Prof. Dr. Oral Erdoğan

1.   Existing Utilization Problem in the World Shipbuilding

Ø  Seaborne Trade, Fleet, New Orderbook Ø  Utilization of Fleet

2.   The Competitiveness of Turkey’s Shipbuilding Industry

}  Review of the literature. }  Contemporary developments in shipbuilding industry

(world vs Turkey) }  Corporate Governance }  Forecast and Projection Analysis }  In-depth Interviews and Survey Analysis }  Conclusion

Seaborne trade continues to rise, but slowly…For tankers, thanks to the lower oil prices, trend is more favorable, for container it seems really sluggish so far, for bulkers the demand gives some hope.

For the supply side of the maritime transport, the seaborne fleet is increasing too. But again slowly. Segments need more detailed analysis. For instance, just for the dramatic increase in the total fleet between 2009-2013, bulker deliveries dominated the sector.

Since 1997, the fleet ,increased more than 150%. The most rapid increase has been in container fleet; 450%.

For the shipbuilding market, the orderbook finally responds to recent sluggish demand.

No Country Number DWT CGT %(CGT)1 China 1538 84.5 28 36.62 Japan 762 54.1 18.6 24.33 S.Korea 420 44.7 18.1 23.74 Italy 28 0.1 2.75 3.65 Germany 39 0.3 2.4 3.16 Philippines 72 7.2 1.98 2.67 Brazil 57 2 1.07 1.48 Vietnam 81 1.5 0.81 1.19 Romania 42 1.1 0.62 0.810 USA 76 0.6 0.56 0.711 Taiwan 20 1.12 0.46 0.612 Russia 48 0.28 0.42 0.513 Norway 29 0.08 0.36 0.514 Turkey 49 0.2 0.33 0.4

total 3261 197.78 76.46 100

China is leading in the new building orderbook, while Japan catches the second row in front of S. Korea. Turkey is missing upper rows.

The seaborne trade (demand) based on one unit (DWT) fleet has been decreasing since 2007. That clealy explains the lower freights, time charter rates, ship values and earnings.

}  Objective }  Literature Review }  Contemporary developments in

shipbuilding industry }  International developments and

standard in global shipbuilding industry

}  R&D and technological advances }  Corporate Governance }  Forecast and Projection Analysis }  In-depth Interviews and Survey

Analysis }  Policy Recommendations

The book titled «Türk Gemi İnşa Sanayinin Rekabet Gücünün Artırılması» is prepared by the Piri Reis University and published by GİSBİR in 2017.

}  To contain the different dimensions of the shipbuilding industry, evaluates the existing potential of Turkey today.

}  Taking off from the theoretical relations between development, industrialization and foreign trade axes, it illustrates in detail, the key role of the sector for Turkish economy.

Literature 1: Industrialization and Economic Development } Rosentein-Rodan (1943, 1966) “big-push”. Selective industrialization. } Hirschman (1958) unbalanced growth and economic development. ◦  Both discuss the place of “state-government” in key industries’ development

phases. Literature 2: International TradeContemporary Development in International Trade:

}  Not only between industry trade but also within industry trade and specialization matters (Krugman, 1979, 1991; Helpman and Krugman, 1985). Product Differentiation and the Existence of Monopolistic Competition

Literature 3: } Porter (1990) stands as a milestone among the industrial organization literature.

Diamond Approach: Productivity, Technological advances and R&D, Adaptability of Labor force, Link among int’l trade, R&D, productivity.

Literature 4: } Sung (2009) implements Porters “5 Force” approach to shipbuilding industry. Suggesting that: High cost of capital, need for high-quality equipment, difficulty in supply-chain management, taxes, lack of skilled workers all act as entry barriers.

}  Yujing and Xinhua (2014) focus on the role of state to increase competitiveness through various incentive mechanisms in China (i.e. direct subsidies on inputs)

}  Competitiveness and its Decomposition: ◦  Macro Level Analysis are investigated: World Economic

Forum (WEF), International Institute for Management Development (IMD), International Finance Corporation (IFC)

◦  Alternative approaches are highlighted: Market focus, source focus, price focus

◦  Specific emphasize on shipbuilding industry: and

Event Studies: China, South Korea, Japan, Vietnams and India

}  Fleet projections present a variation of demand on the types and class.

