The Airbus Model
Is it time for Europe’s struggling shipyards to consolidate – like its aircraft makers a generation ago?
(Article originally published in May/June 2022 edition.)
European manufacturers know this plot: A once proud industry under cost pressure from foreign – chiefly Asian – competitors, jettisons its mass market segment and survives by serving a luxury niche.
During the quartz watch revolution of the 1970s and 1980s, Japanese brands like Seiko and Casio ate Swiss watchmakers’ lunch, forcing them to shift upmarket. Apart from Swatch, which salvaged the scattered remnants of “everyday” Swiss brands under a fast-fashion label, when we think “Swiss timepiece” we call to mind Rolex, Audemars Piguet or Vacheron Constantin – brands that sell watches for prices that are, if not unattainable, then at least aspirational for the average shopper.
The shipwrights of the Old World have undergone a similar metamorphosis. In the aughts, before the “shipping crisis,” European shipyards’ orderbooks were filled with a colorful mix of different work. In 2007, for example, container ships, passenger ships, offshore vessels, tankers and even general cargo ships made up significant percentages of the 16.8 million compensated gross tons (CGT) of vessel to be delivered that year. (Note: CGTs are a standardized measurement of the work that goes into building one ton of ship, developed in 1977 and last revised in 2007 by the OECD.)
Even some bulkers were still “Made in Europe”! Indeed, no single category of ship made up more than 35 percent of the overall orderbook, and many shipyards served a diversity of buyers.
Today, European shipyards report only 11.5 million CGT on their orderbooks. More than 9.95 million CGT of that is from yachts and cruise ships. The rest consists of offshore and general cargo vessels. In other words, 86 percent of the orderbook is made up of luxury and pleasure craft.
SEA Europe, an industry association representing virtually all of Europe’s shipyards, admitted as much in an April 2021 press release: “Europe has lost nearly its entire merchant shipbuilding and part of its offshore shipbuilding to Asia. Europe’s market share declined from 45 percent in the '80s to five percent today.” The European-built coastal motor vessel, the symbol of Europe’s robust short sea shipping trade, is practically extinct.
In the 1990s and 2000s, as other kinds of shipbuilding went to Asia, the German Association for Shipbuilding Industry & Marine Technology launched a rescue program targeted at leveraging technology to cater to customers wanting to launch private passenger ships and yachts. Government loan guarantee programs followed to help shipyards secure more orders.
Yachts and cruise ships are high value but only narrowly relevant. What both share is that building them requires a high level of skilled craftsmanship, technological finesse and beautiful design, which sounds like the glossy ads I’ve seen touting Swiss horology.
However, the decision to keep the lights on with cruise ships and yachts is high-risk. COVID-19 severely wounded the cruise industry. At Seatrade in Miami Beach, Florida, the CEO of Royal Caribbean Group, Jason Liberty, suggested that cruising would recover its pre-COVID-19 level in 2023 but that 2022 would be “a year of transition,” following two years of bleeding.
Meanwhile, Russian oligarchs own 10 percent of the world’s biggest yachts – which was fine until President Vladimir Putin ordered Russian soldiers to invade Ukraine. That triggered sanctions including yacht seizures. Auctions will inevitably follow as those seizures are put through due process. Both load-bearing columns that support contemporary European shipbuilding have been undermined recently.
Following the outbreak of COVID and the Diamond Princess fiasco, major cruise lines like Carnival, MSC and Royal Caribbean cancelled sailings. Shipbuilding stopped; orders dried up. A 2021 study conducted at the University of Szczecin in Poland concluded grimly that “Shipyards in Europe would not be able to operate without state financial aid.”
Without money coming in for production milestones and without down payments being made for the placement of new orders, shipyards turned to government for support.
MV Shipyards, now part of Malaysia’s Genting Group, was one of the recipients: 300 million euros flowed into the company from the German “Covid Rescue Shield.” As waves of money from Berlin rolled in, the local leader of the powerful metalworking union IG Metall, Daniel Friederich, blithely remarked: “Thanks to federal loans and the associated union tariff agreement, the three sites in Rostock, Stralsund and Wismar are now secure and will continue on as functioning yards.”
However, on January 10, 2022, MV Shipyards filed for bankruptcy. The site and equipment in Stralsund found a buyer in the form of the municipal government, which kicked in 16.5 million (more) euros. In April 2022, family-owned Fassmer and the Meyer shipyards split the purchase of Neptun Ship Design, which was previously part of MV Shipyards – saving 100 employees from a walk to the benefits office.
