It is not just competitive pricing that helps a yard secure a contract.Non-price competitive factors can assist yards to foster strong client relationships and establish themselves as the yard of first choice for many shipowners.

　

In this respect, Korean yards have consistently outperformed their European rivals in terms of marketing, design quality, timely delivery, accommodation of clients' requirements, flexibility and after sales support. This is borne out by the evidence in the Third Party Submissions, which speak out considerably in favour of Korean yards.

　

Not all owners place price levels at the top of their list of priorities when selecting a shipyard. Significant factors include the reputation of the yard, possible poor performance of other yards in this sector, existing relationship with the yard, availability of yard slots, reputation for timely delivery, level of flexibility demonstrated by the yard in meeting owner's technical specifications and level of co-operation with technical supervisors, to name but a few.

　

Non-price competitive factors have in fact helped Korean yards to foster strong client relationships and establish themselves as the yard of first choice for many shipowners. In addition, Korean yards have consistently outperformed their European rivals in terms of marketing, design quality, timely delivery, accommodation of clients' requirements, flexibility and after sales support. This is borne out by the evidence in the Third Party Submissions.

　

In fact several of the Third Party Submissions state that Korean yards have won orders even when prices quoted by other yards were below Korean prices because of other non price factors, the principal ones being:

　

　

It is true to say that Korean shipbuilders have placed considerable emphasis over the years in establishing long-term relationships with the world's major shipowners. As a result many owners now go automatically to yards that are experienced in building tonnage for the owner.

　

This also brings in another important aspect-local culture and customer loyalty. Some geographical or cultural regions are more likely to show stronger national tendencies when it comes to placing orders than others.This is certainly the case in Japan, where Japanese shipowners have tended to order most of their ships from Japanese yards. In Europe, however, attitudes to shipping have destroyed many prospects for playing a national "loyalty card". It is not necessarily European shipbuilders 'fault directly, but they have to live with the consequences.

　

This aspect has already been dealt with in Section 6.Nevertheless,it is worth repeating that Korean shipbuilders have consistently achieved shorter build times on a like for like basis, when compared with European builders.

　

Reliable delivery is of particular importance to clients during a strong freight market, as owners are keen to secure delivery of tonnage as soon as possible in order to take advantage of the buoyant freight market. Korean yards have a recognised track record in meeting stated delivery times. In contrast, European shipbuilders as a whole cannot match the track record of Korean yards in meeting stated delivery times.

　

The Third Party submissions support the generally held view that Korean yards have a reputation for delivering high quality vessels.

　

It has been argued that Korean-built vessels are of such a high quality that they can secure higher re-sale values. This is largely due to the good design and quality of the vessels. Similarly, since Korean yards tend to produce long series of vessels, owners know exactly what they are getting because they have seen the performance of sisterships. This element of greater certainty is of extreme importance given the volume of capital invested in a newbuilding.

　

Korean yards have consistently offered a higher standard of after sales service than European yards. These factors, combined with the reputation and track record of Korean yards, have meant that the yards are able to establish and maintain strong client relationships. It is also unlikely that customers would be willing to pay prices that have been artificially inflated, particularly given the poor returns many shipowners have been getting for years.

　

The evidence for this is also contained in the Third Party Submissions. Korean yards have also built up an excellent reputation for their engineering flexibility to meet the specific demands of individual clients. This derives from their strong engineering capability and commitment to meeting customer requirements, especially for amendments to standard design.

　

Korean yards have a very good reputation in this area.

At the outset is should be stated that capacity is very difficult to measure. Various factors make an accurate measurement almost impossible to obtain. These include the mixture of elements which affect a shipyard s capacity and uncertainty over which facilities to include(such as naval, shiprepair or mothballed facilities which either switch use or are bought back onstream).

　

Although CGT measures are the best available option, they are not perfect. The problems associated with measuring capacity are demonstrated by the results themselves. Several known changes in capacity have not been shown in the OECD figures, and in the case of Spain, Italy and Japan, reported output is substantially higher than stated capacity figures.

　

The Koreans are not the only ones who have increased capacity. In 1996 Japan lifted capacity restrictions on its yards, and as a result capacity has increased substantially. Also, CESA appears to take no account of new entrants into the international market, such as former East European yards and Chinese yards.

　

While it is true that there is an oversupply of capacity, much of this is at yards that are not competitive or specialise in the wrong kind of tonnage. This is illustrated by the difficulty that owners wanting to place orders for tankers and containerships have recently been having due to the unavailability of suitable slots.

　

The measurement of shipbuilding capacity is a problematic subject. The shipbuilding process is complex and is dependent upon a variety of both physical and human resources. The main factors affecting the capacity of a shipbuilding yard include:

　

　

It can be seen therefore that a mix of measures is involved in describing the differing elements, physical measurements in metres, steel tonnage, employment numbers or manhours, and elapsed time in months or weeks.

