In general terms the procurement of shipbuilding materials and equipment operates in a world market, with substantial trade occurring in both directions between Europe and the Far East. In part, this is influenced by the fact that owners may specify the supplier of equipment and main machinery to suit their own preferences or fleet standards. Whilst raw materials and smaller items will often be sourced locally, world-wide competition will tend to promote competitive prices in local markets for such items.

　

The Korean shipbuilding industry has a good domestic supply base and therefore has the option of procurement locally at competitive prices or from overseas if necessary. In terms of overseas markets it is also located geographically close to the major suppliers in the Japanese markets. The Korean shipyards currently purchase approximately 80% of shipbuilding materials and equipment by value locally.

　

Whilst the international marketplace for marine equipment will tend to keep price levels consistent across the world, the Korean shipyards have the advantage of considerable purchasing power in view of their high throughput volumes. Individually the shipyards are the largest in the world and they are therefore in a position to obtain volume discounts in material procurement, which leads to an overall cost advantage on direct materials and equipment costs.

　

In addition to this, in international terms, the devaluation of the Won in relation to the US$ over recent years, has been greater than the depreciation of the Western European currencies. In comparative terms this leads to a significant cost advantage for domestically procured materials and equipment. According to AWES statistics, exchange rate fluctuations amount to a comparative advantage for domestic procurement for the Korean yards against German yards of approximately 20% in 1999 and 50% in 1998, compared to 1995 levels.

　

　

Korean yards have access to international markets for steel and are therefore able to obtain steel at prices at least as competitive as those available to European yards. In addition, due to the proximity of competitive and good quality domestic supplies of steel, Korean yards benefit from low transportation costs. The biggest advantage Korean shipbuilders have lies in bulk procurement, which allows them to gain substantial discounts. The South Korean steel industry is one of the world's lowest cost producers of high quality reversing mill plate. Its costs per tonne are below those for equivalent European producers as a result of good labour productivity coupled with low labour costs, and outstanding performance from excellent plant.

　

POSCO produce plates which are close to the final shape which reduces trimming losses, 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 row cost, very high quality steel plate suitable for laser cutting and welding.

　

Main engines are built in Korea by HHI and HSD. For the types of vessel 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 HHI are the largest builder of main engines in the world. The result 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 certain types of vessel 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 vessels.

　

It can be concluded therefore that the Korean shipyards enjoy a significant potential cost advantage in the procurement of materials and equipment for shipbuilding. This is consistent with the findings of the EU First World Shipbuilding Report Annex 1 where they state that Korean material costs were estimated to be 25% below those of European yards.

　

　

Whilst materials and labour account for around 80 - 85% of shipbuilding costs at Korean yards, the remaining element relates to the recovery of other overhead costs, including financing. In this area there are no simple international comparators, however, it should be recognised that the Korean yards will have benefited from two factors:

　

　

The attribution of other operating costs to individual contracts is an area that is fraught with difficulties, contention and misinterpretation. As such it is not considered appropriate to express these in such terms (See comments in Cost Model section) when in reality this is simply a method of cost recovery rather than true contract cost element. However, at an overall shipyard level (or using whichever cost driver measure), there will be significant economies of scale relating to the overall annual work volumes across which such cost recovery will be borne.

　

These factors will therefore tend to mitigate the effect of capital investment and financing costs that may be higher in the Korean yards, than in the older Western European or Japanese yards.

　

　

The benefits of economies of scale have been referred to in both of the previous two sections. A simplistic picture of the scale differences can be determined by looking at the overall statistics of production in Korea and Germany.

　

In Korea, there are five major yard groups accounting 95% of the output of approximately 4 million CGT per annum (average 1996-98) and around 43,000 personnel (employees and sub-contractors). This equates to an average size of around 800,000 CGT output per annum and 8,600 personnel.

