COMMISSION OF THE EUROPEAN COMMUNITIES

　

　

　

　

　

 In its Communication on "Industrial Policy in an Enlarged Europe"¹ the Commission provided an outline of the horizontal policy measures that are required to move faster towards a more competitive European economy, in particular in the light of the enlargement of the Community. Knowledge, innovation and entrepreneurship were identified as the key elements. The Communication also recognises that this horizontal approach needs to be complemented with specific sectoral approaches, based on close monitoring of the particular situation in a sector, and full stakeholder consultation, in order to arrive at the most appropriate policy mix.

　

 Against the background of the challenges faced by industry in Europe, resulting from global developments and shifting economic patterns in Europe itself, the re-launching of the European economy has received renewed and additional attention. As part of its call for an integrated strategy for European competitiveness the European Council at its meeting of 16-17 October 2003 has called for policies to be pursued in such a way as to contribute consistently to the goal of enhancing the competitiveness of enterprises and industry. In relation to industrial policies the Council and the Commission have been urged by European leaders to address the needs of specific industrial sectors, especially the manufacturing sector, notably in view of their essential contribution to economic growth.

　

 LeaderSHIP 2015 represents the application of this approach to shipbuilding and follows on a similar exercise already undertaken in the case of pharmaceuticals (G10 Medicines) and aerospace (STAR21).

　

　

　

 With the initiative "LeaderSHIP 2015" the European shipbuilding industry has started an ambitious programme to ensure its long-term prosperity in a dynamic growth market. The initiative goes back to the Council conclusions of 14 May 2001 where the Council called upon "the EU Shipbuilding industry to continue improving its competitiveness." The aim is to improve the already existing technological leadership in selected market segments, to drive and protect innovation and know-how, to strengthen customer focus, to improve the industry structure and to move decisively to a knowledge-based production, making EU shipbuilders and marine equipment suppliers world leaders in their field by 2015.

　

 In March 2002 the industry presented the idea of such an initiative to the President of the Commission, Romano Prodi, who responded positively and requested the Member of the Commission in charge of enterprise to set up a working structure, based on a detailed workplan. A High Level Advisory Group for LeaderSHIP 2015² was accordingly established, supported by working groups for eight key areas.

　

　

 In its report³ the High Level Advisory Group for LeaderSHIP 2015 made concrete recommendations in these eight specific areas. These recommendations must now be complemented with targeted actions and the necessary strong political support in order to ensure their aim of making the optimum contribution to the competitiveness of the industries concerned.

　

 Through LeaderSHIP 2015 the specific conditions resulting from the unique characteristics of the shipbuilding sector are taken into consideration.

　

 In this Communication the key issues addressed by the LeaderSHIP 2015 Advisory Group are explained and assessed and policy actions are identified. These relate in particular to the key issues of an integrated approach to industrial and transport policies, increased knowledge-intensity, highly-qualified human capital, organisational changes, technological and non- technological innovation and intellectual property rights protection.

　

 This Communication represents the start of a longer term effort to help ensure the future competitiveness of this important sector of the European manufacturing industry, which also plays a significant role in some of the countries joining the European Union. The Commission will continue to develop and implement its specific policy approach to the sector, in close co-operation with stakeholders and taking into account the responses received from Member States and the other EU institutions to the issues raised. The purpose of the Communication is to facilitate this process.

　

　

　

 The European shipbuilding industry can look back to centuries of excellence in the design and production of ships. Being maritime through history and geography, European nations have always taken particular pride in their ability to produce sea-going vessels as this ability has allowed them to engage in global trade and to defend their vital interests.

　

 Shipbuilding, which consists of shipyards engaging in commercial and naval shipbuilding, the marine equipment industry, the ship repair and conversion sector, as well as a wide range of knowledge providers such as universities, towing tanks, design offices and classification societies, is an essential part of Europe's industrial structure. It develops advanced technologies that offer considerable spin-offs to other sectors; it provides essential means of transport for international trade; and it supplies modern navies with technologically advanced vessels, a key requirement for effective military operations. Shipbuilding is therefore an important part of Europe's strategic economic needs.

　

 Shipyards provide products of high complexity, requiring a multitude of skills, an outstanding degree of scientific knowledge and smart production technologies. Ships are the largest moving man-made objects and their long life cycle, combined with a high level of operational autonomy in a hostile natural environment, makes them one of the most sophisticated capital goods.

　

 Short production series, customisation as a general principle, and global competition force shipyards to permanently search for innovative solutions with regard to design and production technologies. Due to the complexity of the product, shipyards now depend on a large number of suppliers for components, sub-systems and knowledge-based services, including those provided by specialists in the financial sector. Today's shipyards have to be seen as large scale integrators within a high technology industry whose key players are often highly specialised SMEs; they are no longer production sites of heavy industry.

　

 Given that shipbuilding is naturally limited to coastal regions with access to deep water, a modern shipbuilding industry depends on an industrial network of companies, often described as a regional cluster. In an industrial cluster, a wide variety of companies and organizations come together, with the aim of exchanging strategic knowledge for the achievement of projects. Timing and quality of service are essential to make projects successful and profitable.

　

 Shipbuilding is an example of an industry that displays the particular strengths and weaknesses of Europe's economic situation in a distinct sectoral environment, while at the same time addressing the key challenges, through a pro-active approach in a wide range of areas. The world shipbuilding industry has been experiencing structural and cyclical problems since the first oil crisis (which revealed the over-investment in the sector), but European yards have been able to "re-invent" themselves repeatedly in the face of adversity.

