Afloat on debt
The recent history of the country's shipbuilding industry offers a useful lesson in complacency. The late-1990s saw yard managers and owners satisfied with fat order books that promised steady cash flows begin to avert attention from shipyard capacity, worker productivity, account management and a souring sentiment among the industry's principal benefactors - banks.
Szczecin Shipyard Porta Holdings was forced to begin bankruptcy proceedings this summer. That single event has sent shipyards in Gdynia, Gdańsk and Szczecin reeling. Formerly generous creditors turned risk averse, and once loyal customers now eye other ports of call in Europe and Asia.
The drift from relative riches to rags was fast and inconspicuous for the Szczecin shipyard, in particular. "We somehow one day woke up without access to money," said Andrzej Zarnoch, the sales director of New Szczecin Shipyard (SSN). Of course, Zarnoch realises the shipyard's much more complicated path to collapse. But the difficulty of securing a future for the industry is more important than vetting the past and casting blame, he declared.
With significant aid from the Ministries of Economy and Finance, shipbuilders now must inject optimism and confidence into former and potential customers and banks, as well become more efficient producers. The future of the country's industry that employs thousands rests on these factors.
The Szczecin yard exemplifies the state of the country's industry. In July, the 100% state-owned Industrial Development Agency (ARP) bought Allround Ship Service (ASS) company from bankrupt Szczecin Shipyard Porta Holdings for a "symbolic złoty". Swift government action to resurrect operations, which now directly and indirectly employs 4,500, enabled the yard to retain a €549.4 million order book, Zarnoch said. The contract roster comprises old customers that remain loyal, but also new customers, such as Italy's Costa Container Lines.
Still, without enough creditors willing to grant short-term loans to buy vessel materials, customer disappointment looms large.
"We have to secure financing for the projects," Zarnoch said. "The banks think that it's a bit risky. It's going to take a lot of work to bring back confidence in the industry."
If bank reluctance persists, Szczecin will not be able to make good on contracts. To avoid this, the government has stepped in already to guarantee loans. For instance, the state will guarantee a €42.7 million loan for SSN from Bank Handlowy. In addition, the ARP, the yard's owner and the City of Szczecin have agreed to pitch in to ease the cash flow, Zarnoch said. But it may not be enough, and could be too late.
The shipyard is moving slowly forward. After the collapse, ING Bank lšski financed one container ship for Costa Container Lines. State-owned PKO BP has financed four vessels, two passenger and vehicles carriers and one container and one chemical ship. Executives are in talks to secure financing on two more ships, according to Zarnoch. Productivity is better, too.
"At the end of the day, it doesn't matter how much you pay a fellow, it's how much he produces for what you pay," Zarnoch said. "The old shipyard was going to do this but was stopped by unions." He added that worker remuneration hinges more on output, rather than on man-hours, as was the previous custom. Further modification to the labour structure is in the works. He said it is highly unlikely that the shipyard would let any workers go.
While the Gdynia shipyard did not go bankrupt, the mass of potential creditors, nonetheless, categorise it as too risky. The yard, which also owns the fabled Gdańsk shipyard, is ambitiously planning to reach €998.9 million in turnover between 2001 and 2006. One exception is Kredyt Bank, which is willing to lend money based on its past relationship with the Gdynia producer and shipyards, according to Krzysztof Szyszko, head of the bank's project finance department. But he said it is nearly impossible to marshal an adequate bank consortium for the Gdynia yard without specific government support.
"It has almost no financing now," Szyszko said. "We are currently in talks with the Ministries of Economy and Finance. Nothing particular is decided. Meeting after meeting we are getting closer, but there is still a long way to go. We are looking for the government to guarantee 60% of the loans."
He declined to say how much exposure Kredyt Bank has to the yard. Contracts signed by the shipyard include work on new and technically advanced vessels, such as LPG tankers, car carriers, Aframax tankers, Handymax product tankers, multipurpose vessels and container carriers.
The Gdynia yard has a full order book, which will take it to 2005, Szyszko said.
The tenuous financial commitments from the government, banks and customers make industry experts loathe to predict a positive future for the country's ship makers.
"It's difficult to say what will happen at this moment," said Michał Gorzyński, economist at the Centre for Social and Economic Research (CASE). "Too little time has passed. There is an improved financial standing with state guarantees. But the banking sector is strictly afraid."
Gorzyński steers some of blame away from Polish ship makers alone. He said local banks - the producers' lifeblood - were never sophisticated or robust enough to keep production rolling.
"The banking sector is already very week," he said, referring to the prelude to the Szczecin yard's demise. When the shipyard debacle occurred, banks were about to re-evaluate their loan portfolios, as overly risky loans and poor accounting pushed some lenders to the brink of bankruptcy.
The National Bank of Poland's Commission for Banking Supervision (KNB) had to install emergency management at Bank Wschodni and Wschodni Bank Cukrownictwa after poor risk management and accounting could have cost the firms more than €142.7 million. Banks then stepped up their vigilance of risk, which began in earnest in 2000 when Bank Staropolski collapsed. And what better place to start than in the shipyards?
After the Szczecin yard's collapse, the government asked a consortium of banks that lent €349.6 million to write off up to 80%. Not surprisingly, the banks promptly refused on the basis that there was no sufficient restructuring plan.
The heavily subsidised global shipbuilding industry, concentrated in South Korea, China and Japan, is also not a model of excellence. In the past three years, Zarnoch said prices for most vessels have fallen at least 20% because government subsidies have driven down the charges. European Union members, he said, receive 6% of contract prices. And South Korean industry is the target of anger from the West on account of unusually high gifts to builders. South Korean ship makers are under pressure from the EU to raise prices. In September, EU foreign ministers brought this dispute before the World Trade Organisation.
As most of the industry has enjoyed government largesse, Polish builders before the Szczecin collapse relied on the simple market economics to set their prices.
"The shipyard industry globally is very different," Gorzyński said. "It relies on help from the state. It's very difficult to compete in the shipbuilding sector using just market forces."
This is one of the elements that could still drive Szczecin and its compatriot companies over the edge for a second time.
"The competition is extremely difficult because first you have internal problems, and then you have the axe of the world at your back," said Zarnoch of SSN.
Nevertheless, the Szczecin collapse is the shock the shipbuilding industry needed. "The collapse will make the industry more careful," Gorzyński said. "We could see in the last few years that personnel costs were high. They were too risky and took on orders that they couldn't realise."
That's a lesson learned, hopefully, early enough. "At the end of the day, if we keep moving, then our confidence will grow," Zarnoch said. "Definitely, it's a huge task." Shipbuilding companies must do three things at once: improve worker efficiency, build confidence among banks and attract new customers.
"But all this is moving too slowly," Zarnoch concluded.