　

For many years there has been a desire to find a simple and comprehensive measure of shipyard capacity, however, to date this has proved elusive. It needs to be recognised therefore that any such measures can only be indicative and require understanding and interpretation in their application. Even at an empirical level there is no measure which has been shown to provide a pragmatic stand-alone measure of shipyard capacity. A measure commonly referred to, particularly where comparison between demand and supply is required, is CGT, however, there are many complexities in its use and it does not represent an absolute or prescriptive measure of shipbuilding capacity.

　

Aside from the technical difficulties of assessing shipbuilding capacity, there is the question of use of the primary facilities. The key shipbuilding facility is the building location, whether it be dry dock, inclined berth, marine railway or shiplift build location. Such facilities, with the exception of the gravity launch inclined berth, can also be used for shiprepair and conversion work as well as shipbuilding. Some facilities have been designed for or are in general use for only one purpose, however, others may be used interchangeably or occasionally when demand in one sector is, for example, low.

　

Similarly, key building facilities can also be used for either naval shipbuilding or the building of offshore facilities such as rigs and/or floating production or storage systems. Such products are generally accepted as being in a different market to merchant shipbuilding and certainly in the case of EU shipbuilding capacity restrictions have been excluded. In fact there are several examples of facilities for which the use has been restricted to either offshore construction or repair in order to limit merchant shipbuilding capacity.

　

In summary there are therefore three key issues that need to be considered in determining shipbuilding capability based upon CGT as a measure:

　

　

Any resulting calculation of merchant shipbuilding capacity can, and will, vary dramatically according to the context assumed. In part this is likely be the issue lying behind anomalous statistics that have been quoted in various EU reports, for example where the quoted capacity is lower than the actual output of the country in recent years!

　

It is believed that the EU has used the OECD shipyard capacity figures as the basis for its analysis. As far as publicly available information is concerned the latest shipyard capacity figures are for 1998(see table C.3.2). It is understood that these have largely been based upon declarations made by individual OECD countries rather than any assessment from first principles.

　

Shipbuilding capacity can increase over time in any specific country as a result of several factors. The key factors are shown below in Table 7.3.

　

The capacity increases resulting from all of these factors are no more or less real because of the different underlying cause. They will all serve to increase shipbuilding capacity and therefore serve to affect the supply/demand balance within the shipbuilding market.

　

The differing situations of individual shipbuilding countries will, however, tend to influence the type of changes that may increase shipbuilding capacity within that country. Inevitably the longer established shipbuilding nations are less like]y to be opening new shipyards, but are more likely to be upgrading, reconstructing, reopening or changing use of existing capacity. Emergent shipbuilding nations are conversely more likely to be developing new facilities.

　

In terms of productivity and improved performance (e.g. faster build cycle times) factors, it seems reasonable to assume that this represents a natural growth element as, inevitably, existing and new yards will seek to improve their performance on an on-going basis.

　

Change in product mix can also affect capacity and this may be driven by either changes in shipbuilding demand or more often by the evolution of shipbuilding sophistication that comes with longer established shipbuilding experience. In some cases shifts in product mix are driven by the need, rather than desire, to move into higher value added markets.

　

The emphasis within the EU reports seems to be much stronger on the issue of facility related increases in capacity and the focus on the Korean capacity increases seems somewhat one-sided, tending to favour the longer established shipbuilding nations against the newer or emerging shipbuilding nations.

　

Clearly any increase in capacity will potentially impact on the supply/demand relationship whether it is through productivity or performance related factors, facility related factors or product mix factors. There does not appear to be any international agreement or legislation per se that prohibits, constrains or proscribes capacity increases and therefore it is not clear on what basis the comments relating to capacity increases are made and why these should tend to focus on facility related increases.

　

Traditionally there has been a trend for shipbuilding capacity and activity to shin from one geographic region to another, the emergence of both Japan and Korea during the 1970s and 1980s is prime evidence of this. If the development of new facilities is restricted, it will inevitably favour the existing shipbuilding nations and discriminate against the newer countries. It would seem therefore that any tendency to restrict or impede capacity development must necessarily obstruct the potential shift of production between countries as a result of natural evolution or competitiveness, and might be viewed as protectionism. Whilst inevitably such shins in production cause a distortion in the economics of high capital investment facilities, it does not in itself represent an activity which can be described as unfair or anti-competitive.

　

In the marine industry press much attention is given to the emergence of competition from the Chinese yards, some of which although they are not new, have only newly emerged into the international shipbuilding market place. China has also been responsible for increasing world shipbuilding capacity through a combination of modernisation and expansion programmes and the introduction of new greenfield sites such as Waigaoqiao. In Shanghai alone, three new docks are planned at Hudong (2001), and Waigaoqiao (2003 & 2006). All of these new docks have the capacity to build Vlccs, but are expected to focus on smaller vessels. The CSIC has stated that it intends to double its revenue by 2005, while the CSSC aims to become one of the world's top five shipbuilders by 2005. These yards in themselves represent a major change in the available international shipbuilding capacity for the future and the predictable productivity increases that are likely to follow will further increase capacity.

