Lecture 4

UFPE Recife: Shipbuilding Competitiveness
Competitiveness
Paul Stott
July 2013
Define competitiveness
There are as many definitions as there are definers
It should refer to the ability to win something from others in competition with them
It should be sustainable
The ability to gain market share whilst achieving a level of

profitability acceptable to shareholders and staying in
business*
*Paul Stotts definition in the context of the marine production industries
Define competitiveness
To be competitive in business you have to sell things (goods or services)

To be able to sell things, customers have to want to buy them
What is it that customers want?
Marketing: buyer values
On what does a buyer make a choice as to which product or service to

buy?
Do people buy on the basis of price? consider the basis on which you
purchased your mobile phone or your car.
Buying decisions are made on the basis of

perception of value, not price alone
Value = F {price ; fitness for purpose ; other attributes of the product /service}
Marketing: buyer values

Value = F {price ; fitness for purpose ; other attributes of the product /service}
Sector
Typical values (ex price)
Shipbuilding
Delivery reliability
Product performance and resale value
Experience and reputation of builder
Ship repair
Yacht building
Brand values (exclusivity)

Nationality
Product performance
Offshore
Product quality and reliability

Company quality, competence and standards
Design brand
Location
Reliability of re-delivery
Short repair time / price trade-off
Popularity with superintendents
Marketing: buyer choice

A buyer is most likely to choose:
1.A supplier he has used before and is happy with
2.A supplier recommended by someone he trusts
3.A supplier with a reputation or brand
It follows from this that for sustainability (i.e. to stay in business)...
Repeat business is essential for sustainability of any business up to 70%

Reputation is essential for any business to gain new customers
The delivery of value is the key to competitiveness
The customer is King
Competitiveness in shipbuilding
What is the single most important attribute to give competitiveness?
Low labour cost
What are the limitations of low labour cost for competitiveness in shipbuilding?
Low labour cost is an indicator of competitiveness?

Firstly, it is possible to show that there is no correlation
between labour cost and success in gaining shipbuilding
orders.
35.00
South Korea
Peak contracting (million CGT)
30.00
25.00
20.00
15.00
Japan
10.00
5.00
0.00
0.00
10.00
20.00
30.00
40.00
50.00
Hourly compensation cost ($US) in 2009
Source: labour costs from US bureau of labour statistics, contracting from Clarksons
60.00

The lack of correlation remains if we ignore the two
industry leaders on this chart.
1.20
Peak contracting (million CGT)
1.00
0.80
0.60
0.40
0.20
0.00
0.00
10.00
20.00
30.00
40.00
50.00
Hourly compensation cost ($US) in 2009
Source: labour costs from US bureau of labour statistics, contracting from Clarksons
60.00

Despite the lack of any rational proof the link between low
labour cost and competitiveness is seen as axiomatic by
many:
Concerted efforts of the Government and enterprises have

transformed Vietnam in to a fast growing shipbuilding country,
mainly on the basis of its low cost labour sources(UK T&I, 2012)
Given the inherent labor intensive nature of the shipbuilding
industry, India has a natural advantage by virtue of its lower cost
of labor and availability of skills(KPMG, 2008)
Chinas biggest economic advantage is low labour cost
Vinashin effectively went bankrupt in 2012.

Indias industry is struggling to deliver ships despite taking
a large orderbook at the market peak.
High labour cost is an indicator of low competitiveness?

Japan has long had relatively high labour costs amongst
industrialised nations yet still retains a significant
shipbuilding presence.
Source: World shipyard monitor, Dec 2012
High labour cost is an indicator of low competitiveness?

All it is possible to conclude from this brief overview is
that:
Low labour cost is no indicator of competitiveness
and conversely higher labour cost is not necessarily
an indicator of lack of competitiveness.
But, logically it also has to be concluded, as labour costs
necessarily make up part of the cost of ship
construction:
All other things being equal, lower labour cost would
lead to better competitiveness.
How far can low labour cost assist in the pursuit of
competitiveness and what are its limitations?
The effectiveness of low labour cost

The first and most obvious point is that clearly labour
cost alone is not sufficient to measure labour
competitiveness it has to be viewed against the
potential output of each unit of labour or in other
words, productivity variations have to be taken into
account.
Productivity = level of effort used (normally manhours) per unit of output (CGT)
Determined by:
How well the facility is designed
How well the facility is used
Economies of scale

The level of magnitude of economy of scale shouldnt be
underestimated and has a major effect on labour
productivity and material cost.

