Note: This text was originally published in the journal of the Association des Économistes du Québec (ASDEQ). It was also published in the Journal le Soleil in August 2018. The article is being republished because it is still a current topic.
American shipbuilding industry
A report published in 2015 by researchers at the National Defense University in Washington found something significant. The American shipbuilding industry faces competitive problems. These issues arise when compared to Asian competition. Only a few Asian countries dominate the commercial shipbuilding market. China, Japan, and South Korea now hold more than 80% of the global market share. The advantage of Asian countries is mainly due to low labor costs, protectionism and government subsidies. This advantage is such that, currently, the American industry lives almost exclusively from government contracts, i.e. military orders, and barely 15% of its revenues are linked to exports.
One of the report’s key recommendations is to “ensure the predictability of industry revenues.” This should be done through a long-term public procurement strategy.
The Canadian industry
This approach is similar to what is currently being done in Canada . The situation is not very different in the United States from what it is in Canada and Quebec. In both countries, public procurement is widely used to support the industry. Quebec’s strategy has been to keep political pressure on the federal government. The aim is to obtain a fair share of lucrative National Defence contracts. If the past is any guide, we can expect ongoing demands for many years. Each contract will aim to keep the Quebec shipbuilding industry afloat.
However, we must ask ourselves if Canada’s defence procurement strategy is truly a great example of success. This question arises contrary to what American researchers are saying. Does it benefit the industries that rely on it? Using public procurement for economic development purposes can indeed have the following undesirable effects:
- Avoiding governments having to adopt structural measures for the development of the commercial shipbuilding market,
- Exempt the industry from making the necessary efforts to increase its productivity, which would make it more competitive on international markets,
- Diverting the strategic objectives of national defense policy for economic purposes.
Avenues to explore to better support shipbuilding
Public markets should not be completely set aside. It’s essential to explore other avenues. This will enable the Canadian shipbuilding industry to be more competitive.
The development of niche markets
The example of Europe is interesting. All together, 300 European shipyards provide work for some 500,000 workers and generate revenues of more than CAD 50 billion. These shipyards have managed to stand out by targeting niche markets. First, the construction of cruise ships has never been threatened by Asian competition. However, it remains highly technical. There are also specialized offshore services, including offshore wind farms. Finally, new concerns and government regulations focus on reducing the carbon footprint. Therefore, constructing energy-efficient ships has become a priority for Europeans.
Quebec could occupy naval niches. It can rely on its competitive industrial base in several high-tech sectors. These sectors include energy, aluminum, engineering, and design.
Offshore will remain a growth market for a long time to come. It will generate demand for specialized vessels for the collection and transport of liquefied natural gas (LNG), oil or chemicals, and for support and technical work (tugs, barges, research and inspection vessels, etc.).
The increased accessibility of the Northwest Passage will lead to significant changes in the routes used to reach the continents. However, several countries have already started building specialized vessels, including icebreakers transporting LNG, oil or chemicals. For example, a Russian megaproject plans to deliver 16 icebreakers transporting LNG.
Furthermore, the cruise industry remains a booming sector in various specialized markets such as marine mammal watching and excursion tourism. These specialized segments require the construction of buildings adapted to the different types of tourism activities. The ship repair sector will also benefit from the expected increase in cruise ship traffic.
Cooperation
Cooperation between companies is increasingly developing in shipbuilding. The goal is to utilize the specialization of certain shipyards. This aims to increase both the productivity and competitiveness of the industry. Current technology allows the same project’s batches to be executed in various locations worldwide. Cooperation brings together the complementary expertise of two or three builders. This creates economies of scale and reduces fixed costs. It also allows them to enjoy technological advantages. They can share risks. Companies benefit from the comparative advantages of several regions. These advantages include wages and the exchange rate. In addition, cooperation facilitates the participation of small companies in contracts that would otherwise be inaccessible to them.
This model of industrial organization is very similar to the one used in aeronautical construction. In that industry, a few large companies, including Bombardier, act as integrators. They coordinate a large number of equipment manufacturers and suppliers.
The adoption of new financing methods
The size and technical complexity of ships have grown, increasing the risk associated with shipbuilding in the commercial segment. This has led to the sidelining of traditional financial institutions. They lack sufficient expertise. The shipbuilding industry is a project industry, the implementation of which is most often spread over several years. However, during the construction period, performance risks are high and liquidity and financing requirements are significant. Shipyards are therefore required to provide guarantees during the construction period and to pre-finance the construction costs themselves.
Almost all countries with a shipbuilding industry offer tools for financing international shipbuilding projects. Many of these tools call for increasingly sophisticated methods of financial engineering aimed at spreading risks. The French government, for example, has set up a shipbuilding guarantee scheme. The government has the ability to guarantee up to 80% of the default risk. This guarantee is assumed by a financing company during the commercial vessel’s construction.
Conclusion
Government contracts are important for the future of the shipbuilding industry. However, it would be risky to rely exclusively on this factor. Ottawa and Quebec governments and Canadian and Quebec companies must equip themselves with a medium- and long-term development strategy based on real competitive advantages.
Louis Bellemare , economist
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