　

 European shipbuilding has undergone massive changes since the mid 70's. Two out of three shipyards have disappeared and employment has fallen from around 460.000 shipyard workers in 1975 to about 100.000 today in newbuilding and repair (the figures for the current 15 EU Member States are 400.000 and 85.000, respectively). Output in new vessels has remained stable in the last decade at around 4,6 Mio. cgt (compensated gross tonnes) thus confirming the significant productivity increases achieved by European industry (the corresponding figure for the current 15 EU Member States is 3,5 Mio. cgt). It also demonstrates the ability of European shipbuilders to move to more sophisticated and knowledge-based products, away from the mass market where price is the dominant factor.

　

 Today, as the LeaderSHIP 2015 report makes clear, trade distortions are at the core of the EU shipbuilding industry's most pressing problems. These distortions can only be partially offset by improved competitiveness and limit the freedom to pursue change in a more sustainable way. Therefore, the European Commission is actively pursuing actions at WTO and OECD level to remedy these problems. In the light of decreasing market shares for European shipyards, further action is required to address this situation and to safeguard manufacturing capabilities in Europe.

　

 Unless the situation is adequately addressed, European shipbuilding know-how will no longer drive manufacturing activities in Europe, but would rather benefit competitors in the Far East. Today, this is already the case for very large container ships, and to a lesser extent for Liquefied Gas tankers; there is a risk that this experience could be repeated with regard to modem passenger vessels where European technology know-how has up to now largely succeeded in keeping the European industry in a leading position.

　

 The existing market situation is heavily influenced by the strategies pursued by new competitors, attracted by the fact that shipbuilding can provide an entry gate to further industrialisation, and thereby secure their economic base. While fresh competition is always welcome, distortions of the market though unfair trading practices have to be fought with determination in the appropriate international bodies, namely WTO and OECD. Setting prices at below cost levels in order to enter into specific market segments may be a normal commercial practice, but if done on a systematic basis could distort competition. Such distortions of competition can harm viable industrial structures, lead to the loss of employment opportunities with significant welfare costs ensuing, and affect the quality of shipping.

　

 Similarly, treating ships not as a capital good and strategic asset but as a global commodity with a volatile price level or an instrument for gaining tax relief, will only bring short term advantages for certain shipowners and investors, but may pose longer-term problems for the sustainability of the maritime transport industry.

　

　

 The Commission will continue to address these problems in a determined way together with current and future Member States and industry. Trade distortions need to be eliminated, remedied and ruled out for the future. The value of ships has to be re-established to its normal level for a sustainable and efficient transport industry. At the same time measures have to be taken to ensure the future of the European shipbuilding and ship repair industry through improved competitiveness. These measures, based on the report of the LeaderSHIP 2015 High Level Advisory Group, are outlined in the following chapters.

　

　

　

 Commercial shipbuilding and shiprepair operate in a truly global market. This comprehensive exposure to world-wide competition and the fact that WTO trade disciplines are not in all cases suitable for application to this sector, make shipbuilding substantially different from most other manufacturing industries.

　

 State supported strategic investments in Asia, in particular through restructuring aids, have resulted in an imbalance between supply and demand. Structural over-capacity is expected to remain a serious problem for the industry, negatively affecting the open trading environment that characterises the highly cyclical world shipbuilding market.

　

 Accordingly, the market does not work optimally and unfair practices, in the form of injurious prices and subsidisation, are used in several countries. While a strong state aid discipline exists in the EU, no specific discipline applies at international level. Unsustainable capacity is kept in existence, leading shipyards to accept loss-making orders to fill production facilities.

　

 Very low and declining price levels, in particular in combination with low interest rates and the continued existence of favourable tax schemes, are providing an incentive for shipowners to place new orders. However, low newbuilding prices also have a negative influence on the book value of the existing fleet that has been ordered at higher prices. While fleet renewal is certainly to be welcomed in the interest of maritime safety, a very volatile newbuilding market leads to speculation and a disconnection from the economic fundamentals of the shipping industry, namely the development of freight rates. As the consequences of over-ordering for new ships are only felt a few years down the line, the impact on the shipping market is difficult to assess, but certain indications of a future over-supply, e.g. in the container shipping sector, have already been recorded by market observers.

　

 While most industries are effectively covered by existing multilateral trade rules, shipbuilding, due to its own characteristics, is not easily amenable to the application of those rules. In conclusion, the shipbuilding sector is practically the only industry without this type of effective protection against unfair trading practices.

　

　

 The LeaderSHIP 2015 Advisory Group makes the following recommendations for the trade

related issues:

　

　

 The Commission welcomes these recommendations which are consistent with the policy it has pursued so far. It considers that an international shipbuilding agreement, negotiated at OECD level involving also major shipbuilding nations that are not members of that organization, should address both subsidies and injurious pricing practises. More specifically, an agreement should include provisions which make the granting of restructuring aid subject to very strict monitoring and a significant reduction in the production capacity of the benefiting shipyard. This approach is already applied in the European Community. An agreement must also provide an effective remedy in case of non-compliance with the obligations under the agreement. It is important that the People's Republic of China participates in such an agreement as Chinese yards now have a significant market share and are set for further capacity development and extension of their product range.

　

 Also, the existing OECD Sector Understanding on export credits for ships, and related OECD-agreements, need a clear and unambiguous interpretation in order to rule out any potential market distortion and discrimination against EU shipbuilders. The Commission believes that the EU should seek a unified implementation of these rules in all signatory countries and an extension of the rules to all shipbuilding regions.

　

 Additional elements that should lead to a level playing field in world shipbuilding have to be confirmed at WTO level, with the application of the Agreement on Subsidies and Countervailing Measures to shipbuilding. The Commission is particularly active in pursuing this path through a Dispute Settlement Procedure against the Republic of Korea.