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European Economic and Social Committee

Consultative Commission on Industrial Change

REPORT

The European Shipbuilding Industry

Bright present, uncertain future

Public hearing

Turku - Finland— 16 November 2006

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The hearing organised by the Consultative Commission on Industrial Change(CCMI) of the European Economic and Social Committee was held on 16 November 2006 in Turku, home to an important shipyard in Finland. A delegation of seven members represented the EESC at this hearing that was attended by 34 participants[1].

The main theme of the event was providing follow-up on the LeaderSHIP 2015 initiative (including structural social dialogue) and the related Commission report. In addition, the hearing aimed to provide an overview of the current situation in the shipbuilding industry and endeavoured to address its most pressing problems and to anticipate imminent developments and challenges in the market.

The eleven speakers provided insightful information on the above-mentioned topics and the accompanying power-point presentations proved very useful in demonstrating current and future trends.

STATE OF PLAY AND FUTURE PROSPECTS FOR THE SECTOR

The session was opened by Mr Piette, acting chair of the CCMI. Due to the strict time constraints imposed on the hearing, Dr Lüken took the floor immediately, representing the Community of European Shipyards' Associations (CESA). After a short presentation on CESA and the LeaderSHIP 2015 initiative, Dr Lüken spoke about financing issues, the WATERBORNE technological platform, support for innovation, the problems related to the lack of a skilled workforce, and the evolution of the shipbuilding market in general. According to CESA, the main challenges ahead included overcapacity, inflation/exchange rate risks, maintaining European technological leadership, ensuring high-level productivity, protecting intellectual property rights, sound regulatory developments, counteracting the effects of an ageing workforce, recruitment and differing levels of competitiveness across Europe. He praised the importance of LeaderSHIP2015.

The second speaker, Mr Mäkinen, Senior vice-president of the marketing department of Aker Yards Cruise & Ferries, gave a presentation on the shipbuilding market from the global, European and Finnish points of view. He drew attention to the vigorous growth of this industry in Asia, the growth of the merchant fleet, the peaking of orders for new ships, the shift of the order book in favour of Japan, South Korea and China and the cost pressures on shipyards (rising steel costs). The analysis of the relation between the new building requirement forecast and the capacity evaluation clearly demonstrated the possibility of overcapacity. At the end of his presentation, he drew attention to the following conclusions:

a)Despite increasing shipyard capacity, worldwide activity in the new building market remained extremely strong;

b) Demand across all ship types remains robust and shipyard berths for 2009 delivery were now scarce;

c)This continuing strong demand, coupled with limited yard capacity, had led to new increases in shipbuilding prices during 2006 which were now back at, or in excess of, record highs;

d) Underlying shipyard costs (steel prices, labour costs, exchange rates) were also high, contributing to high ship prices;

e) In the short term, the market looked strong and prices were expected to stay high for the next few months.

However, potential overcapacity was still an issue and yards would have to market 2010 berths carefully if they were to maintain these price levels. With regard to Europe, Mr Mäkinen also talked about the development of long-term market shares. The figures clearly showed the expansion of the market share of South Korea and Japan to the detriment of Europe.

The third speaker was Mr van Iersel, member of the CCMI. His presentation covered the EESC's opinion on the Commission’s LeaderSHIP 2015 report. After introducing the shipbuilding and ship repair sector, he presented the characteristics and development of policies in the industry. He explained the reasons behind the LeaderSHIP 2015 initiative and the content of the Commission report (the need for a level playing field in world shipbuilding through EU trade policy, enforcement of applicable WTO rules and enforceable OECD disciplines, EU/industry cooperation on R&D and innovation, pre- and post-delivery financing, quality assessment improvement, safety and control of shipbuilding and ship repair, protection of intellectual property rights, aid for the consolidation of an optimal industrial structure). Finally, he focused on the EESC's opinion, stressing the importance of the following key features:

European approach instead of national policies

World-wide level playing field

Monitoring the application of state aid rules and unfair practices

R&D and innovation

A guarantee fund as suggested in LeaderSHIP as a priority for the Commission

Social dialogue to address differences in labour productivity world-wide

Consolidation

Securing access to a skilled workforce

Establishing sectoral social dialogue was a positive feature

Competitiveness without weakening the European social acquis

Common market in defence equipment

Importance of implementation

Commission should consider price stabilisation on international markets through Community support measures.

Mr O'Riordan from the European Commission (DG Enterprise and Industry) presented the European Commission's position concerning LeaderSHIP 2015. He stressed that the DG Enterprise and Industry was concerned with the global competitiveness of the sector. He then described the objectives of LeaderSHIP 2015 (strong position in selected higher-value market segments, ensuring world leadership in product and process innovation, development of strong customer orientation, further improvement of the networked industry structure, optimisation of production processes and increased focus on knowledge-based products) and the issues addressed by the high-level advisory group (a level playing field in world shipbuilding, improving R&D, advanced financing and guarantee schemes, promoting safer and more environment-friendly ships, protecting European intellectual property rights, securing access to a skilled workforce, building a sustainable industry structure). Finally, Mr O'Riordan talked about the links to other policies and ongoing issues (OECD working party, international agreement/s, market monitoring, EU shipyard financing, R&D, preparation of FP7, Waterborne TP, transport policy review, industry structure, especially Poland and Croatia, state aid framework, Maritime Policy Green Paper process and ship recycling).

