Interim Evaluation of the Structured Financing Facility

3. State of the Shipbuilding Industry in Canada and Worldwide

This chapter presents a brief review of the state of the shipbuilding industry and government support programs in Canada and in a number of other competing countries.

3.1 Canada

Canada was once a key player in the global shipbuilding industry. By the end of World War II, Canada constructed more than 500 ships for the War effort, employing more than 70,000 persons. The shipping industry grew substantially from 1945 to the 1980's. However as the major military projects of the late 1980's were completed, employment and output in the industry declined, due to the failure to win new major shipbuilding contracts, and cutbacks in government funding. Canadian ships built within the last 30-40 years were constructed under various programs of government support and subsidies. Programs included, the National Shipbuilding Subsidy program that ran from the early 1960s through the late 1980s, an Accelerated Capital Cost Allowance program that is still in effect, and more recently the Structured Financing Facility.

The state of Canada's shipbuilding is described in terms of the Canadian shipbuilding capacity, market, manufacturing output, employment, and salaries and wages. The source of the data, for years up to 2001 and 2002, was Industry Canada and Statistics Canada.

3.1.1 Shipbuilding Capacity

There are more than 30 shipyards across Canada in British Columbia, Ontario, Québec, and the Atlantic Provinces as shown in Table 3-1. The infrastructure of the yards restricts the size of ships constructed to less than 85,000 deadweight tons (DWT).

Table 3-1: Breakdown of Canadian Shipyard Employment

Location	Estimated Employment	Share of Total Employment
Source: Industry Canada, estimate based on industry sources, May 2001
14 shipyards and 1 offshore oil and gas fabrication facility in Atlantic Canada	2315	50%
5 shipyards in Québec	570	12%
5 shipyards in Ontario	632	13%
6 shipyards in British Columbia	1190	25%
1 shipyard in Northwest Territories	N/A	N/A
Total: 32 shipyards	4707	100%

3.1.2 Canadian Market

As shown in Table 3-2, the Canadian market has been on an upward trend but that market has been increasingly served through imports rather than by domestic purchases. The value of total shipments from Canadian yards has, consequently, been in decline. The United States was Canada's largest export market in 2001, purchasing 91% of Canadian shipbuilding and industrial marine industry exports, this despite the apparent closure of that market due to the Jones Act.

Table 3-2: Canadian Market for the Shipbuilding and Repair Industry
(in $ Millions)

Year	Total Shipments	Exports	Domestic Shipments	Imports	Canadian Market
Source: Statistics Canada 2002
1994	969.5	44.6	924.9	25.4	950.3
1995	964.8	19.0	945.8	80.2	1,026.0
1996	730.5	17.0	713.5	10.1	723.6
1997	503.5	18.0	485.5	36.8	522.3
1998	393.2	25.8	367.4	278.4	645.9
1999	573.8	184.9	388.9	66.5	455.4
2000	823.0	42.2	780.8	556.7	1,337.5
2001	546.2	56.1	490.1	740.6	1,230.8

The following table (Table 3-3) notes manufacturing shipments and manufacturing value-added from Canadian yards. In the most recent statistics, manufacturing value-added has constituted about 70% of the manufacturing shipments indicating that Canadian industry remains a strong supplier of ship materials and components to Canadian shipyards.

Table 3-3: Manufacturing Output and Revenues (Principal Establishments^*,
$ millions)

Year	Manufacturing Shipments	Manufacturing Value-added	Total Revenues
Source: Statistics Canada, Annual Survey of Manufactures * Incorporated establishments with employees primarily engaged in manufacturing and with sales of manufactured goods equal or greater than $30,000. Establishments may include support facilities, such as sales offices, or warehouses, in addition to shipyards. (Return to reference * of Table 3-3)
1990	1427.5	553.7	1458.0
1991	1346.7	625.5	1377.6
1992	1158.8	607.3	1167.0
1993	1178.2	773.8	1200.6
1994	969.5	610.0	984.6
1995	964.8	696.6	977.5
1996	730.5	559.3	747.8
1997	503.5	378.0	515.7
1998	393.2	219.9	430.2
1999	573.8	332.5	627.8
2000	823.0	587.6	840.6
2001	546.2	366.6	563.3

3.1.3 Employment

Total employment for the shipbuilding and repairing industry in Canada decreased from a high of 11,092 workers in 1992 to 4,284 workers in 2001 ⁴ (employment figures, 1990 to 2001, are given in Table 3-5). This total accounts for approximately 1.8% of those employed in all transportation equipment manufacturing. With the decrease in the size of the industry, new young shipbuilders are not being attracted to this field leaving a workforce that is predominantly composed of an older population. This has led to increasing competition for qualified engineers and tradespersons.

Table 3-5: Establishments and Employment (Principal Establishments^*)

Year	Active Establishments	Production Employees	Administrative Employees	Total Employees
Source: Statistics Canada, Annual Survey of Manufactures * Incorporated establishments with employees primarily engaged in manufacturing and with sales of manufactured goods equal or greater than $30,000. Establishments may include support facilities, such as sales offices, or warehouses, in addition to shipyards. (Return to reference * of Table 3-5)
1990	58	7,309	3,107	10,416
1991	54	7,412	2,743	10,155
1992	54	8,603	2,489	11,092
1993	51	6,859	2,054	8,913
1994	43	5,711	1,650	7,361
1995	49	5,164	1,404	6,568
1996	50	4,572	1,248	5,820
1997	46	3,976	684	4,660
1998	46	4,050	842	4,892
1999	51	5,156	966	6,122
2000	114	4,954	873	5,827
2001	95	3,753	531	4,284

Since 1998, there has been a decrease in the number of Canadian shipbuilding employees working in research and development (R&D) aspects of the industry ⁵. In 1999, shipbuilding R&D expenditures per person-year engaged in R&D amounted to $61,167. In comparison, in the same year, all manufacturing in Canada spent $173,697 per person-year employed on R&D.

As shown in Figure 3-1, within the declining total number of employees, the percentage of employees working in production jobs increased from 79.2% in 1993 to 85.3% in 2002, while the percentage of administrative employees decreased. A similar trend occurred during the same period in the Manufacturing Sector as a whole. There are a number of factors such as reorganization of the work force, technological improvements, or outsourcing that may have contributed to the lower demand for administrative workers.

3.1.4 Salaries and Wages

Salaries and wages have decreased in the ship building and repairing industry in line with the decreasing employment over this same time period. In 1992, payments to employees were $437.8 million, but had decreased to $235.1 million by 2001 (Table 3-6). The average salary in 2001 in the industry was $54,873, compared to $40,803 for the Manufacturing industry as a whole, with average salaries on the administrative side rising faster than on the production side (Table 3-7).

Table 3-6: Total Wages and Salaries Paid (Principal Establishments^*)

Year	Production Employees	Administrative Employees	Total Employees
Source: Statistics Canada, Annual Survey of Manufactures * Incorporated establishments with employees primarily engaged in manufacturing and with sales of manufactured goods equal or greater than $30,000. (Return to reference * of Table 3-6)
1990	267.8	98.0	365.8
1991	280.0	89.3	369.2
1992	342.5	95.3	437.8
1993	300.4	96.7	397.1
1994	257.3	69.3	326.6
1995	229.0	55.4	284.3
1996	190.9	46.1	237.0
1997	167.2	32.9	200.0
1998	155.8	41.0	196.8
1999	214.6	50.5	265.1
2000	253.2	40.4	293.6
2001	205.6	29.5	235.1

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3.2 Worldwide

The shipbuilding industry has seen many changes in dominance over the past half century, first by European nations, and more recently by Asian nations. In the late 1950s, Japan emerged as a key player, challenging European industry. Today, the three leading shipbuilding nations are South Korea, Japan and China. The current situation in these countries as well as in Europe, Australia, and the United States is briefly reviewed below.

Affecting all yards in these countries, is the rising price of steel which is expected to pose a problem for companies that have filled their books far ahead with fixed-price contracts. In the short term, profits will likely be minimal, or wiped out altogether. New technology and increasing automation in shipbuilding are expected to reduce build times and increase productivity, bringing the yards back into profitability.

3.2.1 South Korea

South Korea is currently the world's leading shipbuilding nation, with a 40% market share. It is believed that in order for South Korea to hold onto their leading position, its shipbuilders will need to create strategies to smooth labour relationships, balance the supply and demand of raw materials, and enhance international co-operation to overcome the challenge from China. In 2003, there were approximately 65,000 people employed in the South Korean shipbuilding industry. This is likely to decrease as productivity increases. South Korea is expected to take advantage of locations outside of the country where production factors are cheaper. There are already a number of facilities in China and Vietnam, which are partly owned and managed by South Korean entities.

The South Korean shipbuilding industry is widely believed to be heavily subsidized by the national government. For example, the EU has alleged that the government is providing advance payment guarantees and very low export credit financing from the state-owned Export-Import Bank of Korea ("KEXIM"), debt forgiveness, preferential debt-for-equity conversions, interest relief, tax concessions and subsidies for upstream suppliers, especially steel producers.

3.2.2 Japan

Japan was the leading shipbuilding nation from 1960 until recently when South Korea took the lead. Order books at the majority of yards are full into 2007, causing companies to try and increase output through means of physical expansion, yard takeovers or by upgrading existing facilities. Japan's industry is largely focused on constructing bulk carriers. Recently Japan has been able to secure a sizeable share of VLCC (very large crude carriers) orders. Car carriers are also built in Japan for domestic ship owning groups.

