Riding The Construction Wave

Most people probably think that most of the world’s cruiseships are built in the large Asian shipyards, but they are wrong. The cruiseship construction industry is currently dominated by four shipyards in Europe that have maintained an 84% market share since 2002.

Fincantieri of Italy is the market leader with 34% of the market, followed by Kvaerner Masa-Yards of Finland with 20%, and Meyer Werft of Germany and Atlantic Container Line of France, both with 15%.

EUROPE VS ASIA

According to Dr Reinhard Lüken, secretary general of the Community of European Shipyards Association (CESA), the European yards have a hold on the market due to their specialist skills and longstanding experience. “Cruiseships belong to the most complex ship types,” he says. “Building these ships successfully requires high specialisation and substantial experience; both have been developed in Europe over the last two decades. Since 1980, European yards have delivered more than 97% of all cruiseships worldwide. Based on their (European shipyards) extensive experience, a specific set of capabilities has been developed.”

The required design capacity for cruiseship construction goes far beyond that of cargo ships. “Designing a prototype cruiseship requires more than one million man-hours,” adds Lüken. “Also, in the production process the requirements differ substantially, because each part is produced in very few numbers. Additionally, the yard has to have sophisticated project management systems in place that can handle such large-scale projects, starting from financing to organising more than 1,000 sub suppliers. After all, in cruiseship construction, outsourcing can amount to 85% of the project value. In this context, an excellent network of European marine equipment suppliers is another important asset.”

It would seem that the European yards have the infrastructure, design and planning experience and project management skills to build excellent cruiseships and still turn a substantial profit. Although the Europeans are currently on top of this particular market, it does not stopped yards elsewhere from trying to break into the cruiseship construction market.

Korea’s Samsung Heavy Industries, Hyundai Heavy Industries and Daewoo Shipbuilding & Marine Engineering have all expressed an interest in taking a share of the shipbuilding market. For these companies the economics speak for themselves: while an oil tanker would earn the company $800 per tonne, an 110,000 tonnes cruiseship would earn them $450m, which is more than $4,000 per tonne.

Although the rewards are there, the industry is a risky one for non-established newcomers. “There are certainly many highly competitive shipyards in Asia that may find the cruise sector attractive,” comments Lüken. “However, the entry barriers are fairly high due to the technical and commercial risks. Several newcomers in the past few years have experienced heavy losses and have subsequently stepped out again.

“An example of this is the major Japanese shipbuilder Mitsubishi Heavy Industries, which attempted to break into cruiseship construction in the early 1990s, but ended up nearly $100bn in debt.” Lüken believes that the European yards’ technological leadership in diverse areas is a significant advantage over the Asian yards, and they are constantly improving with innovative designs and advanced production methods, and by promoting innovation among their teams of experienced subcontractors.

“The Europeans have the specialist knowledge and experience to build excellent cruiseships along with a vast network of equipment and service suppliers, of unmatched quality and density,” he says. “They also have a high degree of flexibility in meeting customer demands at any time.”

FUTURE PROSPERITY

Although the future is not set, and the world economy can change in a short space of time, the future for European cruiseship construction in the short and longer term looks positive. According to Lüken, the market has been growing by almost 10% each year for over a decade. “This growth has been possible because of new innovative tonnage,” he says. “The cruise lines know the importance of reliable shipyards, and I believe that both sides will continue to prosper and benefit from an ongoing increase in demand.”

Lüken is confident that the cruise industry will continue to grow both in the traditional markets as well as in new ones. “Some experts are predicting that by 2015 as many as 34 million people could take a cruise vacation,” he says. “This would mean the current figure of about 14 million would almost triple within the next decade.

“Even if you consider this scenario to be a bit optimistic, it is certain that cruise lines offer very attractive and cost competitive products to the consumers.”

With prosperity improving fast in emerging markets such as China and India there will be vast long-term business opportunities for the cruise industry. However, the European and US markets offer much more potential. “Of course, there will always be more risk in specialising in specific market segments, such as the cruiseship market, and this requires a certain dependence on the individual cruise companies to order new ships or refits,” says Lüken. “This is generally the case in any industry exposed to market forces, but we (CESA) are confident in the long-term growth potential of the cruise sector and that the current strong position of European shipyards can be maintained, as a lot of time and effort is being devoted to developing innovative technologies.”

