In order to collect the necessary data, the European Commission has recourse to consultants whose ongoing study has defined a cost breakdown model, including all relevant cost components both of the direct ship production and the shipyard in general. The model is based on cost elements covering direct costs (materials, labour, equipment, etc.) and indirect costs (financing of the ship and of the production equipment, overhead, insurance, etc.). The calculated building price also includes a 5% profit margin. More details of the cost model can be found in Annex I of the first report.

The cost model does not represent an extrapolation of EU shipbuilding costs, as has been suggested by the Korean shipbuilding industry and the Korean Government. It is rather a methodical cost reconstruction for particular orders in particular yards. Comparison data provided by the Korean shipbuilding industry on wage levels, overheads or yard productivity confirm the assumptions used in the cost model.

While, for example, the Korean Shipbuilders' Association gives the average level of overheads for Korean yards as 13% of operating costs, the cost model uses specific figures for each investigated yard which are between 7.5 and 18%. For the major Korean shipyards the overhead is estimated to be in the range of 10.2 to 10.9% (i.e. lower than assumed by the Korea Shipbuilders' Associations itself).

As the study develops, additional information is gathered and used to validate previous cost investigations. Consequently, the nine orders covered in the first report have been recalculated where necessary and the updated findings are given below.

As already stated in the first report all parameters are kept on the "safe side" to ensure that calculated minimum costs for particular projects cannot be challenged.

Currently the cost model does not include an assessment of inflationary effects as this would be highly speculative for orders made now but executed in the coming years (which is typical for shipbuilding contracts). However, any confirmed changes in labour costs, exchange rates or the debt situation of yards under investigation are taken into account. This is particularly relevant for yards which have benefited from debt forgiveness and moratoria (e.g. Daewoo Heavy Industries or Halla Engineering and Heavy Industries [now operating under the name Samho Heavy Industries]).

It is not within the scope of the study or this report to assess whether Korean or other Asian shipyards are generally profitable. Given the limited availability of consolidated accounts for Korean shipyards a statement of this kind is almost impossible to make. To assume, however, that the continued operation of Korean yards is ipso facto proof of profitability would be equally wrong as the structure of the Korean economy in general and the chaebols in particular have offered many possibilities to cover up losses. The proper implementation of newly introduced accounting practices could, however, contribute to enhancing transparency. Only where companies are solely engaged in shipbuilding and where the investigations cover the entire yard portfolio (shiptypes produced) a statement on the overall profitability can be made. This is the case for Halla and Daedong Shipbuilding Co., both yards being under court receivership since 1997 and not having shown any profits since then. For more details on these two shipyards reference is made to Annex II of the first report.

In the context of report COM (1999) 474 final the following orders placed at South Korean shipyards were investigated:

The findings from the detailed investigations are summarised in the table below, the updated figures are given in bold.

There has been some criticism from the Korean Government and the Korean shipbuilding industry of the validity of the above findings. It is claimed that for most orders there is no genuine competition between the EU and Korea as both sides would operate in different market segments. In practice this may be the result of Korean pricing practices and unfair competitive behaviour but the above orders have in part been selected because EU yards tendered and did not win the contracts.

The Korean side also claims that the basic assumptions in the investigations are incorrect and would not take into account the competitive advantages of Korean yards(e.g. wage cuts, favourable Won/USD exchange rate, lower material costs). However, all these elements have been factored in, using most recent data. Figures provided by the Korea Shipbuilders' Association on lower wages (minus 4% from 1997 to 1998) or a decreasing workforce (minus 3.2% from 1997 to 1998) are either misleading (1998 was a particular year for Korean shipbuilding as explained in chapter 2 and the previous report; wages have actually increased in 1999 and it is doubtful that the Korean figures reflect the full extent of bonus payments) or are insufficient to explain the considerable gaps between production costs and offer prices.

In addition to the nine orders investigated for the first report, 13 more orders have been analysed for this report. Nine of these orders were placed at six different South Korean yards, four orders were placed at four yards in the People's Republic of China (PRC).

The Commission assured a balanced selection of cases while taking into account the overall objective of the exercise, the relative urgency of the matter and the availability of meaningful data for comparison. The new orders investigated are:

Not all of the selected projects are confirmed orders and in some cases the financing may not yet be in place, which could lead to higher or lower order prices, depending on the particular situation. The European Commission is, however, convinced that the information entered into the analysis is at present the best available.

The following table summarises the findings for the above 13 orders.

The results from the above case investigations are fully in line with the findings from the first report. Korean yards continue to offer ships at prices well below cost. Low prices are offered again by those yards which are in the most critical financial situation(Daewoo, Halla / Samho and Daedong).

It is noteworthy that fierce competition between Korean yards continues to be a factor that keeps prices down. As all Korean shipyards carry massive debts and ensuring cashflow is extremely important for their survival, none of them can afford to raise prices unilaterally. Where intra-Korean competition is limited, due, for example, to licensing arrangements (as it is the case for the investigated LNG carrier) Korean yards maintain higher price levels (the LNG carrier order would, according to the cost calculations, not yield a profit but neither would it incur a considerable loss).

It appears that costs resulting from debt servicing are typically not included in the price calculations. Prices seem to be set at levels where owners find it hard not to place orders in Korea, and Korean shipyards apparently rely on favourable debt settlement conditions later. With large parts of the Korean commercial banking sector under Government control it is highly likely that the Korean Government has a decisive influence on the financing operations related to one of Korea's major exporting industries. The role of "commercial" banks in Korea needs further scrutiny as the case of Daewoo in particular has shown. To avoid a bankruptcy of the Daewoo group domestic banks have accepted huge losses on their outstanding loans and foreign creditors were pressured to follow suit. Recent reports indicate that the government-owned Korea Development Bank will assume 37% (other sources speak of 60%) of the assets when the shipbuilding part of Daewoo is spun off. This would de facto amount to a partial nationalisation of the Daewoo shipbuilding activities.

The analysis of contracts placed in China is significantly more complicated than for Korea. The reasons are to be seen in the industrial structure and the absence of market principles (see also annex). More investigations will be required to gain a better insight. The four investigations made do not provide a consistent picture. One offer seems clearly loss making, probably due to the technical sophistication of the vessels in question and the lack of experience of the shipyard in this field. The other three orders may be profitable, but again not all conditions of the orders are fully known. in the case of the VLCC a barter agreement seems to be part of the contract (the National Iranian Tanker Company paying for the ships partly with oil deliveries); the exact conditions of this agreement, as well as the specific payment terms for this protracted build programme, may have a severe impact on the profitability of the order for the building yard.

As in the case of the first report on the situation in world shipbuilding, a negative impact on EU yards is assumed when the order is made at a price which does not cover costs and which is low enough to keep the order out of reach of EU yards. This is particularly true if the owner has traditionally placed orders with EU yards.

However, even where Asian competitors had significant market shares in the past the depressing effects of this pricing policy will have a negative effect on the market in general and, on this basis, the price may be perceived to be injurious. Whilst an individual contract may not take work directly from an EU builder there will be a "trickle down" effect in the market as a whole, which will have a detrimental effect on shipbuilding in the EU. As the facilities and skills to build ships for market segments that have already been lost in the past are still available in EU yards, an increase in prices would enable such yards to acquire contracts in these markets as well.

Of the nine orders placed in Korea, covered in this report, six can be seen to have an impact on EU yards. The other three orders concern shiptypes in which EU yards were strong in the past but which are now rarely produced in Europe. The key elements for the six cases are as follows: