Something is fundamentally wrong with Finnish shipbuilding

Something is badly wrong with Finnish shipbuilding: it appears to plunge from one crisis to another, both in good times as well as bad ones.

Throughout the years, the yards there have been able to build spectacular vessels, the latest example of which is Oasis of the Seas. However, what the various owners of the three yards that are all owned by STX Europe today have not been able to do is to run them smoothly.

Two decades ago, in the autumn of 1989, a company called Wartsila Marine Industries (WMI) went bankrupt. It owned the yards in Helsinki and Turku. It had a huge orderbook, including two 58,000 gross ton cruise ferries for partners of Silja Line and three 70,000 gross ton Fantasy class cruise ships for Carnival Cruise Lines.

The Soviet trade that had kept the yards busy was on the wane and just two years after this, the Soviet Union itself would collapse. Against this background , the management of WMI had taken orders, such as the Carnival one, knowing fully well that they can only make money if they can significantly increase productivity.

Nothing of that sort would happen, indeed militant unions preferred to carry out their old practises by extending workers' weekend by endless short strikes. This combined with an unworkable target to raise productivity was largely to blame for the collapse of WMI.

Early in 1990, a new company was erected on the ruins of WMI, mainly by Martin Saarikangas, who became its ceo and Ted Arison, founder of Carnival. It was based on a conversion of debt to equity: the customers of WMI that had claims against the company simply swapped the claims for shares in the new company. The move was a brilliant one, if not unique in similar situations in other industries.

In the early 1990s, the shipping company shareholders of Masa Yards, as the new company was called, sold their shares to Kvaerner, the Norwegian engineering group that was rapidly expanding its portfolio of shipyards. Throughout the decade, Kvaerner Masa-Yards (KMY) was a highly successful builder of cruise liners.

However, a new crisis emerged in the turn of the millennium, when KMY was building a quintet of 137,000 gross ton Voyager class cruise liners for Royal Caribbean International (RCI). In line with industry practise, RCI would pay 80% of the contract price on delivery of each vessel. However, KMY would have to pay its staff, contractors and suppliers at a quicker pace, which meant that the company and the entire Kvaerner group then faced a huge need for working capital. The situation became so bad that KMY actually sold some of the building contracts to banks to get some cash.

As the new millennium progressed and the working capital crisis disappeared from the agenda, a new crisis started to build up at what was now called Aker Yards Finland (AYF). Kvaerner had exited shipbuilding after the working capital fiasco and a disastrous acquisition of Trafalgar House, then e.g. parent of Cunard Line.

The Aker group, which already owned the yard in Rauma, acquired KMY and for some time, everything seemed to go quite well. Then, roughly in the middle of the decade, AYF started to take on huge numbers of orders for ferries, mainly from Tallink but also from Brittany Ferries and Color Line. At the same time, it was building the final Voyager class and later the extended version of that design that was to be known as the Freedom class ships for RCI.

Early in 2007, Aker chairman Kjell Inge Rokke, a former fisherman turned billionaire, offloaded the Aker group's 40% stake in Aker Yards (AKY), which was the Oslo-listed parent of AYF. Soon STX stepped in, first by acquiring Aker's 40% and in the following year, making a full bid for AKY, whose portfolio of cruise ship yards also included the former Chantiers de l'Atlantique yard in France.

The years 2007 and 2008 were not good for Aker Yards: their orderbook was too big and both the yard itself and its suppliers and contractors struggled to keep up with delivery dates and in the case of many ferries, failed to meet them. The group booked heavy one-off charges against these problems.

Rumours started to circulate that Yrjo Julin, the Finnish head of AYF, had been encouraged by Rokke to fill the orderbooks and thereby boost the share price of AKY so that he could get the highest possible price for his shares.

Last year, the situation started to change quickly: ship after another was delivered without new orders being won apart that for two 49,000 gross ton ferries for P&O Ferries. Today, the Turku yard only has Allure of the Seas and the Rauma one the two P&O Ferries' newbuildings on its orderbook.

To sum up: why does the Finnish shipbuilder, whatever its name, go through these seemingly endless difficulties in both good times as bad?

Surely e.g. Meyer Werft in Germany needs to look at working capital and try to maintain a stable workoload throughout an economic cycle as well. Yet we have not heard of any of such problems from the quarters of that company.

Could it be that Finland is a nation of engineering to such a degree that apart from getting the physical product right, other aspects of the business matter little?

As a native of that country that has lived out of there for the past 12 years, it sounds like a credible explanation to a certain degree.