A two step analysis is implemented: Forecasting Global Trade by using a multivariate time-series ARMA model using: GDP and Commodity Prices 𝐺𝑙𝑜𝑏𝑎𝑙𝑇𝑖𝑐𝑎𝑟𝑒𝑡 (𝑡) = 𝑓(𝐺𝑆𝐻 (𝑡−𝑖) , 𝐸𝑚𝑡𝑖𝑎 (𝑡−𝑖) , 𝐴𝑅𝑀𝐴) Forecasting world fleet (demand) by using a multivariate time-series ARMA model using: Global Fleet Demand, Global Trade Volumes 𝐺𝑙𝐹𝑖𝑙𝑜 (𝑡) = 𝑓(𝐺𝑙𝐹𝑖𝑙𝑜 (𝑡−𝑖) , 𝐺𝑙𝑜𝑏𝑎𝑙𝑇𝑖𝑐𝑎𝑟𝑒𝑡 (𝑡−𝑖) , 𝐴𝑅𝑀𝐴)

}  Before surveying, an in-depth interview has been done with sector representatives

}  Three sessions with three sector representatives

}  Two open-ended questions were asked: ◦  What are the factors affecting Turkish Shipbuilding

competitiveness? ◦  To become competitive what should be done?

}  Within this study ‘how the representatives of the sector position Turkey against the other opponents in terms of shipbuilding competitiveness’ is observed through a cluster analysis (27 factors in total).

}  Asked to compare Turkish Shipbuilding to other rivals (S.Korea, China and Japan) in terms of below 50.000 DWT and above 50.000 DWT capacity.

}  39 shipyards (80% of the whole sampling) responded. }  Factors compared: cost of labour, capital, taxation, subsidies,

material (e.g. Steel), main and auxiliary engines, concept and detailed design, government support, shipping sub-industry capabilities, etc.

}  The expectations are still dull in the aftermath of 2008-9.

}  Growth, Trade, Commodity prices, and fleet own dynamics are the main components considered.

}  Main objective is to see if there is any type-size wise segmentation in the demand.

2015 Min Max 2015 Min Max 2015 Min Max2020 Tanker 111.7 121 126 29.79 28.9 31.5 194.25 180.4 193

Bulker 91 86.7 92.3 192.4 233.8 240.4 308.2 405.8 431Container 1724 1701.8 1951.4 3638 2606.6 2839.3 10605 21476.8 24396.65

2022 Tanker 111.7 122.7 131.9 29.79 28.3 32.3 194.25 180.7 192.9Bulker 91 84 94.5 192.4 257.4 279.5 308.2 469 517.1Container 1724 1696.4 2061.9 3638 2081.5 2551.6 10605 28973 35713.7

Handysize Panamax Post-Pana/Cape/VLCCSummary(mlnDWT,000TEU)

Fleet projections within the scope of this study present a variation of demand on the types and class. In this respect, until 2022, it is expected to have an improvement in demand for tankers and container ships in small classes, bulk carriers in medium class, container ships and bulk carriers in big classes. In ship types, the demand improvements are expected to in Anchor Handling & Towing (AHT) vessels, chemical tankers and offshore vessels.

}  According to the projections in this study, even for a fleet that can reach 2.2 billion DWT by 2022; the renewals within these 5 years and additional inclusions dictate around 600 million DWT of newbuilding.

}  Similar predictions can be made for longer periods. Essentially, the demand for newbuilding will continue and the competitive shipyards will continue to have their slices from the cake.

}  It must be taken into account that the rise in demand is also motivated by new international regulations.

BELOW 50.000 DWT Turkey Other

Countries X SD X SS

Cost of labour 5,49 1,27 6,72 2,44 Cost of capital (Loan interest rates, cost of equity…) 3,59 1,34 7,22 1,95 Cost of taxation, subsidies etc 3,95 1,54 6,85 2,02 Concept design 6,21 1,85 6,72 2,16 Cost of materials (e.g. Steel) 4,62 1,53 6,91 1,89 Cost of main and auxiliary engines 3,08 1,79 6,61 2,28 Detailed design 7,00 1,56 6,72 2,04 Government support 4,11 1,94 7,37 1,89 Sub-industry capabilities 5,92 1,88 7,03 2,03 Deliverability to external markets 6,97 1,62 7,13 2,11 Deliverability to internal markets 7,84 1,59 7,61 1,80 Renovation and innovation 6,00 1,83 6,60 2,05 Image and branding capability 6,00 1,61 6,63 2,17 Quality of material 7,21 1,54 6,65 2,13 Quality of labour 6,50 1,43 6,74 1,94 Automation 5,89 1,48 6,69 2,20 Strategic Management 5,97 1,64 6,46 2,05 Operational Management 6,16 1,72 6,74 2,01 Financial Management 5,74 1,73 6,99 1,97 Human Resources Management 5,63 1,28 6,96 1,96 Occupational Health and Safety 6,89 1,50 6,54 2,35 Eco-ship building 6,19 1,57 6,50 2,24 Shipyard Layout and environmental fit 5,58 1,48 6,82 2,11 Copperation capabilities 4,44 2,11 6,28 1,98 Finance capabilities due process 4,33 1,76 7,54 1,75 Post Finance capabilities due process 3,43 2,02 7,23 1,78 Warranties in terms of shipbuilding 4,14 1,36 7,29 1,80

