by Captain John Konrad V (gCaptain) The stock of China Merchants Energy Shipping (CMSE – SHA) climbed higher after the release of the company’s latest investor report where the company announced that net income rose $1.87B, profit margins rose to an astonishing 34.92%, and a possible deal with TESLA motors is underway. The question is why? One paragraph buried on page 16 of the report might provide the clue. China is investing heavily in the digitalization of shipping.
“We will focus on digital empowerment,” says the latest CMSE investor report. “Our nations’ One Belt One Road strategy is relying on stable and long-term technology projects to create a stable business, strict management, and aggressive industry.”
In 1890, in his book The Influence of Sea Power, the great Alfred T. Mahan wrote about an era of technological change and believed that, despite these changes, the importance of sea power remained unchanged. Mahan also believed that a strong merchant marine was as important to seapower and maritime influence as a nation’s naval might. Yet in 2020 only China, by investing heavily in shipbuilding and commercial shipping operations, is following the Mahanian doctrine. The United States Navy may still have the most powerful fleet of warships ever but there remain only 82 US flagged merchant ships in international trade while China has 3,897!
It doesn’t require investigative journalism to verify the US Navy’s total apathy for the other half, the commercial half, of Mahanian doctrine. All that you need to do is attend a shipping conference, any shipping conference in the United States, and look at the audience. You will see many US Coast Guard and US Merchant Service uniforms but, during CMA – the largest ship owner conference in the US – last year I didn’t see a single US Navy officer. I doubt that I will see many at this year’s event (which starts tomorrow) either.
Mahan believed strongly that commercial shipping was important to naval influence and seapower despite technological change but he did acknowledge that technology was important to winning wars and the US Navy is investing heavily in technology. A congressional report published last week shows that the Navy is requesting $579.9 million in FY2021 research and development funding for large Unmanned Vessels (UV) and their enabling technologies. And this is just one of many autonomous ship projects.
Will these projects help American shipping companies? Will it help the broader maritime industry digitalize? This appears unlikely. Nearly all of the billions of dollars earmarked for ship technology is being spent on cyber-security and autonomous ships. As recent headlines make abundantly clear, cybersecurity technology is very badly needed but the technology the US Navy is developing will likely remain classified. The autonomous ship projects could prove promising but will it benefit commercial shipping?
The US Navy is certainly investing in commercial shipping technology companies such as Sea Machines and Edison Chouest – both excellent companies – but there is a catch. The money is not going to these companies directly but is being funneled through partnerships with large defense contractors like Huntington Ingalls and Lockheed Martin… companies that are well known for cost overruns and delays. How many of those billions of dollars will filter down into budgets that will do the most to solve the problems we face: the R&D budget at Chouest and Sea Machines? 1 percent? Half a percent? One-tenth of a percent? My guess is the final number will be exponentially smaller.
gCaptain reached out to blkSAIL, the MIT startup who’s algorithms powered the world’s first fully autonomous commercial ship. “There has been some interest from DARPA and we had several calls with United States Coast Guard last week,” the COO of the company told Captain. “But the US Navy has not called us yet. Not once.”
If the US Navy isn’t calling the only commercial autonomous shipping startup at MIT, the country’s foremost technology institute… it seems reasonably safe to say they aren’t calling any strictly commercial maritime technology startups.
So while the Navy has announced an aggressive multi-trillion dollar plan to meet the “threat from china” by increasing the size of the US Naval fleet to over 500 ships, and has invested heavily in maritime digital products, the money is all flowing through defense contractors. Very little is entering the commercial side where it could help fix the Manhanian imbalance and assist us flagged commercial interests.
There is another problem with US Naval spending. While the US Navy spends it’s money researching and developing technology for war, China’s “One Belt One Road” strategy is not only funding cybersecurity and autonomous vessels, the country also is pouring money into technology for maritime logistics, infrastructure, and commercial ships.
“We will focus on digital empowerment,” says the latest CMSE investor report. “Our nations’ One Belt One Road strategy, relying on stable and long-term technology projects to create a stable business, strict management, and aggressive industry.”
It seems that, while the US Navy is planning to out-shoot China with smart weapons that cost tens of billions of dollars, China is working on both sides of Mahainian doctrine and is investing in both weapons technology and commercial maritime technology to defend its interests and improve its maritime influence. They are investing in weapon power, yes, but are spending even more on commercial maritime infrastructure projects, commercial shipbuilding, and – now – commercial maritime digitalization technology to build goodwill and high levels of influence at sea.
gCaptain will be checking in with blkSAIL and other commercial maritime digitalization firms periodically in the hope that the US Navy invests in these commercial maritime startups (as the US Air Force has already done with great success) and we will be on the lookout for Navy uniforms (especially US Navy ONR NavalX uniforms) during tomorrow’s all-important CMA conference.
That said, we are not going to hold our breath. Instead, we might consider opening a gCaptain office in China because that’s where ship digitalization is happening today, that’s where startups are today getting the checks they need to innovate. See you at the next Captain’s Table for innovation in Hong Kong.