According to Article 10(3) of the TBR, it was examined whether other factors, in addition to the Korean subsidies, have, either individually or in combination, adversely affected the Community industry.

　

Commercial vessels produced in Korea and the ones produced in the Community are destined for the same use and are in direct competition with each other, with the price being one of the main competitive factors.

　

As shown above, during the IP, the Korean shipyards increased their market share (excluding cruise ships) from 30.3% in 1997 to 39.5% in the period January-November 2000. This coincided with the injury, and the serious prejudice suffered by the Community industry in particular in terms of sales price Inductions, undercutting and of a deteriorating profitability. Moreover, the drop in Korean prices also coincided with the financial crisis in Korea and can be partly explained by the effort made by Korean shipbuilders to obtain foreign currency (especially by the shipyards under restructuring) . In its Fourth Report to the Council the Commission actually has concluded that: "the Commission maintains its view that significant over-capacities in South Korean shipbuilding, combined with an ongoing need to generate new orders in order to assure sufficient cash flow, prevent a recovery of prices and the market in general"⁶⁴.

　

When faced with low-priced Korean offers to potential customers, the Community industry had the possibility of either maintaining its prices with a risk of losing market share and closing down individual shipyards, or following the low prices of subsidised Korean yards with negative consequences on profitability. Indeed, as from 1998, in some sectors the Community industry lowered its sales prices. This had a detrimental impact on its profitability, which was already negative in 1997. This illustrates the important impact of the price behaviour by subsidised Korean shipyards.

　

It has been alleged that the Korean pricing policy was not the cause of the injury suffered by the Community industry, as it had structural problems in the past. It is true that the Community industry had structural problems and profited either indirectly from special tax relief schemes (e.g. the KG scheme in Germany, abolished in 1998) or directly through operating aids for contracts concluded until the end of the year 2000 (the aids have been discontinued as from 31 December 2000). However, the investigation has shown that the situation of the Community has further deteriorated due to the subsidised Korean shipyards' behaviour.

　

With regard to serious prejudice, Article 6.3(c) of the ASCM requires a demonstration that the effect of the subsidy is the cause of the significant price undercutting, price depression and lost sales established.

　

With respect to price undercutting, price depression and lost sales the analysis above made reference to concrete examples involving the subsidised Korean yards. With respect to the price undercutting, price depression and lost sales being caused by the subsidy, it has been shown that in the absence of the subsidies the yards in question would have been obliged to raise their prices substantially.

　

In particular, the Commission's Reports to the Council demonstrate that the prices offered by the subsidised yards were at very low levels; this was due to the fact that debt servicing costs had been considerably diminished shed following the massive granting of subsidies through debt restructuring⁶⁵: "It should be noted that in no case has the model concluded that any of the contracts examined has been priced at an economic level, that is to say covering direct costs, plus an appropriate contribution to overhead costs, plus an appropriate contribution to debt servicing (i.e. repayment of principal plus interest), plus an element of profit. In a number of cases, prices have also failed to reach the break-even level (i.e. the normal price excluding profit). On average the losses taken by Korean yards with regard to these orders are ca. 20% of the actual building costs, when inflation is factored in. Some orders maybe close to profitability but these concern shipyards that have been able to reduce their debts, either through the issuing of new shares (HHI) or through debt restructuring (deferred repayments, moratoria on interest, write-offs, debt-euity swaps) as it is the case with Daewoo and Halla/Samho." (emphasis added).

The Commission's Fourth Report is even more explicit: "Previous analysis for Halla/Samho concluded that whilst massive debt restructuring had enabled the shipyard to reduce contract costs by about 6%,..."

　

In other words , had debt restructuring not taken place, these yards would have been obliged to sell at dramatically higher prices to be able to service debts. Thus, the granting of the subsidies has had a direct effect on the prices of these yards. This is even more so for yards which were technically bankrupt and only survived because of the subsidies; in view of the fact that in the absence of debt restructuring it is certain that DSME, Halla and Daedong would have been liquidated,⁶⁶ it is evident that the ability to offer prices at below a minimun debt servicing level (up to 399%) is entirely due to the subsidies received.

　

Several interested parties argued that the injury suffered by the Community industry was due to a world wide over-capacity in the shipbuilding sector occurring during the IP. In this respect, it has indeed been stated in the Commission's reports to the Council on the situation in world shipbuilding⁶⁷ that supply in world merchant shipbuilding clearly outstrips demand; i.e, that there is a world wide over-capacity. Most interested parties agree with this statement This over-capacity, alongside with the Korean pricing policy, led to the fact that, despite a recent strong increase in demand, ship prices did not increase. In addition, it is to be noted that a considerable part of this over-capacity situation is due to the behaviour of Korean shipyards. First, after having increased their capacity substantially between 1994 and 1996, all shipyards in Korea continued to operate during the IP, even those which have been under bankruptcy proceedings since 1997. Secondly, Korean shipbuilders have also reopened idle capacity and converted repair facilities to newbuilding activities. The world wide over-capacity can therefore not be seen in isolation with the subsidies that led to this behaviour of Korean shipyards.

However, a distinction should be made on the basis of the ship sector considered Indeed in some sectors, despite the existence of a certain over-capacity during the IP, while the Korean shipyards were able to gain market shares, the Community industry's position in the market deteriorated significantly.

　

Certain interested parties claimed that the injury suffered by the Community industry is linked to the limited size of the European shipyards. Indeed the investigation has shown that, during the IP, the productivity of certain Community producers was hampered by the capacity of the European yards. However, it is probable that if the capacity could have been increased thus allowing to absorb more contracts, important economies of scale could have been achieved by, at least part of, the Community industry, with the result to lower its costs and therefore offer more competitive prices.

　

The complaint contained evidence of sales by Korean producers below cost i.e. dumping.. Similar information is contained in the Commission's reports to the Council on the situation in world shipbuilding. The fact that injury may be attributed also to dumping practices by Korean yards (possibly involving a different mix of Korean producers and segments of the market) does not affect the findings made with regard to subsidisation.

　

On the basis of the above, it is concluded that the substantial increase in volume and market share of Korean shipyands as well as the considerable decrease in their sales prices and the level of price undercutting found during the IP coincided in time with the injury suffered by the Community industry. The other factors found which could have contributed to this injury are not such as to break the causal link between the subsidies and the injury suffered by the Community industry.