Germany Debates Costs, Deep Sea Mining and Cruise Ships

By Erik Kravets 10-22-2015 07:56:15

Germany's invitation-only 9th National Maritime Conference was held this year from 19-20 October at Bremerhaven, Germany's Stadthalle and Columbus Cruise Terminal. Organizers intended a more “modern” style than the biennial conferences from years prior. Indeed, previously, the conference was dominated by individual workshops, whereas this year the workshops took place in the months preceding the conference at seven preparatory branch-specific forums, and the culmination of these was presented as Germany’s “Maritime Strategy” by the Federal Government’s Maritime Coordinator.

The forums and conference were to be more European and internationally and/or globally oriented. The forums were designed to set up a conference platform that could be more focused on presenting specific results. This objective was met, and the conference delivered bullet point after bullet point.

Whether or not the organizers ensured a European and international discussion is up for debate. The results and topics at the conference appeared to consider Europe and the international shipping industry, but with a focus on ensuring that Germany could protect or grow its own interests. The only truly international moment was (merely?) bilateral, with the signing of a deep sea mining memorandum of understanding with France (see part III). Otherwise, organizers stressed the “special capacity” of German firms to innovate, and then followed through with this focus by announcing a significant change to Germany’s treatment of non-wage labor costs for domestically-flagged ships.

Although the media fervor leading up to the conference was focused on Chancellor Angela Merkel, who addressed a crowd of around 900 attendees during the first day, the non-wage labor announcement was perhaps the most talked about at the conference itself.

I. Non-wage Labor Costs on German-Flagged Ships

"The states and federal government are unanimous that we need a strong German-flagged shipping sector," Chancellor Merkel said.

German shipowners have called on the government to address what they have called the relatively higher cost of non-wage labor taxes (e.g. pensions, unemployment insurance, social contributions, etc.) under the German flag. The manufacturing equivalent of “flagging out” would be opening a BMW manufacturing plant in Mexico. Many German shipowners have opted to use the cheaper Maltese, Portuguese or Dutch flags, where such non-wage labor costs are negligible. The competitive disadvantage of these taxes has been a troubling factor in the deflagging of German ships and the increasing use of foreign (and chiefly other European) flags to save money. With this change, German shipping is largely freed of taxes; this includes VAT (ordinarily 19 percent).

We note that the United States of America does not provide rebates on payroll, state and local taxes or federal corporate and income taxes for use of the US flag, although US citizens may under the Merchant Marine Act obtain other subsidies (like a cost differential subsidy for re/construction or reconditioning in US dockyards of US flagged ships engaged in global trading).

The government garnered much applause from shipowners for bringing Germany's rules on non-wage labor costs in line with other European countries.

As written at present, Para. 41(a), Subsec. 4 of the German Income Tax Code allows ship owners (under various conditions) to hold 40 percent of the non-wage labor costs on German-flagged ships engaged in trade with foreign ports. The modification would change 40 to 100 percent and add an exemption for wind energy sector ships not engaged in trade with foreign ports. Previously, only fossil fuel mining/exploration ships and, inter alia, tugboats, were exempted.

The “German Shipping Crisis” of the last two to three years is, in some ways, a panicked reaction to “flagging out” by some of Germany’s largest shipping companies, for example NSB. In spite of the law change, NSB recently reaffirmed that it will continue deflagging German ships until none of its ships are under the German flag. In the next two years, hundreds of German mariners will lose their jobs.

A further announcement may indeed lead to pain for existing fleets. Merkel announced that further reductions in CO2 emissions would be targeted. On January 1, 2015, the Sulphur Emission Control Area (SECA) entered into force and required a sulphur reduction from 1.0 percent to 0.1 percent. The next round of reductions is slated to enter into force by 2020, but details were scarce.

More relief for shipowners was announced by German Federal Minister for Traffic and Digital Infrastructure Alexander Dobrindt (see Sec. V below).

II. Pushing Forward on Infrastructure

In a separate interview with Germany's NDR, Lower Saxony's Economic Minister Olaf Lies spoke about connecting smaller ports more thoroughly to the national infrastructure. Bremerhaven and Hamburg have sufficient connections, but other ports - like the Jade-Weser Port - do not. Germany's competitiveness depends on all of the harbors being a part of the national plan, rather than relying too much on one or two big ports. For this reason, he argued, Germany needs a national harbor cooperation plan: "Let us, finally, say not only that it is better to work together, but actually move in this direction. It's best for us when we are together; when we are against each other, it will be very difficult."

III. Growing the Sector with Deep Sea Mining

Uwe Beckmeyer, the Maritime Coordinator for the German Federal Government, announced that a "strong signal in matters of technological cooperation" should be broadcast through deep sea mining. In this sector, of course, the Dutch have the lead - but this may change with a new Franco-German venture.

