The main reason for the competitiveness of Korean Shipyards is greater productivity and efficiency.

　

Labour costs represent approximately 20 % of the cost of construction for a Group I vessel such as a VLCC, tanker or bulk carrier. In addition, low labour costs reduce the cost of materials and components which make up the balance of the cost of building a vessel. Accordingly, the impact of labour costs and productivity on competitiveness is very significant.

　

This means that at the end of 1998 Korean productivity adjusted labour costs were around 1/4 of German labour costs,

　

　

If the figures for further productivity gains of around 15% over the last two years 1999 -2000 are added then the advantage is obviously increased.

　

European shipbuilders are much more fragmented than their Asian competitors. Europe has many relatively small yards which are less suited to volume building and more suited for smaller, more sophisticated, vessels which often have one-off designs.

　

Korean yards benefit from the existence of a few large shipbuilding groups which derive huge benefits from economies of scale through bulk purchasing, and have been designed and constructed to maximise economies from volume production which results in greater competitiveness. The 5 main yards in Korea account for approximately 95% of Korean shipbuilding output.

　

European yards are beginning to recognise this problem as evidenced by recent attempts to consolidate the European shipbuilding industry through planned alliances and mergers. This demonstrates a recognition of the inherent advantage that Korean yards have due to their structure. The fact that European yards are now seeking to address their inherent problems demonstrates that they recognise that their current position is uncompetitive.

　

Korean yards have adopted widescale automation with automated plate handling and laser cutting, which has improved the speed and efficiency of the building process.

In addition Korean yards have a very good reputation for process control and production management, both of which are vital to maintaining quality, reducing costs and preventing construction delays. One example of this is that strict control of the tolerance of hull sections is necessary to avoid errors in alignment or dimensional errors resulting in the need to carry out remedial work. Such strict control is also needed to avoid hold-ups in the building process, which can delay completion and increase cost.

　

　

Comparison of data on the time needed by European and Korean yards to construct vessels shows that Korean yards are far more efficient than European yards. Based on data from Fairplay for a sample of containerships delivered since 1995 (see Drewry Shipbuilding Report for methodology) the average number of weeks to build a container vessel is as follows:

　

　

　

Korean yards have access to very high quality steel pale at competitive prices. The South Korean steel industry is one of the world's lowest cost producers of high quality reversing mill plate, with costs per tonne below those for equivalent European producers as a result of good labour productivity coupled with low labour costs, and outstanding performance from excellent plant.

　

Additional advantages are that POSCO in Korea produce plates which are close to the final shape which reduces trimming tosses, and their quality standards are on a par with those of Japan in the demanding market for shipbuilding plate suitable for automated cutting and fabrication. These factors have to be added to the fact that they make very wide 4.2 metre plate which reduces fabrication costs, especially on larger vessels.

　

All of these factors have a direct impact on productivity. with Korean yards using high productivity fabrication techniques on a large scale to make oil tankers and container ships using a reliable supply of low cost, very high quality steel plate suitable for laser cutting and welding.

　

Niels Roed, Senior Vice President of Odense Shipyard in Denmark has stated at a conference that: "Quality of steel has a direct influence on the production performance - we must face this like our East Asian colleagues". European shipyards could improve their competitiveness by addressing these issues but have chosen not to do so.

　

The price of steel in Korea has consistently been lower than the price of Japanese and German steel as demonstrated in the table set out below. This table also shows that Korean steel plate has decreased in price over the last few years as a result of decreases in raw material costs, productivity gains and the depreciation of the Korean Won.

Year	US$ per tonne export price

	Korea	Japan	Germany
1995	480	534	611
1996	407	525	543
1997	392	485	465
1998	343	451	502
1999	310	358	403
2000 part	315	342	373

The competitive advantages arising out of the availability of high quality Korean steel shipbuilding plate are discussed in a report from Jonathan Aylen of the University of Manchester Institute of Science and Technology, which is annexed to the Drewry Shipbuilding Report. It is clear from his report that Korean yards have enjoyed a competitive advantage over German yards for the whole of the period covered by the CESA Complaint.

　

　

Main engines are built in Korea by HHI and HSD. For most of the vessel types which are the subject of the CESA Complaint the main engines are likely to represent approximately 10% -15% of the final delivered price.

　

Korean shipyards have benefited from the fact that both of HHI and HSD enjoy very large economies of scale, and indeed HHl are the largest builder of main engines in the world. The results is that main engines built by HHI and HSD are very competitive. This fact has been recognised by the Japanese yards. who have acknowledged that they are not as competitive as Korean engine builders. This can be particularly relevant for vessels such as Post Panamax large container ships which employ large high powered engines to enable them to achieve the high service speeds required. As a result, the cost represented by the main engines for such vessels will be higher than for Group 1 or Group 2 vessels.

　

The fact that Korean built engines enjoy a cost advantage was confirmed by Koichi Fujiwara of Japan's Ministry of Transportation in an interview with LLoyds List². He is quoted as saying that Japanese main engines are up to 20% more expensive than Korean engines because their engine builders do not enjoy the same benefits of scale as HHI and HSD.

It is clear that Korean yards enjoy an enormous advantage in competitiveness over European yards in the cost of labour, the lower cost of materials and far higher productivity.

　

Any "injury" suffered by European yards is therefore a result of their lack of competitiveness and not any unfair practices by Korean yards.

