In the late afternoon of June 30th, 2018,  the Daniel K. Inaway was officially launched  

from its shipyard in Philadelphia. This was  the first in a line of five highly advanced  

Aloha class container vessels commissioned  for the Matson Shipping Company. Capable of  

carrying the equivalent of 3,220 20 ft shipping  containers. They are each going to be tied for the  

largest merchant ships ever produced by the USA.  These ships have become the pride of the Philly  

shipyard that will be producing them. And they  would be an incredibly impressive achievement,  

except for the fact that on the other side of  the Pacific Ocean, shipyards like Hanwa Ocean  

in South Korea were building vessels five times  as large. Oh, and in the same time it's taken  

the Philadelphia shipyard to build just two  of these vessels, the Korean yards have built  

more than 50 of a new class of mega freighters  that now dominate global trade routes. Oh yeah,  

and one more thing. The American shipyard isn't  even American anymore. It was purchased by the  

same South Korean company they were competing  with just over a year ago. In the race to move  

the world's ocean trade, the war has more or less  been won by just three countries. Japan, China,  

and South Korea. What makes this so interesting is  that by all accounts, there is no physical reason  

why they should have won. Now, if you were to ask  the average person how these three countries came  

to dominate modern ship building, they're probably  going to say something about labor being cheaper  

in a country like China. After all, ships are  clearly one of the easiest manufactured goods to  

well ship around the world. So, it would only make  sense to go with a worker's cheapest, right? Well,  

in this case, it doesn't really matter. Labor  is only a very tiny component of the cost  

of building a ship. According to an industry  analysis conducted by the OECD, an ultra-large  

container ship built in a yard like Samsung Heavy  Industries typically sells for around $150 to  

$200 million depending on exact specifications.  From that end price, only around $10 million will  

go to paying the actual yard workers who put these  vessels together. In addition, most of the work  

is done by massive machinery, and the technicians  that operate these yards are paid very well, even  

by European and American standards. The real costs  are almost entirely in the mechanical components,  

the sheer volume of steel, and the time that these  vessels spend sitting in the yard. In many cases,  

these input costs are actually more expensive in  China, Japan, and South Korea than they would be  

elsewhere. Shipyards in these three countries  didn't win because they were cheaper. They won  

because they were better. So then if ship building  is so important, why aren't other countries even  

trying to do the same thing that these three are  doing? Well, there are really two parts to this  

story. The first is how the ship building titans  of the past lost their dominating lead. And the  

second is how the new Asian upstarts stole away  this critically strategic industry. At the end  

of the 19th century, there was just one country  that dominated ship building, the United Kingdom.  

The colonial empire at the time gave them both the  resources and the motivation to build the largest  

naval and merchant fleets the world had ever seen  up until that point. Other European empires slowly  

started to catch up as they wanted their own  presence in the world's oceans, particularly as  

it became clear that they were all gearing up for  a great war. After we got that all squared away,  

the UK and the rest of Europe continued to  dominate ship building. Trade and transport  

between North America was becoming an increasingly  lucrative endeavor, which kicked off a merchant  

building spree. On the naval side, interwar  militaries were still suspicious of rivalries  

and resentments that weren't exactly settled by  the First World War, and they were already gearing  

up for the sequel. During this time, these nations  actually agreed to limit the size of the biggest  

ships in their navies through the Washington  and London naval treaties. These agreements set  

guidelines on how big capital naval ships could be  and how many each country was allowed to have. The  

hope was that this would avoid a costly arms race.  Now, as you can probably guess, with the benefit  

of hindsight, this didn't really work. And one of  the simplest loopholes was just to build a larger  

number of smaller ships that weren't defined  by these rules. But by the Second World War,  

it didn't really matter anyway. For the next 5  years, global ship building would be dominated  

by one country and one country only, the USA.  Between 1941 and 1945, the Yanks built more ships  

than every other country on the planet combined  six times over. American yards were launching a  

new ship every single day. And they were using  them to supply the war effort in Europe and  

fight their own battles in the Pacific. But this  created a bit of a problem. Massive over supply.  

