'm really deep on this one.
This is the Ice Pact and it goes back several years. This is not a new approach in the industry. It's something I also saw in Southeast Asia with orders that were made from China, but also to mitigate the systems that would go on, for example, their offshore corvettes. This also has applicability, the approach with Davie's Canadian firm working and buying out Finnish icebreaker building companies that are actually very expert in that and the workforce to then bridge it into the United States. This also applies in naval shipbuilding.
It's also a way to mitigate the risk because we do have concerns about transfer of technology that we still hold very close. But again, bringing in treaty allies like the Canadians, but we're also talking about the Japanese, South Koreans, also the same approach applies to naval shipbuilding. And it's also a very iterative way to do it. It makes good engineering sense too.
Matthew Funaiole
Just very quickly, different partners are going to help solve the problem differently. And I think the icebreakers highlight, you know, we can identify the partners that are best suited for trying to solve that particular issue. Just on the commercial side, though, it's a little bit different in the sense of like who's the consumer, who's the customer here? Icebreakers are going to be different than building a tanker. And in that sense, it's not just those building the ships themselves.
We also need to take into account the companies that are buying those ships and what their logic is and how they're thinking about risk of engaging with China. Another area that seems easier to solve is ship repair, ship maintenance. I know under the Biden administration there were deals negotiated with Japan to do ship maintenance in theater. I was just in Gibraltar visiting a shipyard there. Obviously with the Mediterranean and some of the stuff happening in the Middle East, I think they're very excited to do ship maintenance there.
I assume that should be part of our strategy as well and should be an easier component, the maintenance.
Brent Sadler
Absolutely, as a Navy man, absolutely. And we need that type of resiliency because you never know when you're going to have an act of God and a ship is damaged, or if you're in combat, you need to get safely to place to repair and get that ship back out. The Big Horn had a grounding. That was a hard loss for carrier strike group operations at the time. We don't have much backbench that we can pull forward to fill gaps, so we have to have options to fix the ships close to where the fight is.
And we do that through allies. So this military repair operations is another way to get familiarity with the way that we build our ships and maintain our ships with our closest allies. We've already done this with India. We've done this with the Japanese, obviously looking at with the former ambassador Rahm Emanuel, looking at expanding that much more broadly throughout Japan, but also South Korea. A lot of learning's been done, much can be done, much still can be done on that.
Sheri Biggs
Thank you, Madam Chair, and thank you to our witnesses for your testimony here this afternoon. South Carolina is home to a maritime industrial base that includes the largest commercial shipyard on the East Coast, and as of last year, a facility serving within the Navy's distributed shipbuilding initiative to expand naval manufacturing across the country. I've seen firsthand how much investment, workforce training, and time it takes to stand up even a fraction of additional capacity here at home, which is exactly why the scale of what China has built is so alarming to me. Office of Naval Intelligence data made public in recent years put Chinese shipbuilding capacity at more than 232, yes, I said 232 times that of the United States, and Chinese shipyards now account for nearly half of the global shipbuilding capacity. But raw tonnage alone does not capture the full risk.
What matters just as much is how much of that capacity is purpose-built to convert on short notice. China's military-civil fusion strategy deliberately taps the dual-use resources of its commercial shipbuilding sector to support naval modernization, with many yards producing warships alongside merchant vessels as a matter of design. The numbers bear that out. China State Shipbuilding Corporation alone delivered over 250 ships in a single year, totaling roughly 14 million gross tons, more tonnage than the entire US shipbuilding industry has produced since World War II combined. And ONI has identified more than 50 Chinese dry docks large enough to physically accommodate an aircraft carrier.
That combination, scale plus deliberate dual-use design, is what should concern this committee. So my question is, and I think we touched on it a little bit with the chairwoman's question, but what does understanding that with China's dual-use model tell us about how to strengthen our own defense industrial base, including states like South Carolina that are already building out to this capacity? I'll open that to anyone, please feel free to answer.
Brent Sadler
The key thing is that you want to have, it's a generational challenge, so the only way we're going to be able to stay in this game and get back into this sector is to have a competitive advantage. So we have to innovate things like small modular nuclear reactors on commercial vessels that also serve a military purpose, and that means high-speed ships carrying supplies for to say Marines and soldiers that are in the first island chain in the Western Pacific. That's going to have to be the only way forward because if you only followed what we've been doing since the end of the Cold War, trying to focus only on the naval shipbuilding, you have an unsustainable industrial sector. It's why we're, one of the reasons why we're having so many problems finding the workforce and having ships produced on time and at cost, one of, not the only. The other thing is I'm very, very fond of Charleston, South Carolina, Southern South Carolina.