3.2.3 China

There are more than 600 Chinese shipbuilding-related enterprises, eight of which are major shipyards. By 2005, these yards will be able to build the latest generation of container ships and tankers. The China Association of National Shipbuilding Industry projects that China's mainland shipbuilding output will hit a new record of more than 8 million tons in 2004, up from 6.1 million tons a year ago. The surge comes despite growing raw material prices and power supply and yard capacity shortages. In 2003, China State Shipbuilding Corporation (CSSC) began construction on the Changxing Shipbuilding Base on the Shanghai coast which will be the largest shipyard of its kind in the world when completed in 2015. Its annual shipbuilding capacity for that yard alone will reach 8 million tons. Many trade groups have argued that the massive capacity increases of Chinese yards have effectively suppressed prices and that the Chinese yards only compete through the use of extremely inexpensive labour. However, our interviews revealed that the Chinese yards are now using the most up-to-date manufacturing equipment and its designers are much more efficient than those in North America.

In the first half of 2004, tonnage increased by 66% year-on-year to 4.1 million tons, accounting for 14% of the world's total. Orders for new ships reached 9.9 million tons in the period, up 21% from a year earlier, and accounting for 19.3% of the world total. At the end of June 2004, the industry backlog had reached 32 million tons, 15.9% of the world total. ⁶ World market share has been growing rapidly, having been only 9% in the first half of 2002 and 7% in 2000. ⁷

3.2.4 Australia

By the late 1990's, Australian shipbuilders had captured 25% of the value market share of total world aluminium shipbuilding sales and 80% of the high-speed passenger and car ferry market. ⁸ This is a major turnaround for a country where conventional steel hulled ship construction stopped in the mid-1980s. The change occurred because of a combination of strong domestic design skills for fast ferries, strong domestic demand for aluminium hulled commercial fishing boats and tour and dive boats for the tourist industry. Since 1996, shipbuilding exports (including fast ferries) have averaged AUS$600 million per annum.

The Australian government supports the shipbuilding industry through the Shipbuilding Innovation Scheme (SIS), and until 2003 had a 3% price subsidy (total budget for 1999-2003 AUS$28.3 million). The SIS was created in 1998 by the Department of Industry, Science and Resources (AusIndustry). It provides assistance for up to 50% of eligible R&D expenditures incurred, up to a total of 2% of the eligible production costs of a vessel completed on or before 30 June 2004. AusIndustry budgeted AUS$40.5 million for SIS over the period 1999-2003.

The defence shipbuilding industry is worth more than AUS$1 billion each year. Domestically, the major customer is the Royal Australian Navy. Its annual expenditure on the repair and refit of naval ships, submarines and equipment is around $250 million, indicating that Australian shipbuilders have a substantial export market.

3.2.5 Europe

Shipbuilding in Europe is very diverse in its structure, with each nation focusing on a specific type of vessel, outlined in the following table.

Table 3-8: Breakdown of European Vessels, by Country

Country	Type
Germany	Container vessels
Italy	Passenger and RoRo vessels
Denmark	Workboats, tugs and dry cargo vessels
The Netherlands	Tugs, mega-yachts
Spain	Fishing boats
Turkey	Small tankers
Romania	Dry Cargo

According to a 1998 UK Parliament report, "The European Union, together with other AWES (Association of European Shipbuilders and Shiprepairers) countries (Poland and Norway), currently claims about 25 per cent of the world shipbuilding market (by tonnage). Shipbuilding in the European Union is concentrated mostly in high technology, high value vessels involving specialised design and fitting out work. The Chamber of Shipping characterised the strengths of European yards as having "virtually total domination" in passenger ships, and advantages in offshore oil-related vessels; specialised vessels, where the European Union is a design and technology leader; and fast ferries. Such vessels are not generally suitable for series production, unlike the tankers and bulk carriers that are the main products of many Asian yards." ⁹ However, the EU is rapidly losing market share; by the first half of 2002, its share had dropped to 10%. ¹⁰

In January 2004, the European Commission sought to extend the temporary shipbuilding subsidies permitted as a "temporary defensive mechanism" (TDM) until March 31, 2005. The subsidies, introduced as part of a two-pronged response to alleged Korean "unfair" shipbuilding practices, were due to end in March 2004. The Commission indicated that the extension until March 2005 is justified because no solution has been found so far bilaterally or at WTO level. The principal provisions of the TDM are the following maximum aid intensity of 6% of contract value on containerships, product and chemical tankers and Liquefied Natural Gas (LNG) tankers.

