A.1. b) Application of the Shipbuilding Framework - assessment by stakeholders

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1 REVIEW OF THE FRAMEWORK ON STATE AID TO SHIPBUILDING RESPONSE BY STX FINLAND OY, FINLAND Contact details: Eero Mäkinen STX Finland Oy Finland Activities: Ship newbuilding; primary products: cruise vessels, ferries, ships for ice operation, research vessels, ships for government services, equipment for offshore industries [ ] Our response is presented in BOLD text below. I. General Questions (Section A) A.1.a) NA A.1. b) Application of the Shipbuilding Framework - assessment by stakeholders 1. Was your enterprise or members of your association a beneficiary of aid under the Shipbuilding Framework since 2004 until June 2010? If yes: Yes 2. Please indicate the total amount of aid (in million ) received by your enterprise between 2004 and June 2010, on a yearly basis, under the Shipbuilding Framework. Please specify the aid amounts under each specific provision of the Framework and if possible distinguish whether the aid was given under an approved State aid scheme or as individual aid: > Innovation aid 18 MEUR (2008), 3,9 MEUR (decision 2010, to be received in 2012); State aid scheme not individual aid > Closure aid > Employment aid > Export credits > Development aid > Regional aid

2 3. In general terms what is your experience with the application of the Shipbuilding Framework? The Shipbuilding Framework, particularly certain elements of it, is considered instrumentally important for the continuation and future of our shipbuilding activities, specifically to facilitate innovation related development work and productivity development. 4. What are the positive and negative impacts of this aid? In particular, 4.1. What impact does it have on the global competitive position of the EU shipbuilding industry? Does it impact on productivity of this industry? The future of our shipbuilding operation is fully dependant on our ability to offer progressively innovative products. We are operating in a relatively narrow product niche and maintaining the market position requires continues development work, primarily in product technology and also in the field of production processes Does it have an impact on individual companies or certain regions? Does it have an impact on employment levels in this industry, for instance in terms of jobs created or lost? It clearly has an impact to maintain the employment level How does aid under the Shipbuilding Framework contribute to the specialisation of the EU shipbuilding industry? Does it promote better qualifications of workers, better environmental conditions/products? Specialization has been the name of the game in our company since 70 ies. Securing and strengthening the position in selected product segments has required and will require continuous and progressively innovative approach How do you evaluate the administrative burden related to the application of the Shipbuilding Framework? From the yard perspective we have not found the burden excessive. A.3. Market developments 5. How would you describe the development of the shipbuilding capacity in the EU in the past decade? What conclusion do you draw of this development for the mid to long term future, in terms of capacity evolution? We expect our company (and we beleive also many other European yards) to maintain their lead position in the niche markets where the yards have been working and will work in the future. The growth potential is related to the growth of these specific product segements.

3 6. Do you consider that there is overcapacity (or threat of) for the market segments in which your shipyard(s)/company operate? If yes, please provide an estimate of overcapacity, per market segment. In your view is overcapacity structural (persisting despite the cycles of the market) or linked with the current ( ) situation? Do you perceive that overcapacity still has the effect of depressing prices in the relevant market segment? Please provide a detailed explanation. As a result of the 2008 financial crisis there still is in our market segments some overcapacity today and for a couple of years to come. However, this is exepcted to fade away as the result of the economic recovery. Market prices are exepcted to recover following the volume recovery at a delay of 1 to 2 years. 7. Please explain how, from your perspective, employment has developed in the EU shipbuilding industry. In particular, how was employment affected by the financial and economic crisis in this industry? What are the perspectives for the future in this regard? Reference is made to the response of our association, CESA, covering the industry as a whole instead of an individual shipbuilding company. b 8. In your view, are there developments in the structure of the EU shipbuilding industry, which call for changing the State aid regime for shipbuilding? Please provide a detailed reply. We do not expect drastic changes to the structure. The slow development of shipbuilding globalisation does not seem to change the environment around State Aid issues in our view. 9. Do you perceive that there are significant trade distortions in the world shipbuilding market that concern the shipbuilding segment on which your shipyard(s)/company is active? If so, please specify the nature of these distortions 1 and the way they impact on your activity. Yes there are. There are clear signs that in certain product segments selected Far Eastern shipbuilding companies (particularly one government owned company in Korea) offer prices well below their cost. European yards have lost recently e.g. a few ferry orders to Korea as a result of this. A. 4. Financing of shipbuilding activities 10. Please describe how shipbuilding is generally financed (working capital financing) in your company/member State. In this regards, has the financial and economic crisis changed the normal sources of financing? Please specify. 1 Examples of distortions could be subsidies by other countries. 3