The nuclear part there as well as your commercial port there is a potential to actually seize this opportunity now. Things like maritime prosperity zones, which are in the president's executive order, could be a way to attract the capital that can actually start to trigger that industrial growth. As far as addressing the Chinese civ-mil fusion, we don't want to replicate their approach because it's not appropriate for us, but we should start to hold them accountable in the way we do trade. And I think the 301 complaint that was submitted and adjudicated earlier this last year is the tool to use.
Matthew Funaiole
I'll just quickly echo that, you know, there, you can look at what China's done and say is that a model that works for the US and I agree it's not a model that works for the US. We have other strengths to lean on. But one area that we haven't talked really about is we've focused on the hardware side of it, but there's a whole software component to this as well. We've talked a lot about allies and partners and how that could be part of the solution. So the onboard systems, the navigation systems, increasingly autonomous systems are going to be important to the shipbuilding industry.
They're already important to the military and there's probably some crossover there if you think about the innovation that's happening especially in autonomous systems that could benefit on the commercial side.
James Kim
You mentioned earlier about distributed shipbuilding. This is one approach. You don't have to do the whole building out completely in one yard. You can partner up with different yards and be part of a supply chain and a distributed shipbuilding network. And so these two ideas clearly, but you don't need to have the same kind of yard that every other country or even for that matter other states have.
And that to try to look for ways to play to the strength that South Carolina offers or the yards there offer.
Thank you very much. I was recently able to observe some of the RIMPAC exercises and my background is Air Force, but I got to tell you, it was super exciting and if I were younger, I would think about joining the Navy in a heartbeat. But thank you for your time today and I yield back.
Young Kim
Thank you. I recognize the gentleman from Rhode Island, Mr. Amo, for your questions.
Gabe Amo
Thank you to our witnesses for being here and thank you, Chairwoman, for holding a hearing on a topic near and dear to my home state of Rhode Island. So Rhode Island, South Carolina, I guess we have that going on. Since long before the United States became a nation, Rhode Island has been a hub of shipbuilding. Starting with the first shipyard established in 1643, Rhode Islanders understood the importance of shipbuilding to our local economy and to national security. That's why Rhode Island created the first naval force in the colonies in 1775.
Now, times have changed and certainly in the decades since World War II, the Ocean State still remains a leader in shipbuilding. Manufacturing everything from commercial sailboats to nuclear submarines, Rhode Island shipyards provide thousands of good-paying jobs but are always in need of more skilled workers. As we refocus on investing in our shipyards, one of the challenges remains workforce shortages as one of the most significant constraints on expanding our shipbuilding capacity. Now, Rhode Island has several programs to support workforce development at our universities through the National Institute for Undersea Vehicle Technology and the Southeastern New England Defense Industry Alliance. But state-level action is not enough.
The federal government, of course, needs to play a partnership role. So starting with Mr. Kim, give me a sense of your thoughts on how we can collaborate in the ecosystem with universities, apprenticeship programs, industry partners to support workforce development and meet the needs of our shipbuilding industry.
James Kim
Thank you, Representative Amo, for that question. I can tell you based on the experiences in Korea and Japan how they're dealing with dual challenges there. They have also labor shortages in their yards and also a very aging society. And so the labor pool itself is also shrinking. And the way they're doing this through multiple different channels.
One is obviously standardizing the shipbuilding design and to make that a bit more efficient so that it's a bit easier to teach incoming workers on how to build these ships. The other is automation and then third is foreign workers. So they're dealing with this in different ways. With the United States, depending on needs, if there's investments happening by some of these foreign shipbuilding companies, there could be skill transfers.
Skill transfers can occur through exchanges both here and also in the foreign yards. You can also have R&D arrangements with universities and community colleges. These are all things that are happening right now as we speak.
Speaker 12
Thank you. You know, I do want to touch on another topic that's important because in some of our conversations, you know, we've learned some of the about the supply chain disruptions from China. And, you know, would love to hear perspectives on how we should support domestic shipyards so they can assess their supply chain security, right? How can we help them avoid key Chinese tools, machines, components, other raw materials that are embedded in the shipbuilding supply chain, especially as we look to build resilience domestically? I'll start with Mr. Kim, but I certainly would welcome other thoughts.
James Kim
So one of the recommendations I made in my written testimony was standardizing the design and the components and the technical specification associated with these ships with our allies so that our allies would be using the same parts and and they would become part of essentially the supply chain itself. So if there's a need and and an urgency to dip into that network, then we can ask for that help. The other is also coordinate using these coordinating mechanism like the trilateral cooperation arrangement that we have or the G7 to try to figure out how to offset some of these coercive practices by China.
Thank you. Mr. Sadler.
Brent Sadler
Yeah, real quick. As a nuke submariner, having naval architects that have wisdom and experience that understand when a what seems to be a minor change is going to have massive delays and cost overruns is an important avenue to also in the intellectual exchange with our partners in South Korea and Japan to try to get their more seasoned and salty foremen as well as their naval architects exchange to share that knowledge. This is one of the other root causes for why we're having delays and also cost overruns in the naval shipbuilding program. We're only just now addressing that dearth. University of Michigan is also helping to address this issue.
