How Britain Lost Its Shipbuilding Industry

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0:54thanks for listening to a long time in finance with jonathan ford and neil collins

1:03so 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 in part of my own interest in the history of British shipbuilding, one of the great industries thrown 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%.

1:45The government has got a single ship. Depends how big the ship is. Sounds like a rowing boat to me. 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.

2:35So 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?

2:52Brian Potter: 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 the dominant shipbuilder for say the first half of the 19th century. They have just such a huge quantity of ship-quality lumber. All that lumber had been cut down in the UK, and the UK industry was quite struggling during that period.

3:31Brian Potter: You talked about the Industrial Revolution, and it really is like the Industrial Revolution, which changes the fortune of British shipbuilding. You have the transition from wooden sailing ships to iron and then later steel, steam-powered ships. There was 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. But eventually it did. And because the UK was such a dominant force in steam engine manufacturing, and they had sort of applied that to their shipbuilding industry and had become a very, very successful shipbuilder.

4:10Brian Potter: where 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 happens 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.

4:53Those numbers, I mean, I just find them staggering. Germany, in theory, was building a large military and merchant marine at that point. It's amazing that they ever managed to build a high seas fleet. But what What was the sort of secret sauce? How did the UK manage to do it so much better than everyone else?

5:10Brian Potter: It just seems, yeah, like a combination of just, they had developed these production methods that were like quite efficient. They're operating at 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, where US wages were like much, much higher. And so even if they hadn't had this like productivity disadvantage, the British were able to have a sort of labor cost advantage. And so, yeah, inexpensive labor, inexpensive iron, they were really good at building these steam engines.

5:39Brian Potter: They had a 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 onto 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 labour 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.

6:18That 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.

6:31Brian Potter: 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 US has always much more emphasized machine-based production that was less reliant on unskilled labor. And so this shows up in, you know, shipbuilding as well, where the British were like very focused on like using these like skilled labor intensive methods of production. It seems like there's 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.

7:25Brian Potter: 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 the very easy way to to do that as you say is to just have like this skilled labor intensive production where you can just like lay everybody off when 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 it just they you know had this production method and it definitely works because they're ending up building 80 of the world's ships by the turn of the century i think that's a market share that can only go down Well, and it does, because I suppose we should come to the interwar period when it basically the first cracks, as you say, in your essay appear.

8:29What creates those cracks, really, do you think?

8:32Brian Potter: 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, 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. 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.

9:06Brian Potter: They sort of saw it as like a national priority, partly likely for like defense reasons. So they started pouring all these subsidies into these shipbuilding industries. Before the war, foreign competitors had started to be a little bit competitive, could perhaps produce things a little bit more efficiently than the UK, but the gap was very, very small. After the war, the gap started to sort of expand. The foreign competitors really just started to take orders from the British shipbuilders in a way that they hadn't really seen before. You started to see actual British shipowners, which had historically always just ordered from British shipbuilders, some of them starts like, these foreign prices are really, really attractive.

9:46Brian Potter: 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. I noticed the incredible fuss it caused when this ship owner called Furness 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, is, 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. It falls to 60 % in the mid-20s and it's down to 40%.

10:23Terrible 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 shipbuilding managements after the war to think we need to be very careful here, this is a very treacherous industry, because the slump is so incredibly deep?

10:54Brian Potter: Yeah, so basically, yeah, the sort of trajectory that you see is like immediately following the end of World War I. There's a huge boom in shipbuilding. Yeah, all this like new yards came online, all this infrastructure gets built. Yeah, starting in the 1920s, 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 at 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, if we have these big, expensive, capital-intensive production methods, that will come back to bite you when there's this huge slump in new orders.

11:39Brian Potter: You will go out of business. And so a lot of the yards that go out of business during this period are some of these ones that had invested in these 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 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 of i think you'll know about this neil possibly when you're young man.

12:14The Jarrow Crusade is a huge story from the mid-30s when a shipyard in Jarrow called Palmer's 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 Jaro, something to be done. 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.

12:54Brian Potter: This was a huge factor that became a huge factor later, whereas, you know, these shipbuilders were so willing to just, yes, scale their Labour force up and down as needed, which, you know, is an abstract way of saying like hiring 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 these 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.

13:31You seem to have described a whole swathe of 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.

14:17And he actually wrote a passage about how many people it took to change a light bulb in a shipyard. These include a labourer, brackets, member of the Transport and General Workers Union to carry the ladder to site, a rigger, brackets, member of the Amalgamated Society of Boilermakers, Shipwrights, Blacksmiths and Structural Workers Union to erect it and place it 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.

14:55Well, 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.

15:10Brian Potter: Yeah, that's the sort of interesting aspect of sort of the skilled labor intensive production method, where you didn't necessarily need a lot of overhead to help these ships get built. this sort of skilled workers or 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 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.

15:49Brian Potter: And again, this actually works nicely in like this certain period of time because you don't have this extra expense of these management overheads. And it's very flexible because you can just let the workers 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 way that these ships were purchased for a long time was basically cost plus, which you would build the ship, figuring out how much it costs you to build it. And the 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 or 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.

16:47We're 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 a 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 the 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?