ABOVE 50.000 DWT Turkey Other

Countries X SD X SS

Cost of labour 5,00 1,32 6,70 2,35 Cost of capital (Loan interest rates, cost of equity…) 3,27 1,03 7,23 1,89 Cost of taxation, subsidies etc 3,46 1,33 6,96 1,96 Concept design 4,62 1,63 6,92 2,10 Cost of materials (e.g. Steel) 4,44 1,62 7,00 1,82 Cost of main and auxiliary engines 2,95 1,52 6,76 2,13 Detailed design 5,97 1,38 6,97 1,98 Government support 3,49 1,63 7,48 1,86 Sub-industry capabilities 5,23 1,66 7,15 1,97 Deliverability to external markets 4,45 2,35 7,00 2,29 Deliverability to internal markets 5,88 2,06 7,67 1,78 Renovation and innovation 5,08 1,66 6,56 2,04 Image and branding capability 3,36 1,87 6,76 2,26 Quality of material 6,35 1,32 6,67 2,03 Quality of labour 5,35 1,90 6,80 1,82 Automation 4,77 1,53 6,66 2,12 Strategic Management 4,93 1,78 6,68 1,96 Operational Management 4,99 1,72 6,76 1,92 Financial Management 4,24 2,18 7,05 1,90 Human Resources Management 4,79 1,52 7,07 1,86 Occupational Health and Safety 6,32 1,36 6,54 2,29 Eco-ship building 5,90 1,55 6,49 2,19 Shipyard Layout and environmental fit 4,08 1,53 6,79 2,18 Copperation capabilities 3,39 1,52 6,19 1,94 Finance capabilities due process 3,50 1,77 7,59 1,67 Post Finance capabilities due process 3,23 1,79 7,38 1,63 Warranties in terms of shipbuilding 3,22 1,38 7,37 1,77

(t = 5.39, df = 30, p < .001, 95% CI for mean difference 0.84 to 1.87) (t = 10.68, df = 52, p < .001, 95% CI for mean difference 2.31 to 3.39)

}  Within the study ‘how the representatives of the sector position Turkey against the other opponents in terms of shipbuilding competitiveness’ is observed through a cluster analysis (27 factors in total).

}  According to the outcomes; although China, India and the Philippines are clustered together, China seems to be a little away and it differs from the others. Spain, South Korea and Japan also make a cluster. But again, Spain is positioned a little away and it is regarded different from the others. The interesting point in this case is that Turkey is regarded as a cluster itself and it is in a different position from all others. That means, the representatives of the sector view Turkey away and different from other two clusters and having a lower competitiveness.

}  A questionnaire applied to the representatives of the sector determined the key factors which are affecting the competitiveness between Turkey and the countries of South Korea, China, India, Japan, Brazil, Spain and the Philippines in building below 50,000 DWT vessels. These factors which are considered as having a negative impact in our competitiveness are:

}  Cost of Capital }  Lack of enough co-operation between the shipyards }  Material costs }  Taxes, social security/insurance premiums and other costs }  Financing through building and post financing means }  Main and auxiliary machinery costs }  General support policy of the state.

}  Turkish shipyards sustained a successful rise to the upper levels of the world orderbooks with a speedy progress in 1990’s and a high performance in the beginning of 2000’s.

}  Although effected heavily from the global financial crisis that started in 2008, Turkish shipbuilding industry is still a major player in international productivity and competitiveness.

}  In the light of financial theories; in order to increase the competitive advantage of an industry, related costs must relatively be lowered and the quality is needed to be higher.

}  Therefore, establishing a correct balance between the price and the quality is unavoidable for achieving a higher more competitive status in shipbuilding industry.

}  In this regard, where the profit margins are very low and the work is carried out even in losses, the governments can become the main definers of sectorial competitiveness.