The success of Korean yards is not solely due to competitive prices, but is also the result of other factors where Korean shipyards have consistently out-performed European yards, a fact which is evident from the Third Party Submissions. In fact, several of the Third Party Submissions state that Korean yards have won orders even where the prices quoted by other yards were below Korean prices because of non price factors, which include:-

　

Strong client relationships; Korean yards have made considerable effort in building longstanding relationships with the world's major shipowners.

　

Shorter build times; In contrast to European yards, Korean yards have consistently achieved shorter build times, across all types of ship.

　

Reliable delivery; Korean yards have a recognised track record in meeting stated delivery times. This is a very important factor for a shipowner, especially in a rising freight market and for container operators. In contrast, European shipbuilders cannot match the track record of Korean yards in meeting stated delivery times.

　

Quality; Korean yards have a reputation for delivering high quality vessels, with owners therefore having to provide less on-site supervision during construction.

　

Re-sale value; The high quality of Korean built vessels is reflected in stronger resale values in the second-hand market for Korean built vessels than European built vessels, a fact emphasised by the Third Party Submissions.

　

After-sales service; Korean yards have consistently provided higher standards of after-sales service than European yards.

　

Engineering flexibility: Korean yards have earned a reputation for great flexibility in meeting owners requirements for amendments to a standard design. This is a result of strong engineering capability and commitment to meeting customer requirements.

　

Customer service; Korean yards have a very good reputation in this area.

　

Several of the Third Party submissions from brokers and owners have mentioned these aspects as being of great importance to owners when deciding where to order new vessels.

　

In addition, the Third Party Submissions state that owners would prefer to order from Korean yards even if European yards were able to quote the same prices because of better quality, and reliability so far as speed of build and delivery times are concerned. In addition, the evidence is that owners take into account the better resale value of Korean built vessels when deciding where to order new vessels.

　

The Third Party submissions also state that in some cases the price quoted by German shipyards is below Korean prices after soft financing available in Germany is taken into account. Despite this, orders have gone to Korean yards because of the non-price factors referred to above.

　

It is clear that owners' preference for ordering from Korean yards is not solely based on price alone. Other factors are extremely important.

It has been widely alleged that Korea is responsible for driving down prices by increasing capacity over the last few years. Increasing capacity is not in breach of WTO rules, and Korea is not the only country to have done so. Capacity increases have been made by Korean shipyards on economically justifiable grounds in order to enable them to increase production of vessels in which as a result of substantial investment and many years of effort they have achieved a considerable and quite legitimate productivity and therefore cost advantage.

　

For example, in 1996 Japan deregulated restrictions on capacity as a result of which capacity increased between 1995 and 1998 by more than 40%. In addition the East German shipyards were re-activated in the early 1990's after heavy investment and restructuring and the Odense shipyard re-opened in the early 1990's. These capacity increases were in addition to increases from recent entrants such as the PRC.

　

It is generally accepted that the World shipbuilding industry has had an excess of capacity over demand for many years. However, much of this excess capacity in Europe is uncompetitive on the basis of higher material and labour costs and much lower productivity.

　

Finally, the CESA complaint alleges that unfair competition from Korean shipyards has caused them to lose orders, and by implication has led to them being unable to fill capacity. Publicly available data, however, demonstrates that the real position is different as is shown below.

　

Japan - Japan deregulated restrictions on capacity in 1996. As a result the capacity of Japanese yards increased between 1995 and 1998 by more than 40%.

　

Germany - Kvaerner Warnow Werft was found to be in breach of the EU imposed capacity restrictions in 1997 and 1998, and clearly therefore had no difficulty in obtaining orders.

　

In addition, there has been a concerted campaign by German shipyards to persuade the EU to lift the capacity restrictions on the former East German shipyards. These yards were reconstructed in the early 1990's with the assistance of a huge amount of state aid from the German government accompanied by significant tax breaks. This intensive campaign for the EU to lift the capacity restrictions on East German yards provides the best possible evidence that German shipyards are not adversely affected by competition from Korean yards but, on the contrary, are confident of securing orders to utilise yet further spare capacity.

　

The capacity that the German shipyards want to have released from the EU restrictions is the most modern capacity. which is therefore best equipped to compete for new orders.

　

As of November 2000 the former East German yards had an order book of 40 vessels worth DM 4 billion. HDW entered 2001 with a record order book totalling Euro 5 billion and has work up to 2003. Meyer Werft is also busy, with slots booked up to 2005.

　

Italy - By the beginning of 2001 Fincantieri is reported to have filled its building capacity until the end of 2003, and the first available slot for a cruise ship is reported to be early 2005.

　

France - Chantiers D Atlantique only builds cruise vessels, and capacity is reported to be completely full.

　

European yards can not demonstrate any injury since it is clear that figures for capacity are unreliable. However, despite the unreliability of the figures it is clear that in many cases European yards have healthy order books in comparison to some previous years. In the case of Germany the fact that yards are seeking to have capacity restrictions lifted shows that they are confident of winning orders. The evidence of recent ordering of small and medium size container ships shows that European yards can win orders in sectors where they are competitive.

New orders, completions and the size of the order book have generally increased during the 1990's, and it is unrealistic to concentrate only on the period since 1997. It is correct that the Korean order book grew in the late 1990's, but the European order book has been maintained or increased during the same period. It is also clear that demand has been greater than earlier predictions by some commentators.

　

In fact it can be seen from the table at Annex 3 that the proportion of new orders won by AWES yards in fact increased in 2000 partly as a result of the success of German and Polish yards in securing orders in the medium size container ship sector.

　

The total European order book over the last 6 years is as follows:

　

　

　

　

　

European yards have been successful in increasing their order book over the last years, and can not demonstrate any injury as a result of Korean yards winning orders.