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Rationale for a Comprehensive Discipline

Rationale for a Comprehensive DisciplinePerfect Imperfection • Strategic industry! • Unlike products ... Unsustainable business Government intervention Bail-out of shipyards Distortion

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Page 1: Rationale for a Comprehensive DisciplinePerfect Imperfection • Strategic industry! • Unlike products ... Unsustainable business Government intervention Bail-out of shipyards Distortion

Rationale for a Comprehensive Discipline

Page 2: Rationale for a Comprehensive DisciplinePerfect Imperfection • Strategic industry! • Unlike products ... Unsustainable business Government intervention Bail-out of shipyards Distortion

In an Ideal World…

• Like products

• Full market transparency

• Profit orientation

=> Perfect resource allocation

Page 3: Rationale for a Comprehensive DisciplinePerfect Imperfection • Strategic industry! • Unlike products ... Unsustainable business Government intervention Bail-out of shipyards Distortion

Perfect Imperfection

• Strategic industry!

• Unlike products

• Non-transparent decision factors

• Chronic overcapacity

• Lack of profitability

• Instability

Page 4: Rationale for a Comprehensive DisciplinePerfect Imperfection • Strategic industry! • Unlike products ... Unsustainable business Government intervention Bail-out of shipyards Distortion

Data Source: Clarksons

Page 5: Rationale for a Comprehensive DisciplinePerfect Imperfection • Strategic industry! • Unlike products ... Unsustainable business Government intervention Bail-out of shipyards Distortion

Data Source: Clarkson, OECD

80

90

100

110

120

130

140

150

160

170

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Ind

ex (

bas

is 2

00

0 =

10

0)

Newbuilding Price

Clarkson Newbuilding Price Index

Inflation (CPI) - OECD

Page 6: Rationale for a Comprehensive DisciplinePerfect Imperfection • Strategic industry! • Unlike products ... Unsustainable business Government intervention Bail-out of shipyards Distortion

Individual vs Collective Rationale

• Low price order by Owner is rational

– Lower capital cost = higher competitiveness

• Low price offer by yards are rational

– Hoping for better times (contribution margin)

– Betting on bail-out if necessary

• Reasons for subsidisation by Governments

– Investment in future (strategic industry)

– Politically opportune

Page 7: Rationale for a Comprehensive DisciplinePerfect Imperfection • Strategic industry! • Unlike products ... Unsustainable business Government intervention Bail-out of shipyards Distortion

Collective Disaster

• Depressed markets (owners, yards, value chain)

• Corporate losses, job losses, state budget burden

• Insufficient resources to invest in technology

development

• Insufficient resources for addressing safety and

environment footprint

Page 8: Rationale for a Comprehensive DisciplinePerfect Imperfection • Strategic industry! • Unlike products ... Unsustainable business Government intervention Bail-out of shipyards Distortion

The Vicious Cycle:

The Disease in Shipbuilding infects Shipping

Imbalance of

supply and demand

Low newbuilding

price levels

Unsustainable business

Government

intervention

Bail-out of shipyards

Distortion of market

incentives

additional, unsustainable Capacity

Low price levels

Unsustainable business

Book value of existing

fleets decreases

Incentive to buy newbuilding

Increase speculation&volatility

additional,

unsustainable Capacity

Shipbuilding ShippingImbalance of

supply and demand

AWES, Brussels March 2002

Page 9: Rationale for a Comprehensive DisciplinePerfect Imperfection • Strategic industry! • Unlike products ... Unsustainable business Government intervention Bail-out of shipyards Distortion

…and even affects Safety

Imbalance of

Supply and demand

Low newbuilding

price levels

Unsustainable

business

Government intervention

Bail-out of shipyards

additional, unsustainable Capacity

Low price levels

Unsustainable

business

Book value of existing

fleets decreases

Incentive to buy newbuilding

Increase speculation&volatility

additional,

unsustainable Capacity

Shipping

Distortion of market

incentives

Strong cost pressure Strong cost pressure

Affects newbuilding standards Affects capabilities of technical departments

Affects Safety

ShipbuildingImbalance of

Supply and demand

AWES, Brussels March 2002

Page 10: Rationale for a Comprehensive DisciplinePerfect Imperfection • Strategic industry! • Unlike products ... Unsustainable business Government intervention Bail-out of shipyards Distortion

Policy Discipline

• Market interventions related to the actual transaction

– Direct ordering, reserved cargo, subsidies to buyers

– Financing conditions

– Direct production subsidy, any form of state aid to the builder

• Market intervention related to the enterprise

– Bail-outs of any kind

– Tax schemes etc.

• Market intervention in favour of industry sector

– Rules and regulations impacting factor costs e.g. labour, energy,

exchange rate, land etc.

Page 11: Rationale for a Comprehensive DisciplinePerfect Imperfection • Strategic industry! • Unlike products ... Unsustainable business Government intervention Bail-out of shipyards Distortion

Corporate Discipline

• Legal compliance

• Normal value prices

Page 12: Rationale for a Comprehensive DisciplinePerfect Imperfection • Strategic industry! • Unlike products ... Unsustainable business Government intervention Bail-out of shipyards Distortion

Market Injury

• Timing is essential!

• Competitors suffer injury by

– Loss of contract/business

– Lower market price level

• Government Intervention only cause injury indirectly

– Enabling competitor‘s behaviour

– Compensating competitor‘s behaviour

• Long business cycle allow a long period of unsustainable

pricing => Injury cannot be compensated

Page 13: Rationale for a Comprehensive DisciplinePerfect Imperfection • Strategic industry! • Unlike products ... Unsustainable business Government intervention Bail-out of shipyards Distortion

Subsidy discipline

No gaps please!

Page 14: Rationale for a Comprehensive DisciplinePerfect Imperfection • Strategic industry! • Unlike products ... Unsustainable business Government intervention Bail-out of shipyards Distortion

How?

• Complete definition of subsidies

• Notification obligation

• Enforcement of rules

Page 15: Rationale for a Comprehensive DisciplinePerfect Imperfection • Strategic industry! • Unlike products ... Unsustainable business Government intervention Bail-out of shipyards Distortion

Pricing Discipline

Ex-post is too late!

Page 16: Rationale for a Comprehensive DisciplinePerfect Imperfection • Strategic industry! • Unlike products ... Unsustainable business Government intervention Bail-out of shipyards Distortion

How?

• Obligations linked to use of public instruments such as

finance

• Price plausibility (e.g. cost factor developments, past

performance etc.)

• Prima facie evidence = open book obligation

• Violation to be determined based on concrete results

and sanctioned by lasting exclusion from any use of

public instruments

• Failure to execute sanctions leads to loss of

on/offloading rights

Page 17: Rationale for a Comprehensive DisciplinePerfect Imperfection • Strategic industry! • Unlike products ... Unsustainable business Government intervention Bail-out of shipyards Distortion

Finally

An international, effective International Shipbuilding

Agreement can work!

…provided all parties WANT to make it work.

Page 18: Rationale for a Comprehensive DisciplinePerfect Imperfection • Strategic industry! • Unlike products ... Unsustainable business Government intervention Bail-out of shipyards Distortion

Thank You!

More info: www.seaurope.eu