Mr Hirvilammi, deputy mayor of Turku gave a presentation on the Turku technological cluster. In his speech, he touched upon the following: key players in the maritime cluster, the economic significance of the cluster, employment effects, operational links between component companies, competitiveness factors and the positive outlook for the future. He also talked about the importance of the public sector to the cluster: its objective was to improve the operational possibilities of companies within the maritime cluster. Training and educational organisations also had their own significant place in the maritime cluster and in securing its future. The Turku region was also strongly engaged in research and development activities up to university level. Mr Hirvilammi drew the following conclusions: in southwest Finland, the maritime cluster entity was very diverse and it influenced the economy and society of the whole region. Cooperation between companies had to be developed as a prerequisite for growth, thereby making new business possible. Cooperation added cost efficiency and flexibility and made it possible for companies to concentrate on their own area of expertise. The good future prospects were reflected in the increased need for workforce and this was a challenge for the education system, as the labour supply did not meet demand.

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SOCIAL DIALOGUE

Mr Calvet Chambon introduced the Social Dialogue Committee. This committee was created three years ago and mainly addressed problems of big and middle-sized shipyards and issues related to ship repair and conversion. Mr Calvet Chambon mentioned that shipbuilding had a very bad image; it was seen by the public as an old-fashioned industry with no prospects for the future, and people linked images of catastrophes with shipbuilding. Young people were not attracted to jobs in the sector. Furthermore, construction and ship repair showed a strong regional dependence, with the industry closely resembling mining in this respect. European production was characterised by prototypes, unique products, not by mass production. The sector required highly qualified personnel and advanced technology. Mr Calvet Chambon also talked about the fact that the sector was subject to cycles of demand that were often quite long, affecting the social partners. The committee had undertaken various efforts in the past two years. In October 2005, a working group addressed the issue of qualification/training and the need to attract highly qualified young people to maintain the technological leadership. The group tried to identify where the education system was failing. In March 2006, the committee organised a seminar in the European Parliament with the support of the European Commission to improve the sector’s image. Another working group (Toolbox) tried to tackle the periods of sacking demand and the need to retain the workforce without generating a social catastrophe. The European Foundation for the Improvement of Living and Working Conditions was therefore made responsible for drawing up a study. The study could contribute to identifying European solutions.

Mr Irastorza, research officer for the EMCC at the European Foundation for the Improvement of Living and Working Conditions (EUROFOUND) gave a presentation on managing cyclical changes in the European shipbuilding and ship repair sector. The shipbuilding and ship repair sector was characterised by cyclical fluctuations in demand and by inflexible production and service capacities. It was essential for European industries to increase their capacity for flexibility and to retain access to highly qualified workforce. It was crucial to find mechanisms to deal with cyclical changes in demand in a socially responsible way. Mr Irastorza listed three types of measures for dealing with cyclical fluctuations in demand:

a) working time arrangements

overtime/short-time work

working time accounts

b) changes in work organisation

Quantitative adjustment:

outsourcing and subcontracting

temporary workers/fixed-term contracts

secondment schemes and staff pools

Qualitative adaptation:

training initiatives

c) financial concession and support

public income support

company specific agreements.

Mr Irastorza provided details on the various aspects and on the use of these methods. He concluded that the effectiveness of the various measures was heavily dependant on country- and company-specific conditions. There was no best way for dealing with cyclical fluctuations in demand. With reference to the choice of methods, company size was more important than the sector (shipbuilding v ship repair). The preferred methods were outsourcing and subcontracting, coupled with technical measures and a more flexible use of own workforce. The choice of tools was dependant on country specific constraints, on the legal and institutional context and on the tradition of industrial relations. The outcomes depended on the perception/strategies of the social partners and on the nature of their interaction. The willingness to cooperate and the role of the state were also essential. The role of these actors was crucial in achieving increased flexibility while ensuring employment security.

Mr Lebrun from the General Directorate for Employment of the European Commission gave a presentation on social dialogue. Social dialogue had a long tradition in the Commission, going back as far as 1951 when European Steel and Coal Community was established. Every time a major policy was established, a social dialogue committee was set up. A major step forward was achieved in 1985: Jacques Delors wanted to ensure the support of the social partners for the internal market. He also wanted working conditions to be fixed by social dialogue, rather than by legislation. Mr Lebrun also gave details on Articles 138 and 139 of the Treaty, laying down the rules for social dialogue.