The first limit on the effectiveness of labour cost stems
from the range of variation in potential productivity that
is apparent in different shipyards.
The range of potential productivity

The lower end of the range is identifiable: the most
productive Korean yards can achieve as low as 10 to 12
manhours per CGT as a peak level
Manhours/CGT
65
60
55
50
45
40
35
30
25
20
15
10
5
7% long
term
average in
South
Korea
20
05
20
03
20
01
19
99
19
97
19
95
19
93
19
91
19
89

The upper end of the range is more problematic and
could be regarded as open.
Global benchmarking exercises undertaken in the US
found that 50 manhours per CGT is not unusual and far
higher than this can be found.

The range of potential productivity alone can easily wipe
out all labour cost advantage.
Shipbuilder characteristics
Higher labour cost but good
productivity
Low labour cost but mediocre
productivity
Labour
Productivity
cost
(Mh/CGT)
($ per hour)
Cost per unit

($ per CGT)
20
12
240
50
250
Low labour cost is often transient

The second issue is that the cost of labour is subject to
macroeconomic factors that cause it to shift most often
upwards and the shift can be faster than expected.
In a developing economy labour rates will tend to rise.
Ships are generally sold in $US and a developing
economy also (normally) brings with it a strengthening
currency (-ve effect on dollar competitiveness), although
weakening also occurs (+ve effect on dollar
competitiveness).
Currency movements alone can be significant

Currency fluctuations can be significant.
12.00
10.00
$US
8.00
6.00
4.00
2.00
Sep-2000
May-2000
Jan-2000
Sep-1999
May-1999
Jan-1999
Sep-1998
May-1998
Jan-1998
Sep-1997
May-1997
Jan-1997
Sep-1996
May-1996
Jan-1996
Sep-1995
May-1995
Jan-1995
Figure 3: the value of 7,905 won converted at the prevailing exchange rate

Currency fluctuations can be significant.
China has seen a 25% reduction in $ competitiveness since partial

flotation of the RMB in 2005, compounding labour cost rises in RMB

The effect of wage rise and currency strengthening in a
strongly developing economy can rapidly outpace the
potential for performance improvement.
Industrial wages in Poland
4.5
Index (1992 = 100)
4
3.5
Polands belief 3in its competitiveness through labour cost

advantage masked
the need to invest and improve until it
2.5
was too late the
Polish industry is now mostly closed.
2
1.5
1
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
11% performance improvement
Significant investment was the only way that Poland

could have maintained its competitiveness.
The limitations of low labour cost

1. The range of productivity possible in shipbuilding.
2. The counter-action of macro-economic forces.
3. The structure of ship cost.
Typically about 70% of revenue passes straight out of the
shipyard in material, subcontract and other costs.
The other 30% is available for labour, overhead and
contribution to {fixed asset/finance costs} and
(occasionally) profit
Taking into account that overhead costs are partially
labour-related, a typical total benefit to the bottom line from
a 1% labour cost advantage would be expected to be about
0.26%.
Put another way, a 3.8% labour cost advantage is needed to
reduce total ship contract cost by 1% (given equivalence in
all other cost factors).
Variation in cost structure by ship type

The structure of cost varies by ship type and this leads to
some variation in the amount of influence that labour cost
has this is under more detailed investigation.
Increasing product complexity
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
Overhead
Labour
Other direct costs
Other Materials
Steel
Material cost advantages

It follows from the structure of cost that reduction in steel,
other materials and other direct costs has a proportionately
greater potential for influence on the total cost than labour
costs.
1% reduction in materials leads to about a 0.7% reduction
in total cost, compared to 0.26% for a 1% reduction in
labour costs.
Each per cent reduction in material costs is 2.7 times more
effective than a 1% labour cost advantage.