In addition, individual European countries provide state support for shipbuilding, including financing funds in Germany (50 million Euros budgeted in 2002 to provide ship financing better than CIRR) and a Spanish scheme whereby Spanish companies were allowed a corporate tax break on their entire profits if they invested in Spanish-built ships. This program boosted domestic demand; in 2003, 10 of the 13 Spanish-operated ships that were delivered were built in that country. The UK Department of Trade and Industry has a Home Shipbuilding Credit Guarantee Scheme (HSCGS). Scheduled to end in 2005, the HSCGS provides soft credit finance facilities to UK resident purchasers of ships in the form of loan guarantees of up to 80% of contract value for the construction and conversion of vessels. DTI budgets approximate €1 million year to HSCGS. It also ran the Shibuilding Intervention Fund to subsidize ship prices by up to 9% and was allocating up to €13 million a year to that program, but is was ended in 2004.

Shipyards in the Netherlands have done well by investing heavily in innovation, specializing in certain ship and boat classes and through the use of outsourcing. According to the Nertherlands Shipbuilding Industrial Association, shipyards conduct more than three times as much research as the rest of the maritime cluster and new products or services also account for more than 60% of the yards' sales. Revenue increased 128% between 1993 and 1999 and return on capital was over 20% in 1999. Niche markets which the Dutch have exploited include the mega-yacht market (defined as greater than 24 m in length), with shipments of 680 million euros in 2002 and tugs, where yards finish hulls outsourced in eastern Europe.

3.2.6 United States

The American shipbuilding industry specializes in the construction of tugs, crew boats, and vessels for the offshore industry. It is predicted that many of the buyers for American vessels will be government entities.

In the United States, there are over 280 privately owned shipyards. In 2001, the industry produced $US10 billion in annual revenues and has nearly 100,000 employees. Department of Defence procurement accounts for about 70 percent of the industry's revenue. The commercial side of the industry is less than half the size of the military but has grown at a faster rate in the last five years. International business plays a very minor role for the U.S. shipbuilding industry and accounts for only about 1 or 2 percent of total revenues. ¹¹ Only 43 yards are capable of drydocking ships of 122 m in length and only six yards are building Navy combatant ships. The termination of the US construction-differential subsidy program in 1981 curtailed the ability of US yards to win international commercial shipbuilding contracts, but this was largely offset by the decision to expand the US Navy to 600 ships. However, in the 1990s, it was decided to reduce the size of the US Navy fleet to 260 ships and so, yards have seen a major decrease in military work. In 1993, Congress amended Title XI of the Merchant Marine Act, 1936, to permit the US government to guarantee loan obligations for foreign owners of foreign-flagged vessels built in US yards. The terms provided by Title IX financing, particularly the duration, are generally more favourable than those offered by other countries.

The other major legislation affecting the US marine industry is the Merchant Marine Act of 1920, as amended (the "Jones Act"), which requires the ships engaged in coastwise trade to be owned by a US company, crewed by US citizens and built by a US shipbuilder. The Jones Act was excluded from US–Canada (and later NAFTA) free trade negotiations and despite periodic efforts to rescind or modify the Jones Act's provisions, often championed by domestic groups which would benefit from cheaper shipping rates, it is unlikely that any softening of the protectionism provisions will occur. ¹² In fact, from our interviews, we learned that the Jones Act might be extended to include small watercraft and yachts. Other interview subjects indicated that an unforeseen effect of the Jones Act has been to make American commercial shipyards vastly uncompetitive internationally in terms of design effort and labour content per ship.

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3.3 Conclusions

The world shipbuilding industry has operated for years under state subsidies and protectionism. While many countries, including Canada, have moved unilaterally to end these practices, there are many major shipbuilding and ship owning countries that continue to favour them. This has resulted in artificially low prices, and countries in Europe and North America have seen their market share decline dramatically as a result.

Some countries, notably Australia and the Netherlands, have been successful by attracting a domestic market and by using government support and moving into niche foreign markets.

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⁴ The discrepancy in the 2001 employment figures between Tables 3-1 and 3-5 is a function of different data sources. (Return to reference 4)

⁵ The Canadian Shipbuilding and Industrial Marine Industry: http://www.ic.gc.ca/eic/site/sim-cnmi.nsf/eng/uv00049.html (Return to reference 5)

⁶ Marine Log, September 2004 (Return to reference 6)

⁷ The Institute for Shipping Analysis, Göteborg, November 2002. (Return to reference 7)

⁸ Australian Trade Commission (Return to reference 8)

⁹ Proposal for a Council Regulation establishing new rules on Aid to Shipbuilding, UK House of Lords, 1998 (Return to reference 9)

¹⁰ The Institute for Shipping Analysis, ibid. (Return to reference 10)

¹¹ Industrial College of the Armed Forces Industry Studies 2001: Shipbuilding, National Defence University, Washington, D.C. (Return to reference 11)

¹² Federation of American Scientists' Military Analysis Network. (Return to reference 12)