We produce only dozens of these naval architects when we need hundreds. On the, I guess, the industrial base questions for for your state in particular in the nuclear realm, there is going to be a need for more capacity in the training. So the universities there that may have had in the past a naval architect program and also in the blue collar realm. So we need also highly skilled technical folks that are going to be the foremen, and it's the foremen that are running the small workshops that really make the difference. And they need to be supported with very responsive naval architects to know when a design change can be made without any real significant implication.
So your state's at the hub of this, I think, on the as a nuke submariner and also with the production that's yet to come. The nuke submarine fleet is going to be growing.
Matthew Funaiole
Yeah, just I'll just quickly add on a couple of things. One is is just a I think a reality check. It's we're not going to be able to get China out of the supply chain anytime in the short term, right? And there needs to be an assessment of what's realistic today, tomorrow, five years from now, ten years from now. You know, I mentioned high value components a couple of times and focusing on what that looks like.
But you're right, there needs to be a comprehensive assessment of what level of China being engaged in the market is acceptable. What reduces our risk and what does that look like? And it's going to be different for different platforms.
maritime ambitions isn't just shipbuilding, right? There's port infrastructure, there's technology, there's a whole host in the maritime ecosystem that China seeks to dominate. So yes, we need to upskill our own workforce for ships, but we also need to think about port infrastructure, we need to think about cranes, we need to think about operating software. All of this is really critical to ensuring that the US has the ability to secure its interests.
Andy Barr
Thank you, Madam Chair. You all have laid out the challenge in stark terms. A single state-owned conglomerate, the China State Shipbuilding Corporation, builds more commercial vessels by tonnage each year than the entire US shipbuilding industry has produced since the end of World War II. China's share of global shipbuilding output is now more than 53%. Ours is 0.1% of global share.
That disparity is simply unsustainable. Thankfully, American companies are making meaningful strides in maritime autonomy and advanced manufacturing. Additionally, as noted, South Korean and Japanese companies have similarly developed advanced shipbuilding methods that have allowed them to remain globally competitive. What specific advanced shipbuilding methods employed by South Korean and Japanese yards offer the greatest potential for improving US competitiveness, Mr. Kim?
James Kim
Thank you, Representative Barr, for that question. Let me just say that if you take a look at the share on the commercial side of the kinds of ships that the Koreans and the Japanese have still a significant market share in, these are the more complex vessels, vessels that are like very large LNG carriers, LPG carriers, ships that use dual-fuel technology to lower emissions. These are areas that the Koreans and the Japanese shipyards are still quite competitive in. It's on the low end that the Chinese yards are dominating on the commercial side. And so if you were to take a look, staying at the cutting edge of shipbuilding with technology that allows us to stay ahead, I think that is one way that we could try to prevent.
Andy Barr
Let me ask you, and maybe, Doctor, you could answer this question. How are Chinese state-backed banks using predatory financing to undercut American shipbuilding bids globally? I know that they provide the state-run banks provide below-market financing to China's major shipbuilders. How does the US combat that?
Matthew Funaiole
Thank you for the question. The approach that the Chinese government has taken to shipbuilding has changed over the last couple of decades, right? When it started off, it was big state subsidies to try to build up shipyards. They handpicked ones that they decided were going to be champions and they threw the weight of the state behind that. That's changed now that they have market competitiveness and the big advantage that they have is on indirect subsidies.
So steel, for instance, one of the biggest costs that goes into shipbuilding, well, China's also the world's largest producer of steel and they get very much undervalued, undermarket steel for their shipyards. The same when it comes to labor, the same when it comes to energy. It's something we don't often talk about when we think about industrial capacity, but China heavily subsidizes energy into its shipyards, which means that those shipyards' fixed costs are way, way lower than they would be in a place like South Korea and Japan. So you have to think about the entire ecosystem and what you want to do from the US perspective. It's not just the workforce, it's not just the cost per vessel, it's what do those inputs look like and how do you ensure that you can remain competitive with that type of behavior.
I'll also echo what Mr. Kim mentioned earlier on the high-value versus low-value vessels. You know, Korea's still producing around 60, 61% of those sort of higher-value vessels, and so to me, that's an area for the US to focus on. They are more complex, but cargo ships, bulk carriers, there's not a lot of profitability in there.
Andy Barr
Obviously, we need to revitalize pre-existing shipyards that are outdated, but it's not enough to compete with China. We do need to invest in new greenfield shipyards designed from the ground up to incorporate modern manufacturing techniques and advanced technologies. I hear about this Forever California project, for example. I don't know if that's viable or not, but do you agree, and Captain, I'll ask you, do you agree that expanding our capabilities requires building new state-of-the-art shipyards in addition to modernizing existing facilities? And if so, what federal policies are needed to encourage that investment?
