how valid is consolidation as a survival strategy?

In the first of our recent marine powerful thinking articles, we looked at the recent past and the near future of the shipbuilding industry and how it is placed to meet the challenges of a changing world, and the ‘lower for longer’ oil price. In the second, we looked at how shipbuilding industry leadership has changed and how a broader outlook, as well as reinvention, could be used as a survival and growth strategy. In this article, we look at the use of consolidation and amalgamation, be it by State edict, or by merger or acquisition, as a key strategy to remain competitive in the market place.

Mergers and acquisitions (M&A), leading to a consolidated position, are not new to the oil & gas industry. They have been successfully employed during previous market downturns. Between 1998 and 2002, when BP was at an acquisitive high, its M&A strategy seemed almost as if it intended to take over the world in alphabetical order, a merger with Amoco, acquisition of Arco, then Burmah-Castrol. Meanwhile in Europe, the Total takeovers of Petrofina and Elf Aquitaine briefly created TotalFinaElf, before reverting back to simply Total in 2003. In the USA, Exxon and Mobil became ExxonMobil; and Chevron and Texaco ChevronTexaco, before Texaco became silent in 2005.

In the automotive industry, M&As have also been rife and, in some cases, successful. An examination of the industry reveals a massive level of interrelationships. Fiat successfully controls Jeep, Chevrolet, Dodge, Chrysler, Alfa Romeo, Maserati and Ferrari. Equally notable is the Volkswagen (VW) group[1]. As early as 1966, VW acquired Audi, and has since further used acquisition to consolidate and diversify. In 1990, VW looked to strengthen its base and took over Seat. At the same time, they began gradually investing in Skoda, until it was finally fully acquired in 2000. As they solidified their strength in the consumer market, VW also looked to diversify and targeted the super-luxury market, bringing Bentley, Lamborghini and the Bugatti brands[2] into the VW fold during the 1990s. In 2012, the luxury portfolio was enhanced by the acquisition of 49.9% of Porsche, and further diversification was evident in their purchasing Ducati, the iconic Italian motorcycle manufacturer.

From the examples above, it could be concluded that appropriately timed M&A, with due consideration of market strengths and position, is an ideal way to ensure survival and to look to growth when the market is in a lull. But, in truth, for all the examples that support this, there are an equal number of those that offer warning. Staying with our consideration of the automotive industry, the tale of the acquisition of Rover by BMW is a chastening case.

The Rover Group had a chequered history, and its origin lay in Prime Minister Harold Wilson’s government’s (1964-1970) attempts to bolster the UK automotive industry. In 1968, Anthony Wedgwood Benn, as chairman of the Industrial Reorganisation Committee, attempted to prevent the collapse of British Motor Holdings (BMH)[3] by merging them with the Leyland Motor Company (LMC)[4]. The resulting conglomerate became British Leyland Motor Corporation Ltd (BLMC)[5]. BLMC brought together 40 manufacturing plants across the UK, and a massive amount of replication. Besides poor management, multiple other problems beset the merged company. Internally, there was inherent and ongoing duplication of product and activities, and troubled relationship with the unions leading to strikes. Externally, there was the 1973 oil crisis, the imposition of a national three-day working week in response to the miners’ demand of a 35% pay rise and high inflation. In 1975, BLMC went bankrupt and was effectively nationalised when the Government became the majority shareholder in the newly formed British Leyland Limited holding company.

British Leyland Limited was divided into four divisions, with Leyland Cars focusing on car production with 128,000 workers at 36 locations and with a production capacity of one million cars per year[6]. Reorganisation and rebranding took place over a number of years. In 1977, Leyland Cars became BL Cars Ltd, and split into Austin Morris and Jaguar Rover Triumph (JRT). The former was aimed at the volume market; the latter the specialist / upmarket niche, and the ‘British Leyland’ name ended, simply abbreviated to BL. In 1986, BL became the Rover Group, hoping to leverage the kudos of the Rover brand. In 1988, the Government sold the business to British Aerospace (BAe), then, suffering financial difficulties of their own, BAe sold Rover to BMW for £800 million in 1994. BMW had limited time to undertake due diligence, as the deal was concluded in 10 days.

Akin to VW’s strategy, BMW was looking to expand its volume base, along with gaining iconic brands such as Mini and Land Rover. However, the decision did not get universal support from the BMW board, and more directors resigned in the year after the purchase than in the previous forty[7]. By 2000, BMW was also suffering losses at a rate of £2 million a day[8]. As a result, BMW decided discretion was indeed the better part of valour: the Rover Longbridge plant was sold for £10 to the Phoenix Consortium, and Land Rover was sold to Ford for £1.8billion. BMW kept the Cowley plant and invested in the ‘new’ Mini.

Professor Dan Jones, of the Cardiff University Business School, has rather harshly summed up BMW’s acquisition management strategy as:

‘BMW did not do their homework, they did not understand the depth of the problems and they did not listen’[9]

As such, BMW’s adventure, although not an abject failure, does offer lessons in leadership, appreciating cultural differences, and the need for due diligence.

