The R&D Tax Credit Aspects of Smart Ship Design

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        The shipping business went through major transformations throughout history. For instance, the emergence of steam technology and containerization were considered, at their times, revolutionary. Unprecedented computing power and innovative communication technology promise to unleash a new shipping revolution, paving the way for the so-called “smart ships.” The present article will discuss the latest trends in smart ship design along with the R&D tax credit opportunity available to support companies as they enter the digital era of shipping.

The R&D Tax Credit

        Enacted in 1981, the Federal Research and Development (R&D) Tax Credit allows a credit of up to 13 percent of eligible spending for new and improved products and processes. Qualified research must meet the following four criteria:

  • New or improved products, processes, or software
  • Technological in nature
  • Elimination of uncertainty
  • Process of experimentation

        Eligible costs include employee wages, cost of supplies, cost of testing, contract research expenses, and costs associated with developing a patent.  On December 18, 2015 President Obama signed the bill making the R&D Tax Credit permanent.  Beginning in 2016, the R&D credit can be used to offset Alternative Minimum tax and startup businesses can utilize the credit against payroll taxes.

The Economic Impact of the Shipping Industry

        Shipping has played a fundamental role in the history of capitalism. In the 19th century, technological advances in ship design enabled the globalization of trade and commerce, which have since fueled the world economy. Nowadays, according to HIS Global Insight, cargo transported by the liner shipping industry represents about two-thirds of the value of total global trade, or $4 trillion worth of goods per year.
        In addition to being a facilitator for other industries, shipping has a direct impact on economic growth. Data from the World Shipping Council show that the annual contribution of the global liner shipping industry in 2007 included $183.3 billion in direct gross output, $29.4 billion in direct capital expenditure, and 4.2 million direct jobs. When direct and indirect impacts are considered, they amount to $436.6 billion and 13.5 million jobs.

        According to a recent PricewaterhouseCoopers study, the U.S. domestic maritime fleet comprises of 40,000 vessels and generates more than $100 billion in annual direct and indirect economic output. The American shipping industry is responsible for nearly 50,000 direct jobs, each one of which results in almost five indirect positions.

Marine Technology Trends

        Smart technologies, such as sensors and monitoring equipment, are an increasingly common aspect of ship design. The massive amounts of data that result from the incorporation of such technologies promise to change the way the shipping industry works. Better informed decisions, more efficient operations, and reduced risks are just a few of the potential benefits of smart ships.
        A recent report by Lloyd’s Register (LR) entitled “Global Marine Technology Trends 2030” predicts that ships of the future will be “smarter, data-driven, greener, with flexible powering options, fully connected wirelessly onboard, and digitally connected through global satellites.” They will incorporate advances from multiple scientific areas and integrate people, software, and hardware, setting new paradigms for naval design, construction, and operation. .

        The report identifies key technologies that can potentially transform the marine world over the next fifteen years, many of which are presented in the following paragraphs.

1)  Big Data Analytics
        We currently have access to an unprecedented amount of data that can potentially affect shipping activities, such as meteorological and oceanographic data, traffic data, material and machinery performance data, data on cargo flows across the world, and maritime accident data .  The ability to extract actionable information from big data is a game-changer in the shipping world. It enables the identification of patterns and trends, therefore opening the way for enhanced operational efficiency, reduced traffic congestion, and maximized vessel or fleet utilization. Recent IT developments, such as cloud computing  and improved satellite services, allow for easier data storage and transfer. Concurrently, faster and more robust processors equipped with self-learning algorithms are capable of handling massive volumes of complex information. In addition, cognitive systems offer user-friendly interfaces that present information in a useful way and assist the decision-making process. Examples of potential applications of big data analytics in the shipping industry include real-time condition and performance monitoring, alert systems, situational awareness systems, ship performance modeling, condition-based asset management, and predictive maintenance.

2) Robotics
        According to LR’s report, crewing represents the second largest cost in shipping operations and the recruitment of capable, highly skilled labor is increasingly difficult. For these reasons, the study considers the reduction of human intervention as an important trend in the shipping industry. This is made possible by advancements in robotic technologies, which include improvements in the cognition, versatility, adaptability, and sensory capabilities of robots .  In addition to greater cost-effectiveness due to the reduction of labor costs, the incorporation of robots into shipping operations promises to bring other benefits, such as enhanced crew safety due to the reduction of human involvement in dangerous activities along with fewer incidents caused by tiredness and lack of concentration. Examples of robotic applications in ships include 1) sniffers, which monitor vessel’s emissions; 2) dispensers, which perform housekeeping tasks such as cleaning; 3) searchers, for finding and rescuing people overboard; 4) maintainers, for heavy tasks, like welding; 5) firefighters; and 6) mini surveyors, which will have access to areas too small for human intervention.

