How Britain Lost Its Shipbuilding Industry

I'm Jonathan Ford, and if you like financial history as much as we do at a long time in finance, we've got some good news, haven't we Neil? We do. Our new friends, a library of mistakes, run a brilliant course on the practical history of financial markets, written and presented by leading academics, senior economists and investment practitioners, and hosted by one of the UK's leading business schools. The course covers key areas, including equity valuations, economics, behavioral finance and liquidity. Brilliant. And the really good news, they're giving listeners to the podcast at 25% discount. Just go to the link in the show notes and enter outif25, that's A-L-T-I-F, 25 in the boxmark promo code. Thanks for listening to a long time in finance with Jonathan Ford and Neil Collins. So one of the things we're interested in at a long time in finance is the rise and fall of great industries and more importantly, why they rise and fall. Now, I'm not ashamed to admit that this week's episode is a product and part of my own interest in the history of British shipbuilding. One of the great industries ran up by the Industrial Revolution, which has now almost entirely disappeared. And this happened almost within living memory. After the Second World War, Britain still built almost 60% of global tonnage. And even in the late 1950s, around 20%. But by 2024, that figure had declined to just a rather tragic 0.01%. The government has got a- A single ship. In the past few years, the government has created what they call the National Shipbuilding Strategy, built obviously around warship production, which we still do, but one that proposes that UK shipyards should once again get into commercial markets to smooth out the warship ordering cycle. Now, we can come on later to whether that idea is remotely realistic. But first we thought we'd look at the history of British shipbuilding. Why did it rise so high and what factors delivered its demise? And we're very pleased to be joined by Brian Potter, senior infrastructure fellow at the Institute for Progress in Washington, who recently wrote a very elegant essay entitled, How the UK Lost Its Shipbuilding Industry. So Brian, welcome. Thank you for having me. Well, before we get into the losing part, let's deal with the origin story. How did Britain become the shipyard of the world in the 19th century, building around 80% of global tonnage by the turn of the century? Was it raw materials? The fact that lots of the customers were here? So if you go back farther, it's really the Dutch that are the biggest shipbuilders in the world up through, you know, around the 1700s. And then kind of towards the end of that century, they kind of start to lose their advantage a little bit. And it looks like the UK is going to become the premier shipbuilder in the world. But then what actually happens is the US ends up becoming a dominant shipbuilder for say, the first half of the 19th century. They have just such a huge quantity of like ship quality lumber. You know, all that lumber had sort of been cut down in the UK. And then the UK actually industry was quite struggling during that period. And you talked about the industrial revolution. And it really is like the industrial revolution, which changes the fortune of British shipbuilding. You sort of have the transition from wooden sailing ships to iron and then later steel steam powered ships. There's actually a very long period of overlap between those two things. It took quite a while for iron and steam to really kind of displace sail as the sort of best way of building a ship. So eventually it did. And because the UK was such a dominant force in a steam engine manufacturing and they sort of applied that to their shipbuilding industry and where had become a very, very successful shipbuilder. They could build their ships incredibly inexpensively and then British shipping firms were some of the largest in the world. They had a very large fraction of like the world merchant marine and all these British shipping companies went and purchased their ships from these British shipbuilders. So yeah, it's kind of a combination of these technological and economic aspects where they were able to build these iron and steam ships really inexpensively. I think productivity is going to form part of the discussion that we're going to have about what happened in the future. But I was staggered when I read the productivity statistics that you produced for the year 1900 where the UK is 33% more productive than America. One and a half times as productive as a German shipyard and two and a half times as productive as a French one. I mean, I've just found them staggering. Germany in theory was building a large military and merchant marine at that point. It's amazing that they have a managed to build a high seas fleet. But what was the sort of secret sauce? How did the UK manage to do it so much better than everyone else? It just seems like a combination of just they had developed these production methods that were quite efficient. They were operating it like a comparatively large to other industries at least scale. They were operating with like a relatively inexpensive labor. This was like a big important difference between the US or US wages for like much, much higher. So even if they hadn't had this like productivity disadvantage that British were able to have a sort of labor cost advantage. So yeah, inexpensive labor, inexpensive iron, they were really good at like building these like steam engines. They had the century of practice. They were able to translate that to sort of these fairly efficient production methods. I mean, you talk about the labor aspect and that's another thing that will come out through the story. The shipyards, the production method they latched on to involved using lots and lots of labor and essentially not a lot of machinery plant and equipment or the minimum they felt they could get away with and essentially allowing the labor to take the strain when business conditions change from being a boom to a bust. You would simply lay off your workers and wait for the market to come back. That's once again seems slightly counterintuitive that the most productive country in the shipbuilding industry is operating on a kind of people