Should we look at Title III of the Defense Production Act?
Brent Sadler
Yeah, thanks, great question. California Forever is one of several greenfield projects that I think are very viable, and things like the maritime prosperity zones are just intended to try to attract the capital and also focus it on maritime shipbuilding, maritime industry. So you have to do the greenfield, but we also have, we're far behind, so we have to also start at the very basic. So building the bulk ships, building the MR tankers in order to start to step up. We're not going to be able to jump to the higher-end value chain of the shipbuilding.
So the brownfield industry that can start building a tanker that we need in the tens of, up to 40 just for a Pacific war scenario, but we need more than 90 if we're going to start getting into a nation-led effort, wartime effort. And that's a simple ship. That's a good way to start. It's also what you're seeing in the Philadelphia shipyard. So we have to iterate, and it's going to take a generation to get there.
So how can you get strategic capital moving in the right direction, sustained not just for one budget cycle or one FYDP, but it's got to be there for probably two or three, the 10 to 15 years generational. Things like the Office of Strategic Capital inside the Pentagon come to mind, things like the Development Finance Corporation. But those are for external, and we also need to take a fresh look at our Pacific islands as well, like American Samoa as well as Guam. These also are places that we need to look at and develop out the infrastructure and the labor to support through repair and sustainment of military vessels. The business case is tough, and there's going to have to be some intervention at some level to get to that point, but an iterative approach is necessary.
Andy Barr
Well, my time has expired, but I'd love to ask you about AUKUS at some point too. My time has expired, but maybe you can address that.
James Moylan
Thank you. I'm glad you mentioned Guam because now I'd like to recognize Representative Moylan for five minutes.
Thank you, Madam Chair. Dr. Fanioli, I've long been working to advocate for targeted reform on the Jones Act for the non-contiguous and especially to expand to the territories. And you've got some great research through the CSIS, and it suggests that even further reforms are necessary because of what China's doing with the shipbuild and capabilities and even expanding it through the military-civilian fusion strategies. So what, tell me, what additional recommendations for you believe Congress should be aware of, and specifically on energy supply, right? We're really concerned about LNG.
How would this help?
Matthew Funaiole
Thank you for the question. Before getting into specifics, there's one sort of I think framing component that needs to be sort of brought into the conversation that we haven't had a chance to touch on yet, and that is the customers themselves for vessels, right? So for the US, if we're talking about US shipbuilding capability, I think Mr. Sadler talked a little bit about, okay, we need to be the customer for what that looks like, right? And so maybe that doesn't have to be as market-competitive with China, right?
Like we can incur some additional costs on that front. But when we're talking about China's specific shipbuilding capability, and I'll get back to having a domestic fleet in a second, we're not just talking about Japan and South Korea as partners for this. European countries are very much involved in buying those vessels to fill out shipping companies themselves. And so we run the risk, you know, we can certainly talk about working with allies and partners for shipbuilding, but we need a shared risk assessment with everyone who is facing a, you know, threat or pressure from China to understand what those risks really look like, right? If you're sitting in Europe and you're saying I'm going to, I need ships, I need to fill out my fleet, what's the logic that you're going to go to in terms of, okay, what is the US going to offer versus Korea versus China?
It's often cheaper to get it in China, you get it faster, and that's why the market dynamics have sort of shifted in that direction. On the, you know, a strategic support fleet or on a commercial domestic fleet or, you know, of that nature, I think the most important thing to think about is those resources are going to be costly, right? We're going to have to build up infrastructure for it, we're going to have to support it. So they need to be able to fulfill a mission set across the entire domain. That means in peacetime, what are they able to do?
In a crisis, what are they able to do? In a conflict, what are they able to do? And that's where I think it takes some maybe creative thinking about the restrictions of the Jones Act and what that means in terms of how in peacetime, if we do build up that capability, can we ensure that we're getting the best return on that investment for maritime trade.
Speaker 9
And for, you can expand on the supply chain, energy supply chain and LNG.
Matthew Funaiole
Yeah, for sure. So one thing, and we spell this out in, in sort of our report, the US doesn't have as much leverage in shipbuilding as it does in some other areas, right? If you look at something like semiconductors, it has a lot of advantages that it can leverage to try and change market dynamics. It's less so in shipbuilding. But one area where the US does have dominance is on energy.
It's an energy exporter. And so if we think about that as a critical part of our ecosystem in which we can affect change, we can start to think about who and what trusted nations could be able to transport those goods and does that come with certain types of tax incentives or other types of carrots to lessen the costs while also increasing market penetration.
