What motivates government involvement in the building process of luxury ocean liners?
As the "prime industrial gem," Federal Chancellor Olaf Scholz labeled the Meyer Werft during his announcement of the billion-dollar state bailout for the company in late August, located in Papenburg, Lower Saxony. Now, contracts have been finalized. However, one may ponder, why is the federal government and the state of Lower Saxony investing heavily in the construction of luxury cruise ships at the Meyer Werft? Here's a breakdown:
What is the Meyer Werft?
Originating more than 200 years ago, Meyer Werft is currently a leading manufacturer of cruise ships and is considered one of the largest and most modern shipyards globally, according to German Federal Minister of Economics Robert Habeck. Other sectors, such as research and specialized vessels, are incorporated in its portfolio. With around 7,000 employees working for the Meyer Group, in addition to its main site in Papenburg, there are shipyards in Rostock and Turku, Finland. The shipyard's economy relies heavily on thousands of ancillary jobs as well.
A disadvantage of the shipyard is its peculiar location, being 40 kilometers from the North Sea. The relocation of the ships along the narrow Ems is impressive but hindered by restrictions on length and width. Consequently, larger cruise ships are built at Meyer Werft in Turku. Rostock's Neptun shipyard, meanwhile, supplies and constructs river cruise ships.
Why is the company struggling?
Despite an abundance of orders, Meyer Werft is grappling with the aftermath of the COVID-19 pandemic and rising costs due to the Ukraine war. Some contracts for cruise ships were secured before the pandemic, lacking provisions for price adjustments to soaring energy and raw material expenses. Furthermore, some banks have become more cautious in providing ship loans. Shipyards typically receive about 80% of the purchase price upon delivery. Responsible for financing the construction, shipyards must cover the remaining amount with loans, leaving Meyer Werft in need of almost 2.8 billion euros to cover ship construction costs by the end of 2027.
Why is the state intervening in Meyer?
The primary objective of state aid is preserving the thousands of jobs at the shipyard and its suppliers. There's also an aim to support the maritime economy and maintaining German shipbuilding expertise. The federal government is pursuing strategic interests with the crisis intervention by employing the shipyard facilities for Navy construction in times of geopolitical tension.
Are cruise ships environmentally detrimental?
Upon signing the contracts, Lower Saxony's Green Party leader, Anne Kura, revealed her stance: "I'm not too keen on a cruise. I'd rather go hiking." Despite the environmental concerns, the shipbuilding industry has progress to make in the realm of sustainability and carbon emissions. Nevertheless, Kura believes that the Meyer Werft has demonstrated its innovative capabilities, constructing the world's most advanced ships, and expectations for future advancements are high. Kura supports state intervention, viewing it as a prime opportunity.
Economics Minister Habeck also highlighted that the shipyard could contribute to the energy transition by building converter platforms, which enable the transmission of wind energy generated at sea to land. Hence, the Green Party is backing the rescue of the shipyard in both federal and state governments.
What measures is the state adopting to assist the shipyard?
The federal government and Lower Saxony are collectively purchasing roughly 80% of the shares for 400 million euros. Moreover, they are offering the company guarantees of approximately one billion euros each to ensure bank loans.
Will Meyer remain a state-owned enterprise?
German and Lower Saxony officials have reiterated that the end goal is not to remain involved long-term. Rather, the goal is to transfer ownership to private entities once a certain period expires, according to Lower Saxony's Premier Stephan Weil. However, the timeframe of the state's withdrawal remains uncertain: "Whether it will be 2027, 28, 29, or whenever, I cannot say. It depends on the right circumstances." Chancellor Scholz also commented on the limited duration of the federal and state governments' role: "We are investing for a certain period, not to remain partners forever, but to establish a solid foundation for a prosperous future on a private economic basis."
What changes can we expect in the shipyard?
The turnaround strategy for the company includes a reduction of 340 jobs. While operational dismissals are not immediately planned, a voluntary program is in effect until March 2025. Ultimately, the specifics of job cuts have yet to be finalized.
Structurally, the shipyard will be run as a corporation with a supervisory board and a group works council in the future. During negotiations on the aid, the state of Lower Saxony insisted on relocating the company headquarters from Luxembourg to Germany. However, questions remain unanswered – for example, the identities of supervisory board members and the detailed cooperation with the Finnish shipyard.
What is the outlook for the shipyard's economy?
Decision-makers in the federal and state governments expect that the shipyard will see a rebound in a few years. They cite the demand for luxury cruise ships as evidence, with Meyer Werft recently sealing its largest order in history with four ships for Disney Cruise Line. According to Lower Saxony's Minister of Economics, Olaf Lies, Meyer Werft will not generate a profit until 2028, according to a study.
Yet, economist Marcel Fratzscher voiced his concerns over the firm's inability to secure a private investor. "This situation essentially signifies that the company may not be financially stable in the long run," the head of the German Institute for Economic Research expressed to NDR in August.
After the significant investment from the federal government and Lower Saxony, questions about the justification for building luxury cruise ships at the Meyer Werft arise. Despite the challenges posed by the COVID-19 pandemic and rising costs due to the Ukraine war, the shipyard's economy relies heavily on thousands of ancillary jobs and its leading position in the global shipbuilding industry.