17:26Brian Potter: Immediately following the war, the UK seems to be in a very good position shipbuilding-wise because their industry has sort of operated throughout the war. Most of the Axis powers, all their shipyards have been sort of devastated. Most of the European shipyards have been devastated. Places like Japan, which had a lot of their infrastructure intact, were prevented by the terms of the piece from building ships initially. The U.S., as you mentioned, which had built like an enormous number of cargo ships during the war, basically decided just not to pursue the commercial market. Since the transition to iron and steel and steam, the U.S.

18:03Brian Potter: had basically not been especially competitive in the international shipbuilding market. They just couldn't build commercial ships as cheaply as many of the other countries. They basically just turn 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, and for a few years, they're, you know, once again, the biggest shipbuilder in the world, upbuilding 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 was still in place.

18:35Brian Potter: And as these sort of countries get their feet under them, and as Japan is allowed to sort re-enter 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 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 I, it doesn't turn into a bust after a few years, just keeps 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 a year.

19:14Brian Potter: 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 share terms, the UK has fallen very, very far, even though 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.

19:52Brian Potter: 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 shipbuilding industry. And so during the war to build their huge number of cargo ships, Liberty ships, to overcome Germany's U-boats in the Battle of the Atlantic, the U.S. had adopted these sort of prefabricated construction techniques where historically ships were sort of built up on a shipway, just one piece at a time, like a bunch of laborers swarming over this skeleton that gradually transforms into a ship. And the U.S. had sort of developed these methods for building ships out of these big, big prefabricated chunks.

20:31Brian Potter: It's interesting because during the war, they were able to sort of improve these methods over time and get better and better at doing it. But they weren't actually able to build them more efficiently than the U.K. If you look at like, you know, total number of hours it took to build a U.S. ship during the war, it was actually a little bit higher than it took to build a similar cargo ship in the U.K. What it did 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 u.s did not try to sort of compete in the market after the war was over yeah but when it ended up happening it's like these sort of prefabricated production methods the guys that knew how to do them they took these methods over to japan which was like just starting to sort of rebuild its industry and 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 combine them with these other developments in production technology, these methods that have 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.

21:38Brian Potter: And they sort of combine these into sort of a new method of shipbuilding that 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 was a good way to sort of go out of business when the downturn inevitably came.

22:13Brian Potter: But because, you know, this downturn didn't not occur, you know, it was years and 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 seaborne trade and the need for vast numbers of container ships and large oil carriers, you know, which were the things that were going to dominate the world shipping market in coming years.

22:47But maybe that's the consequence of not having any managers who knew what was going to happen next. The other thing, of course, and this will be very familiar to Neil, who gets very cross about this even these days, is that there was no shortage of government reports looking into the shortcomings of this industry, which were always saying things like, and this is one from the mid-1950s, there's a need for a wholesale modernisation of the shipyard in terms of layouts, plant and equipment, particularly to increase the use of prefabrication. And then in 1960, production control in the industry was primitive.

23:18The total effort devoted to research and development was insufficient, and almost no organised research had been applied to production and management problems with a view to improving the productivity of capital and labour 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 just 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 even have reports about reports. Hundreds of them.

23:49And 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 nationalisation 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 costs them considerably more to build the actual ship. When nationalisation 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 nationalisation.

24:28I think he loves it he loves it yeah lie down lie down until the feeling goes away is my view on

24:35Brian Potter: nationalization yeah it's a combination I think of like too late and not necessarily the right intervention I think the basic idea which can you see but even come before nationalization which is you need to consolidate this industry to be able to achieve the 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 these 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 into this one big organization combining these like, you know, 27 different shipbuilders down to 12 different shipbuilders or whatever isn't enough to sort of change those those fundamental facts.

25:26Brian Potter: And yeah, with nationalization, you kind of see the same thing where it doesn't change the facts on the ground, which is, yeah, these shipyards are just too out of date with kind of been willing to sort of adopt these production methods, you know, and with nationalization, you now take out the 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 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.

26:00Well, you quote one author who's written about the industry who basically says, the thing about it is even though the outcome is disastrous, all the decisions taken by the owners of the shipbuilders were perfectly rational in the base of war period, given the kind of constraints and realities that they were operating under. Do you know that's fair?

26:19Brian Potter: I think it would have been very, very difficult to change because they were operating under these constraints. You look into the future and you see it clearly, right? It was not necessarily obvious inside the shipbuilding industry that this transition to sort of prefabrication would be successful in the context of this greatly burgeoning shipbuilding market. The U.S. had sort of used this prefabricated shipbuilding technologies 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.

26:59Brian Potter: They could have certainly worked harder 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.

27:33Brian Potter: There's like a very strong logic in the shipbuilding industry to 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? Where we are now is at 0.01%. So to start with, to reverse your thing, we can only go up.

28:03We're building a ferry 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 quoted 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? We're not going to run out of ships. There's plenty of them.

28:35Brian Potter: We're seeing something very similar in the US, where there's this very strong sense that we need to revitalize 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 in 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.

29:11Brian Potter: 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 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 an 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 is this your famous mixed 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 hugely 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.

30:10It does strike me, there is so much that's sort of about this story that is kind of counterintuitive from the labour 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 sort of expired in the longest boom the shipbuilding market ever had.

30:34That 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 app. you