James Moylan
Thank you. Mr. Kim, let's, let's continue on with that chain of thought regarding the Jones Act and targeted exemptions. Can Congress work toward deepening the co-production with Korea and Japan shipbuilding companies without compromising American workforce concerns?
James Kim
The short answer for that, Congressman, is, is exactly what I said before. As long as we keep our eye on the prize with respect to the American workforce and developing our domestic capacity here, and the investments are going to happen in that way with specific milestones linked to demand, so that we have strategic commercial fleet demand that is in the works. Then the foreign shipbuilders will be incentivized to invest because, and if they invest, then we will have that fleet. And the more fleet we have, we address the problem that you just mentioned with respect to Guam.
James Kim
Some of those 12 that I mentioned before from last year are for the energy-based, energy transport, and one of them I think was for the LNG. And so yes, we would need to expand that portfolio.
Speaker 11
Thank you so much. Now I recognize Representative Sherman from California for five minutes.
Brad Sherman
Well, thank you. The Maritime Action Plan calls for the elimination of regulations that protect our national environment. This administration regards those requirements as burdensome. The White House would like to abolish inspections of unmanned barges on the Great Lakes, and it wants to change the Environmental Protection Agency's engine international air pollution prevention certificate requirements.
I wonder if we really need to do this. I know that Japan and South Korea have been successful in the shipbuilding industry, and yet they maintained their environmental standards. Dr. Kim, are other countries able to protect the environment and still have a viable shipbuilding industry?
James Kim
Congressman Sherman, let me put it to you this way. Any regulation, whether it's environmental or labor-related, is cumbersome and costly for businesses. Yet, historically speaking, we have regulations in place for a reason, whether it be for the environment or for labor. And businesses, as long as it's applied fairly across the board, they comply and maintain doing business in that country. Now, the problem here is that China is not beholden to these kinds of regulations or restrictions compared to the US here, or even for that matter, Korea and Japan.
Yet, as you have mentioned, Congressman, Korea and Japan are still the second and the third largest producers of ships. And they do this through what they call green shipbuilding. And there are two ways to do it. One is to create the ships that are engaged in lower emissions, following through on the International Maritime Organization's desire to become net zero by 2050. They are on track to try to do that with dual-fuel technology that lowers emissions.
Second is to have a shipyard that is compliant with the environmental regulation in the respective countries.
Speaker 23
So, yeah, so they do this and they are competitive. That's how I would say it.
Brad Sherman
Okay. And I would point out that without subsidies or quotas, we're not going to revive the shipbuilding industry in this country, and the environmental requirements are just a small portion of the economics that need to be overcome. If we're going to revitalize a domestic shipbuilding capacity, we have to invest in a domestic supply chain, not just final assembly. There are countless products that are needed, from plates to engines to cables to coatings. After decades of decline driven in part by China's state-subsidized dominance of global shipbuilding, the US Navy estimates that China's shipbuilding capacity now stands at 232 times that of the United States.
Mr. Kim, do you agree with groups such as the AFL-CIO that we need to reverse this trend and oppose any proposal to move domestic shipbuilding and the ship repair offshore?
James Kim
Congressman Sherman, thank you for the question. And I've been clear from the beginning that any kind of cooperation with our allies should have as its objective about revitalizing the shipbuilding industrial sector here at home and also creating jobs, American jobs, here at home.
So the question is how do we get there? And when you don't have the capacity build out here, it takes time and in the near to medium term, we need vessels. So there are different ways to do this and I've included in my written testimony a short comment about a recommendation with respect to taking on the Maritime Action Plan's so-called bridge strategy. And we can debate the values of this, but ultimately the goal of that strategy is to get to build out, is to have a build out capacity here at home from start to finish. Thank you.
Young Kim
Let me now recognize the gentlelady from American Samoa, Rep. Radewagen, for your five minutes of questioning.
Aumua Amata Radewagen
Thank you, Talofa. I want to thank you, Chairwoman Kim, and the ranking member as well for holding this important hearing today and thank you all for testifying. I'm always happy to see my good friend Brent Sadler, who's a great advocate for the Pacific Islands and just recently visited my home in Pago Pago, American Samoa, located deep in the Pacific. As you know, we are the only US soil south of the equator and we have the best natural deepwater harbor in the region. We rely heavily on shipping and we're lucky to be the only territory that is not held hostage by the Jones Act.
American Samoa stands ready to host more US naval and shipping assets in the Pacific. So, and this question is for all three of you who'd like to answer, what specific incentives can the US offer global shipping companies to move their vessel orders from China to allied nations?
Matthew Funaiole
I'll go very quickly at first and maybe set things up. You know, there are incentives that can be put in place from government and we can certainly talk about those, but to me the most important aspect is there being capacity outside of China. Businesses that are buying ships from China aren't doing it out of a fondness for Beijing generally, right? They're doing it because that is where the capacity is and that's where they can get ships at cost. So yes, you can put incentives in place to try and curb the behavior of a particular company or try to get it to buy ships from elsewhere, but if that's not paired with there being more capacity in the short term in South Korea and Japan and in the long term, as Mr. Kim has brought up, capacity here in the United States, then you're always going to be fighting against market dynamics.
