The Future of Industries: What to Buy and What to Produce? Shipbuilding

7 September 2022

The Future of Industries: What to Buy and What to Produce? Shipbuilding

KEY CONCLUSIONS

There is increasing demand for Russian-made ships, and the industry is in need of additional investment

“One sixth of all shipbuilding and ship-repair enterprises are based in the Far East. That’s 17% in terms of the number of enterprises, 11% in terms of the workforce, and 8% in terms of actual production. Currently, 25 government-supported shipbuilding projects are under way in the Far Eastern Federal District. This support is provided in the form of incentive regimes. <...> Almost 68% of total planned investments have been made, or RUB 175 billion of RUB 257 [billion – ed.],” Konstantin Dolgov, Deputy Chairman of the Committee on Economic Policy of the Federation Council of the Federal Assembly of the Russian Federation.

“Our objective is firstly to determine with more or less certainty what the demand for ships will be for Russian customers. The second aspect is that we are actively monitoring the actual state of ship-repair capacity. This is so we gain an understanding of the objective picture, and know whether we can, with the shipbuilding capacity we have, construct the ships which various customers need today. These customers range from private companies to those which make orders under Federal Law 44, i.e., state-owned companies. <...> Until recently, there was a need for a little over 1,000 ships; however, <...> this has grown. <...> So, we need to construct around 1,500 vessels at our Russian shipyards by 2035. The programme for around 300 ships initially earmarked a little over RUB 130–140 billion of funds. However, just recently it came under review, and a fairly large amount of medium- and large-capacity marine equipment was added to it. Now, RUB 500 billion has been earmarked,” Viktor Evtukhov, State Secretary – Deputy Minister of Industry and Trade of the Russian Federation.

“There is a demand among the regions for more than 250 ships [to boost river tourism and cruise traffic – ed.]. Currently, the programme provides for 140 ships. <...> These include Meteor hydrofoils, Valdai hydrofoils, and Griffin catamarans,” Evgeniy Ditrikh, Chief Executive Officer, GTLK.

Modernization is required and new shipyards need to be built in order to further develop the shipbuilding industry

“If we want to build ships ourselves, there’s no other option. That’s particularly true given the current sanctions. We need to invest heavily in Russia’s shipbuilding industry. In addition, the modernization of shipyards is a prerequisite for further development. If we don’t do this, it will be difficult to compete with our closest neighbours in the region we’re in now. That includes China and North Korea. <...> At least RUB 440–500 billion in capital investment is needed to modernize and develop our shipyards, and to enable them to offer more up‑to‑date ships and a bigger range,” is the Viktor Evtukhov, State Secretary – Deputy Minister of Industry and Trade of the Russian Federation.

“We are proceeding on the basis of building in the places we catch fish. The Far East is home to the biggest fishing fleet. That’s a fact – we have all the shipyards, all the potential, all the expertise, and all the initiatives in place. <...> So, we need to work to our strengths. <...> We need to build in Khabarovsk, Komsomolsk, Vladivostok, and other cities in the region,” Mikhail Degtyaryov, Governor of Khabarovsk Territory.

PROBLEMS

A dependence on imports of accessory equipment and the need to urgently localize production

“We urgently need to localize production of equipment. <...> There are numerous problems in this sector, because Western suppliers are refusing to even deliver equipment that has been paid for in advance, and our manufacturers are not yet in a position to make it themselves. <...> RUB 21 billion will be allocated over three years to fund [the production – ed.] of critical equipment. That includes more than 60 items. <...> Starting from this year, we will be able to meet the demand for this equipment among shipyards and our customers,” Viktor Evtukhov, State Secretary – Deputy Minister of Industry and Trade of the Russian Federation.

“The anti-Russian sanctions have affected the shipbuilding industry as well. They have put certain weaknesses under a more powerful spotlight, and highlighted the degree to which the industry is dependent on foreign-made accessory equipment. The task is now to mitigate this negative effect as much as possible, and to implement long-term plans to build facilities capable of manufacturing our very own high-tech assemblies and components,” Konstantin Dolgov, Deputy Chairman of the Committee on Economic Policy of the Federation Council of the Federal Assembly of the Russian Federation.

“The key problem revolves around the main engines. <...> Currently nobody in Russia makes engines with a capacity of 15,000 megawatts, or even 9,000 [megawatts – ed.]. There’s also not a single mechanical engineering enterprise in Russia which builds dual-fuel engines,” Sergey Tseluyko, Chief Executive Officer, Zvezda Shipbuilding Complex.