Material cost advantages are particularly effected by:
Bulk discounts, which are linked to economies of scale
The availability of a competitive local supply industry,
with delivery costs minimised

Bulk buying power can be very significant.
In 2009 HHI Ulsans throughput of steel (gross) was
estimated to be about 3.2 million tonnes and the yard
produced 104 ships purchasing 104 main engines, 104
sets of auxiliaries, bridge gear, etc. The yard also (as with
other Korean majors) exercises very strong control over
the makers list.
Pipavavs ambition was to deliver 8 panamax (all but 1

cancelled) in 2012, a target gross steel throughput of about
110,000 tonnes (3.5% of HHI Ulsan) but in reality achieved
a steel throughput of less than 20,000 tonnes.
Ulsan purchased 120 times as much steel and 104 times as

much of most other items in 2012 when compared to Pipavav
This advantage is compounded by the fact that Ulsan is

only one part of the HHI group, with group purchasing
leading to even greater buying power
It is also further compounded by the strong Korean
supplier base for steel and marine equipment.
India, on the other hand, produces no shipbuilding steel
plate nor marine engines all will be imported with the
associated costs.

The level of cost advantage is under investigation. If we
assume (conservatively) an advantage of 10% to 15%
advantage in South Korea, this wipes out a labour cost
advantage of 30% to 45%.
The limitation of low labour cost

Based on this analysis it is not surprising to conclude that
low labour cost is actually of limited use in the pursuit of
competitiveness:
1. It is easily wiped out by low productivity
2. It is under attack from macro-economic
movements
3. It is trumped by material cost benefits from high
volume producers with a good indigenous supply
industry
This isnt the whole story, however. One further factor
trumps it:

competitiveness:
movements
industry
This isnt the whole story, however. One further factor
trumps it: the depth of the governments pockets and its
motivation to support the shipbuilding industry.
Government support
Lets look at the specific case of a start up yard, which is
located in a country with a growing supplier base, and
which is a high volume yard Shanghai WaigaoQiao
Shipbuilding
Government support
WaigaoQiao had a tangible fixed assett value of just over
$0.5 billion at the end of 2011 (from company accounts),
and reportedly cost 4.7 billion Yuan to construct.
Thousands
WaigaoQiao output
6,000
5,000
4,000
3,000
dwt
2,000
1,000
0
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
The rated output of the yard is quoted as in excess of

7 million dwt
It took 10 years to build up to 80% of that value
Government support
WaigaoQiao capacity utilisation
90%
80%
70%
60%
50%
40%
30%
Capacity utilisation
(dwt)
20%
10%
0%
Under-utilisation of capital has to be funded during the

extended start-up period.
Slow build-up of performance has to be compensated for in
financial terms
Government support
90%
80%
70%
60%
The shortfall in added value compared to

target steady state capacity utilisation in
the period 2003 to 2012 is estimated to be
about $2 billion four times the level of
capital investment in the yard itself.
50%
40%
30%
(dwt)
20%
10%
0%
The level of funding required in a start-up period for a large

shipyard is beyond the capability of private capital, given
the level of risk and low return that characterises
commercial shipbuilding Government support is
inevitable.
Government support
90%
80%
70%
60%
50%
40%
30%
(dwt)
20%
10%
0%
Government support is also likely for under-utilisation of

assets (physical and human) during a downturn, due to the
unstable nature of the shipbuilding market.

competitiveness:
movements
industry
4. Low labour provides very limited compensation
for the high cost of under-utilisation of fixed
assets, particularly in a start-up period, which
may swamp a new business without substantial
government backing

Such a build-up period is common for a new shipbuilder
Hyundai heavy Ulsan

1,600,000
1,400,000
GT Delivered
1,200,000
1,000,000
800,000
600,000
400,000
200,000
1972197419751976197719781979198019811982198319841985

Such a build-up period is common for a new shipbuilder
Hyundai Vinashin
600,000
500,000
GT
400,000
300,000
200,000
100,000
0
Build-up to 60% to 80%
Competitiveness in marine production
Can competitiveness be represented by a single number?

How is competitiveness in calculated?
The equation of competitiveness in shipbuilding

What would determine whether a shipyard is competitive
in the newbuilding sector?
1. Whether or not it is successful in winning work
Which in turn is determined by:
2. Whether it can offer products at the prevailing market
price (either on its own account or supported by
subsidy)

Competitiveness in shipbuilding is broadly determined by
whether or not the builder can meet the market price.
This is best analysed by reviewing the gross margin

calculation.
The calculation needs to be looked at from both the
supply side (the shipyards costs) and the demand side
(the market price).
Establishment charges refer to depreciation, interest, etc.

the capital costs of running the business.