heavy model with minimal capital equipment. You know, I've spent some time researching like industrial history more generally and it does seem like this like focus on like these skilled labor methods of you know skilled labor intensive methods of production has historically been something that you see in a lot of like British industries. The U.S. has always much more emphasized machine based production that was less rely on skilled labor and so this shows up in shipbuilding as well where the British were like very focused on like using these like skilled labor intensive methods of production. It seems like this the nature of shipbuilding where you're building like a relatively small number of goods and there's a relatively broad degree of like customization where different ship owners want like their own specific thing that that sort of skilled labor intensive production method dovetails like reasonably nicely with it on top of the fact that yeah historically the shipbuilding industry has been very very very cyclical between you know periods you might have like a huge up and down change in how many ships are produced and so in that sort of production regime it is very useful to have to be able to like scale your expenses up and down in concert with that and a very easy way to do that as you say is to just have like the skilled labor intensive production where you can just like lay everybody off when the orders decline and then hire them back when orders pick up again if you have like this very capital intensive production where you have all this like factories and equipment and machinery you're still paying the cost for all that stuff when you don't have any orders so yeah just they you know had this direction method and it definitely works because they're ending up building 80% of the world ships by the turn of the century I think that's a market share that can only go down well and it does because we I suppose we should come to the interwar period when it basically the first cracks as you say in your essay appear what creates those cracks really do you think yeah basically as you said that market share can only go down you know they had generated this huge advantage but the truth about shipbuilding is that it's like you know this you're building this like complex object right but it's not like so complex that other people can't also figure out how to sort of build it and sort of how to use like sort of similar production methods and so basically other countries started to sort of figure out how to sort of build these things as efficiently as the UK could do it and part of it was that after the war a lot of countries the governments were very interested in sort of supporting their shipbuilding industry they sort of sought is like a you know a national priority you know partly likely for like defense reasons so they started boring all these like subsidies into these like shipbuilding industries before the war like foreign competitors had started to be a little bit competitive you know could perhaps produce things a little bit more efficiently than the UK but the gap was like very very small after the war the gap started to sort of expand you know the foreign competitors started really to start to take orders from the British shipbuilders in a way that they hadn't really seen before you started to see like actual British shipowners which had historically always just ordered from British shipbuilders some of them starts like these foreign prices are really for the attractive and that was a big shock to the British shipbuilding industry when they started losing British shipping orders to some of these foreign competitors yeah yeah it knows they're incredible fast it calls when this ship owner called furnace withy decided to buy ships from germany of all places in 1925 everyone thought it was astonishing that they should be so disloyal the 20s obviously sees a decline in the percentages I think after the First World War partly because as you say wartime you get a lot of people building up shipyards because they're building warships as falls to 60% in the mid 20s and it's down to 40% terrible result by the mid 1930s during the slump various other countries like Germany Sweden and Japan are coming up does the reaction to this kind of pressure lead to things which will either deepen the slump or does it have a sort of psychological effect in your view that conditions you know shipbuilding management after the war to think we don't need to be very careful here this is a very treacherous industry because the slump is so incredibly deep yeah so basically yeah the sort of trajectory that you see is like immediately following the end of war one there's a huge boom in shipbuilding yeah all this like new yards can mine line all this infrastructure gets built yeah started in like the 20s it turns into like a huge slump there's a huge like contraction in global trade and then after you know sort of the depression starts the end of the 1920s that only gets worse and so yeah there's this huge contraction in the shipbuilding industry and so the lesson that the British shipbuilders learn from that is that basically we don't if we have these like big expensive you know capital intensive production methods that will come back to bite you when there's this huge slump in new orders you will go out of business and so a lot of the yards that like go out of business during this period are some of these ones that like had invested in these like new expensive modern shipbuilding facilities and the sort of ones that hadn't done that are able to like weather the storm a little bit better and it's a very long storm as you say like the 1920s through basically at the end of the 1930s and it's really only the sort of new orders for warships as it became clear that there is going to be another war in Europe that really things start to turn around yeah it's of course in Britain it becomes it becomes very political because I think you'll know about this Neil possibly when you're a young man and the Jarrow Crusade is a huge story from the mid 30s when a shipyard in Jarrow called Parmers is closed the workers are all thrown on the dole they're promised that the new industry steel will set up but it doesn't because there isn't demand for any steel so they end up marching