　

In Germany, there are approximately 8 major yards involved in mainstream merchant shipbuilding production. These account for approximately 80% of the German output of approximately 1 million CGT per annum (average 1996-98) and around 17,000 personnel(employees and subcontractors). This equates to an average size of around 100,000 cgt output per annum and 1,700 personnel. It is evident therefore that the scale of individual shipbuilding yard operations in the major EU shipbuilding nation is only a fraction of that of the Korean individual shipyard operations.

　

The economies of scale of larger shipbuilding operations will include:

　

In addition to this, the Korean yards generally benefit from a higher level of series build production runs which can provide significant cost economies in both design/technical and production areas.

　

The structure of the European shipbuilding markets is one of the key inherent weaknesses of the European shipbuilding industry that has prayed a large part in the decline of the industry. European yards are considerably handicapped by the fragmentation of their market, whereas on the other hand, Korean yards benefit from the huge economies of scale arising due to their consolidated structure.

　

Asian yards benefit from the existence of a few large shipbuilding groups, which derive benefits from economies of scale through bulk purchasing and the greater competitiveness arising out of volume building. The Korean industry is characterised by a small number of very large relatively recent yards with high aggregated national output - there are 5 main yards/groups. The Japanese industry, whilst delivering a higher aggregated national output, comprises a far greater number of longer established yards. In contrast, in Europe, many small yards exist. They are more fragmented with an aggregated Community output that is Iess than that of Korea. This makes them more suited to building smaller, sophisticated vessels, which are often one-off designs.

European yards are beginning to recognise this problem as evidenced by several recent attempts to consolidate the European shipbuilding industry through planned alliances and mergers. This demonstrates a recognition of the inherent advantage that Asian yards have due to their structure. In Asia, Japanese yards are also undergoing a process of consolidation, suggesting that within the region, Korea also has a structural advantage over the Japanese yards.

　

As well as operating in largely different markets, the European and Asian shipbuilding industries are distinguished by the differences in their structures. Table 5.6 lists the main EU shipbuilding yards active in merchant shipbuilding since 1997.

　

There has been some progress within Europe towards integration into larger units, however, these have not all survived the test of time, and have tended until recently to be limited to a few acquisitive groups. The main EU based shipbuilding groups are:

　

　

Virtually all of the individual yards within these groups are, however, still relatively small in world terms and whilst they can benefit from group economies of scale in procurement, technical and other support operations, they still operate with considerable autonomy in production operations.

　

Outside of these groups there are a large number of independent yards, many of which have generally operated with little inter yard co-operation. There are loose knit collaborations of smaller yards in both Germany and the Netherlands and increasingly there is interest in procurement collaboration through e-commerce portals that are being developed.

　

It may be, however, that the European yards are recognising that the structure of their industry leaves them at a relative disadvantage, with discussions over further potential alliances and/or mergers, e.g. between the ThyssenKrupp group and Babcock Borsig, owner of Howaldtswerke-Deutsche Werft. HDW is also understood to be holding discussions with AESA/Bazan, Fincantieri and British Aerospace with regard to establishing a shipyard network in Europe. It would seem that some of the EU shipbuilders are beginning to see that the fragmentation of their industry is a significant handicap in terms of international competitiveness.

　

However, the two of these large shipbuilding groups are nationalised shipbuilding groups in Spain and Italy for which there has been pressure to privatise and break up. The recent decision to merge AESA and Bazan to form IZAR would seem to indicate a change of strategy, resulting perhaps from the unsuccessful attempts to bring the AESA merchant shipbuilding operations to self-sustaining profitability.

　

The Japanese shipbuilding industry, strongly encouraged by the Japanese government, is also in the process of restructuring. Hitachi Zosen and NKK Corporation have formally announced the merger of their shipbuilding operations by 2002.

　

Kawasaki Heavy Industries, Ishikawajima-Harima Heavy Industries and Mitsui Engineering and Shipbuilding have also announced a planned tie up of their commercial shipbuilding and ocean engineering ventures. These two groups, together with Mitsubishi and Sumitomo, would independently create a core of 4 main Japanese shipbuilding groups for the future.

