If one can borrow, why build or buy? More than ever, in today’s climate where cash is king and credit is tight, alliances are a smarter, swifter, more reactive and economical way to pursue strategic opportunities and gain competitive advantages.

These words of wisdom from INSEAD applied to the ING bank where I worked (increase the throughput in Change Management by means of outsourcing). It also applies to the shipbuilding industry, my current field of endeavour. Typically all shipyards have to invest heavily to gain a competitive edge which in turn demands a higher turnover to maintain their ROI. The high investment in capital machinery also required the skilled man power able to manage that.

INSEAD

At the moment, and considering the economic climate, the Indian market is not mature enough to be wiling to pay a premium for quality. Sad but true. Classification agencies go soft as their bills need to be paid. Often you will see people opting for a typical low quality product made by some small time contractor with the use of unskilled labour. This is not such a huge problem for a shipyard with a low infrastructure. For example in Gujarat I visited a shipyard where they build complete ships on the beach without too much of a problem.

However, as soon as a shipyard has reached a certain critical mass of investment this practice becomes a case of penny wise pound foolish. Contract labour may be cheap but one needs so many of them and above all the time wasted is enormous. I suspect this is encouraged as the people in charge of procurement are often technically very sound but handicapped when it comes to Finance. The higher the investments in a shipyard the higher the need to push through more new builds. At a certain stage time gains prominence over cost.

To have labour assemble a ship hull with traditional methods (manual cutting, line heating, and hammering to get things a bit in shape) takes ages with all sort of unknown time factors such as a sudden shortage of staff, middle management issues, weather conditions, etc. The manufacture of pre-fabricated ship parts goes very fast and mitigates many risks. The capital cost of the required machinery, the skilled staff required for this, the R&D etc however is very high.

So each yard needs to calculate for itself what their yard costs a day and evaluate whether it is worth to invest. In almost all cases you will find that it is a much better option to build strategic alliances as they are a smarter, swifter, more reactive and economical way to pursue strategic opportunities and gain competitive advantages. Just like the way the automotive industry has matured.