And I think you really have to broaden the market out in order for there actually to be effective change. Any measures that are put in place by government are temporary fixes until there is an actual viable industry for companies to pull from. Thank you.
Brent Sadler
Yeah, so Talofa, it's great to see you again. A couple of things on this to be real quick. One, the fact that we have US flag Jones Act fleet ships going to China to do maintenance or even doing significant modifications to be dual fuel use is a problem and it's an indication that the system is broken and we need to look differently at this. So first off is trying to make that either prohibited or to put conditionality on any other benefits that the shippers get in that. But there does need to also come with some more carrot or more incentivization on that and perhaps looking at what we're learning with attempts to use DFC for flagging or provide assessments with or assistance with P and I insurance.
Something, an idea that still needs further development. But for our Pacific islands, it's you have small market economies that are scattered over great distances. There needs to be a different model approach that also addresses the needs there, which are unique. But there is also a national security implication to this as well. So we need to do better on how we attract shippers.
I agree that we need to also address the supply side, which is a lot of it, but as well as the demand. It's both sides of this equation. So we need to attract more of the production in the United States. And there's a reason why the Japanese and South Koreans are looking, partly because real estate's not easily to find and is expensive there, but labor is driving them to other places, to the United States. Now when it comes to repair, and again the distances involved, there's an opportunity for islands like American Samoa, Guam, as well as Hawaii to develop out more commercial repair and sustainment.
I know very well the port there in Pohnpei supports a lot of the local fishing fleets. There's a dual use there to support Coast Guard that should be looked at. But we're not going to get there with purely economic, market-driven. There has to be a greater strategic drive in this. The Jones Act is not the solution.
It's also not going to be part of the problem, but we need to look at and focus on competitiveness. And I think that's partly why the Chinese have been undercutting us and preventing us from getting that comparative advantage at field.
James Kim
I would just add that better logistics along with more vessels would be helpful. Even though American Samoa is exempt under the Jones Act, still has their, there are nodes that the ships have to go through in order to get to American Samoa. And so some of those are Jones Act compliant ports. And so I think that just having that exemption is not enough. I think you need to have better planning with respect to the logistics and certain kinds of exceptions or waivers that are, that potentially could be considered if it's headed for American Samoa.
Speaker 25
Thank you. I see that I'm out of time, but I have some questions I will submit for the record, Madam Chairwoman. Thank you.
Young Kim
Thank you very much. I'm informed that we have one other member on his way in a minute now or any second. So in the meantime, I will take the opportunity as the chair to ask a question, if you don't mind. You know, beyond the shipyards themselves, China has systematically locked down the vertically integrated sectors of the global trade, including ports, container leasing, and maritime logistics software. And that creates a strategic vulnerability even if we work with our allies to expand the shipbuilding capacity.
So maybe Mr. Faniola, you can answer and any one of you too. If we successfully scale up allied shipbuilding capacity, how should the United States coordinate with partners to counter China's chokehold over the physical and digital infrastructure of global ports?
Matthew Funaiole
Thank you very much for, for the question. I think this is, you know, critical to take into account when we're trying to look at the broader maritime system. Ports themselves are complex operations. So there's the physical infrastructure that China's heavily involved with and in expanding piers themselves, but there's also things like cranes. You know, I know that there's been a lot of attention on ZPMC cranes, China controlling most of the world's cranes that are used to move goods between vessels and to ports.
But an area where they have struggled but they are getting better at is on the software side of it, right? So ZPMC hardware is Chinese, but a lot of the software on some of those systems is, comes from other places, right? They get it from European providers or from Asian providers or companies that provide it to them.
But their goal is complete dominance on both the hardware and software side of things. That goes beyond just one port. This is really a system of systems or a network, right? And you have to think of it like a network analysis. They sometimes get more information from one port than they get from another port, but the goal is to try to have a complete picture of their own vulnerabilities.
They're extremely concerned about their vulnerabilities to maritime disruption, but also understanding with a level of granularity that I really don't think anyone else has access to what the vulnerabilities are of other countries which could become a source of leverage in the future. And I think there needs to be alignment on that issue to understand that yes, it might just look like an investment in a port in one place, but that's connected to a broader system and that opens up vulnerabilities. Thank you.
Mr. Sadler.
Brent Sadler
Yeah, a couple things on this. We saw this at play with COVID zero policies where one shipyard worker gets potentially COVID and they shut the entire container port down and that has weeks if not months of implications on cargo traffic. So imagine that for political purposes. And the Chinese do that. So the port operations are key.