　

Similarly, the changes taking place throughout Eastern Europe and the former Soviet Union mean that substantial existing shipbuilding capacity may come into the international market. To some extent this has already happened, most notably in Poland, however, there is still substantial under-utilised capacity in Romania, Ukraine, Russia and Croatia that may enter the market to increase capacity. The existing output from these facilities falls well below their maximum output mainly as a result of difficulties in overcoming financial and marketing disadvantages. Should these difficulties be overcome, however, it would be expected that there will be a significant increase in capacity which will be further enhanced by future productivity / performance improvement. There seems to be very little recognition of this in any of the EU reports.

　

　

Since their annual 1998/9 annual report, AWES has included capacity projections into their annual report, however, actual output is used for historical information for past years rather than the OECD information. The average output of EU countries over the 4 year period 1996-1999 is 3.4 million CGT some 10% higher than the 1997 capacity quoted by the Commission in their report and, of course, this is without taking any account of any unutilised or under- utilised capacity.

　

It seems strange therefore that the EU should quote the OECD statistics (or values that are consistent with these) in the World Shipbuilding Report if they have other information via AWES, which seems to have been prepared as part of a detailed working group study in 1997. The capacity projections are stated to be prepared in conjunction with SAJ and are quoted for both 2000 and 2005, and interestingly project a 11 % increase in capacity between 2000 and 2005 for AWES countries.

　

Looked at in a different fashion, the projected 2005 capacity represents a 27% increase in AWES countries over the output of 1997. The reference figure used in the EU report records a 29.5% reduction in capacity for EU countries! The AWES grouping differs slightly from the EU grouping by the inclusion of Norway and Poland, however, without access to a breakdown of the AWES figures and the detail of the capacity assessments it is not possible to be any more precise. Even so, it would seem to suggest that AWES capacity is set to increase between now and 2005 by roughly the same amount as EU capacity decreased between 1988 and 1997, according to EU/AWES information.

　

In the AWES capacity projections, the combined capacity of the main emerging economies of China and former CPE (Eastern Europe and former Soviet Union), indicate a doubling of 'capacity' by 2005 compared to the output lever of 1997. This projected growth rate is higher than that of Korea and any other grouping. It is believed that the future and present capacity of these countries is greater than that projected by AWES, in which case the potential increase is understated. On this basis it is not clear why Korean capacity has been singled out for attention.

　

Finally, as highlighted in the previous section, AWES predicts an 11% increase in their own capacity between 2000 and 2005, based upon a 2000 capacity that is itself 8% higher than the OECD rated capacity for these countries in 1997. Given that it appears that OECD figures (or others consistent with these) have been used by the Commission in their World Shipbuilding reports, then this represents a projected increase in capacity of approximately 20% over a period of 8 years. This is equivalent to a growth rate of approximately 2.5% p.a. It would, however, seem that such projections do not take into account the potential reactivation of restricted capacity following the end of EU imposed restrictions for Germany and Spain. Similarly, the 2000 figures do not seem to have reflected the re-activation of restricted and mothballed shipbuilding capacity in the UK, which is starting to take effect at the current time.

　

　

The OECD capacity figures commented on in the previous section are those that are publicly available. They are consistent with the figures used by the EU themselves in their first world shipbuilding report.

　

During 2000 revised capacity evaluations and projections were reported to the OECD CWP on Shipbuilding. These projections comprise four different sets of figures, as shown in the Table below, for 1998 (evaluation) and 2005 (projection). In each case the world capacity figure is significantly higher than the AWES and existing publicly available OECD figures.

　

Capacity restraints imposed by the EU are currently in place in Germany and Spain. In both cases they relate to only pan of the national shipbuilding capacity. However, there have also previously been capacity conditions applicable within the UK.

　

　

In Germany, the capacity restrictions relate to the four former East German yards and were agreed essentially in response to a 'special' circumstance one-off government investment in these yards. The investment was substantial, leading in the main to completely rebuilt and modernised shipbuilding facilities. The restrictions were imposed for an initial period of 5 years, to continue for a further 5 years unless specifically terminated.

　

For some time now at least two of the yards involved have been lobbying for the restrictions to be lifted at the end of 5 years in 2000, rather than continuing them for a further 5 years through to 2005. One of the yards (Elbewerft Boizenburg) has gone into bankruptcy and closed and there has been pressure for the allocated capacity of that yard to be made available to the other three yards.

