Friday, May 27, 2011

German Shipbuilding: Exploring Growth Opportunities

By Eugene Gerden

The German shipbuilding industry is steadily recovering from the effects of the recession, which is reflected by the ever-growing number of orders, received by German shipyards, as well as recently announced ambitions of the German government and major local players to create conditions for the diversification of German shipbuilding.

Germany has the third largest merchant fleet in the world, and ranks first in containerships. Germany is also one of the leading international ship finance sites, and with a turnover of €85 billion, shipbuilding is a key industry in the German economy.

The storm has abated, but winds are still high. German shipbuilding has coped with the downturn in the wake of the financial and economic crisis remarkably well, avoiding the worst scenarios, however most of the analysts warn that in the absence of reforms the next crisis is only a matter of time.

Angela Merkel, Chancellor of Germany, commented, “Due to the crisis, global competition in the industry has become even more noticeable. The importance of shipbuilding for Germany is reflected by the fact that up to 90 percent of the European foreign trade is transported by sea.”

At the same time Werner L√ľken, chairman of the German Association for Shipbuilding and Marine Engineering (VSM), and one of the most authoritative people in German shipbuilding has expressed optimism regarding the end of the recession.

“We are optimistic that we have walked through the valley of tears,”
he said.

A necessary basis for a successful development of the German shipbuilding was laid by Gerhard Schroeder, Merkel's predecessor as the Chancellor of Germany in 2000s, through the adoption of his “Guidelines for the promotion of the German maritime industry.”

Angela Merkel, his successor, has continued Schroeder’s successful course and was able to provide conditions for further industry growth, partially thanks to its so-called tonnage tax, when the billions of profits from container shipping during its boom remained almost tax-free.

However, the financial crisis has broken the consistent development of the German shipbuilding, resulting in a significant decline in demand for container and other cargo vessels, which were always the flagship products of the German shipbuilding, up to 75 percent of which were exported abroad.

The crisis was more or less successfully turned only by those German shipyards, which are traditionally focused on the implementation of state contracts, such as the Bremen Fassmer shipyard, which specializes in the production of warships, as well as police and patrol boats.

For the rest the numbers speak for themselves: in the wake of the crisis eight German shipyards declared bankruptcy, with 3,400 employees affected. Only 13 orders for new ships were received by German shipyards in 2010. The country’s world's market share has shrunk from 3.1 percent in 2001 to a current 1 percent, compared to the South Korean's 33 percent, China's 28 percent, and Japan's 21 percent.

At present the German shipbuilding industry is still suffering from the consequences of the crisis, at the same time facing more aggressive, and sometimes unfair competition from its age-long rivals, such as China, Korea and even Vietnam.

According to Luker, over the last year and a half the South Korean shipbuilders received about €30 billion of state subsidies, which helped them to increase their share in the market of container ships even during the times of the crisis and to dump on the market, receiving favorable orders, with the use of the practice of the establishment of rock-bottom prices.

At the same time, the German federal government currently is not only unable to provide the same volume of state support to its shipbuilders as the Asian governments, but has even cut the state subsidies for its shipbuilders in recent years. In addition, the German banks are still reluctant to grant loans for domestic shipbuilders.

In addition to direct Asian competition, the high cost of steel, along with the higher labor costs, makes the cost of building traditional container ships in Germany significantly higher than in Asia, by at least 30 percent, putting the balance sheets under greater pressure.

The weakness of the US dollar is also associated with serious difficulties for German companies, while the strong euro has resulted in many layoffs in the industry in 2010.

In addition, the acute shortage of engineers has also affected the industry’s plans to take advantage of its huge technological potential, the products of which are always considered as a benchmark of quality by shipowners all over the world.

Unlike Asia, it is currently difficult to find a yard in Germany that isn't lacking engineers and other high-skilled personnel. There is also a problem keeping many top executives within the industry.

For the last several decades and for various reasons the number of shipyard workers in Germany has decreased significantly, although this has resulted in an increase of the number of jobs in the related sectors, such as marine engines and electronics production or the interior of ships. Currently the total number of workers, involved in the German shipbuilding and related branches is estimated in the range of 65,000 to 70,000 people.

In 2010 the German shipyards delivered some 54 ships, which are practically the same figures, compared to 2009, but with higher tonnage and greater value, said a spokesman for the Association for Shipbuilding and Marine Engineering (VSM), who said these figures are currently estimated at nearly 1 million compensated gross tons (CGT), and more than 4 billion euros respectively. In 2009 there were 0.73 million CGT worth 2.6 billion euros.

“2011 will be a decisive year for the industry” said a spokesman from VSM. He said the shipyards will have to fight for additional orders in order to survive. In 2010 of 20,000 people, which are directly involved in the German shipbuilding, 1,300 workers lost their jobs, while since the beginning of the recession in September 2008 total number of layoffs in the industry reached 3,800 people.

At the same time according to state forecasts, during the next several years the industry will continue to recover, and is expected to reach its pre-crisis figures by 2014.

New Opportunities
The financial crisis has forced many German shipyards to think about their future and to look for other recipes of their further success. Currently most of the industry’s players believe that the diversification of activities and the focus on the construction of new types of ships could be considered as one of the drivers of their future growth. The industry's concentration on the building of container and cargo ships appears to be the past, and there is a need to pay more attention to the construction of other types of vessels, including luxury yachts, cruise ships, as well as special vessels for offshore wind farms.

According to Merkel, one of the main goals of the German shipbuilding industry in the coming years is to tap into some promising market niches and to exploit its technological advantage.

“Classic container ships are no longer the future of Germany”, the Chancellor believes.

Merkel made it clear that the ever growing popularity of renewable energies in the EU and the US can provide an additional impetus to the development of German shipbuilding.

In this regard, she has already appealed to the national banks to engage more strongly in funding of projects, including the building of ships for offshore wind farms.

According to representatives of ThyssenKrupp AG (TKMS), the German’s largest shipyard operator, German shipbuilding must use its technological advantage to respond in a global competition for the impending energy shortage through the construction of technologically advanced, durable ships as well as to produce smart ideas. This is true both for the development of “clean ships” as well as those ships, which can be used for resource extraction in deep water.

Some German analysts also believe in the ability of German shipbuilders to exploit certain niches in naval shipbuilding, and, in particular to focus on the construction of ships, which could be used to combat piracy.

However, the changing of production priorities could be associated with serious difficulties to some German shipyards, which for many years benefited from the boom on the fast and relatively easy-to-manufacture container ships. The cost of such ships is usually in the range of only €20 to 40 million, which is significantly less than a highly complex cruise ship, priced at least ten times higher.

Hans Christoph Atzpodien, CEO of TKMS, believes that the concept of the construction of technologically simple merchant ships in Germany is no longer viable, due to the current great yards’ overcapacity in Asia.

“The commercial shipbuilding in Germany is no longer competitive. “We need to focus on our core products”, Atzpodien said.

Such “core products” are currently built at some of the shipyards owned by ThyssenKrupp and in particular Blohm + Voss, a Hamburg shipyard, which combines the construction of surface warships, especially frigates and corvettes, with supply ships.

Eugene Gerden is a free-lance writer based in Moscow, Russia who has covered the European maritime industry for 10 years. He can be reached at gerden.eug@googlemail.com.