4 [ ] 11. Based on your experience (as a shipyard; ship owner/member State) what is the proportion of public financing (i.e. State aid and other State support in any form, for example advanced payment guarantees at market rates) versus private financing in shipbuilding? How do you see the role of State aid for shipbuilding financing in the short/medium/long term? [ ] II. Definitions and Scope (Section B) 12. Do you consider that section 2 of the Framework accurately reflects the activities of the EU shipbuilding industry? If not, how should it be modified? Please justify your reply. No. There has been a major evolution of ship types over the last 20 years. Hence the scope could be modified to take into consideration the world of today. 13. Do you agree with the scope of the Framework? In particular, do you consider that the Framework should include State aid to both ship yards and ship owners and third parties, or should it be limited to aid to shipyards? If not, what type of "third parties" is/could be beneficiaries of aid? The Framework has been developed to enhance the activities and secure the position of the shipbuilding industry. Extending the aid scheme to cover shipping 5

5 companies and thrid parties (e.g. shipbuilding suppliers) would de facto result in the aid schemes to support indirectly Far Eastern shipbuilding industries, i.e. would support the competitors of the European shipbuildig industry. Hence, we consider it absolutely critical that the object of the shipbuilding framework is limited to shipbuilding companies and more importantly shipyard operations in Europe. 14. Do you consider that there are provisions - in the Shipbuilding Framework overlapping with those of the maritime guidelines 2, in particular the provisions on investment aid in these guidelines- which set out the rules under which aid to the shipping industry can be approved by the Commission? We have not adequate knowledge on this issue. 15. Do you have any other comments concerning the scope of the Framework? Please justify your reply. III. Specific provisions (Section C) Section C 1-Aid to research, development and innovation 16. Please provide examples of projects that were financed with innovation aid and explain what the innovation consists of. Please also indicate whether these projects consisted mostly of (a) innovative processes for the shipyard, (b) ship prototypes or (c) components of products. [ ] 17. How much does your shipyard spend on R&D activities, as a percentage of total operating expenses, on a yearly basis? What percentage of these costs was clearly incurred for innovation projects? As operating expences vary considerably form year to year the percentage of R&D activities vary accordingly. On the average the R&D expences have been appr. 10 % of the value added of the shipyards and appr. 2 % of the total revenue of the yards. (Outsourced activities - equipment and turnkey supplies cover appr. 80 % of the total cost of the products). By nature of our products and role in the market place every prototype we are involved in is considered highly innovative. 2 Commission communication C(2004)43 Community guidelines on State aid to maritime transport, OJ C 13 of 17.1;2004, p.3 6