3) Sensors
        LR’s report points out that the decreasing price of computational elements combined with advances in wireless sensor technology and micro- and nano-mechanical systems will revolutionize environmental monitoring and data collection in the shipping industry. Smart sensors capable of real-time communication and data transmission will enable condition-monitoring and early warning systems that will help optimize maintenance practices and resource allocation strategies. The identification of poor performing engines is an example that can lead to considerable savings in fuel consumption. By enhancing operational efficiency and safety, high-quality sensor data promises to extend the lifespan of vessels. An interesting application is the possibility of gathering live hull structural integrity information. Innovative sensor technology allows for advanced leak detection systems that create micro-electrical fields capable of accurately identifying the location of slight disruptions caused by water.

4) Smart Shipbuilding
        The integration of smart technologies promises to optimize ship design, leading to fewer parts, less weight, and reduced environmental impact. The LR report presents a list of examples, which include automation, high-fidelity design software integration, human-computer interfaces, morphing structures, and 3D printing. Despite upfront costs, there is little doubt as to the potential cost savings of smart shipbuilding technologies. Additive manufacturing, the revolutionary new way of producing material layer-by-layer, is particularly promising, as it expands the spectrum of possible designs, facilitating the production of objects with complex geometries .  Design automation and the multiplication of human-computer interfaces is also a game-changer. Intelligent algorithms and language-processing capabilities are just a few examples of technologies that can accelerate and enhance the efficiency of the design workflow. Further efficiency will be made possible as innovative software bridge the gap between design and construction.

5) Unmanned Vessels
        Maritime autonomous systems are probably the most revolutionary aspect of smart ship design. The use of remotely operated and autonomous systems should experience considerable growth, enabling significant savings in weight and fuel. Unmanned surface vessels, in particular, promise to become strategic tools both for economic and national security efforts. In addition to creating new defense capabilities, they bring major benefits to industries such as oil and gas.

        Automated systems contribute to eliminating human error, which is a common cause of marine incidents, particularly due to long work hours (not surprisingly, most incidents occur during the night hours between midnight and 6 AM). Such systems also reduce the risk of drowning and rule out the health implications of dangerous cargoes .  Unmanned vessels are also a solution for the growing shortage of qualified sea-going staff.

        Despite the potential benefits at stake, safety and environmental concerns along with the lack of a regulatory framework stand in the way of a more widespread adoption of unmanned vessels. The creation of a code of practice, risk assessment standards, as well as requirements for training, accreditation, and certification are key steps in this process .

        Automatic docking systems are an early example of the potential of unmanned vessels. Using advanced sensor technology that updates data by the second, these systems are capable of monitoring vessel speed, distance, and angle during approach, as well as measuring wind and depth. They enable secure and fast docking with no need for human intervention.        

6) Ship Management Software
        Smart ships require integrated management solutions. Specially designed software solutions provide a comprehensive view of shipping operations, from accounting, payroll, and crew management to planned maintenance and performance monitoring. In addition to streamlining operations, these solutions help realize the full potential of smart technologies by establishing a user-friendly interface for optimized decision-making. Maritime software products also make it easier and more cost-effective to comply with regulations, simplifying recurrent tasks such as audit management, self-assessments, risk assessments, inspections, port state controls, and accident/incident reporting.

7) Energy Efficiency
        Environmental concerns as well as the pursuit of enhanced cost-effectiveness have encouraged ship owners and operators to look for ways to reduce fuel consumption and lower emissions. According to the American Bureau of Shipping (ABS) there is a variety of ways to improve vessel efficiency. Structural measures include hull form and appendage design optimization for reduced resistance, which includes the selection of adequate proportions and the assessment of both wave and wind impact, along with the use of lightweight materials, such as higher strength steel, for reduced energy consumption.