Demand
Supply
Market price
Labour cost
less
plus
(Material cost +
Subcontract cost +
Other outgoing direct cost)
equals
Net income or added value
Divide by contract CGT
equals
Added value per unit of work
Overhead cost
plus
Establishment charges
equals
Total annual shipyard cost

Divide by annual output CGT
equals
Shipyard cost per unit of work
Value cost = +ve : profit

Value cost = -ve : loss or subsidy

Demand side
Supply Side
Price
100,000,000
Materials
71,500,000
Subcontract
300,000
Financing cost
600,000
Other
5,200,000
Total cost of sales
77,600,000
Added value (gross margin)
22,400,000
CGT
46,000
Added value per CGT
Total labour cost

Total overhead cost
Interest charges
Depreciation
Total
486.96
per annum
per annum
per annum
per annum
194,942,000
22%
Througput
43,800,000
91,000,000
37,116,000
23,026,000
460,000 CGT per annum
Cost per CGT
The shipyard is profitable

Profit =
$
63.17 per CGT produced
$
29,058,000 per annum
2.9%
VLCC example (10 ships per year)
423.79

What would a 5% reduction in price do to the ad val per CGT
Demand side
Supply Side
Price
95,000,000
Materials
71,500,000
Subcontract
300,000
Financing cost
600,000
Other
5,200,000
Total cost of sales
77,600,000
17,400,000
CGT
46,000
Added value per CGT
Total labour cost

Total overhead cost
Interest charges
Depreciation
Total
378.26
per annum
per annum
per annum
per annum
194,942,000
18%
Througput
43,800,000
91,000,000
37,116,000
23,026,000
Cost per CGT
The shipyard is no longer profitable

Profit =
-$
$ -20,942,000 per annum
-2.2%
5% reduction in price = 22% fall in gross margin
423.79

What would happen to profit if you managed to negotiate a 10% discount on all
materials?
Demand side
Supply Side
Price
100,000,000
Materials
64,350,000
Subcontract
300,000
Financing cost
600,000
Other
5,200,000
Total cost of sales
70,450,000
29,550,000
CGT
46,000
Added value per CGT
Total labour cost

Total overhead cost
Interest charges
Depreciation
Total
642.39
per annum
per annum
per annum
per annum
194,942,000
30%
Througput
43,800,000
91,000,000
37,116,000
23,026,000
Cost per CGT

Profit =
$
$ 100,558,000 per annum
10.1%
Profit has increased by 350% !

$
423.79

What would happen if you managed to reduce labour costs by 10%?
Demand side
Supply Side
Price
100,000,000
Materials
71,500,000
Subcontract
300,000
Financing cost
600,000
Other
5,200,000
Total cost of sales
77,600,000
22,400,000
CGT
46,000
Added value per CGT
Total labour cost

Total overhead cost
Interest charges
Depreciation
Total
486.96
per annum
per annum
per annum
per annum
190,562,000
22%
Througput
39,420,000
91,000,000
37,116,000
23,026,000
Cost per CGT

Profit =
$
$
33,438,000 per annum
3.3%
Profit has increased by 15%

$
414.27

The single most important measure of competitiveness in
shipbuilding is the yards cost per CGT
Note that the influence of material costs is far more
important than the influence of labour costs.
How do you minimise material costs?
Locate the yard in a country with a competitive supply industry

Minimise delivery costs
Standardise the makers list (minimise buyer choice)
Use economy of scale
Buy in volume (either alone or in consortium)
Establish long term collaberative relationships with suppliers (develop
the supply chain)
How do higher cost suppliers survive without subsidy

Many dont they may go out of business
The characteristics of survivors are summed up in The

seven habits of highly effective shipbuilders
The seven habits of highly effective shipbuilders
1. Investment
Investment is essential to survival.
Shipbuilding is no longer the low/medium technology business
that it used to be.
Investment in facilities, technology, training and R&D
CESA estimates that R&D in European shipbuilding amounts to
around 10% of revenue
2. Performance
The right level of performance is essential for survival
Targets are set on a rational basis rather than being arbitrary
Targets aim to achieve profitability
3. Use of best practise