6 18. In a given year, how many innovative projects 3 (i.e. expressed as a percentage of the number of ships produced, or of the turnover) are carried out by your shipyard? In the product development/concept development/project design areas 6 to 10 innovative projects are undertaken annually (on the design development level). Our three shipyards deliver appr. 4 ships per year, 2 or more of them prototypes. 19. Do you consider that without innovation aid, your shipyard (or shipyards in general) will in any event produce innovative vessels/ projects, as this is normally required from the market? If not, please explain why. A great majority of our projects can be classified as innovative. The extent of innovativeness vary from project to project. The potential availability of Innovation Aid lowers considerably the threshhold for the company to suggest innovative solutions to prospective clients. 20. Based on experience, are there situations where the innovative project can/could be completed without State aid? Were there situations in which the application for innovation aid was not successful and if so was the project completed anyway? Please specify Major innovations and innovations representing technical/economical/operational risks are not introduced without the availability of Innovation Aid. We have not had any cases with major innovations in the category of the second sentence of the question. 21. Are the innovative aspects of a project likely to be driven by demand of the ship-owner, or developed on the initiative of the shipyard, or the equipment manufacturer, or other? Iniatives come typically from the shipyards or sometimes from a shipowner - not from suppliers. 22. Are the innovative aspects of a project usually used for a whole series of ships or do they usually concern a single ship, based on technical specifications required by the ship owner? Please give examples from your practice. Nowadays large passenger vessels - our main products - are contracted one ship at a time. The series, however, may by 2 to 5 vessels down the road. The length of the series is to some extent dependant on the extent of the innovativeness of the product. 23. Do you consider that since the entry into force of the Shipbuilding Framework, innovation aid has contributed to improving the efficiency and competitiveness of your shipyard/the EU shipbuilding industry? In particular, does it facilitate the introduction and dissemination of new production methods, technologies and products? Does it stimulate or hinder research and development? Do you consider that the present 3 Innovative projects are to be understood as projects bearing innovation in the sense of the Shipbuilding Framework (i.e. compared to the state of the art existing in this industry in the Community) 7

7 "innovation aid" rules are the right tool for reaching these objectives? Or there could be alternative rules/instruments for promoting the efficiency and competitiveness of EU shipyards? Please provide a detailed reply, with concrete examples. Our company has not used the Innovation Aid for production process related innovations but only for product related. This is the result of three reasons: using innovation aid for product related aspects serves directly the potential of securing shipbuilding contracts, our facility investment budget has been quite low for the last couple of years and the limited budget of innovation aid. We consider the present innovation aid scheme very constructive and favourable particularly to support activities towards supporting securing of shipbuilding contracts. 24. Please provide an estimate of the economic impact of innovation aid for your shipyard. Please also explain if the projects that benefited from innovation aid had benefits for the environment. Securing of the two prototype contracts mentioned under item no. 16 above (incl. Appendix 1) are to a great extent the result of the availability of Innovation Aid. Environmental issues are a major part of the innovative aspects in both of the mentioned prototypes. 25. Have you experienced any problems with the application of the current innovation aid rules? In particular, do you consider the rules as existing in your country complex/discouraging? Should the notification thresholds be reviewed? If yes, please specify the details and explain how, in your view, the rules should be modified. After full familiarizartion with the rules we face no problems. Notification threshold: NA to us. 26. Do you consider that innovation aid could be more effective than it is now for the purpose of building "greener' ships"? Would you prefer to exclude from the eligibility for innovation aid other types of innovation and only keep innovation if linked to "greener ships"? Or, do you take the opposite view and recommend a widening of the scope of application. Please specify which sort of amendments you would like to see and justify. Green is today everywhere. Complementing the innovation aid scheme with horizontal environment related rules could enhance the green development even further. Hence, it might make sence to include in the future framework clauses that would represent the application of horizontal environmental aid rules specifically to shipbuilding industry. 27. Do you consider that it is necessary to maintain innovation aid for shipbuilding, in addition to aid under the horizontal RDI Framework? Please justify your reply. We consider it very attractive and well justified to maintain the innovation aid for shipbuilding. One primary reason for the establishment of the Innovation Aid scheme was to be able to get some support for protype development and construction (for the innovative parts of the product) which support was not 8

