INDU Committee Report
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CHAPTER 16:
THE SHIPBUILDING SECTOR
Economic Contribution and Industry Structure
The shipbuilding industry in Canada is generally defined as including establishments engaged in the manufacture and repair of all types of ship of more than five tonnes displacement; activity with lesser vessels is deemed to be boatbuilding. According to this definition, 26 Canadian establishments were engaged in shipbuilding in 1996; there was at least one shipyard in each Maritime province, Quebec, Ontario, Manitoba and British Columbia. There are, however, only a dozen major shipyards in Canada, mostly part of large corporate groups. As of May 1999, there was a workforce of roughly 5,000, with work skills including welding, steel/metal cutting, plumbing, carpentry, electrical work, pipe fitting, as well as numerous other trades required for the construction of a ship.
| The shipbuilding industry in Canada in 1999 comprises employment of approximately 5,000 people and approximately 12 companies. There are four regions where there's activity. In British Columbia, employment is about 1,300. The firms are as listed: Allied Shipbuilders and the Washington Marine Group, which is a fairly significant industrial group. There is one firm remaining in Ontario: Canadian Shipbuilding and Engineering Ltd., in Port Weller, which employs about 700 people. In Quebec, there are two firms, with employment of approximately 1,000: Industries Davie and Verreault Navigation. In Atlantic Canada, there are approximately 1,900 employees in three firms: MM Industra, Friede Goldman Halter, and the Irving Group, which owns a number of smaller shipyards. So we have some major industrial groups in each region, as well as a few small firms still remaining. [John M. Banigan, Industry Canada, 5:9:05] |
Shipbuilding in Canada shows virtually every classic sign of being in decline. Industry shipments in 1997, for example, were approximately $608.3 million, which dropped from something more than $1.6 billion in 1990, while value added by the industry fell from $450 million in 1990 to less than $200 million in 1997. In 1990, there were still 48 shipyards (26 in 1996), while industry employment was 11,984 (5,556 in 1996). This downward spiral is not simply the result of an anaemic economy or a protracted recession that began in 1990; the seeds of the industry's demise were sown in 1976, when the shipbuilding industry began to contract in response to a worldwide glut in seaborne shipping and trade services. For example, ship prices are depressed; using a price index of 100 in 1987, prices climbed to 180 in 1992 but have since dropped to 120. The industry has adjusted to these circumstances by: (1) discarding outdated shipyards; (2) contracting out sub-assembly work; (3) shedding labour; and (4) replacing skilled labour with automated machinery where appropriate.
It appears that all segments of the industry have suffered, but in particular tankers and container ships. In Canada, no market has done worse than the export market. Exports accounted for more than 65% of the industry's gross tonnage built in 1976 and 45% of that built in 1979; however, by 1984, exports had ceased altogether. Not until the 1990s did Canada return to the export market, but, even here, the turnaround was slow. Canadian exports of ships were $68.6 million in 1997, representing an export intensity of shipments of 11.3% -- its highest level in decades.47 Coincidentally, this export performance was sufficient for Canada to record its second straight trade surplus in ships of the 1990s.
Productivity and Competitiveness
A shipyard is essentially an assembly plant equipped to handle structural steel units; this involves cutting, forming and fabricating sheet and plate steel and pipe in conformity with ship design specifications. Additionally, some sophisticated shipyards manufacture propulsion machinery. A shipyard requires at least one building berth or dock with a site spacious enough to accommodate the construction of the hull, a quay or jetty deep enough to allow mooring alongside launched vessels, and a good supply of capital equipment. Traditional shipbuilding was concerned with a series of steps incorporating the fabrication and assembly of individual parts piece-by-piece. With the passage of time, this process has given way to another that involves batch production of standardized components. This development enables shipbuilders to substitute automated equipment for skilled labour and to contract out sub-assembly components to firms that may be more competitive.
Despite the decline in demand for shipbuilding in Canada, the industry has increased its capital stock from $700 million in 1988 to $900 million in 1996, representing an average annual compound growth rate of 2.5%. Given the number of layoffs in this period, the capital-to-labour ratio (capital investment divided by salaries and wages) has increased substantially from an average of about 14% in 1990 to 45% in 1996. The value-added component has declined relative to the value of shipments in the 1990s, which illustrates how much some sub-assembly work is contracted out.
