Friday, April 26, 2013

European Union to Save Domestic Shipbuilding from Asian Threat

By Eugene Gerden

The European Commission, which represents the interests of the EU and ensures that EU law is correctly applied by member countries, is developing a package of measures aimed at supporting a struggling domestic shipbuilding industry which continues to lose ground amid the pressure of Asian competitors.

 So far, the European shipbuilding industry has not been able to fully recover from the effects of the global recession, which is evidenced by the fact that since 2008 the order book of EU shipyards has shrunk by 30 percent, and the number of deliveries related to tonnage is expected to significantly exceeded the number of new orders this year.

The situation is aggravated by the presence of other problems in the industry, among which are lack of cheap loans, overcapacity and irreversible job losses.

In fact, the first signs of a crisis in European shipbuilding appeared in the 1970s. Prior to 1975, the EU shipyards accounted for half of the world’s ship production, but in 1975 their share of the world market had fallen to 22 percent.

At the time the global leadership in the market was held by Japanese shipyards, which accounted for 50 percent of world production of ships. At the same time, the rise of Korean shipyards began in the second half of the 1970s after the oil crisis, which led to massive lay-offs in the industry and cancelled orders.

By the 1990s Korean shipyards had increased their production shipbuilding capacities by more than three times, and a few years later had become the world’s largest manufacturer of ships. At the same time, this resulted in a sharp decline of world prices for ships and market overcapacity.

At present, Asian manufacturers account for up to 80 percent of the global production of ships, while their order portfolio represents as much as 90 percent of the global orders. Meanwhile, the European Union’s share of shipbuilding has declined to its current level of 7 to 8 percent.

The decline could have disastrous consequences for the European shipbuilding industry, which currently remains of great importance to the EU, given that more than 500,000 workers are employed in the €80 billion industry.

Heino Bade, former chairman of the European Metalworkers’ Federation (EMF), warns: “The EU and national governments must be fully aware that abandoning shipbuilding will lead to industrial erosion in Europe’s maritime regions, the irrecoverable loss of highly-skilled employment, the disappearance of numerous modern and high-tech shipyards together with their network of equipment suppliers, and the extinction of an effective and energy-efficient transport mode made in Europe.”

In this regard, according to the plans of the European Commission, the development of a special package of measures should significantly increase competitiveness in the international arena.

Such a position has already been welcomed by some leading EU analysts.

The implementation of the new support measures is intended to help to solve the most acute problems of the European shipbuilding industry and to stimulate local demand, provide an access to cheap loans, to set conditions for better protection of workers, and to create a level playing field.

In the case of employment policy in the sector, according to the plans of the European Commission, there is a need to introduce a practice of short-time working arrangements, which would better protect the rights of workers, amid the instability of the European shipbuilding and the decline of orders.

The European Commission also plans to create conditions for long-term funding of the industry, and to provide incentives for banks to lend to local shipbuilders. In addition, the European Commission plans to create the conditions for increasing the volumes of building of ships with an advanced environmental profile, which is also expected to help stimulate the market demand.

As part of these efforts, there are plans to encourage the local shipyards to increase investments in R&D activities, which already make up more than 10 percent of their annual profits.

The European government understands the importance of supporting the national shipbuilding industry, which is currently going through difficult times, while stressing that the support measures should be aimed at improving the quality of ships, not their number.

At the same time European officials realize that the absence of large orders could also result in a lack of scientific discovery and continuing innovation in European shipbuilding.

Currently the majority of European shipyards are going through different times, including the producers from Germany, Italy and Nordic countries, whose positions in the global market have always been strong.

Perhaps the only bright spot on this background are the Turkish producers, which managed to maintain a fairly high level of efficiency, mainly benefitting from relatively cheap labor, compared with other European shipyards.

Aware of the inability to compete with Asian shipyards in the production of container and other standard ships, European shipbuilders plan to continue to focus on building specialized vessels, including cruise liners, the demand for which is steadily growing amid the boom of cruise travel.

The area of interest also includes a segment of ferries, which have always been dominated by European shipyards. According to analysts, the global demand for these types of ships will continue to grow in the near future, due to aging ferry fleets in the Mediterranean and other world regions.

Construction of cable-laying ships and other service vessels is expected to remain another promising niche for European shipbuilding during the next several years, and an increase in oil and gas production on the sea shelf means that the demand for offshore and special vessels for the implementation of such works will grow.

Finally, amid the global wind energy boom many European shipyards are expanding their portfolios, including orders for new ships to serve the offshore wind energy market.

“From 2020 we will see 40,000 MW per year built offshore” said Eddie O’Connor, founder and CEO of Mainstream Renewables, a renewable energy group, and an honorary Director of the European Wind Energy Association. “This will require ten to twelve new heavylift vessels, other vessels for transporting foundations, towers, nacelles and blading systems. New ports will have to be built across Europe.”

At the same time further tightening of environmental regulations for ships could benefit European shipyards and provide them a competitive advantage over their Asian rivals, which traditionally paid lesser attention to environmental issues than Europeans.

Securing competitive advantage against Asian yards is of special importance for EU shipbuilders, as the competition between the sides will continue to be tightened, and not necessarily on a level playing field.

This is reflected by the fact that despite repeated negotiations between the European Commission and the governments of major Asian shipbuilding nations about fair competition and creation of a level playing field, the latter still provide huge financial support to domestic producers, allowing them to dump in the global market, at the times when EU countries are no longer able to subsidize their shipyards.

For example, the South Korean government recently announced its plans to expand the volume of financial support to its shipbuilders by providing additional $3.5 billion for this year. The additional loans will be available at two state-run lenders-Korea Finance Corp. and Korea Development Bank-and five commercial banks, including Kookmin Bank. The additional financing plan for local shipyards is on top of the country’s existing KRW3.5 trillion in such loans available.

In the meantime, this news has already caused sharp criticism by the European Commission, which again accused the Korean government of the adoption of protectionist measures that create conditions for almost 20 percent dumping in the global shipbuilding market.

At the same time representatives of Korea’s largest shipyards, including Hyundai, Daewoo and some others have already denied the accusations of price dumping, claiming that their lower prices are the result of increased efficiency, lower labor costs and availability of private investments.

Due to unfair competitive practices by Asian shipbuilders, the EU has not ruled out the possibility of special measures to protect the domestic producers. There is a possibility that the list of such measures could be announced early this year.

The EU is aware of the ever growing shipbuilding threat from Asia, and some European yards are accelerating their activities in the field of design and production of high-tech ships. It’s also possible that the adoption of modern technologies will come through the purchase of European shipyards by their Asian competitors. For example, China Shipbuilding Industry Corp, one of China’s two largest shipbuilding conglomerates, recently announced its interest in acquiring shipbuilding companies in Europe. According to Sun Bo, senior executive of China Shipbuilding, the company has already held “advanced talks” with a European company in recent months, the name of which is not disclosed.

In addition to the Asian threat, the ever rising production costs and in particular steel prices could be another obstacle for the development of EU shipbuilding in the coming years. This mostly affects those shipyards that signed a large portion of orders when steel prices were significantly lower.

Despite the planned measures, most analysts believe that EU shipbuilding will experience difficult times in the long term, including passenger ship orders. The annual average amount of orders for European shipyards is not expected to exceed 6-8 ships a year, compared to an average of 12 in the period 2004-2007, with a peak of 16 in 2007.

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