Britain misses the boat: After years in the doldrums, there are new opportunities for the shipbuilding industry worldwide. But the once-great yards of Britain may now be too weak to take advantage, says David Bowen

WHEN Bill Scott started as an apprentice at the Fairfields shipyard in the mid-1950s, 50,000 Clydesiders were building half the merchant ships in the world. Now there is one merchant yard left on the river - still Fairfields, which has been renamed Govan and belongs to the Norwegian Kvaerner group. It is one of two UK yards capable of building large merchant ships: the other is Harland & Wolff in Belfast, which belongs to the Norwegian Fred Olsen. Between them they employ 2,900 people.

At the end of March, according to Lloyd's Register, UK yards accounted for just 1.9 per cent of the world order book for ships of more than 100 gross tonnage (or gt, the standard measure of ship size). Naval shipbuilding is similarly depleted. Swan Hunter, whose future is now balanced on a taffrail, is one of only four naval shipyards, compared with nine 10 years ago.

The rump of the merchant shipbuilding industry is not doing badly. Bill Scott is now chief executive and part-owner of Ferguson Shipbuilders in Port Glasgow, Greenock. In the past four years the yard, which builds small ships, mainly ferries, has increased its workforce from 34 to 300. Kvaerner Govan, which has received pounds 26m investment in the past five years, is building specialist gas carriers. Across the Irish Sea at Harland & Wolff, a 78,000 gt ship for First Olsen Tankers will be named tomorrow.

'We have halved the number of hours it takes to build a ship in the last four years,' says Per Nielsen, Harland's chief executive. 'In the next four years we will halve it again.' He says ships can now be built in Britain more cheaply than in Japan, which has 30 per cent of the market, and almost as cheaply as in South Korea, which has 26 per cent.

The ice age that has gripped the industry since the late 1970s is finally in retreat. Prices have fallen sharply in the past year - a result of recession and increased capacity - but the industry regards this as a wobble in an upward trend.

The giant vessels that were built in their hundreds in the early 1970s are now entering their dotage, and new safety regulations are forcing others into early retirement. Meanwhile, demand for seaborne freight is forecast to rise at 2-3 per cent for the rest of the decade. 'It doesn't take a genius to see there's a massive building programme ahead,' says Anthony Harvey, secretary of the Maritime Foundation.

Other countries are gearing up to take advantage. Last year South Korea's order book outpaced the Japanese one, and Korea's shipbuilders aim to increase capacity by 20 per cent in the next few years. The Swedes, who withdrew from merchant shipbuilding in the 1980s, are contemplating reviving one large yard. Even the Americans, who have not built merchant ships for export for 30 years, are considering action.

With their new low costs, the British should surely be climbing aboard this bandwagon. Life, unfortunately, is not that simple. 'We can build a ship cheaper than in Japan,' Mr Nielsen says. 'But that does not mean we can sell it cheaper.'

Shipbuilding comes second only to agriculture in its addiction to government support. In July the OECD finally managed to abolish the overt subsidies that had become ingrained during the 1980s - but British shipbuilders say their overseas rivals benefit from a raft of measures that strip away any cost advantage they have.

The financing of such an expensive item as a ship is often more important than the price - and the UK's guarantee scheme for ships is, builders say, less generous than those operated in most other countries. Government-backed fixed-rate finance is available over eight years, against 12 years elsewhere, and the Government will normally allow 60 per cent of the value of the ship to be used as security, compared with 80 per cent in other countries. This was increased from 40 per cent last year but, Mr Nielsen says, it still means a ship built in Britain is unlikely to make money for several years, while one built abroad can generate cash from its first year.

Other governments are also more helpful in supporting marine research and development; and the British Government is doing nothing to reverse the decline of the UK- flagged fleet. Shipbuilders say there is a link between the strength of a home registry and the strength of a building industry.

'It is very difficult to sell ships out of Britain,' Mr Nielsen says. 'It is not possible to have shipbuilding in a country that doesn't support it.'

But the builders also accept that there is another reason why Britain is unlikely ever to be a serious force in shipbuilding again. Past blunders and complacency have left it so weak that it will never be able to attract the vast investment needed to rebuild itself. And that is more the fault of poor management than poor government.

From the Middle Ages until the past few years, British governments believed our economic strength was intimately linked to the strength of our shipping. 'The merchant fleet was always seen as a fundamental part of an industrial strategy,' Mr Harvey says. 'It provided the arteries for industry.'