8 available for shipbuilding industry through horizontal rules. This fundamental aspect has not changed. 28. Can you identify policy instruments other than State aid which could improve the conditions for innovation activities in the shipbuilding sector (such as regulatory instruments, improving networking, coordination and dissemination of information, education and the labour market)? We do not consider any of the aspects listed above fully applicable to innovativeness of products or production processes. Section C 2 Closure aid 29. What would be the impact for the EU shipbuilding industry if closure aid was abolished And if it was maintained? Please justify your reply. As the industry may continue to face capacity reduction or restructuring of operation we still consider Closure aid potentially justified and useful. We realize that Closure aid had not been used a lot but the continuing uncertain environment still justifies keeping that element in place. Section C.3 -Regional aid 30. Please provide an estimate of the number of shipyards located in assisted regions in your Member State. Which regions benefited most from State aid in the shipbuilding sector in the Member States? Question NA to an individual shipbuilding co. 31. What is the relative importance, in economic and social terms, of shipyards for your region? Please provide a quantitative estimate. We expect the Government of Finland has answered this question. 32. Please describe briefly the type of projects that have benefited from regional aid since Would it be possible to carry out the same project without aid? If not, please specify. NA as we have not been a recepient of Regional aid. 33. In case the regional aid rules as currently existing in the Shipbuilding Framework are maintained, do you consider that the scope and aid intensities of these rules are adequate for the type of investments that are necessary in this industry? Please justify We are not fully aware of the details of the Regional aid rules. Inclusion of Regional aid rules to the framework is justified in case the shipbuilding specific rules would give better/clearer/more simple etc. terms to the shipbuilding industry that what the horizontal rules give. 9

9 34. In case regional aid was prohibited for shipbuilding (as is the case for the steel sector) would this prevent investments in the shipbuilding industry? Please specify. Would probaly reduce investment volumes. 35. If the regional aid rules for shipbuilding were aligned to the common rules would there be a danger of increased distortions of competition, given the cyclical nature of the shipbuilding market and the fact that only shipyards in assisted areas would be eligible for regional aid? Is it your perception that there is an appetite among European shipbuilders to increase production capacity and that regional aid could provide an incentive to do so? Do you consider that creating new capacity with the help of State aid would be a right step in a sector with problems of cyclical overcapacity? We do not expect an increase of the capacity as such but recovery of capacity uitlization. We do not have a clear view on the potential of the use of Regional aid in this respect. 36. In your view has regional aid had a positive impact for the regions where shipyards are located? If yes, please provide concrete examples. We do not have such knowledge. 37. Did you experience any problems with the interpretation or application of the current regional investment aid rules? If yes, please specify the details and explain how the rules should be modified. We have no experience on this matter. C.4 Employment aid assessment requested from public authorities 38. In the light of the above, the current provision on employment aid in the Shipbuilding Framework no longer appears justified. Do you agree with this view? If not, what would be the reason to keep this provision? We beleive horizontal rules serve this purpose properly. C. 5 Export credits and development aid 39. Do you consider it is useful to maintain specific provisions on export credits and development aid for shipbuilding? In your view, what is the added value of these provisions? STX Fi considers the OECD provisions give a framework for the government officials to follow, allowing them to operate within the given terms and therefore the provisions are helpful for the utilization of the export credits. 10

10 40. Did you experience any problems with the application of the rules on export credits and development aid? If yes, please specify the details and explain whether in your view the rules should be modified. Please provide a detailed answer. STX Fi is not aware of any specific problems with the application of the rules on export credits and development aid. IV. Options for the future of the shipbuilding framework/ Other issues (Section D) 41. Do you have any other comments on the application of the Shipbuilding Framework or proposals for its modif tion on issues other than the ones covered in the previous questions?ica No 42. Based on your replies above, do you consider that the Shipbuilding Framework should (a) be maintained, (b) modified or (c) allowed to expire in December 2011 and shipbuilding become subject to common rules? Please provide a detailed answer. Maintained for sure and potentially modified in certain areas. 11