Thursday, November 24, 2016

Where should ships be built?

Viking Line shipping group recently announced that it's new passenger ferry for a northern Baltic line will be built in China at the Xiamen shipyard. According to the group CEO, the designers of the ferry will be Deltamarin in Finland. This announcement raised often heard and frankly quite typical criticism from a South-West Finland Parliament mp. In short a publicly supported private ferry company should concentrate its new build tenders to a domestic yard to support domestic shipyards. That these yards just happen to be in the said mp's district is hardly surprising.

In order to understand these points, let's take a closer look at the history of shipbuilding and shipping companies intertwined histories. This discussion of domestic shipping support for shipyards has been going on for a hundred years. It was one the key issues between the two industries in the first ever Finnish shipping and shipbuilding conference in Turku in 1925. Shipping interests won out as that industry was more important to a country of forestry exports and better ships could be bought cheaper from depression struck yards across Western Europe. Finland Steamship Company and others started to buy ships from domestic yards in the late 1930s, but that was largely due to a global upswing in demand that had filled shipyards' order books everywhere.

This always happens because of these two industries relationship to international commerce flows. Without going in to technicalities, shipbuilding is a boom-bust industry, seven good years and seven bad and all that. Here's a recent visualisation I did with Lloyd's Register historical shipbuilding data:

Global commercial shipbuilding output 1900-1960. Source: LRS Shipbuilding Returns.
After the war reparations to USSR (1944-1952) Finnish shipbuilding had expanded rapidly with public funding. The industry gained a reputation as modern and nationally significant. This by the way is what my phd is all about. In such a situation it was not surprising that Finnish shipping companies started to buy domestic. First, there was domestic competition that kept prices honest. Second, many new operators entered shipping – among them the state owned Enso-Gutzeit and KELA funded Finnlines. This was the era of big, publicly intertwined business after all.

With the collapse of shipbuilding in Finland alongside USSR, the industry became to be seen as a delicate and vulnerable area in need of saving. Meanwhile the country had been tied to Western free market ideologies that ill fitted such protectionist industrial tendencies. Shipbuilding is a sore issue in this regard, because historically the same shipyards that built tankers and Ro-Ros can build warships. And governments and navies like to be able to control such strategic industries. This is also how Wärtsilä shipbuilding came together in the 1920s and 1930s, through navy appropriations. The spikes in my graph are US World War cargo and troop ship production.

Shipping lines get public funding because governments want to provide such services. Japan built its postwar shipbuilding empire on this idea. The island nation needed connections and liner companies were tied to metal manufacturing with extremely strong ties and public support. This nationalised system model was later imported to South Korea and more recently to China, the rising shipbuilding super power with significant regional interests. Nothing new there, except that it isn't us westerners. USA retains only naval construction capacity that is fully tied to its military-industrial complex. One buyer and a couple providers to stop the whole system becoming too corrupt.

What does this mean in the context of Viking Lines then? Shipbuilding and shipping are often perceived to be nationalistic endeavours here and elsewhere. This leads to nationalistic cries for protection whenever things don't go swingingly, whatever that may mean. Meyer Turku Shipyard has retained many tenders in the past year and has a specific build profile. It is cheaper and more lucrative for them to built certain ships sizes and types than others. Of course they could build the new Viking ferry same as the Chinese, Koreans, Italians or whoever. But if it doesn't fit the yards schedules and optimisations, they will charge for it. Meanwhile, the Chinese yards are trying to build their expertise in more specialised types of vessels having already cornered container, tanker and bulk segments. This necessitates research and development though. In such a a situation, cooperation with a well known design bureau is ideal.

As a result the ferry company gets a cheaper ship. If they were forced to concentrate their tenders to domestic yards at higher price points, they would then transfer these costs to their customers – us. Ships move and can be built wherever there's water near by. In a global intertwined economy someone will always built one cheaper than you. This is why shipbuilding remains a boom-bust business.

Rauma shipyard has been hit hard recently. Real lives are at risk when people go unemployed. The structural issues related to the 1990s depression are still with us. Whether Finnish people want to prioritise national strategic interests (and their providers) or get their stuff cheaper is really for everyone to decide. We've had more protectionist governments in the past but this really is a political issue with immensely complex, intertwined roots. Ships can be built anywhere but at what cost?

Pugilists and pundits may want to decry the evil of companies in situations like this, but these same companies function and are a part of society. If Finland was supposed to be the greatest shipbuilding nation ever, we would have to make significant changes to our employment, tax and commerce policies and in the end give up something else. What would that be?

As a disclaimer, I have no economic or family ties to shipping or shipbuilding companies other than an ongoing research and PR project with Arctia Shipping. I do know many people involved in these industries but my interests remain academic.

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