　

Whilst these proposed or recent alliances may generate future benefits, much will depend upon the extent to which there is integration or rationalisation of production operations.

　

The Korean yards have, however, definitely benefited throughout the 1990s from the economies of scale of both their yard capacities and their heavy industries groupings in comparison with EU yards.

　

　

Table 5.7 has been prepared from build information contained in the Fairplay database for ships delivered since 1995. Approximately 170 records each were available for both Korean and EC, which is clearly a very small proportion of the total number of vessels delivered. No comment can be offered on the accuracy of the database. It should be noted that yards like Odense, which probably represent the most competitive on timescale in the larger bulk vessels, were not represented in the sample.

　

The above analysis can only be used to provide a rough estimation of the difference in the build times of European versus Korean yards. The figures cannot be taken as exact representations of average build times, because the sample sizes are small compared to total output. The sample sizes differ between Europe and Korea and, naturally, the vessel specifications will differ.

　

Nonetheless, as a rough guide, the data does show that where figures for both Korea and the EU are available, Korean yards have consistently shorter build times. This is a reflection of the greater efficiency of Korean yards. Quick delivery is of particular importance to owners in times of strong freight markets because they are keen to bring the vessels in to service as soon as possible in order to enjoy the maximum benefits from the current upswing in the market.

　

The effect of shipyard technology levels on productivity and competitiveness must be considered within the overall economic context of a particular yard. Higher levels of technology will not necessarily mean improved productivity or competitiveness and can in some instances reduce the cost competitiveness of a shipyard.

　

To illustrate this point, consider the payback on a capital investment in new machinery that is designed to reduce production man-hours and hence improve productivity. The productivity improvement required to justify the investment in a low labour cost economy is much higher than that required in a high labour cost economy. In the case of Korea, modern technology has been installed even though labour costs are much lower than in several competing countries. This is because the technology installed has provided sufficiently high productivity improvements to be justified even in a low labour cost economy.

　

Equally, investment in technology needs ideally to be consistent across the whore shipbuilding process. Isolated 'islands' of high technology will have much of their benefit dissipated or lost in the lower technology areas. Conversely -black spots' of low technology can cause a disproportionate level of disruption in the overall operation or lose much of the benefits gained elsewhere. To some extent the concept that an operation is only as strong as its weakest link is applicable.

　

Investment in technology must therefore be considered within the economic context of a yard and as across the totality of shipbuilding operations. Higher technology yards will generally carry higher levels of overhead costs, reflecting depreciation and financing costs of higher capital investment. To operate cost effectively, they will need to have achieved a higher revel of productivity than their lower technology competitors.

　

Inevitably, however, a certain level of technological advantage is inherent in the construction of new yards or redevelopment of existing yards. The base level of technology available improves continually and, where there is a need to purchase new or replacement equipment, even the basic model may be more sophisticated than that of a few years earlier.

　

The Korean yards are well-equipped, relatively modern yards which will have a technological advantage over some of their competitors in Europe and elsewhere. The benefits of this will be seen in productivity levels, whilst the cost impact of this will be reflected in the level of overhead recovery required.

　

Over recent decades shipyards have been designed for a particular 'product mix' of vessel types and the yard technology will generally reflect this. Whilst this may make the yard more efficient in the production of these types of vessels, it can make it less effective in the production of other vessel types.

　

For example the Korean yards were designed to build large vessels in series build and they will inevitably have a technological advantage over yards designed to build a greater variety of ship types. Conversely, however, they may operate at a disadvantage in building other vessels such as cruise ships and other single or small order runs.

　

The Korean yards being modern greenfield site developments do not generally suffer from some of the space constraints that affect the redevelopment of European yards in more densely populated areas. They are also generally well laid-out and enjoy good material flow and buffer storage space and transport logistics. Whilst initially these yards did not have a readily available domestic infrastructure, there is now a well developed supplier network both domestically and within the Far East region.