all the way from Jarrow to London in a thing called the Jarrow Crusade to basically ask for industries to be moved to Jarrow something to be done and this is very much seared into certainly the consciousness of the Labour Party in Britain is this idea that this industry is one where Labour needs to be protected from a situation where people are chucked out of work this was a huge factor that became a huge factor later whereas you know these shipbuilders were so willing to just yeah scale their labour force up and down as needed which you know is an abstract way of saying like hiring you know tons of people and then firing tons of people as they were no longer needed and what that resulted in was like very very strong degree of like unionization in the shipyard working facilities and that made it very difficult to introduce these sort of new production methods that would like change how work was allocated the unions that had sort of taken shape really really resisted that you seem to have described a whole sway the British industry in all sorts of areas not least of all journalism and newspaper production which was similarly driven to the brink by the restrictive practices of the workforce a highly unionized workforce and indeed there are others I think you could mention the motor industry as well and I fear there are others the steel industry itself it's the sort of microcosm of the failure of British manufacturing there was a brilliant illustration in your piece you quoted the Geddes report this man called Ray Geddes was one of the many people who wrote a gloomy report assessment of what was going on in the shipyards in the 1960s and he actually wrote a passage about how many people it took to change a light bulb in a shipyard and these include a labourer brackets member of the transport and general workers union to carry the ladder to sight a rigour brackets member of the amalgamated society of boiler makers shipwrites blacksmiths and structural workers union to erect it and places in the proper position and an electrician brackets member of the electrical trades union to actually remove the old bulb and screw in the new one production was often halted while waiting for a member of the appropriate union to arrive to perform the job reserved by agreement for them well Brian you have an interesting thing where you describe structurally how the unions became so strong largely because the companies didn't really have very much management they kind of delegated a lot of the stuff to the skilled unions they employed yeah that's the sort of interesting aspect of sort of the skilled labour intensive production method where you didn't necessarily need a lot of overhead to help these ships get built this sort of skilled workers for these like small groups of skilled workers they knew enough of like what needed to be done that you could just give them like a high level description of what needed to be done and they would like figure out all the specifics and so as a result of that yeah you don't have this like strong upper layer of of management that is determining what gets built and when it gets built you're sort of given these instructions to these sort of groups of tradesmen and they're figuring out what needs to be done and again this actually works nicely in like this certain period of time because you don't have this extra expense of of these management overheads and it's very flexible because you just let the workers like figure out what needs to be done when it needs to be done it works well in a specific way of when these ships are getting purchased the the way that these ships were purchased for a long time was basically cost plus which you would you know build what what you know build the ship figuring out how much it cost you to build it and the you know ship buyer would pay that plus you know whatever margin you were charging them starting in like the 1950s and 1960s as these foreign competitors get much much stronger they start marketing their ships as like fixed cost so instead of having to just you know charge whatever it is that you charge they would agree up front to a specific number it is very hard to compete in a fixed cost you know a market when you don't have these like production control systems in place and you can't tell what it's going to cost you to build it beforehand we are now moving on to the decline obviously it starts with the second world war which is another boom for shipbuilding and Britain comes out of it even though huge number of ships have been built in the United States Britain comes out of it still with its lead intact which is interesting partly a product of the various enemies of Britain and they allies being told they can't build ships after the war I guess or having their industries devastated there's nothing like a war of course to rebalance supply and demand when your enemy is trying to sink your merchant fleet is the decline after that which comes what drives it and is it inevitable immediately following the war the UK seems to be at a very good position shipbuilding wise because they have yeah their industry has sort of operated throughout the war most of the you know the the access powers all their shipyards have been sort of devastated most of your European shipyards have been devastated plays like Japan which had a lot of their infrastructure intact were prevented by the terms of the peace from from building ships initially the US as you mentioned which had built like an enormous number of cargo ships during war basically decided just not to pursue the commercial market since the transition to iron and steel and steam the US was had basically not been especially competitive in the international shipbuilding market they just couldn't build commercial ships as cheaply as as many of the other countries they basically just turn their their whole machine off after the war is over the UK starts out in what seems like a very good position you know they're ends for a few years they're you know once again the biggest shipbuilder in the world up building more than 50% of the world's tonnage but sort of these changes in the market that had already been like taking place prior to the war these sort of increasingly competitive foreign operators that sort of situation is still in place and as these