German Shipbuilding Industry

Germany has always been an important shipping and shipbuilding nation. Germany's military ship production is a very small percentage of its commercial ship production, as measured by GRT. German military ship production peaked at about 51,000 equivalent GRT in 1984 and reached that level again in 2006. It has averaged about 15,000 equivalent GRT per year since 1980. UK warship and auxiliary ship production has averaged about 24,000 equivalent GRT per year over roughly the same period. Thus, the shipbuilding industries of the United Kingdom and Germany are very different. The United Kingdom has maintained a larger military shipbuilding industry than Germany has but with almost no commercial ship industry, while Germany has maintained a solid commercial ship industry but a comparatively small military shipbuilding industry.

At the end of World War II, Germany's shipbuilding industry was all but ruined. Harbors were clogged with rubble and littered with mines, internal waterways were destroyed, and shipbuilding firms were scheduled for destruction. Yet barely ten years later, the Federal Republic's port cities, notably Hamburg and Bremen, were churning out merchant ships, freighters, oil tankers, and military vessels. By 1954, shipbuilding was one of West Germany's largest exporting industries. The ports and coastal areas of northern Germany fell into the British and Soviet zones of occupation after World War II. Yet under the terms of a 1944 agreement, the United States was granted administrative control over the city and port of Bremen and, consequently, its largest shipbuilding firm A.G. Weser.

Germany sustained a substantial shipbuilding industry for many years. The commercial industry averaged about 1 million GRT per year since 1975. By the early 1980s, West Germany, like other high-wage countries, had decided that the only way to remain competitive in shipbuilding is to concentrate on highly specialized, small vessels and leave ordinary series construction to the Far East. Consequently, Germany is looking toward continuous technical innovations and new ship designs in building high quality ships for the future.

Since 1975, German shipyard capacity had been reduced by 75 percent in the large shipyards and by 40 percent in the smaller ones. The biggest realignment of yards has recently taken place in the Bremer and Bremerhaven region. At yearend 1983, there were 4 7,000 employees in the shipbuilding industry, a reduction of 7,000 from the previous year. During 1983, there were strikes and yard takeovers by shipbuilding employees in protest of the reductions. In 1983, labor-wage compensation costs in West Germany, at $11.61 per hour, were among the highest in the world.

In 1983, West Germany held 3.7 percent of the world market for shipbuilding and ranked third behind Japan and Korea for new ship orders. In spite of reductions in shipbuilding capacity in the past few years and an increase in new orders during the first half of 1984, there are serious concerns about the long-term prospects for the German shipbuilding industry. As of September 1984, capacity utilization was at 90 percent but is expected . to drop to 55 percent by 1985. Orders were low at the end of 1983, totaling 601,930 gt. Of this total, 593,765 gt were delivered during the first 9 months of 1984 and new orders amounted to only 244,342 grt. Only 20 percent of total orders were for export, mostly to Third World countries.

West German shipbuilders had generally been successful in switching from larger, less sophisticated ships to more specialized ones. However, the German industry's movement toward higher value ships had not compensated for the loss of orders for larger ships. A dip in the late 1980s coincided with the dip in world shipbuilding at that time. During much of the 1980s, traditional shipyards throughout the world suffered from the worst shipbuilding recession in history, precipitated by the oil crisis of the mid-1970s and its subsequent detrimental effect on seaborne trade. The severity of the situation reflected not only the cyclical nature of the shipbuilding business responding to fluctuations in the shipping market, but also the massive overbuilding of shipbuilding capacity that had been undertaken in Japan and Europe in response to an unprecedented, highly speculative demand for new ships -- particularly tankers -- during the 1960s and the early 1970s.

The response of most governments of the world in the 1980s to this situation was to provide increased measures of shipbuilding assistance. Since the end of the Second World War, German economic policy had been based on a "social-market" model which is characterized by a substantially higher level of direct government participation in the economy than in the United States. In addition, an extensive regulatory framework, which covers most facets of retail trade, service licensing and employment conditions, has worked to limit market entry by not only foreign firms, but also German entrepreneurs. Although the continuation of the "social market" model remains the goal of all mainstream political parties, changes resulting from the integration of the German economy with those of its EU partners, the impact of German unification, pressure from globalization on traditional manufacturing industries, and high unemployment forced a rethinking of the German post-war economic consensus.

Both federal and regional governments subsidize commercial shipbuilding in West Germany through direct cash infusions, ship production grants, preferential financing, and credit guarantees. On the federal level, money for shipbuilding subsidies was paid out of budgets for defense and for economic assistance to developing countries, as well as from funds for direct shipbuilding assistance. Regarding the latter, the German government announced that it would add Dm300 million ($101.7) more to its ship production aid program for FY 1990, bringing this year's allotment to Dm343 million ($174.4 million).

