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Ukrainian Shipbuilding is waiting for Foreign Investors

In 2003 and 2004 the tendency of production level growth, increase of export potential and direct investment flow in the Ukrainian shipbuilding industry began to be precisely observed. In 2003 the production increase by itself made up 10 % and in 2004 it was approximately at the level of even 15 %. Such indices of the development, a significant underestimation of enterprises assets, low production costs, saved scientific potential and also an economic growth, that begins to appear, as well as political stabilization in Ukraine cannot fail to interest foreign investors. What risks and prospects should they expect in Ukraine?

In 90s shipbuilding industry was surviving with the country a very serious crisis. Credit rates were higher than 100% in the terms of hyperinflation, which made it impossible to use usual financing schemes for shipbuilding; new ships output was almost suspended due to serious problems of the main customer – the state (the Ukrainian shipbuilding industry output had been constituting up to 70 % of the total military and citizen fleet of the former USSR). By the middle of 90s the majority of enterprises had become unprofitable. Attempts of improvement of their situation through privatization were not successful as the state had not managed to attract foreign strategic investors, which scared of serious economic and political risks in Ukraine: the majority of enterprises of the industry passed into the ownership of local investors who did not have enough resources for investment in the development.

Beginning from 2000 the situation began to improve when a series of laws, supporting shipbuilding industry, have been accepted. At the moment 11 large shipbuilding plants, more than 25 Scientific-Research enterprises and a number of small-scale ones, engaging mainly in small ships and boats building, run their activity in Ukraine. About 60 % of enterprises are concentrated in Nikolayev. In 2004 the following enterprises were working with the best indices: “Shipbuilding plant n. 61 kommunara” State enterprise, “Leninskaya Kuznya” Plc, “Sevmorzavod” Plc, “Damen Shipyards Ocean” Plc etc. Comparing with 2003 the volume of rendered ship repair services grew by 65 %. Production growth made up 24,3% at marine instrument-making enterprises, it constituted 76,4 % at assembly enterprises. More than 90% of production has been exported because of the inner market weakness.

Why is the industry attractive for foreign investors?

Among reasons due to which investors are actively interested in the enterprises of the Ukrainian shipbuilding industry the following can be emphasized:

  • The necessity of a ship costs decrease due to transfer of a part of production capacities to the third world countries, specifically to Ukraine, where inexpensive and qualified work force and relatively low-priced raw-materials, metal etc. are available.
  • Favorable geographical location (Black Sea);
  • Low costs of entrance into the market, underestimation of shipbuilding enterprises assets.

Potential risks

Among deterrents can be named the following:

  • Still existing political risks;
  • Lack of development of the inner financial sector to work with shipbuilding enterprises;
  • Low purchasing capability of the inner market (more than 95 % of the production is being exported).
  • Risks connected with not complete investor’s law protection.

A successful example of investment

Probably, the best example of investment into the Ukrainian shipbuilding industry is “Damen Shipyards Ocean” plant (the third in its significance), acquired by Dutch Damen Shipyard Group in 2001. The appearance of a strategic branch investor at the plant has allowed to attract investments in the development and modernization and also provided a stable orders flow for shipbuilding during the next several years (the growth of production volume of the plant made up about 30%). The fact that the next year after being bought the plant received a profit for the first time during the last 5 years testifies to an investment success.

Due to this example the branch has shown its investment prospects in practice – now west holdings, considering the possibility of outsourcing high costs processes (production of ship hulls etc.) to the third world countries, study actively the possibility of acquiring Ukrainian shipbuilding enterprises. Among those who represent the biggest interest are “Shipbuilding plant n. 61 kommunara” State enterprise and “Chernomorskiy sudostroitelnyy zavod”. The last one has already been privatized but the government considers the possibility of cancellation of sales agreement with the following second privatization because of non-observance of investment obligations. “Sudostroitelnyy zavod im. 61 kommunara” has been a state enterprise for more than 100 years. It has been specializing mainly on military orders and has significant production capacities. At the moment it is working out measures to attract strategic investor for the creation of a new production in the not used production space (a sum of investments makes up about 46$ million). It is also likely to be privatized in the medium-term.

Market Trends

Ukrainian shipbuilders due to a series of customs limitations and national market weakness are engaged mainly in export orders among which orders of ship hulls building take a significant place and then are to be delivered to European shipyards and to be completed. Orientation on such production, indisputably, does not allow getting a significant margin but gives an opportunity of survival for many enterprises as well as makes them attractive for selling them to holdings, restructuring their production processes and transferring a part of their production to other countries for cost minimization.

Investors, who plan to invest in Ukrainian shipbuilding, should not forget also about the local market. It is true that its purchasing capability is not high. However, taking into consideration growth rates of GDP and for the most part worn out fleet, a significant orders flow for shipbuilding from local clients can be forecasted.