What future for our shipyards?

The events of these last several weeks, which have led to the creation of two companies to absorb the 2,600 workers who up to now had been employed in our two shipyards, have been as convulsive as those that took place in the end of 1972 and early 1973. One should read the book Transition to workers' self-management by Gerard Kester to realise how endemic and persistent certain problems are in our shipyards.

Various opinions have been expressed about the significance of the changes which have been agreed to between the government, management and the union. These reactions ranged from the euphoric to the completely sceptical. What are the real prospects for the shipyards? Will the present plan for the shipyards guarantee success?

Like every other commercial organisation, Malta Shipyards has prepared a business plan which addresses all the issues one would normally expect in such a management document.

The fact that this business plan has not been published has raised a few eyebrows in some sectors. I know of no commercial company, whether public or private, that goes about giving details of how it intends to beat the competition.

Of course, the Malta Shipyards is a publicly owned company and it must stand the scrutiny of public opinion and of politicians who represent the interests of the Maltese public who has invested so heavily in the shipyards over the past decades. But this does not mean that commercially sensitive information should be made available to everyone who believes he has a right to have it.

So it is only fair to outline how this business plan was created, who had an input in it, how it was scrutinised and what its principal objectives are.

Discussion on the business plan for the shipyards started about two years ago, initially among the senior management of the shipyards.

Management followed the methodology usually adopted to prepare such a plan. We analysed our 'yards' competitiveness, future corporate organisation, marketing and commercial activities, safety management, production and operations, human resources, management information systems, capital investment and financial projections.

All this was done in the context of an earlier strategic analysis of the commercial and political realities which the shipyards are facing as well as an open discussion on the strengths and weaknesses, opportunities and threats facing our shipyards.

A most important element of course is the analysis of market prospects. At the end of the day the shipyards will only survive if they attract enough business at a margin which at least covers our costs.

The shipyards industry in Europe is an industry in distress. Competition from China, Korea and the Baltic states in shipbuilding and Turkey, Croatia, and the Gulf states and the increasingly more efficient northern European and Mediterranean shipyards in shiprepair, make life difficult for any shipyard like ours that are still struggling to improve their productivity.

Massive overcapacity has led the EU to control state aid to this industry. Malta had to negotiate an agreement which would lead to the phasing out of all operational subsidies by 2008 to enable us to comply with EU competition regulation.

Equally important was the message which we kept getting from our monthly management accounts, namely that whatever we did to increase turnover was not leading to any bottom line improvements because we had no agreement with the union to introduce the work reforms that would improve productivity.

Political developments in Malta over the last two years made it difficult to push these reforms to the top of the agenda of the interested parties.

The business planning process relied heavily on the findings and recommendations made by experts commissioned by the shipyards in the last 10 years, namely Blohm and Voss and Appledore.

Of course, adjustments had to be made to address new realities, for instance, our increasing loss of competitiveness in the ship- building sector. Our business plan, including the turnover and marketing forecasts, was tested for its reasonableness by the same experts who prepared the Appledore Report.

I quote just a part of the conclusions reached by Sue Hall, managing director of Shipyard Economics, in a report she presented to management in 2002 on the 'yards' business plan projections:

"Examined individually the projections of the individual business lines do not appear to be unreasonable, over-ambitious, or ill-founded and they represent a desirable diversification of the business away from being overly dependent on the single sectors of shiprepair and shipbuilding. This diversification should provide a much stronger workload and customer base for the Malta Shipyards and this should make it less vulnerable to downturns in any particular segment."

The report goes on to emphasise the need for "focus and some specialist targeting of marketing and production resources".

The report by Shipyard Economics concludes: "In these early years (of the plan), the main bottom line benefit will come out of the reduction in the cost base, most obviously by making the long overdue separation between the productive and potentially commercially viable labour force and that element that is surplus to the business requirements and comprising significant element of disabled, unproductive, and administrative workers.

"The level of burden has not only had a negative and misleading impact on the P & L bottom line, it has become an obstacle to productivity improvement and culture change that was identified as required in the 1997 Appledore Report... The sooner the social issue of surplus labour is separated from the management challenge of building and sustaining a commercially viable business enterprise, the better for all concerned. The greatest risk to the business is further delay in the restructuring progress."

Our business plan was discussed with the board of directors, with government ministers and with EU officials who had to determine whether our plans to reduce state aid over a period of seven years were realistic. All of these were satisfied with the reasonableness of our plans.

The marketing strategy of the Malta Shipyards is two pronged: diversification into higher added value sectors and deeper penetration in the higher end of the commercial ship- repair market.

In five years' time, our commercial shiprepair activity should account for about 50 per cent of our activities while the other 50 per cent will be made up to maintenance work for the offshore oil sector, yachts and super yachts, conversion of vessels and steel fabrication.

Let me just quote one example on our planning process. We researched thoroughly the super yacht industry. This is one of the fastest growing marine businesses that has the big advantage of being practically recession proof.