Some of the European shipyards, such as Fincantieri, also have a lot of business with ferry operators. Although these projects are substantially smaller than cruiseships, they can be very lucrative and help to keep the order book full.

REFIT FACTOR

Cruiseships have to have regular refits during their lifetime to upgrade facilities and to conform to new standards and regulations for safety at sea. “Refit is a rapidly growing market, albeit much smaller compared with newbuilding,” says Lüken. “All cruise vessels require regular refits in order to provide attractive new facilities to the passengers. It is a cost-effective solution to exploit existing capacity. Growth and new market opportunities will be realised with the construction of new tonnage – it is expected that the refit market will basically grow parallel to the cruiseship fleet. The cruise market is currently experiencing an upward business cycle after a period of consolidation with comparatively low ordering activity. This is also demonstrated by the fact that several completely new designs have been ordered or are under discussion. Therefore, both the newbuild and refit markets are very good for the
European yards at the moment.”

The introduction of new technology has helped European shipyards to make cruise shipbuilding quicker and cheaper. Many of the ships under construction can be regarded as modular in design, with components being produced to agreed custom designs off-site by subcontractors for delivery and installation to an agreed timescale.

Up to 85% of any cruise building contract can be handled by subcontractors, the process then relies on excellent project management and a high degree of engineering skill to fit all the pieces together. A single project might employ 800 subcontractors, and so their efficiency and productivity is a major factor in the success of the project.

Technology obviously plays a big part in this and is paramount in saving time and manpower. According to Lüken, “Productivity increases in European shipyards are indeed quite remarkable, and this is mainly to the benefit of the customers. The products have substantially improved over time and therefore statistics might not correctly reflect the situation.

“However, we see that ships twice as large are being built in almost half the time that they were ten years ago.” An example of progressive technology in European shipyards is the automated panel line at Fincantieri’s Monfalcone yard in Trieste, Italy. This is one of the first yards where designs go directly from the designer’s computer to the factory floor. The flat panel sections are produced by an automated process without being touched by human hands.

LONG-TERM SUCCESS

The success of European yards relies on a well-trained and dedicated workforce and the shrewd sourcing of materials and technology at the best possible price. There could be further value for the Europeans in forming alliances with Asian or US shipbuilders to facilitate the exchange of technology and skills. As most of the technology would be from the European side, all the USA could offer is finance. Fincantieri has signed cooperation agreements with both US and Chinese yards in the past to exploit capacity where costs are lower, and increase strength through alliances.

A world-class shipbuilding company has to hedge its bets against the future. “A dedicated and skilled workforce, cost-effective sourcing of materials and technology are all decisive for the total success of any project,” says Lüken. “The most important factor is reliability. The investments involved are very large and the technological risks are considerable. For the cruise lines it is important to have suppliers that know their business.”

As far as cooperation with other yards outside Europe goes, Lüken believes that, taking the required skill levels into account, labour cost differences appear less obvious. “Additionally, considering that steel processing and outfitting are most cost-effective when carried out in the same location, there seems to be limited opportunities for cooperation over long distances,” he says.

With demand for new cruiseships built in Europe increasing, in order to accommodate these orders yards may have little option other than to expand their production facilities, a costly and time-consuming operation. Another option may lie in following the example of Fincantieri, which has formed alliances in the past with foreign shipyards with spare capacity. “The supply capacity has been growing in recent years and will continue to do so gradually,” comments Lüken. “What is most important is that the supply side is sufficiently flexible to adapt to the changing demand. I believe this has been proved to be the case.”

FULL STEAM AHEAD

It would seem that the European yards are riding the crest of the wave when it comes to the cruiseship construction business. However, with the cost of materials increasing and non-European shipyards waiting in the wings for an opportunity to prove themselves, European yards must protect their markets and look towards the future by investing in the best technology and personnel and possibly forming alliances with Asian and US shipbuilders.

But, with the best technology, an excellent network of subcontractors and suppliers, and creative state-of-the-art cruiseship design, European yards are far ahead when it comes to creating unique signature vessels that passengers will want to return to time after time.