What can other industries learn from this? The UK shipbuilding industry has tended to view itself as an industry apart. Its roots date back to the wooden ships that defeated the Spanish Navy and the Fleet of Napoleon’s France. Shipwrights consider themselves artisan craftsmen, and Naval Architecture is often thought of as much a dark art as it is a science. Despite this, its more recent history does bear undeniable similarities to the UK car industry.

As described in a previous powerful thinking article[10], the UK shipbuilding industry fell into notable decline after the Second World War. The Geddes Committee was appointed in 1965 to consider how greater competitiveness could be achieved in the shipbuilding industry through changes in organisation and methods of production. Coincidentally, the Fairfield Shipyard, having suffered four consecutive years of losses, appointed a receiver that same year. Despite some push back from the Bank of England, James Callaghan, the Chancellor of the Exchequer, pushed through a £1 million bail out loan to keep the yard afloat until the Geddes Report was published[11].

The final report, published in 1966, concluded that in order to take advantage of opportunities for growth, individual shipyards would need to be joined in groups. This would enable the effective sharing of resources for research and development, and the construction of the new designs of very large cargo ships and tankers. It recommended the formation of large groups based in the Tyne, Wear and Tees, the Clyde and in Belfast. Having accepted these recommendations, the Government set up the Shipbuilding Industry Board (SIB) to oversee the proposed reorganisation. Substantial finances were made available to cover reorganisation. Curiously, the board of the SIB contained no one with shipbuilding experience[12].

In 1968, subsequent to the Shipbuilding Act (1967), the UK shipbuilding was divided up into five units: two on the Clyde (Upper and Lower Clyde Shipbuilders), two in the north-east, and one in Northern Ireland. But by 1971, with Ted Heath’s government now in power, Upper Clyde Shipbuilders (UCS)[13] went into receivership. The Government declined to help, as they had implemented a policy of no longer supporting ‘lame-duck’ industries, having been stung by the emergency nationalisation of Rolls-Royce, and by rescuing British Leyland.

However, in response to a union lead ‘work-in’ and major public support, the Government relented and in 1972 restructured UCS around two new companies. However in 1973, the same crises that afflicted the automotive industry also blighted shipbuilding. Despite Heath’s government having been replaced by a more supportive Wilson government, the end of independent shipbuilding in the UK was nigh. In 1977, the UK Parliament enacted the Aircraft and Shipbuilding Act, which nationalised large parts of the UK aerospace and shipbuilding industries. The British Shipbuilders Corporation was formed, consisting of 32 shipyards, 6 marine engine works and 6 general engineering plants. It accounted for 97% of the UK’s merchant shipbuilding capacity, 100% of its warship-building capacity, 100% of slow-speed diesel engine manufacturing and approximately 50% of ship-repair capacity[14]. The only yard to escape was Harland & Wolff, which was deemed to be a special political case and remained out of the control of the British Shipbuilders’ management, despite it also being in State ownership from 1977.

In an attempt to make the industry economically viable, British Shipbuilders‘ closed half of the yards, and, in 1983, they attempted to privatise the remaining assets as dictated by the British Shipbuilders Act (1983). UK shipbuilding limped on, mainly based on military vessel construction, but was a much smaller shadow of its former self.

And so, have these lessons been learnt, and have they informed the recent round of mergers and reorganisation in the shipbuilding industry? As they restructure, are the Chinese shipyards reflecting the market positioning of VW, or the failings of the Upper Clyde Shipbuilders?

In 1982 China looked to split its consolidated heavy engineering capability, with the ‘sixth Ministry of Machine Building’ giving way to the China State Shipbuilding Corporation (CSSC)[15]. This decision ‘corporatised’ all state shipbuilding activities under CSSC, and to some extent allowed a degree of market-based economic autonomy. CSSC’s mandate included direct control of 153 organisations that included shipyard; technical research and design universities; authority over nearly all military and commercial shipbuilding and repair; power to conduct joint ventures with foreign companies; and ability to negotiate export sales through the newly established China Shipbuilding Trading Company.

The British Shipbuilders had tried, and failed, to hitch their survival to Government-funded military contracts, whereas the formation of CSSC, and the broadening of the commercial horizon to include international merchant ship sales and standards, allowed the Chinese shipbuilding sector to grow when the shipping industry began to recover from its 1980s recession. Further subdivision occurred in 1999, when the newly created China Shipbuilding Industrial Corporation (CSIC) was spun off to look after the shipbuilding operations in the northern half of the country. CSSC remained in control of the majority of the shipyards and related subsidiaries in Shanghai and south of the Yangtze.

Response to the most recent downturn in the industry has not been to re-instigate the CSSC monopoly, but to rationalise within the individual CSSC and CSIC umbrella corporations. 2016 saw a consolidation plan within CSIC, whereby The Dalian Shipbuilding Industry Company will be merged with Tianjin Xingang Shipbuilding; Bohai Shipbuilding Heavy Industry will be merged with ship repair specialist Shanhaiguan Shipbuilding Industry; and Qingdao Wuchuan Heavy Industry, which specialises in offshore equipment and large commercial vessels, merged with Qingdao Beihai Shipbuilding Heavy Industries, a developer of unmanned surface vessels[16].