        There is also a wide range of energy saving devices aimed at improving propeller propulsion effectiveness and reducing hull frictional resistance. High-efficiency propellers include those with end-plates and Kappel propellers that have specific blade geometries that help reduce or eliminate tip vortex and consequently improve performance. When it comes to reducing skin friction, there are innovative ways to improve the interaction between a ship’s wetted surface and the fluids around it. The ABS points out that, in addition to the traditional use of paints that prevent the growth of marine life on the hull, ongoing research points to air lubrication techniques, which aim “to minimize the power needed to force air to stay in touch with those parts of the hull that would normally be in contact with water.”  The two main types of air lubrication are air cavity systems, which consist of thin sheets of air kept over the flat sections of the vessel’s bottom by pumps and hull appendages, and the use of micro-bubbles that reduce the density and viscous behavior of the water.

        Finally, the use of renewable energy sources, particularly wind and photovoltaic solar, should also play an important role in the future of ship energy efficiency. The ABS defends that adopting wind power technologies can promote up to 30 percent reductions in propulsion fuel consumption. The most promising solutions in this area include towing kites, vertical axis wind turbines, and turbosails. When it comes to solar power, the advancement of land-based applications and the consequent cost reductions could lead to a more widespread adoption by the shipping industry. For now, solar PV panels are more commonly used for auxiliary power, particularly in the crew’s living quarters.

Connected Ships

        Martin Stopford, director at Clarksons, a British provider of shipping services, argues that information has played an important role in the evolution of shipping. He illustrates with the creation of the cable network, in the 19th century, and the consequent ability of sending cargo manifests ahead of the actual cargo, which enabled much more efficient distribution upon arrival.

        Recent advances in communication technology are at the heart of the ongoing smart shipping revolution. According to Mr. Stopford, dramatic changes in the global communications system have paved the way for a fundamental transformation: ships are no longer self-contained business units, but integrated management units; in his words, “a fleet of ships becomes a production unit manufacturing transport.”

        These changes include 1) satellite systems, which have made continuous communication with ships cheap and reliable; 2) cloud technology, which enables the storage and use of large amounts of data generated by ships for operational, management, and research purposes; 3) the Internet of Things , which uses sensors to gather information about onboard equipment enabling real-time monitoring and automation; and 4) smartphone technology and accompanying mobile applications that perform various tasks without the need for spacious computer systems .

        LR’s report on future trends for the shipping industry supports this idea by pointing out how the integration of 5G, WiFi, and new generation satellites will enable stakeholders to remotely track the status of cargoes and machinery components, monitor live audio and video collected onboard, and establish seamless communication between ship and shore.

        Despite the undeniable advantages of fully connected vessels, the continuous transmission of operation and management data and the remote control of machinery create new threats for the shipping industry. In the emerging world of smart ships, cyber security must be a priority, particularly when it comes to the protection from viruses, piracy, and terrorist attacks. External interferences have the potential to disrupt the working conditions of smart systems, causing major economic and safety concerns. The creation of a comprehensive regulatory framework for smart shipping operations is a necessary step to preventing cyber attacks.

Innovation in Ship Design

        The following sections present examples of ongoing smart ship efforts around the globe. The incorporation of some of the technologies presented so far sheds light on the (not too distant) future of shipping operations.    

Hyundai Heavy Industries
        South Korea’s shipbuilder Hyundai Heavy Industries and Accenture are working together to enable better fleet management and enhanced operational efficiency of vessels. They are designing “connected smart ships” with built-in digital technology that will allow users to make data-driven decisions.

        The innovative project is built upon a network of sensors that gather a wide range of information, such as location, weather, ocean current, onboard equipment, and cargo status. This wealth of data is combined with real-time analytics as well as historical fleet information. Innovative visualization technologies present the resulting insights in a user-friendly way, so that ship owners and managers can not only monitor their vessel’s status and condition but also make better-informed decisions that will translate into more efficient operations.

        Smart technologies to be integrated into the connected ship will include real-time alerts and warnings, predictive maintenance, and efficient scheduling. A combination of Hyundai Heavy’s on-ship platform and Accenture’s Connected Platforms as a Service will ensure remote monitoring and maintenance of smart devices.

        Pioneering the smart ship design business is a strategic move for Hyundai Heavy, which seeks to capitalize on the ongoing digital transformation to strengthen its competitiveness. In the words of Eric Schaeffer, senior managing director, Accenture, “business can gain a competitive advantage by embracing the connectivity wave underpinning the Internet of Things and integrating digital services into their products to keep pace with the next wave of innovation.”