There is a strong correlation between performance and the use of
best practise
Can better use be made of existing technology or is investment
needed to improve performance ?
80
70
COMMERCIAL
LARGE YARDS
Man-hours per CGT
60
SMALL
SHIPYARDS
50
40
30
20
10
0
1
3
Overall best practice rating
4. Continuous improvement
No amount of improvement is ever enough
Performance improvement must be part of every day routine
The amount of improvement that can be achieved depends on the
starting conditions
Manhours/CGT
65
60
55
50
45
40
35
30
25
20
15
10
5
7% long
term
average in
South
Korea
20
05
20
03
20
01
19
99
19
97
19
95
19
93
19
91
19
89
5. Market focus
Shipyards are no longer ubiquitous and multi-purpose facilities.
They have to be focused.
The choice of product mix has profound implications for the
shipyard.
Many in Europe have chosen to specialise in the passenger niches
where competition with Far East is less and the value of work is
higher
Average revenue
( per CGT)
Finland
3,642
France
3,443
Italy
3,158
Germany
2,593
Denmark
1,764
Poland
1,477
Romania
1,428
Croatia
1,306
Main product focus
Passenger
Passenger / Container
Container
Tanker / dry cargo
6. Consolidation
South Korean shipyards achieve significant economies of scale
Harder to achieve when grouping shipyards together, particularly
when they are geographically separated
Consolidation has therefore proven to be difficult in Europe
Greatest benefits in Europe has been partnership with shipyards in
lower cost countries
7. Strategy
It is not possible to achieve the preceding six attributes without a
long term strategy
A strategy is needed to direct investment, performance
improvement and R&D
Commitment to a strategy involves risk
Not committing to a strategy amounts to gambling

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UFPE Recife: Shipbuilding Competitiveness

The ability to gain market share whilst achieving a level of

*Paul Stotts definition in the context of the marine production industries

To be competitive in business you have to sell things (goods or services)

Marketing: buyer values

On what does a buyer make a choice as to which product or service to

Buying decisions are made on the basis of

Marketing: buyer values

Typical values (ex price)

Brand values (exclusivity)

Product quality and reliability

Marketing: buyer choice

Repeat business is essential for sustainability of any business up to 70%

Low labour cost

Low labour cost is an indicator of competitiveness?

Hourly compensation cost ($US) in 2009

Low labour cost is an indicator of competitiveness?

Peak contracting (million CGT)

Hourly compensation cost ($US) in 2009

Low labour cost is an indicator of competitiveness?

Concerted efforts of the Government and enterprises have

Vinashin effectively went bankrupt in 2012.

High labour cost is an indicator of low competitiveness?

Source: World shipyard monitor, Dec 2012

High labour cost is an indicator of low competitiveness?

The effectiveness of low labour cost

The effectiveness of low labour cost

The effectiveness of low labour cost

The range of potential productivity

The range of potential productivity

The range of potential productivity

Cost per unit

Low labour cost is often transient

Currency movements alone can be significant

Currency movements alone can be significant

China has seen a 25% reduction in $ competitiveness since partial

Currency movements alone can be significant

Index (1992 = 100)

Polands belief 3in its competitiveness through labour cost

11% performance improvement

Significant investment was the only way that Poland

The limitations of low labour cost

Variation in cost structure by ship type

Material cost advantages

Material cost advantages

Material cost advantages

Pipavavs ambition was to deliver 8 panamax (all but 1

Material cost advantages

Ulsan purchased 120 times as much steel and 104 times as

This advantage is compounded by the fact that Ulsan is

Material cost advantages

The limitation of low labour cost

The limitation of low labour cost

The rated output of the yard is quoted as in excess of

Under-utilisation of capital has to be funded during the

The shortfall in added value compared to

The level of funding required in a start-up period for a large

Government support is also likely for under-utilisation of

The limitation of low labour cost

The limitation of low labour cost

Hyundai heavy Ulsan

The limitation of low labour cost

Build-up to 60% to 80%

Competitiveness in marine production