And it's important to note that even in those hundred plus ports that they have a presence, they don't have to own or have a majority ownership to be able to impact. They don't even in some cases even have to have a presence in the yard if it's a country that's very pliable or one very reliant because then they can actually insist that a certain naval ship cannot have permission to visit or that there's not pier space available. This was the excuse used in Solomon Islands a few years back when it became clear they had a security pact agreed with Beijing that the Coast Guard cutter couldn't make a scheduled and previously approved visit because there wasn't pier space. It wasn't true. The other is if you have commercial ships that are moving cargo, some of it, some of the containers say of the thousand that are on board one of these ships, several of them have military purposes or use.
Holding up the fuel, holding up perhaps other harbor services because it's inconvenient to the Chinese interest has an implication in the peacetime. In wartime that could be disastrous and cost lives of our soldiers, sailors, and airmen. We saw this play out when the former administration was trying to move supplies for the Gaza, you know, humanitarian relief and also supplies to the Israelis and you had, you know, pro-Hamas supporters shutting down ports in the Pacific Northwest in Washington State, but also leaning on one of our allies, the Spanish government, to make it very hard to get into ports in Southern Spain and even complicating with our British allies in Gibraltar. So the problem is here and now. The ports are important and I will say one thing on the supply chains.
We kind of missed the opportunity to talk about it. There needs to be much more application of AI and supply chain understanding and intelligence. This is part of the intelligence piece. Many of our allies rely on second, third tier, not further down in, on China's source of materials. That includes our key allies, Japan and South Korea.
Knowledge is very powerful on this. We need to be far better at that and also understand when the markets are being manipulated to cause delays or interference.
Speaker 29
I'll just add finally to add to what Mr. Sadler said before about infrastructure development in developing countries. We can utilize DFC financing for these activities and we can do it in partnership with our allies through the trilateral mechanism as well.
Brent Sadler
Thank you very much. I was going to ask like if there was diplomatic and economic tools that we can use to encourage allied and partner nations to diversify away from Chinese-built systems and equipment.
There's a few. Ones that we actually control right now, it's mostly through foreign military sales. If you tie it back to national security, we can try to set up partnerships where co-development, co-production, and inside the stipulations and conditions of those type of deals you tie them because of security implications more fully into our supply chain. You have to be careful. That can't be applied uniformly.
The platform or the system in question matters. And the key thing is to start small. And we're doing this right now in munitions production by necessity, things like Patriot batteries. Hopefully we'll probably see advanced heavyweight torpedoes on this with Australia. Now we start taking it to the systems of systems which is a ship.
It's really a systems engineering challenge when you're building these ships, trying to integrate these things together.
And the Navy's going to be living with this very soon with the new landing ship medium, which is a Dutch design. How to integrate a European supply chain and adapt it for the US? We have a lot of experience with our NATO allies to some of this, not to the extent necessary, but with our Asian allies because of things like MRO, these are the repair ops. We have several years under our belt of getting better understanding amongst the group of us what our ship standards are, build and repair standards, and familiarity with the actual platforms themselves. And that's an important first step.
Young Kim
Thank you very much. I'm going to now recognize the gentleman from Pennsylvania, Rep McKenzie.
Ryan Mackenzie
Great, well thank you Madam Chair and thank you to all of our witnesses for coming today. I especially want to recognize Mr. Kim, I saw that you previously taught at Juniata College in Pennsylvania, so we like that. We appreciate you bringing your knowledge a little closer to home there for a time. We're discussing one of the most critical industries that has been ignored for far too long here in our country. It's been allowed to languish for decades.
Washington's negligence with regard to domestic shipbuilding has not only hurt manufacturing here at home, but also left us vulnerable from a national security perspective. So I'm glad to see that there is this greater focus both in Congress and from outside stakeholders who want to correct that and rectify the situation. One of the things that I saw recently was in Philadelphia at the Navy Yard, we have a partnership going on with an investment coming in from a Korean stakeholder. Fantastic, revitalizing and bringing back that old Navy shipyard. But the output is still incredibly low compared to adversaries like China.
And so I think part of that is that dual-use production capability that they have at their Chinese shipbuilding locations. How can we increase the amount of ships or send the demand signal that it's not just a government imperative and desire, but we want to see more ships just in general built at US facilities so that they can start making the investments in newer technology and ultimately see more output from locations like that? So what can we do in a wider perspective? And I think Mr. Sadler was talking a little bit about kind of those types of things in your last comment, so maybe you want to go first.
Brent Sadler
Yeah, so Hanwha's investment is kind of like the canary in the shipyard, so to speak. And so what's key thing to watch now is what orders do they get for tankers? And in the current budget that was proposed by the administration, there's consul tankers, there are oilers. How many of these civilian ships that preferably are going to be built in a US yard go to Hanwha? They are actually positioned to do that.