Two shipbuilding groups particularly benefitted from government subsidies: state-owned Howaldtswerke Deutsche-Werft (HDW) and partially government-owned Bremer Vulkan. Most of the ships on order at the HDW yard in 1987, 1988, and 1989 received some government subsidy, with the level of aid particularly high in 1987 and 1988. Two of the contracts were especially controversial, although they ultimately received approval from the EC Commission: the American President Lines (APL) containership deal and Zim Israel containership deal. Of the subsidies paid for the APL ships (three built at HDW and two at Bremer Vulkan), Dm125 million ($69.4 million) came out of funds from the German Ministry of Defense despite the fact that the vessels are merchant ships and cannot contribute to the NATO sealift pool since they are operating in the Pacific and cannot transit the Panama Canal. The U.S. Government contributed to this process by waiving research and development costs on the German purchase of HARPOON.

In the Zim Israel case, the West German government termed Israel a "lesser-developed country" so that it could bypass EC rules and pay a 25.4 percent on an estimated $100 million contract to build four containerships. (Originally, two of the ships were to be built at the Bremer Vulkan yard, but the entire order was transferred to HDW.) In 1989, the German government provided Zim Israel with another lowcredit package and a 30 percent subsidy so that HDW could build three more ships.

Five shipyards in East Germany underwent an in-depth restructuring in the 1990s, benefiting from substantial amounts of state aid of about €3 billion. The restructuring of these yards followed a pattern: the yards were privatised quickly after the political and economic changes following the reunification of Germany and then restructured between 1992 and 1997. Public support was used not only to support their operations, but also for a genuine modernisation of the yards. The restructuring was accompanied by a substantial capacity reduction of 40% on the overall level, including a closure of two shipyards.

The German commercial shipbuilding order book is substantial, totalling 1.84 million GRT,9 or more than 50 times that of the United Kingdom. Germany is the second largest commercial shipbuilder in the European Union, just behind Italy (1.86 million GRT), and ranks sixth worldwide. Germany is the largest of the Western European military export shipbuilders. The demand for commercial shipbuilding in the global marketplace increased from a lull in the late 1980s to a peak in 2002 and 2003. Some national shipbuilding industries, notably the German and the Dutch, recovered during this period.

At the national level, key European governments remain relatively hostile to acquisitions by U.S. firms. The 2002 acquisition of the German shipyard HDW by One Equity Partners (OEP), a U.S. institutional investor, led to fears of a sellout of the German arms industry. These fears were ameliorated somewhat in 2004, when HDW was merged with the shipyards of Thyssen Krupp, with OEP's stake reduced to 25 percent.

In the United States, two naval shipbuilders operate six yards, while Europe has 21 firms with 23 yards. Whereas US defense firms have made a fair number of acquisitions in Europe in these particular sectors, European governments likely have reached the limits in their willingness to allow this trend to continue. In October 2004, two of Germany's biggest shipbuilders, Howaldtswerke Deutsche Werft (HDW) and ThyssenKrupp, merged their assets. The next logical step would be a merger with France's DCN, although some in the French government would like to include Thales in the mix - an addition that the Germans feel would give the resultant company too much of a French orientation. Given the strong hand that the French government has to influence this sector, it would be virtually impossible for shipbuilders to consolidate on their own accord.

Germany's MEKO modular frigates have also done well in the market. These ships are easy and inexpensive to build and adaptable to the customer's system requirements. France is also cultivating the La Fayette frigate for export in competition with the German MEKO vessels and may be considering export of the Mistral LHD (helicopter/dock landing ship) as well. In fact, the export market is largely an SSK/frigate market. SSKs make up about half the market and frigates another third.

With the global financial and economic crisis, the situation for the German shipbuilding industry changed dramatically. After a period of full order books and an unprecedented global demand for commercial ships in the years 2003-2008, many shipyards that had concentrated on commercial shipbuilding, as well as some shipyards engaged in dual activities, with both civil and naval products, have been hit severely by the recent downturn in demand. Commercial shipbuilding had been used by some shipyards to fill periods of underutilization related to the cyclic business of naval vessels or mega yachts. During the crisis years 2008 and 2009, many existing orders were cancelled or postponed. A number of shipyards already had to file for insolvency in 2008/09, e.g. the Cassens, Lindenau, SMG Rostock, SSW and WADAN shipyards and the Nessewerft.

The shipbuilder ThyssenKrupp Marine Systems (TKMS) originally comprised several shipyards in Hamburg (Blohm&Voss), Kiel (HDW), Emden (Nordseewerke), Rendsburg (Nobiskrug), Greece (Hellenic Shipyards) and Sweden (Kockums) focussing on the development and construction of submarines and naval surface vessels, yachts, commercial shipbuilding and ship repair and employing around 8,000 people.

In order to adjust to the global economic recession and to the existing overcapacities, the management decided a radical change of strategy and a complete restructuring of TKMS in 2009. This involves quitting the market for container shipbuilding, the sale of whole production sites and the conversion of others, as well as a strategic partnership with the foreign investor Abu Dhabi Mar. in autumn 2009, TKMS finally sold the production equipment of TKMS Blohm + Voss Nordseewerke in Emden to the steel construction company Schaaf Industries AG (SIAG). The new owner SIAG will gradually transform the shipyard under the name of SIAG Nordseewerke GmbH into a production site for components for offshore wind power plants.