You see, most of the ships built during the war  would not be attention-grabbing battleships or  

aircraft carriers, but rather supply vessels  to carry provisions across the oceans and feed  

the front lines. The American logistics machine  was so massive that they even deployed specialty  

refrigeration ships to the Pacific theater with  the express mission of making ice cream for troops  

fighting in the tropical heat. As the legend goes,  a Japanese general who was struggling to feed his  

starving forces at the time eventually found  out that the Americans had enough resources to  

waste on these ice cream ships. And it was at that  point he knew the war was truly over. Either way,  

after the war, American ship building effectively  stopped overnight, which didn't actually make that  

much sense. Sure, they didn't need to keep such  a large navy anymore, but international trade  

was starting to boom. The Breton Woods global  financial system locked in currency exchange  

rates which made doing business across borders  far more easy as every major government agreed  

to keep their own currency locked in line with  the USD. This combined with a postwar recovery  

was really opening up global trade at this time.  But American shipping companies had a choice to  

make. They could buy one of the thousands of  Liberty ships the US Navy was dumping on the  

market or they could commission a new ship for  10 times the price. Unsurprisingly, US shipyards  

didn't have many customers lining up. So most  of them just closed down. On the other side  

of the Pacific though, the story was completely  different. To support their war effort, Japan had  

developed the skills to build some of the world's  most impressive ships. And after the war was over,  

the American occupation actually encouraged  them to keep on working on their shipping  

industry. The Americans really wanted to hold  off the spread of communism into Asia. And they  

saw Japan as a strategic outpost to control that  objective. By encouraging the shipping industry,  

the Americans not only opened up a new trading  partner, they also created good jobs for lots  

of workers who in turn wouldn't be tempted by  silly ideas like seizing the means of production.  

Japanese shipyards also got another lifeline in  1950 from yet another war, this time on the Korean  

Peninsula. UN forces were primarily coming all the  way from the USA and Europe to fight against the  

North Koreans and Chinese who were right there  with direct access to the front lines. Instead  

of sailing their combat and logistics ships  all the way back across the world for repairs  

and maintenance, they instead opted to use the  shipyards right next door in Japan. In a strange  

twist of fate, these were the exact same shipyards  that were fighting against these navies less than  

half a decade before. But historic ironies aside,  the injection of capital gave these Japanese yards  

what they needed to start the positive feedback  loop. Japan, alongside China and South Korea,  

are severely lacking in the raw materials they  need to make ships, like the iron ore that's  

used to make steel, which is used to make holes.  As the Japanese got better at building massive  

bulk frighterss, they lowered global shipping  rates, which made it easier for them to import  

raw materials from places like Australia and  Brazil, which made it cheaper for them to build  

even more ships. By the 1970s, Japan was building  more ships than every other country in the world  

combined. Europe had shifted to specifically  built cruise liners. The UK had given up,  

and the US just wasn't even playing the same game.  At this point, you'll have probably noticed that  

a lot of ship building depends on who's going to  war with who. Well, the USA figured this out way  

back in 1920 when they passed the Jones Act.  This law effectively says that for a ship to  

operate between two American ports, it needs  to be built in America, flagged in America,  

and operated by Americans. When they first passed  this law, the intention of it was that it would  

encourage and protect local shipping and ship  building industries, which meant that if they ever  

went to war, they'd have a strong naval capability  at home. Unfortunately, these noble ambitions were  

no match for simple, practical economics. Since  American ship builders had guaranteed customers  

from the US Navy and domestic merchants like  Matson from the beginning of this video,  

they never really needed to compete with other  global shipyards. This meant they stayed small,  

specialized, and far less efficient than the new  conglomerates growing in Asia. But it wasn't cost  

alone that let Japan go on to dominate global ship  building. Their real secret weapon was finance. By  

this time, Japan had become an export powerhouse,  selling everything from TVs to Toyotaas all over  

the world. But when people paid for these exports,  they were mostly doing it in their own foreign  

currency. An American dollar may be the greatest  piece of paper ever created by man, but it's not  

going to buy you much in Japan. So, these growing  export companies exchanged it for local yen,  

which they could use to run their business. Now,  this was a problem because every time they traded  

American dollars for Japanese yen, it would push  up the price of the yen, which was not allowed.  

