The soft skin material was chosen to be watertight (or at least water-resistant) from the start.
They still had trouble with the water. It takes a HUGE amount of force to yank a big object through water quickly. And the sharks were never complete sealed shapes, they always had open areas with exposed internal framework.
The biggest issue was the salt water. Bob Mattey (the shark builder) had tested the sharks in fresh water in Cali and they worked. But at Martha's Vineyard the salt water started rusting & frying everything. So they switched the whole powering medium from electro-hydraulic over to pneumatic air to deal with it. That way they could locate the electricals & air tanks & compressors on the crew's barge that was parked off-camera. The shark basically ran on a bunch of air hoses from the barge.
The problems were never really Bob Mattey's fault from what I've read.
TLDR version: Mattey estimated 1 year to build the shark. They rushed him down to 9 months, and then spent 3 months debugging it during production. D'oh! By the end of the movie the sharks worked pretty well. But by that time they were months over schedule/budget and the shark's bad reputation was cemented.
To put it in perspective, Bob Mattey was hired from outside Universal because he was the only person confident that the shark could be done. Universal's own SFX department had estimated 2+ years (which is basically saying "The project is uncharted territory. No promises.")
JAWS 2 was another trainwreck behind the scenes, but it was human & creative bullcrap. The movie started out with a darker tone and then got switched to teeanger fluff. The director elected to show the shark more because now it worked. And the first movie had already revealed it by the end.
JAWS 3 didn't use the Bruces AFAIK. The "35 foot" shark was only built as a mechanical head. The full-body shots were miniatures.
JAWS 4 was back to the Bruces (or at least their descendants). But it was a decade after the original, different people, low budget, etc.