　

Furthermore, the Warnow Werft yard has exceeded its capacity limit during 1997 and 1998 and has had to make a repayment of part of the investment subsidy. It has subsequently diverted part of its capacity into offshore vessel construction that is exempted from the capacity limits, in order to avoid exceeding its capacity in 1999 and future years or having to limit activity levels.

　

These efforts to lift or somehow increase the capacity restriction would seem to suggest that the remaining three former East German yards are not suffering from under-utilisation as a result of competition from Korea or anywhere else.

　

　

In Spain the constraint was expressed in the form of a reduction and limit on capacity on the publicly owned yards. Predominantly this is seen to be the yards comprising the AESA group, which were involved in merchant shipbuilding rather than naval activity. The restraints were agreed as part of a government backed restructuring plan to try and turn these state owned yards back to profitability following a period of sustained loss making since 1987.

　

The constraint was brought into effect during [1995/6] for a period of 10 years and involved a reduction of capacity from 240,000 CGT to 210,000 CGT. It also required that the non-reopening of the 135,000 CGT rated capacity of the Astano yard for shipbuilding (as opposed to offshore construction). Reference was also made to capacity reductions elsewhere in Spain amounting to 17,500 CGT.

　

Output statistics from Fairplay would seem to indicate that the AESA (or former AESA) yards have delivered in excess of the restraint during the three-year period from 1998 - 2000 with the statistics indicating an average of 272,000 CGT over this period. However, part of this has related to drillships which are presumably categorised as offshore rather than shipbuilding. On this basis, the merchant shipbuilding output would appear to fall within the constraint at 182,000 CGT.

　

It is clear, however, that the capability of the industry still remains, although it is currently in part directed at offshore construction. On this basis, at the end of. the 10-year period of restraint, then presumably this capacity can re-enter the merchant shipbuilding market.

　

　

The European Union imposed a capacity restriction on the UK shipbuilding industry as part of the restructuring of the toss-making nationalised British Shipbuilders' yards. The North East Shipbuilders yards at Sunderland were closed, with a 10-year restriction imposed on the resumption of merchant shipbuilding capacity at any of the sites. During this time, two of the three main yards have been closed and redeveloped for alternative purposes, however, the remaining covered facility at Pallion, remained in existence with limited steel fabrication and ship repair/conversion activity. The 10-year period has now expired and efforts are underway to consider re-activating shipbuilding activity.

　

The situation is believed to be as follows:

　

　

By the beginning of 2001 , Fincantieri is believed to have virtually filled its building capacity up to the end of 2003. The first available slot for a cruise vessel delivery is now in early 2005. With the yard full to capacity, it is difficult to see any signs of injury caused by Korean competition.

　

　

Kvaerner Warnow Werft was one of the yards included in the 1992 restructuring plan, and had a restriction of 91,000 cgt placed upon its annual output. In both 1997 and 1998, the yard was found guilty of exceeding its capacity limits and ordered to pay back US$ 6.34m of German state aid. Since the yard has been exceeding its capacity limit, and given the pressure being applied by east German yards upon the Commission to lift the capacity restrictions, there does not appear to have been a great deal of injury caused to the east German yards since they are already producing to their maximum permitted capacities.

　

As of November 2000, east German yards had orders for 40 vessels worth DM4bn at the four main yards in Wismar, Straslund, Warnemunde and Wolgast. Although Brussels has thus far rejected east German yards' calls to remove the 327,000 CGT capacity limit, it may be more sympathetic to requests to carry forward unused quotas or redistribute them between the yards.

　

HDW which builds both naval and merchant vessels, entered 2001 with a record orderbook rd will have surface vessel work up to 2003, Meyer Werft is also busy, with slots booked to 2005.

　

　

In Japan capacity restrictions were deregulated in 1996 leading to the removal of regulations relating to "scrap and build", restrictions on the number of Vlcc docks allowed, prohibition of partial relocation of surplus capacity of Vlcc docks and restrictions relating to the largest vessel types. This gave Japanese yards a much greater degree of flexibility allowing them to increase output.

　

The assessment and treatment of capacity cannot be analysed in a simplistic fashion and there would seem to be numerous inconsistencies, anomalies and contextual issues that surround the arguments, statements and statistics put forward by the EC in their reports. A number of these have been addressed in this report and they include:

　

　

In view of the haphazard use of capacity statistics and the questionable accuracy of these, it is not possible to place any confidence in the capacity projections used to review the future supply / demand balance. If one element of the two is of questionable relevance, accuracy and interpretation then the results must be subject to similar concern.

　

If capacity projections are to be used, it is important that the assumptions and basis for these are clearly visible to all concerned, and for this to happen they would need to be detailed at individual yard level so that projected changes can be easily reflected. This is also necessary in order to demonstrate to what extent capacity is being allocated to shipbuilding as opposed to shiprepair/conversion and to merchant shipbuilding as opposed to naval or offshore construction.