The Bretton Woods system, which Japan  had agreed to all the way back in 1952,  

stipulated that they fixed their exchange rate at  360 yen to one American dollar. So to counteract  

the market activity of Japanese companies  selling American dollars to buy Japanese yen,  

the Japanese government had to sell Japanese  yen to buy American dollars, which presented  

them with a strange problem. They had too many  American dollars. Instead of just piling all of  

this into bonds and collecting interest on this  cash, the Japanese government had a better idea  

and they formed a series of public banks. One  of these banks was the rather creatively named  

Export Import Bank of Japan. And the primary  objective given to this bank by the government  

was to administer lowcost loans to support the  corporate growth of strategic export companies. So  

how did this actually work? Say you were a 1970s  international businessman and you wanted to start  

your own shipping empire. Well, you're going to  need some ships. If you go to the European Yards,  

you are going to have to pay for your ships  upfront in cash before they even lay down the  

keel. If you don't have that much money on hand,  you could take out a loan from a regular bank,  

but they're going to want a significant down  payment and proof that you have enough money  

left over to pay them back, even if the ship never  makes it into the ocean. However, if you go over  

and talk to the yards in Japan, the government-run  import export bank will be there to help you out.  

What they do is take some of the American dollars  they had stockpiled and send it to your preferred  

private bank of choice. That deposit could be a  down payment on a ship from a Japanese yard, which  

means you purchase your first vessel with much  less money down. To make the deal even sweeter,  

the import export bank of Japan would also offer  refund guarantees on ships built in their country.  

If you pay for a ship and then the ship builder  goes out of business before delivering your  

vessel, then you are, as people in the industry  would say, ship out of luck. Oh, brother, this guy  

stinks. But seriously though, even if the chance  of a shipyard going out of business is incredibly  

low, there is so much money on the line that  most normal banks won't finance a project unless  

the buyer has enough money in reserve. or they  can get a refund guarantee from the government  

through an institution like the import export  bank of Japan. In 1999, the import export bank  

of Japan was merged with the Japanese overseas  economic cooperation fund to form the Japan Bank  

for International Corporation, but its day-to-day  mission remains the same. On their website, in  

addition to providing upfront financing for ships,  they also offer financial services on satellites,  

ports, railways, and nuclear generators. Today,  this has almost become the industry's standard,  

which goes a long way to narrowing down which  countries can reasonably offer such high-priced  

exports. For a country to sell ships, it needs a  government bank willing to underwrite them. To get  

a government bank willing to underwrite them,  they need a lot of foreign exchange reserves.  

And to get a lot of foreign exchange reserves,  they need to be a major export power to begin  

with. When you also add on the requirement that  these countries need to have access to the ocean,  

they need to have governments stable enough to  not just squander these foreign exchange reserves  

and have the industrial capacity to build ships.  It's not that surprising that only three countries  

can tick all of these boxes today. And it's also  not surprising that they're all here right next  

to each other. But that still doesn't answer  the whole question. A country like Germany,  

for example, still technically ticks all these  boxes. So why haven't they got a multi-billion  

dollar ship industry as well? Well, they actually  do. And netted out, they make just as much money  

from ship building as the South Koreans. The  only difference is they just focus on the  

parts of the ship that actually make money.  Companies like Mand Diesel and Turbo, MTU,  

and Caterpillar build marine engines that cost  up to 50 million each. That's almost a quarter of  

the final build cost of these mega freighters in a  machine that took only a tiny fraction of the raw  

materials. Perhaps the clearest example of this  lies in this unassuming factory here. This is MMG,  

and all they do is make the propellers that end up  going on these ships. Each of the screws that go  