China State Shipbuilding Corporation
        On December 1, China State Shipbuilding Corporation (CSSC) unveiled a smart demo ship project to be developed on a 38,800 deadweight tonnage bulk carrier. With the objective of guaranteeing navigational safety and operational efficiency, the vessel will incorporate real-data transmission and collection, large-capacity calculations, digital modeling, and remote control. The idea is to “set up a whole-ship information perception system and realize information integration and data sharing between all the systems and equipment on the ship.”

        According to CSSC, key smart functions by the smart ship include overall performance and status monitoring; ship status safety assessment; ship energy efficiency monitoring, analysis, assessment, and optimization; engine room equipment operation, safety, and performance analysis; equipment maintenance including prediction and reliability, status assessment and maintenance optimization; navigational operation and control information analysis; and environmental impact analysis.

        Ongoing research of smart ship technologies is expected to enable the construction of the first remote-controlled ferry in less than five years. Oskar Levander, Vice President for innovation, engineering & technology at Rolls-Royce Marine in Finland says that “Today there is a lot of R&D focus on unmanned airplanes and driverless land-based vehicles and society is becoming more prepared to accept these game-changing solutions. It is only a question of time as to when shipping will follow the same path.”

        Though the necessary technology to enable unmanned ships is already available, further development efforts are necessary to combine them into viable, working systems. Due to their confinement to relatively small areas and the necessity of lower crew costs, ferries could be prime candidates for early adoption.

Eco Marine Power     
        Japanese company Eco Marine Power (EMP) is the creator of the Aquarius Marine Renewable Energy system, an innovative combined wind and power solution for shipping. The system aims to overcome the existing limitations to using rigid sails and solar panels on ships.

        The idea is to reduce the environmental impact of vessels while making them more cost-effective. EMP estimates that a large ship could save more than a thousand tonners of bunker fuel every year by using the Aquarius system. Attractive returns on investment are expected to help hybrid power technologies gain ground in the shipping industry.

        On the one hand, solar power will be generated by panels located both on the sails and deck, which can charge batteries for energy storage or be fed directly into the power distribution system. Wind power, on the other hand, will come from EnergySail, EMP’s proprietary rigid sail technology that is supported by an automatic control system.

        Aquarius will be accompanied by a management and automation system that communicates with other equipment on the ship, such as engines and generators. In addition to creating an interface with marine renewable energy solutions, the software also calculates emissions and monitors fuel consumption.

R&D Tax Case for Shipbuilders

        In a landmark R&D tax credit case, shipbuilder Trinity Marine Group challenged the IRS for tax credits relating to the design, construction and testing of first in class ships. (A first in class ship is essentially a prototype or the first in particular product line).  At issue was whether or not the cost of developing the ships should be eligible as a Qualified Research Expense in computing the credit amount. The government argued that the projects in question should not qualify because many of the components of the ship were not themselves innovative.  The court however rejected that argument. Judge David C. Godbey elaborated:

        Much of the design work at issue involved integrating extant subassemblies into a ship design. The government suggest[ed] that this [was] nothing more than ordering off a menu: pick a hull from column A, a propulsion system from column B, an HVAC from column C, etc.” The court finds that this greatly oversimplifies the process.”

        “[T]he systems do not exist in a vacuum. They interact with each other, sometimes in complex and nonintuitive ways. A change in electronics may require a change in power generation and distribution, which may require a change in the engine plant, any one of which may affect the weight distribution and performance of the vessel as a whole.”

        Ultimately, the case was a victory for taxpayers.  In regards to many of the projects at issue, the researcher was permitted to claim the entire cost of the first in class ships as a research and development expense. In other cases where much of the ship development process is rudimentary, the researcher will be able to isolate those more innovative components and claim R&D tax credits for that area of product development.


        Shipping is becoming a data-driven business. The use of smart technologies, such as sensors, robots, and big data analytics are transforming vessel management and operations and establishing new terms of competitiveness within the shipping industry. R&D tax credits are strategic tools for ship owners and producers willing to ensure a timely and seamless transition into the new era of smart ship design.

Article Citation List



Charles R Goulding Attorney/CPA, is the President of R&D Tax Savers.

Andressa Bonafé is a Tax Analyst with R&D Tax Savers.

Michael Wilshere is a Tax Analyst with R&D Tax Savers.

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