And that'll be a proof to the concept and the investment was well worth it. On the labor side, and there are labor issues in the Philly yard that should be expected anywhere that you're starting up a brownfield and certainly a greenfield opportunity, but Philly is a brownfield. So getting and attracting that, you got to pay a premium to get the labor, but you also have to improve using technologies like AI and some of these augmented reality to be able to rapidly, not to fight against the reality of high turnover, but to embrace it so that you can train up someone to be running wires or pipe fitter or actually being a welder much more rapidly than has traditionally been the case. And that's something that is moving too slow right now. And it's the US Navy's shipbuilding that you're seeing that, places like Huntington Ingalls has been trying to do this.
But we need to take it to another level rather not fight but to embrace high turnover. When it comes to the timeframe everyone and I'm I'm also very guilty of this it's not fast enough. But when we're talking about capital investments and industrial uptake you're looking at fast is three years. Probably pretty much above average is five years. And so we're really into the second year of the Hanwha investment into Philadelphia.
In three years to five years we should start to see more production we should see labor issues starting to stabilize out. But it's going to take no less than five years to really see solid return on investment and output on this. It's an industrial slow moving endeavor and shipbuilding is perhaps one of the highest in the value chain and also the widest in employment. So when you build a ship there's a thousand different things and parts and specialties that go into it. There's no greater job creator there's no greater technological like innovation driver and motivator at the same time.
But that comes at cost and that comes at time unfortunately.
Ryan Mackenzie
Now for this follow-up to anybody on the panel is there anything additional that we in government can be doing to help that private sector investment achieve a better ROI make more investment sooner to speed this process up?
Brent Sadler
So this one I've been involved with like things like the Ships for America Act the executive orders the White House. We need to change the incentive structure with industry. Capital investment and workforce higher salaries needs to be prioritized and and basically rewarded rather than focusing on the the shorter one year three year invest return on investment. Stock buybacks this is something that really infuriated the former administration Secretary of the Navy and it's infuriating the current president as well because that money that's going in for orders for ships the price is higher needs to meet means that salaries should be paid at a higher rate to attract the workforce and capital investments made. So we have to change and I think Congress has a key role on this in things like the Ships for America Act to try to memorialize this new incentive structure.
A lot of ways to skin that cat. Some of our partners overseas Japan but also in Estonia have some very interesting tax mechanisms to to incentivize the right type of behavior.
James Kim
Congressman this is part of the reason why in my written testimony I've recommended converting the investment pledges and tying them into the demand with specific milestones associated with the the size of that demand. This way there's some degree of predictability and in where you see different deliverables on the investment side and also from the company's perspective about you know how much they're going to invest and how quickly they will invest given given the demand. So instead of simply passing the act I think what you need to do is link that in with specific milestones on these investments.
Matthew Funaiole
I know we're we're overtime so I'll be very very quick on on this. Consistency is probably the most important part and I and Mr. Kim just brought that up like this this is a a multi-decade endeavor. And so if you're going to send the right demand signals to business the US needs to be reliable in what it is especially if it's trying to attract foreign investment. I want to put one other thing out there because you sort of cast a wide net in what else we can be thinking about. A lot of the legislation in place right now or legislation that's working to be in place is focused on the the ship construction component.
And that's critical, but we also have to think about what advantages the US has, and it has advantages in AI and in automation, especially when it comes to China. China's very much aware that it lags the US and it wants to catch up in those areas. And so we need to be thinking, in my view, more broadly about not just the hulls themselves, but the onboard systems, how do you automate elements of the shipyards, how do you bring AI in so that we can train the workforce faster and that they can be augmented in the work they do. If you have high turnover at a shipyard, AI can help to be a solution there so that you're getting your workforce up to speed as quickly as possible.
Brent Sadler
I'd only add one more very big American advantage, comparative advantage in this is marinizing small modular reactors, nuclear power. We have, as a nuclear submariner for many years, this is perhaps a trusted industry the world over. It's also a place where we have a comparative advantage and why for many years I've been arguing that we need to put that on ships, both for military purpose, logistics, but also for this to take back market share from the Chinese by focusing in on the type of shipping that we need, blue water, international trade, at the same time we're actually providing something that's very competitive in the market space. And there's a reason why everyone's looking to nuclear now, because it is green and because it is actually very effective at having high-speed transits, less ships, more cargo throughput.
Great, thank you all. I yield back.
Young Kim
Thank you. I know we're up at our time here, so I want to thank our witnesses for your testimony and answering all of our members' questions, and I want to thank the members for participating with your questions as well. The members may have additional questions for the witnesses and we'll ask you to respond to those in writing. Pursuant to committee rules, all members have five days to submit statements, questions, and extraneous materials for the record, subject to the length limitation. So without objection, the committee now stands adjourned.