As merchant adventurers gave way to imperial traders and a great navy grew up to protect them, Britain became a shipbuilding giant. The industrial revolution gave it a technical lead that it kept into this century. In the 1870s, the Japanese came to Sunderland to learn about quality manufacturing, and in 1905 they sank the Russian fleet with ships built in the North-east.

Early this century, naval yards were racing to outbuild the Germans, while merchant and passenger ships poured out of the North-east and Scottish yards. In 1906, the Tyneside yard Swan, Hunter and Wigham Richardson launched the Mauretania, fastest liner in the world.

Because ships are so expensive, the industry has always been cyclical: in a recession, freight rates drop, ships become less viable and owners cancel or postpone orders. The 1930s Depression was cataclysmic - but 20 years later the industry was once again on a high, as orders poured in for tonnage lost during the war.

But success, as ever in Britain, bred complacency. Managers and owners did nothing to tackle the rigid demarcation lines and inefficient practices that had become engraved in the rule-books. They did not notice when the Japanese government, which saw shipbuilding as a rapid route to reindustrialisation, nudged companies into building huge modern capacity, and banks into financing it. Armed with low wages as well, Japan was soon stripping orders away from British yards.

In the late 1960s the Geddes Report criticised the industry for poor equipment, demarcation disputes and high costs, and the government pushed shipbuilders into merging. But by then business was booming again, thanks to the closure of the Suez Canal and the sudden demand for giant tankers to round the Cape.

Yards invested heavily in new equipment, and built supertankers as fast as they could. Swan Hunter had to pay for the electricity of a row of houses whose light was blocked by the hull of the Esso Northumbria. 'In 1974, UK yards were booked up four years in advance,' Mr Harvey says.

Governments across the world were gung-ho about shipbuilding, and produced schemes that were open to abuse. The British were as generous as any. One scheme allowed owners to claim tax allowances on ships that were then built abroad. The Treasury, which saw hundreds of millions slip away, has been unimpressed by the industry since.

In 1974 the world order book peaked at 133.4 million gross tonnage - more than double the 1970 level. Japan was already dominant, accounting for 59.3 million gt; Sweden was next at 10.4 million, with the UK coming in behind Germany at 6.8 million gt. Then came collapse, as the oil crisis and overcapacity drove down freight rates and brought the ordering spree to a disorderly halt. By 1980 the order book had shrunk to 34.6 million gt.

Even as the UK share fell to 860,000 gt, danger signals were flashing from South Korea. Its book had grown as others had shrunk, and was now in second place at 2.5 million gt.

Mr Harvey says the British were partly responsible for this. Much of the equipment installed in UK yards in the early 1970s had lain unused because managers had been unable to persuade their workers to operate it. As a result they looked for other ways to earn money, and started teaching others how to build ships.

'We had 40 technology transfer contracts from this country alone,' he says. 'The major Korean shipyards were built by frustrated Brits who couldn't get things done at home.'

The Labour government reacted to the crisis by nationalising Britain's shipyards, many of which were perilously close to bankruptcy, in 1977. Labour relations improved and for a while there was a glimmer of light before bureaucracy closed in, and morale relapsed.

The Conservatives' return to power in 1979 was quickly followed by a move which, Mr Harvey says, was psychologically crucial. Responsibility for maritime affairs was taken away from the Lord Privy Seal and given to a minister of shipping. Shipping was being stripped of its special status to become just another industry. It was not one Margaret Thatcher liked much either. 'Margaret wants rid of shipbuilding. Remember that,' a senior civil servant told Sir Robert Atkinson, then chairman of British Shipbuilders.

The health of the industry declined from bad to worse. There was vast overcapacity, and as fast as Europeans closed yards, the Koreans opened new ones and bid aggressively for orders.

Although the government in Seoul was helpful to its industry, much of South Korea's expansion came from reckless underbidding by the yards themselves. Many of them collapsed, and had to be rescued by the state. Korean capacity doubled between 1980 and 1986, and a study showed that world prices for large vessels were running at 46 per cent below European costs.

In other industries, Britain had stood out against other Europeans as a particularly hopeless case. Not so in shipbuilding: the degree of European inefficiency was irrelevant when set against cut-throat Korean prices. Even the Japanese found themselves under rising pressure.