Shipbuilding enterprises in the Far East carry an additional burden

“There is a problem which is primarily connected with the financial burden carried by companies in the Far East. <...> This is down to the so-called northern allowance – a social package <...> paid for by the employer. <...> It makes it virtually impossible to compete with Western shipyards – those in the Western part of Russia,” Mikhail Degtyaryov, Governor of Khabarovsk Territory.

“Given the climatic challenges and factors affecting the shipbuilding industry, the lack of investment in fixed assets is undoubtedly leading to us needing to address this somehow,” Alexey Rakhmanov, Chairman of the Board, Chief Executive Officer, United Shipbuilding Corporation.

Sanctions have transformed all economic models and supply chains

“All our financial and economic models collapsed at once. <...> The figures are now very different, so we of course <...> need to work out what to do about it,” Vyacheslav Ruksha, Deputy Director General – Director for the Northern Sea Route Directorate, ROSATOM State Atomic Energy Corporation.

“Our building work is done in roubles, and the subsidies we get are provided in roubles. However, all our key customers plan their revenues in foreign currency. <...> When we convert the cost of a new steamship according to a rate of 62 [roubles to the dollar – ed.], the resulting figure makes our customers go, ‘Are you seriously suggesting we buy your steamships for USD 20 million apiece? That’s never going to happen’. And at that point, we need to either move away from being tied to foreign currency <...> or find some other metric,” Alexey Rakhmanov, Chairman of the Board, Chief Executive Officer, United Shipbuilding Corporation.

“Supply chains have now changed in the world: we need to supply things to other places, supply things under different conditions, supply other types of cargo, and supply things using different steamships,” Evgeniy Ditrikh, Chief Executive Officer, GTLK.

SOLUTIONS

Moving to serial production and conducting expert analyses before a deal is signed in order to avoid being bound by loss-making contracts

“Today, our objective as a manufacturer is to present the customer with projects which can be calculated in advance and agreed upon, so that the terms reached work well for both the customer, and the manufacturer,” Viktor Evtukhov, State Secretary – Deputy Minister of Industry and Trade of the Russian Federation.

“In order for there to be a long-term order, the shipyard needs to understand when and what it needs to construct, and under what terms. We need to move to serial production. <...> We need to move away from small batches – from lead steamships – to serial production,” Evgeniy Ditrikh, Chief Executive Officer, GTLK.

“A mandatory expert analysis should be conducted by both the customer and the shipyard prior to a ship construction contract being signed. <...> When building a commercial fleet, a shipyard should also undergo an expert analysis in order to avoid getting into loss-making contracts. Unfortunately, this is a problem we have. It was particularly acute when the shipyards were less busy,” Viktor Evtukhov, State Secretary – Deputy Minister of Industry and Trade of the Russian Federation.

“Less procurement, more production,” Konstantin Dolgov, Deputy Chairman of the Committee on Economic Policy of the Federation Council of the Federal Assembly of the Russian Federation.

Preserving the Russian shipbuilding industry’s human capital as a matter of importance

“Reputation is a matter of importance. Our Amur- and Khabarovsk-based shipbuilders have never let anyone down. In the past few decades, all orders have been fulfilled on time and to the required quality. <...> This is the platform we stand upon,” Mikhail Degtyaryov, Governor of Khabarovsk Territory.

“In our business, people are the most important thing. You can pump in hundreds of billions of roubles, but without a person able to handle everything competently, nothing will get done. <...> Maintaining our human potential is the key to everything going on today,” Alexey Rakhmanov, Chairman of the Board, Chief Executive Officer, United Shipbuilding Corporation.

Long-term planning which factors in government support

“We need to take the long view. For the shipbuilding industry, looking ahead to 2035 is insufficient. We need to look ahead to 2050 or perhaps beyond that. <...> Shipbuilding is a competition involving government support. Let’s see how the shipbuilding industry took root in Japan, how the shipbuilding industry developed in Korea, and how the shipbuilding industry began to develop in China. These are all links of a single chain, and it’s crucial that we are able to look at the measures that were put forward by our neighbours. We should analyse them carefully and do what is needed to move into manufacturing in the near future, and afterwards find our place in the international market,” Alexey Rakhmanov, Chairman of the Board, Chief Executive Officer, United Shipbuilding Corporation.

For more information, visit the Roscongress Foundation’s Information and Analytical System at roscongress.org/en

The Future of Industries: What to Buy and What to Produce? Shipbuilding

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