The other two sites, Wismar and Rostock, have not attracted buyers and remain idle. MV Shipyard’s last project was a 342-meter-long cruise ship called Global Dream. Destined for the Asian market, it remained incomplete when it was put up for auction in early 2022.
Lloyd Shipyard in Bremerhaven, also owned by Genting, filed for bankruptcy on the same day as MV Shipyards – but was soon acquired by family-owned Rönner Group and Gustav Zech Trust. While the Global Dream continues to languish in Wismar, Lloyd docked the Aida Aura for repairs. Carsten Sippel, the General Manager at Lloyd, noted that the “Market for ship repair in Northern Europe is very good. The demand for docking capacity is high.” There was no mention of newbuilds.
Genting’s German adventure is a common one in recent history. It entered the market with high hopes, sinking 100 million euros into beefing up the two shipyards. Genting wanted to capitalize on strong Asian demand. Tagesschau, the German government-funded news agency, ran a 2017 report titled: “MV Shipyards: Will the ‘Sick Man’ Turn into a ‘Global Player’?” It was true, the report admitted, that previous investors in shipbuilding had failed miserably, costing taxpayers and employees dearly. But surely Genting was made of sterner stuff. It had, after all, “paid the purchase price promptly.”
But fast payment is perhaps not the true shibboleth. Tagesschau’s analysis was incomplete: It takes more than a fistful of dollars and big aspirations to make a “Global Player.”
With MV Shipyards insolvent and Lloyd sold off to yet another German Mittelstand company, it looks like the dream of ships built in Europe for the Asian market is more of a recurring nightmare. Asian yards long ago cracked the code and have been the first port of call for cost-conscious European shipowners, but MV Shipyards and Lloyd show how hard it is to turn a profit in the other direction.
And Asian shipyards have proven themselves adept at turning out lovely cruise ships and yachts, too: Note the Shanghai-built, 135,000 gross ton Vista-class for Carnival Cruise Lines, which floated out last year.
The combination of high costs – for labor, regulatory and environmental compliance – and generous, top-down subsidies have created a structural environment wherein European shipyards can remain operational but not profitable. And there’s plenty of demand for cruise ships and yachts, especially ones with the German seal of quality for which one does not even need to pay the full market price.
Germany is not alone in supporting its shipyards. With an 84 percent share, France’s government is the main owner of Chantiers de l’Atlantique. Italy’s Cassa Depositi, part of the country’s Ministry of Finance, is the biggest shareholder of Fincantieri. In other words, both are effectively state-owned enterprises.
Together, Fincantieri and Chantiers de l’Atlantique employ 13,000 workers. Both cater heavily to the cruise industry with Fincantieri in talks with Norwegian Cruise Lines for $4 billion in orders this year and Chantiers de l’Atlantique building for Royal Caribbean, among others.
The Airbus Model
In this European round-robin tournament where national governments fight each other via their subsidized or directly owned shipyard proxies, the biggest losers are the taxpayers. An alternative would be to allow these companies to consolidate or disappear from the market entirely.
In that scenario, it would at least mean that the winners and losers would be the companies, as the market dictates, and not the taxpayers. But cleaning out a supply glut is never enjoyable, and no European government wants to pull the plug first.
The way out of this morass may have an historical parallel in Airbus Industrie. Likewise a heavily subsidized, government-steered company, Airbus has become the world’s biggest airplane manufacturer.
It was formed by merging various smaller national champions. British Aerospace, German DASA, French Aerospatiale and Spanish Construcciones Aeronauticas were among the companies that came together under a complex agreement about where factories would be sited, which countries would be responsible for which stages of work and how development would be organized. The result has been a cumbersome but effective behemoth that at least arguably spends its public money more smartly.
After all, Airbus caters to military demand with, for example, the Eurofighter Typhoon, a multirole fighter, various helicopters and the A-400M Atlas, a four-turboprop military transport aircraft. An argument for Airbus is and was that Europe wanted to retain strategic capability for its own security. The same reasoning would apply to European shipyards, which supply warships to Europe’s navies.
Time to Let Go?
Transitioning Europe’s struggling shipyards into a single entity could benefit everybody so long as enough countries buy in and decide to realign their defense procurement along similar trajectories.
The current beneficiaries of this system are tourists and Russian billionaires, who can contract with loss-making shipyards for the cruise ships and yachts they desire. Isn’t it time to let that go?
The opinions expressed herein are the author's and not necessarily those of The Maritime Executive.