The number of super yachts being built in the world at present is at the highest level it has ever been. These super yachts need special facilities to be serviced to the level of quality expected by their demanding owners. These owners are usually prepared to pay premium rates to get a premium quality of work.

We saw an opportunity in this sector but realised that we needed to upgrade our facilities, retrain our workers and brand our services with an easily recognisable leader in this industry. We have so far met the first two requirements. We have installed a dock cover which is one of only two in the Mediterranean and sent a team of our workers to the US for training.

Unfortunately, our prospective partner has recently been involved in a legal dispute about the use of the brand name which he had bought and the joint venture proposal is now on hold.

If this matter is not cleared soon, we will need to look for other partners who will bring with them the branding which we need. In the meantime, and despite this setback, our super yacht business is growing according to plan.

This diversification in itself will not solve our problems. In our endless inward looking public discussions on our shipyards we often overlook what our competitors are doing.

Niche markets by definition are few and an overcrowded European shipyard community is targeting these markets with determination and passion. We just cannot afford to waste more time while our competitors are picking the cherries.

Our commercial objectives can only be achieved by improving our productivity. At present we estimate that our production workers are productive for 35 per cent of the seven hours which is available for work in each day.

We need to improve this to 65 per cent in five years if we are to achieve our business objectives. A 65 per cent level of productivity will bring us at par with most European shipyards, even if there are several north European shipyards that achieve even higher productivity levels.

We have compared our pricing with that of our competitors in different sectors. Our pricing will continue to be aimed at recovering all costs because our saleable hours are capped at a level of two million hours per annum. This is why it was important to cap also our costs at a reasonable level.

We are no longer a low cost country but over the past few years we have shown that several jobs we bid for and won have left us a good margin of profits. If we can replicate this experience in every job we win we will have a good chance of achieving our business aims.

This improvement in productivity will not come about automatically simply because we have agreed on a programme of work practice reforms with the union. There is a big difference between knowing what needs to be done and knowing how to do it. Once again I quote Gerard Kester who described the Malta Drydocks situation in 1973 in his book Transition to workers' self-management:

"Estimates that concealed under-employment (in Malta Drydocks) ranged from 500 to 1,000 workers. The Drydocks was incurring heavy losses - during the four-year period since nationalisation over Lm9 million - and these losses had to be financed from public funds.

"About a quarter of the total outstanding public debt was accounted for by advances to Malta Drydocks. Also, the Drydocks was still faced with the very difficult problems of work organisation and performance. Its strict demarcation lines between jobs, slow rhythm of work and system of fringe benefits, characteristics of the 'yard when it had not been a commercial undertaking, had not changed much and moving, retraining and transferring personnel was difficult."

The passage of 30 years, a succession of several different political administrations and the involvement of a quite a few government ministers responsible for the shipyards, has, unfortunately, left us with the same basic problems relating to low productivity.

Today the 'yards management has to face the same difficult tasks of bringing about change. We plan to do this by keeping our workforce and the public informed of what needs to be done and what progress we would be achieving.

We need to motivate our workers to face the difficult challenges ahead of us with determination. The safety nets that have been in place to help the shipyards survive despite their serious deficiencies are now being dismantled. We know exactly what we will get from the government... the rest depends on our performance.

Other factors examined in the business plan included a physical infrastructure upgrading programme. For the past 30 years hardly any significant capital expenditure has been made in the 'yard. The business plan identifies the most urgent capital needs of the 'yard because failure to upgrade the infrastructure will seriously impair our chances of improving productivity.

Similarly, we have examined the need to retrain most of our younger workers to be able to cater for the new skills which progress in technology and the different markets we want to enter have made indispensable.

Our apprenticeship scheme has started, even if we are finding it very difficult to retain good apprentices who, unfortunately, see little future in our shipyards industry and prefer more "safe" jobs.

During the course of the recent negotiations, I have been asked to "guarantee" that now that work reforms have been agreed to, there will be no further problems of performance in the shipyards.

My reaction is that business is based on taking risks and that the only guarantee we all have and can give is that one day we will all be dead.

When the best-managed and largest private company in Malta frets about its decreasing competitiveness, why should anyone expect our shipyards industry to give a lifetime guarantee about its future commercial viability?

Placing the responsibilities of the different stakeholders of the shipyards in neat pigeonholes and pretending that once these reforms have been agreed to on paper, from now on success or failure is solely management's responsibility will destroy any chance of survival that the shipyard industry in Malta has.

Those who, like Shylock, are asking for their pound of flesh from management who insisted on well-defined changes will soon understand that failure to achieve results will hit them too.

The "blame culture" which at times characterises the way we go about our business in Malta will only lead to wasted energy, frustration and failure.

A failed shipyard will have no further need for shareholders, for a board of directors, for management and, worst of all, for workers.

If we succeed we will all succeed, if we fail we will all be worse off. However much we like to point figures at each other, we will be better off concentrating on beating the competition which loves to see us hurl insults, insinuations and hatred at each other.

Mr Cassar White is chairman, Malta Shipyards.

Tomorrow: "Our future is what we make it".