on to power the ultra large container ships coming  out of the yards over in Asia ultimately start  

their journey back here in Germany. About 110 tons  of copper, aluminium, nickel, and magnesium are  

melted down to form a bronze alloy resistant to  saltwater corrosion and the immense forces it will  

be dealing with over its lifetime. Those materials  at today's market prices would cost MMG about €1.2  

million. But once their highly skilled technicians  and state-of-the-art machines shape that slab of  

metal into a propeller, they can sell them to the  shipyards for more than €3 million each. That's  

a markup of over 100% even after including labor  and well shipping. Compare that to the shipyards  

themselves. The sheer scale of their operations  is impressive, but most of their work is turning  

steel sheets into glorified floating boxes  that'll be packed full of other boxes. According  

to available financials, about 80% of the value  of the finished container ship comes from the  

component parts themselves. After accounting  for the 10% that goes to the yard workers,  

that only leaves 10% for the yards themselves to  cover all their overheads and turn a profit. The  

margins are razor thin. But that's actually both  a blessing and a curse. And that's because there's  

one final box that these countries need to tick to  have a domestic ship building industry. And it's  

an important one. They have to actually want a  ship building industry. Of course, these shipyards  

would love to juice their profit margins,  but by keeping the income statement so tight,  

it makes it incredibly difficult for any other  competitors to enter the business or even want  

to enter the business. The fact that the industry  has become so consolidated has let them fill order  

books decades in advance and build multiples  of the same class of ships over and over again,  

cutting down on design costs and giving them a  competitive moat of sheer economies of scale.  

For everybody else, it's just easier to buy from  these three. Yes, the ability to build ships is  

clearly a strategic military advantage, but to  use Germany as an example again, their naval fleet  

is quite small and is meant to complement NATO  operations rather than project power across the  

planets like the USA. Additionally, not to go full  armchair general, but if a global conflict broke  

out which made it impossible to procure merchant  ships from these Asian yards, we wouldn't be able  

to sail those container ships around anyway. In  America, strategic ship building still exists, but  

there's really only one client worth working for,  the Department of Defense. If you take a look at  

that shipyard in Philadelphia from the beginning  of the video, slowly constructing small Jones Act  

compliant merchant ships, you won't need to walk  around long to see where the real money is made.  

A single Gerald R. Ford class aircraft carrier  is purchased by the Navy at a unit price of $13  

billion. So even though they're only slightly  smaller overall than a container ship like the  

CMA Champse Elysee, they are worth 65 times more.  They also present far more lucrative ongoing  

contracts for maintenance programs with no global  competition because obviously the US Navy isn't  

going to let a dry dock in China do repair work  on a carrier's nuclear reactors. Within the last 5  

years, yards in China, Japan, and South Korea have  produced the largest container ships the world has  

ever seen. But all of those ships combined are  still only worth as much as one of these freedom  

exporting capital ships. In Europe, the decision  was similar. We are still building ships just at  

a far lower volume and far higher quality. We  have our own navies and we even export highly  

technical craft like submarines. But we also have  businesses like Lurssen, aberking and Rasmussun,  

Benetti and Feadship which build super-yachts  where price is much less of a factor. When Jeff  

Bezos commissioned his midlife crisis koru, it was  built by Ocean Co. in the Netherlands at only 127  

m long, it was less than a 50th the overall size  of the new ultra-large container ships. But it  

costs more than twice as much because it was a  highly technical design paid for by someone who  

could be much more cavalier with their wallet.  By pure volume alone, the three Asian giants  

dominate global ship building to a point where  everybody else barely shows up in the data.  

But in terms of the real value of the industry,  it's a collaborative and highly interdependent  

endeavor. They've gone into the mass market,  high volume, low margin. Then the McDonald's  

of global ship building, a good business, but  just different from the fine dining everybody  

else has decided to specialize in. And well,  just like McDonald's, these yards do not exactly  

have the most promising future at the moment. Go  and watch this video next to find out why these  

mega freighters don't really end up making any  money for the shipping companies that buy them.