Industry commentators have been critical of this strategy, drawing analogies with the failed Japanese mergers of the 1970s[17]. Yet, there are key differences when we compare the Chinese consolidation to those of the UK and Japan. The UK did not correctly focus financial support for the generation of revenue; while CSIC’s move to consolidate its shipbuilding activities follow the establishment of several finance companies in 2015, which are aimed at generating funds to support operations in light of the downturn in commercial shipbuilding. Likewise, an example of the attempt to target a broader market, is the creation of the Qingdao McDermott Wuchuan (QMW) topsides fabrication facility, which is a CSIC joint venture with the McDermott Corporation, aimed at the offshore and facilities module market.

Although Japan went some considerable way in modernising their yards, similar to the majority of yards worldwide, there is a limited physical space to grow the size of the shipyards. The Korean yards had to literally move mountains (DSME), and have knocked down office blocks (Samsung), to expand their yards[18]. Availability of space is a major boon to the Chinese yards. The alliance of a number ofCSIC yards[19] to form the Wuchang Shipbuilding Industry Group (WSIG) gives the freedom of room to create a SmartYard concept that combines availability of dry docks, quayside space, and both topsides and shipbuilding fabrication facilities. Facilitated by optimal yard layout reflecting work flow, and ample cranage, WSIG can emulate the Liberty Ship’s Kaiser yard efficiencies, and can use a scientific approach to shipbuilding to revolutionise the speed of construction, in the fabrication of FPSO and FLNG vessels.

Whether intentionally, or unintentionally, the Chinese model appears to be skirting the issues experienced by the UK Shipbuilding Industry Board and by the British Shipbuilders Corporation. Financial support is evident, with ICBC Financial Leasing Co Ltd, the subsidiary of Industrial and Commercial Bank of China, and China Merchants Energy Shipping Co looking to order six and possibly another three very large ore carriers respectively with 325,000 of DWT each from Qingdao Beihai Shipbuilding Heavy Industry Co, at a total value of $675 million[20]. And the development of new, more efficient, fabrication methodologies means that the Chinese can leverage their location advantage and organically grow around optimised work-flow.

Drawing on a unique breadth and depth of experience, including all aspects of field development, economics, systems thinking, manufacturing and, of course, shipbuilding, io is working closely with yards in China to leverage this consolidation and bring value, greater certainty and higher decision quality to integrated FPSO and FLNG solutions. To find out more about how io can support your developments with this innovative offering, contact us at: hello@iooilandgas.com

[1] See Newell, P. (2017), Top Companies Owned by Volkswagen, Investopedia, www.investopedia.com

[2] Bugatti Automobili SpA went bankrupt in 1995 and its assets sold before the VW purchase.

[3] BMH was the result of previous mergers comprising the Morris Motors Limited (including MG, Wolesley Motors Ltd., Austin Motor Company Limited, Pressed Steel Company Ltd, and Jaguar Cars)

[4] LMC was originally a manufacturer of lorries and buses, but diversified into cars with the acquisition of Triumph, and merger with Rover.

[5] See Nicholls, I (2014), British Leyland – the Grand Illusion, AROnline, www.aronline.co.uk

[6] See 5 above

[7] Whiteley, S (2012), Takeover and Mergers – one that went badly wrong…, www.tutor2u.net

[8] Staff Article (2000), How brash BMW ran Rover to Catastrophe, Business, The Observer, UK.

[9] See 8 above

[10] Bird, E (2017), the necessity of reinvention, www.iooilandgas.com/the-necessity-of-reinvention/

[11] Capie, F (2010(, The Bank of England:1950s to 1979, Cambridge University Press

[12] The board consisted of William Swallow of Vauxhall Motors, Anthony Hooper of the Tiling Group which had just completed the reorganisation of Pretty Polly hosiery, and Joe Gormley of the Miners’ Union.

[13] Consisting of Fairfield in Govan, Alexander Stephen & Sons in Linthouse, Charles Connel & Co in Scotstoun and John Brown & Co in Clydebank.  Yarrow Shipbuilders Ltd, had originally been an associate subsidiary but left the joint venture in 1970

[14] Source: Wikipedia

[15] See Erickson, A, Goldstein, L.J., & Lord, C (2009) China Goes To Sea, Naval Institute Press

[16] Nan, Z (2016) China Shipbuilding changes course to high-end specialist vessels, chinadailycom.cn

[17] See Grevatt, J & Yu, a (2016), China shipbuilding Industry merges key subsidiaries, Fairplay

[18] See Staff Article (2003), Investments to up productivity, motorship.com

[19] Qingdao Beihai Shipbuilding Piping Processing Co. Ltd; Qingdao Wuchuan Heavy Industry Co Ltd; CSIC (Wuhan) Marine & Offshore Engineering Co Ltd and Qingdao McDermott Wuchuan

[20] Staff Article (2017) China:Shipbuilding sector continues its recovery’, Hellenic Shipbuilding News, October 2017.