sort of countries get their feet under them and as Japan is allowed to sort of reenter the commercial shipbuilding market it really starts to come to the fore and so the UK you know their market share steadily declines through the 1950s and and through the 1960s but it declines in a kind of interesting way after the war you see a big boom in the shipbuilding market but unlike after world war one it doesn't turn into a bus after a few years just keep going and going and going and going and going and doesn't peak till sometime in the 1970s and so what you see is the UK building a relatively steady amount of ship tonnage like a million tons yeah yeah even as the market like expands enormously the UK is building this like same amount of tonnage year after year other countries are building more and more and more and more so in in share terms the UK has fallen very very far even though it from the inside of the industry maybe it looks like they're not doing too bad yeah but I suppose the other thing is that the market aside from just the competitors becoming bigger which is obviously a problem in the long run they're doing it differently aren't they finally the world is moving away slightly from the British model of lots of skilled tradesmen towards more industrial processes yeah I would say after the war you finally see some degree of like what you might call mass production style methods being successfully adapted into the ship built industry and so during the war to build you know they're a huge number of cargo ships liberty ships to overcome Germany's e-boats in the in the battle of the Atlantic the US had adopted these sort of prefabricated construction techniques where historically ships were sort of built up on a shipway just the one piece at a time like a bunch of laborers like swarming over this like you know skeleton that gradually transforms into a ship and the US had sort of developed these methods for building ships out of these big big prefabricated chunks it's interesting because during the war it they were able to sort of improve these methods over time and get better and better doing it but they weren't actually able to build them more efficiently than the UK if you look at like you know total number of hours it took to build a US ship during the war it was actually a little bit higher than it took to build a similar cargo ship in the UK what it didn't allow them to do was like build these things really really quickly but because it was still you know it was still like less efficient overall that's perhaps one reason why the US did not try to sort of compete in the market after the war was over but when it had happened it was like these sort of prefabricated production methods the guys that knew how to do them they took these methods over to Japan which is like just starting to sort of rebuild its industry and it was very interested in sort of shipbuilding and the Japanese sort of learned these prefabricated construction methods were very interested in them and they sort of combined them with these other developments in production technology these methods that had been used to sort of build aircraft more efficiently these like statistical process methods that they could use to better control the sort of manufacturing process they sort of combine these into sort of a new method of shipbuilding that was relied on prefabrication and had elements of mass production but had sort of adapted it into a way that could work for the smaller number of individual units broader array of complexity and broader sort of types of offering that the shipbuilding industry produced and the UK was reluctant to kind of make this transition because they had learned during the 1930s that making all this investment in like this you know expensive shipbuilding infrastructure it was a good way to sort of go out of business when the downturn inevitably came but because you know this downturn didn't not occur and it was years and years and years and decades where the market just kept going up and up and up and up they just ended up falling further and further and further behind these other countries that were willing to make those investments in these new production technologies and new infrastructure that was required. Yeah they just seem to have completely missed the kind of growth in sea-borne trade and the need for vast numbers of container ships and large oil carriers you know which worked the things that were going to dominate the world shipping market in coming years but maybe that's the consequence of not having any managers who knew what was going to happen next the other thing of course is and this will be very familiar to Neil who gets very across about this even these days is that there was no shortage of government reports looking into the short coming through this industry which always saying things like this is one from the mid 1950s there's a need for a wholesale modernization of the shipyard in terms of layouts plants and equipment particularly to increase the use of brief application and then in 1960 production control in the industry was primitive the total effort to research and development was insufficient and almost no organized research had been applied to production and management problems with a view to improving the productivity of capital and labor and reducing costs so there's no shortage of advice coming from officialdom telling them to get their act together but obviously they just don't seem to be very interested in or maybe they don't have the money I don't know well we are of course world leaders in producing reports we have reports for everything we have reports about reports of them and they're all lessons will be learned from the past and they're then put on a very high shelf and forgotten as if the job had been done but we ought to have a word about nationalization because the fundamental problem is by the 70s even with full order books the shipbuilders are not making any money in fact they're often losing money on their contracts because as you say they quote a fixed price and then it cost them a considerably more to build the actual ship when nationalization happens in 1977 which is quite late does it have any impact or is it just too late I know Neil you have strong views about nationalization I think he