There also appear to be some economies of scale at the plant level, but limited on the firm scale, in the form of multi-product line, multi-shipyard ownership, and vertical integration. Indeed, vertical integration between shipbuilding and shipping services is more the exception than the rule. The same is true of multi-shipyard ownership; there has been very little consolidation through joint ownership in this period of retrenchment. In terms of the industry's productivity, the Committee was told that:
| [L]abour productivity in shipyards has increased by 46% since 1991. Real wages increased by only 3%. He can also tell you that the GDP per shipyard worker is $84,000, which is 68% more than the Canadian average in industry. [Les Holloway, Marine Workers Association, 13:10:50] |
The Canadian shipbuilding industry is not all things to all people. It does not have the facilities to build the largest categories of ships. As one witness explained:
| It's important when looking at the Canadian shipyard industry to understand that we are not necessarily competing head-to-head with the Japanese and South Koreans. Our competitors are in Norway, in the U.K., in Spain, where they have similar-sized yards, where they have similar types of niches they're going after. This is more where the Canadian shipbuilding industry is. We're not into the VLCCs. We're into ship repair, specialized vessels, conversions, and offshore equipment. If one were to look at those areas, the picture would be different from the one where Canada is less than .04% of the marketplace. [Daniel Primeau, Export Development Corporation, 5:9:55] |
This contrasts sharply with the situation in Japan. As one witness put it:
| The Japanese have been big shipbuilders for a number of years. Their strategy appears to have been to specialize in some of the very large tankers and bulk carriers that has been a niche market for them. It's been an outlet for their steel industry in the post-war period as well. They have come to dominate that particular area. They have become involved in a number of specializations in terms of production technology, like modular construction. They have used information technology for CAD/CAM design and some of these sorts of things and have managed to keep their productivity gains quite high in this particular sector, despite being a fairly high-wage country. So as for the challenge of high wages, I guess it is possible, although obviously rather difficult; if you do use technology and you learn how to specialize, you can be competitive in a niche market despite being a high-wage country. [John M. Banigan, 5:9:45] |
Industry Outlook and Policy Issues
The global market is experiencing strong downward pressure, causing the industry to restructure. Reductions in capacity in Japan and Europe have reduced the number of yards from 1,111 in 1976 to 776 in 1996. Industry-led rationalization in Canada reduced employment from approximately 12,000 in the 1980s to 4,711 in 1997. As of February 2000, Canada's share of the international market is small, at 0.03% of the tonnage on order in the world. South Korea and Japan, had 40% and 38% of ship orders by dead-weight tonnage, respectively, with Europe at 10% and the United States at 0.8%.
The Canadian shipbuilding industry is faced with an extremely competitive foreign market, as a result of a significant overcapacity for shipbuilding, a forecasted declining demand, very competitive pricing and new capacity, especially in the Pacific Rim (China, South Korea, Vietnam). Government procurement has declined significantly over the years, as have federal capital expenditures for the departments of National Defence (DND) and Foreign Affairs (DFO) and the Royal Canadian Mounted Police. Budget 2000 will bring some new funding (not yet finalized) to DND and DFO and some of these funds will be used for capital acquisitions.
The Committee was advised that, from a policy perspective, the shipbuilding industry in Canada must be looked at in light of some basic facts:
| In any examination of shipbuilding, one must always be aware of three important premises that have and will continue to have a significant effect on the industry. Firstly, shipbuilders the world over can no longer rely on preferential markets such as those that were once provided by their governments or navies. They must seek external markets. Secondly, few, if any, free market forces are at play in the industry. Shipbuilding has arrived at its present state not by natural market forces but by political manipulation, normally in the form of some form of subsidization. Too often this point is forgotten and discussions of the Canadian industry focus on the role of the market in determining what companies succeed or fail. The market in this industry does not make that determination; governments do. Thirdly, access to competitive financing is a key element in an owner's decision to place an order with a shipbuilder. This is not to denigrate the more traditional factors that determine competitiveness. Suffice it to say that one may put together a good technical proposal at an excellent price, but unless the deal is attractively financed, it is unlikely to be consummated. [Peter Cairns, Shipbuilders Association of Canada, 18:9:05] |
An immediate example of the unfairness comes from trade policy. Despite there being a free trade agreement between Canada and the United States, there are important non-tariff barriers:
| On the trade side, the government will continue its negotiations in multilateral fora to deal with unfair trade barriers. The most difficult one, of course, is what's frequently referred to as the Jones Act. This is an act that has been on the books in the United States for many decades, which essentially says that all vessels plying a trade between ports in the United States must be built, manned, and repaired by Americans, which precludes Canadians and others from accessing the commercial market in the United States. [John M. Banigan, 5: 9:20] |
The Committee understands that a review of a number of issues, including Chapter 11 of the NAFTA, the investor-state dispute settlement measure is being considered by some of the signatory parties and, therefore, recommends:
29. That the Government of Canada seek the repeal of the so-called Jones Act of the United States or seek an amendment to it that would provide an exception for Canadian built, manned or repaired vessels.
Current shipbuilding policy measures in Canada are much appreciated by industry officials, but were viewed as insufficient in light of foreign government intervention in the market:
| I acknowledge that the federal government does give limited assistance to the industry. You are familiar with the 25% tariff on non-NAFTA vessels, the requirement to replace and repair government vessels in Canada, assisted rationalization, accelerated CCA, R&D credits and EDC funding. These are useful measures and important to the industry, but they are not effective in today's competitive market. [Peter Cairns, 18:9:15] |
The Committee concurs with these views and believes that the federal government should be prepared to go beyond existing measures in providing strategic assistance to the Canadian shipbuilding industry in its attempt to crack selective foreign niche markets; however, it should not engage itself in a matching subsidy battle with foreign governments. The Committee recommends:
30. That the Government of Canada consult with all stakeholders of the shipbuilding industry to adopt and modify industrial policies that would assist shipbuilders in capturing niche markets.
47 Export intensity is defined as the dollar amount of exports divided by the dollar amount of shipments.