Between the mid-1970s and mid- 1980s, Europe's shipbuilding workforce halved from 260,000 to 130,000 - and there was still 40 per cent overcapacity. In 1986 Sweden, once a great shipbuilding nation, declared that it would no longer build merchant vessels.

The only reason any ships were being built was because of subsidies. The European Commission allowed limited subsidies, but made clear that it wanted to see capacity cuts as a quid pro quo. National governments had to haggle with Brussels, promising to reduce capacity in return for permission to subsidise what was left.

The UK cut with the best of them. In 1983 Graham Day was brought in to oversee the sell-off of British Shipbuilders' naval yards, and in due course sold Yarrow to GEC, Vosper Thorneycroft and Swan Hunter to their managements, and Vickers - which included Cammell Laird - to its employees. He also sold Scott Lithgow, at Greenock, to Trafalgar House: it had tried to move into oil platforms, and had become disastrously bogged down on its first contract. Trafalgar House had no better luck, and the yard was eventually closed.

The disposal of the naval yards scuppered any possibility that British Shipbuilders could make a profit. Earnings on naval contracts could balance merchant ship losses, and even allow BS to cross-subsidise bids. The group looked for niches, such as ferries and fleet auxiliaries, but its losses kept on rising. In the 1985-6 financial year it won a tenth of the orders it needed to balance its books, and made a loss of pounds 429m - pounds 14,300 per worker. The government, which had pumped in pounds 1.4bn since 1979, was losing patience.

The death of British Shipbuilders was a messy affair. By 1987, it was employing 5,000 people, compared with 35,000 a decade earlier. It was now concentrating activities at Govan on the Clyde and in two Wearside yards - Sunderland and Austin & Pickersgill - which traded as North East Shipbuilders Limited.

It had a rival - Harland & Wolff in Belfast. There was always tension across the Irish Sea, because the yard, a Protestant stronghold, was owned directly by the Northern Ireland Office and, the mainland shipbuilders felt, was treated with kid gloves.

Bill Scott, who was running NESL at the time, is convinced that the government struck a deal with Brussels under which it said it would sacrifice one yard if the EC would allow it to privatise the others - with the help of substantial capital injections. Harland & Wolff was protected by its political status, while by 1988 the government was already talking to Kvaerner, a Norwegian shipping giant, about the sale of Govan. That left NESL.

On the evening of 15 February, 1988, John Lister, chairman of British Shipbuilders, arrived at Scott's house in Newcastle. 'He said 'get out a bottle of Bell's',' Scott recalls, 'I've just had dinner with Kenneth Clarke (then industry minister): it's all over. The decision has been taken.' Although the government kept up talks with potential buyers to the summer of 1989, Scott believes it never had any intention of keeping NESL going. The Sunderland yards were bulldozed, and became an enterprise zone.

BS's remaining small yards, Ferguson and Appledore, were sold off, and the group put out its lights. Lord Young, then trade and industry secretary, did not much care. 'In a world in which there are few orders, and those orders are always carried out at an enormous loss, surely we should be looking at the industries of tomorrow,' he said in May 1988.

Mr Scott disagreed. 'At the point British Shipbuilders was starting to become effective, it was terminated,' he says.

Shipbuilding has moved into a new phase in the past five years. In 1989 Harland & Wolff was sold to a management and staff team backed by Fred Olsen. He put in most of the money, but took only a 47.5 per cent voting share.

Both the large commercial yards are in Norwegian hands, which is just as well. Not only have they got to grips with the productivity problems, they have provided work where otherwise there would be none. 'They could see the cycles the industry was going through, and saw there were a number of inefficient yards waiting to be turned round,' says David Smith, commercial director of Kvaerner Govan and president of the Shipbuilders and Shiprepairers Association. The Norwegians are still waiting for their reward. The recession and extra capacity have kept prices low, and both yards have had to rely heavily on their parents for orders. Harland's one big outside contract, for six bulk carriers, turned to dust, as five of the orders were moved elsewhere or cancelled.

Bill Scott, meanwhile, is busy proving that a British yard can be successful - albeit on a small scale. 'We've delivered seven ships, all ahead of programme,' he says. Ferguson Shipbuilders is making a profit and is looking round the world for export opportunities.

But Mr Scott admits he could have chosen an easier career. 'It's been an education,' he says. 'I feel that I have attended an institution of negative learning.'

(Photograph and graphs omitted)