loves it yeah lie down lie down until the feeling goes away is my view on nationalization yeah it's a combination I think of like too late and not necessarily the right intervention I think the basic idea which kind of you see but even come before nationalization which is you need to consolidate this industry to be able to achieve economies of scale that was that was the big thing that they were concerned about was like not operating at sufficient scale to be competitive which is like true but you can't necessarily get that scale just by like combining a bunch of like these disparate companies to like one organizational umbrella right you're still operating like the shipyards that are too small and too cramped on these like really narrow waterways that aren't equipped with like the latest production equipment and just burden them and this is one big organization combining these like you know 27 different shipbuilders sound to 12 different shipbuilders or whatever isn't enough to sort of change those those fundamental facts and yeah with with nationalization you kind of see the same thing where it doesn't change the facts in the ground which is yeah these these these shipyards are just two out of date with and have been willing to sort of adopt these production methods you know and with nationalization you now take out this sort of the competitive pressure to sort of make these operations work even better and that competitive pressure hadn't apparently been enough before nationalization to inspire these these shipbuilders to sort of really revamp their operations that doesn't get any better after that you sort of combine them into sort of one big national entity well you quite one also who's written about the industry who basically says the thing about it is even though the the outcome is disastrous all the decisions taken by the owners of the shipbuilders were perfectly rational in the baseball period given the kind of constraints and realities that they were operating under do you as fair I think it would have been very very difficult to change because they were operating under these constraints you look into of the the future and you see it clearly right it was not necessarily obvious inside the shipbuilding industry that this like transition to sort of prefabrication would be successful in the context of this like greatly burgeoning shipbuilding market the US had sort of used this prefabricated shipbuilding technologies and but had still not been competitive so yeah just based on the constraints that they were operating under and sort of the fact that you know their information was limited it's hard to see how they could have done something all that much different they could have certainly worked hard to sort of had more foresight than been more willing to sort of adopt these new methods when it became clear that that was what was needed but it's not amazingly clear it ultimately would have had all that much difference in the outcome and kind of one reason for that is that you see that these countries that really did adopt these new production methods quite quickly countries like Sweden and countries like Germany they ultimately ended up losing their commercial shipbuilding industries anyway in the face of just like this relentless competition from Japan and Korea and China there's like a very strong logic in the shipbuilding industry you just move it wherever like the labor costs are cheapest and so it's not obvious the ultimately what could have been done to change that but I think they could have been more successful in delaying the sort of complete collapse of the industry can we come up to date to see where we are now we are now is at 0.01% yeah so to start with you to reverse your thing we can only go up we're building a a fairy in Scotland which is a fine example of the best of British workmanship I think where the cost of construction is I think now approaching 10 times the original price and they still haven't finished it now let me just be that we are better off out of this industry because if the country as a whole can't make any money out of it why do we do it they're not going to run out of ships there's plenty of them we're seeing something very similar in the US where there's this very strong sense that we need to revitalize that the US shipbuilding industry we're seeing sort of similar government efforts there's like these new startup companies that you know think that they may be able to build these ships more efficiently than we have historically and the US the sort of concerns are largely around that like shipbuilding capacity specifically is to some extent like a dual use technology in the sense that you need to have this thing for like military purposes both to build warships also to build like cargo ships and things like that to just sort of move your material across the ocean if you have like a you know a major foreign engagement you need to move this stuff from where you are to sort of wherever it is in the world you need more than warships to to be able to do that you need basically just shipbuilding capacity I think the concern is especially if there's like a huge differential in like the shipbuilding capacity of you versus your potential adversary if that adversary is like across the ocean but I think what I'm detecting is that it's going to be a long shot to do anything other than scratch the surface of the commercial shipbuilding market if you start if this is your favourite metaphor here if you scratching scratching the surface of anything I was going to scratch your surface in a minute it's going to be very difficult for countries like Britain and the United States which are essentially not usually competitive compared to the giant state run entities in China and East Asia which you're talking about which is sad but there we are it does strike me there is so much that sort of about this story that is kind of counterintuitive from the labor heavy but very productive model that you describe and also just this idea that the British shipbuilding industry wasn't killed off by a bust it's sort of expired in the longest boom the shipbuilding market ever had that was a long time in finance with Jonathan Ford and Neil Collins production and editing by Nick Hilton please rate and review it on your podcast out