The current social dialogue process could be used for any sector. The social partners could either give their opinion or decide to launch negotiations. The resulting agreement would then be directly transposed into law by way of a Council decision, and neither the Council nor the European Parliament had the right to alter this agreement.

Mr Lebrun finally mentioned the issues addressed during shipbuilding week and drew attention to the main problems (cyclical aspects, gender equality, ageing workforce, workers from Baltic States, Flexicurity).

The next presentation was given by Mr Mäkinen from Aker Yards Cruise & Ferries. He introduced the Aker Group and provided important figures concerning the company. Aker Yards (listed in the Oslo Stock Exchange) was one of the world's largest shipbuilders; it comprised 17 yards in 7countries, with 20000 employees.

Mr Malinen, board member of Aker Yards spoke about employees' prospects and expectations. There were approximately 3800 employees at Aker Yards, Finland. The company's assembly yard concept entailed directly employing their own people as well as many others in cooperation companies, thus boosting the whole surrounding economic region. Turku was one of the biggest and most modern shipyards in Europe, building post-Panamax size cruise vessels. Mr Malinen provided details on the change of the shipbuilding process, the cost structure of the Cruise ships, the head count, the age structure of the workforce and the average number of years in service. With reference to the outlook for recruitment, the Finnish shipbuilding cluster would need 10000 new professionals within the next five years, so there was clearly a huge demand.

Mr Landowski from Shipbuilding & Shipping Ltd., Gdansk, Poland, gave a short presentation on the current situation of Polish shipyards. Most of the biggest shipyards were located in Gdansk and Gdynia – within the so-called "TriCity" agglomeration[2]. There were also many small companies specialising in hull assembly for western yards, and in building pleasure boats and yachts. Thus the total number of companies involved in the business amounted to hundreds of enterprises. The whole sector was estimated to have about 80000 employees in total. Mr Landowski provided details on the development of the USD/PLN exchange rate. Due to the continued strengthening of the Polish currency (zloty), the real value of contracts had decreased significantly. Coupled with growing prices of raw materials and energy, this had caused financial instability in Polish building yards. Contracts were pending and had to be renegotiated. Mr Landowski presented the developments in the overall number of orders taken by Polish yards for 1998 and 2006, and then provided a breakdown by shipyard (Szczecin New Shipyard, Gdynia Shipyard, Gdansk Shipyard, Remontowa Group SA, Szczecin Ship repair Yard Gryfia, Naval Shipyard Gdynia). The final part of the presentation covered the average wages at European shipyards in 2003 and average labour productivity in 2003. It was clear that salaries in Polish shipyards in 2003 were dramatically lower. That was why Polish workers were migrating to the top seven best paying European countries. The situation had improved since 2003 (no more recent data was available as yet). Three years ago, labour productivity was lower than in other European shipyards. Although workers’ migration caused by the emergence of the open labour market, due to accession to the EU, had partly helped solve the problem of overcapacity, the Polish industry still faced the problem of solving low labour productivity.

The shipbuilding industry still ranked high in the Polish economy, exporting more than 90 percent of its production, and held second place in Europe and fifth worldwide. However, in order to maintain this position, and to anticipate the uncertain future, an entirely new approach was needed, especially when low labour costs, the main source of competitive advantage, seemed to be disappearing. Skilful management, innovation, and a change in attitude were necessary.

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CONCLUSIONS

An inadequate pool of skilled workers was one problem raised by various speakers. Shipbuilding in Europe was a technologically advanced sector characterised by both the production of unique, high-tech ships and extremely limited involvement in standardised mass construction. It was therefore vital to have a highly skilled workforce, without which it would be impossible to maintain Europe’s position as leader in the field of technology or to face up to competition from the Far East.

The problem was complex, with a number of aspects:

Firstly, the age pyramid of employees in the sector showed that the majority was aged between 50 and 59. The workforce was the repository of extremely valuable knowledge and experience. It was important to ensure that that knowledge was not lost and that it was handed down to the younger generations.

At the same time, the sector was facing recruitment problems for two reasons: the demand for highly skilled workers generally exceeded the supply in the current labour market, and the sector suffered from an image problem, with regard to technical nature and attractiveness of the work. In parallel with efforts to enhance the perceived value of studies and careers in scientific and technological fields, sector-specific campaigns aimed at universities and the media were needed to ensure that the public was better informed about the real nature of shipbuilding.

The demand in the field was cyclical, and it was important to respond to it in a socially and economically acceptable way. It was essential that the European shipbuilding industry be able to retain the highly skilled workforce it required, even during periods of reduced activity. As shown by the study carried out by the Dublin Foundation, various instruments were available and should be implemented effectively.

Another problem affecting shipbuilding was the heavy pre-financing it entailed, since the owner paid only 20% of the price prior to delivery. A severe cash flow problem therefore dogged European shipyards, which produced a relatively limited number of unusually high-value ships. An analysis of ways of facilitating access to the financing needed and of a possible adaptation of the tax rules in force would be helpful.