Obtaining raw materials from the ocean and ocean floor is not an easy market, and it requires use of advanced technology. The gears are already in motion. Before the eyes of the audience, a bilateral Memorandum on Deep Sea Mining Cooperation was signed by German and French government representatives - a pilot mining test is already underway, and the target is, in particular, Seafloor Massive Sulfides, which are a form of ore deposit.

Approaching deep sea mining will require a sustainable approach. And indeed, deep sea mining can cause significant environmental damage. German and French technological and industrial prowess will have to mitigate these issues.

Much time, further, was spent explaining the importance and size of the German maritime sector: 400,000 employees and 50 billion euros in revenue. The trouble with these statistics is evident to captains and sailors, namely that the number of actual German mariners employed by this sector is fewer than 7,000.

IV. A Grab-Bag of Proposals to Boost the Maritime Sector

A variety of other ideas were floated by Minister Sigmar Gabriel:

- An explicit affirmation of the dredging of the Weser (Bremerhaven) and Elbe (Hamburg) rivers was announced by the Federal Government;

- The competition amongst European harbors should be regarded as being between Amsterdam/Rotterdam/Antwerp and Hamburg/Bremerhaven and other German coastal harbors, not between German harbors themselves, a sentiment advocated by Bremen economics minister Martin Günther;

- TTIP was explicitly noted and supported, since access to foreign markets is essential for the prosperity of the German economy, and could - so the argument - allegedly create inroads against the U.S. Jones Act;

- Creating a maritime version of the German Aeronautics and Space Society with the goal of investing more resources in research and development, since the maritime sector receives only 50 million euros in high tech subsidies compared to aeronautics and space, which receives 1.5 billion euros annually.

Also announced were that the Bremerhaven Lloyd Werft has a new Malaysian investor, Genting Group, and that this will support German dockyards in competing with foreign dockyards which, in part, are publicly owned.

V. Cavalry to the Rescue? More Federal Government Maritime Aid

With the motto "invest, modernize and digitize", Minister Dobrindt noted 100 million euros of aid flowing to shipowners in terms of non-wage labor cost relief - the hope being that more German mariners will be hired and continue working in Germany. Additionally, mutual ship insurance pools shall be exempted going forward from the insurance tax of 19 percent on net value. The subsidy paid to shipowners for trainees, which is received when a trainee is allowed to complete his training as a mechanic or officer, will rise to 30,000 euros.

Investments were also announced for the aging Kiel Canal.

VI. Frank Del Rio from Norwegian Cruise Lines Pays a Compliment

CEO and President Frank Del Rio of Norwegian Cruise Lines paid a great compliment to the shipbuilding skill and talent of the Lloyd Werft. He noted that the costs of the new Norwegian Escape were financed in large part by business loans made by the KFW Bank (= Kreditanstalt für Wiederaufbau or Reconstruction Bank), a German federal government owned entity which is similar in its structure and purpose to the U.S. Export-Import Bank.

Access to capital is very important. Each new cruise ship ordered by Norwegian Cruise Lines costs approximately $1 billion.

Mr. Del Rio noted that Asian competition is fierce and threatens the shipbuilding sector, which is an important engine of European growth. While Germany has an advantage (and a technological and skills-based lead), "European shipbuilders cannot rest on their laurels." In remaining competitive, government must be an ally. Just last week Del Rio was in Shanghai, China presenting a ship built in Germany exclusively for the Chinese cruise market. Its ETA is Summer 2017.

Further, government and industry are working in concert in China to generate massive, targeted investment and development. The USA and Germany must work hard and really hustle in order to retain their present superiority in the few manufacturing industries not already dominated by China. In this respect, the streamlined and efficient supply chains in Germany are a major factor; 3/4 of the construction work for the Norwegian Escape was outsourced to more than 300 different (largely) German, but also European, suppliers.

In this context, he attacked "useless regulations" which are a burden and make existing industries in the West uncompetitive versus developing economies.

Moving ahead, Norwegian Cruise Lines anticipates aggressively growing its operations in the largely commoditized German cruise market. They plan on offering a more upscale, exclusive and customized experience with superior service.

VII. Panel Discussion: Labor vs. Capital

A major critique leveled at the recent German federal government programs designed to provide relief to shipowners is focused on the fact that the German shipowners did not commit to providing any relief to German employees, whether it be through hiring more sailors or increasing wages.

Two union representatives, from Germany's powerful ver.di and IG Metall Küste, spoke on this topic and noted that the deference being paid to shipowner interests is unfair and will lead to unrest amongst the rank and file.

IG Metall Küste's representative noted, "These are not compliant unions, they are strong unions."

An especially lamented point was that the German federal government allowed Europe-wide competitive bidding for a 4 billion euro destroyer contract instead of assuring it to a German dockyard. Harald Fassmer of the Fassmer Werft and the union representatives found common ground, at least, on this point.

Vice Admiral and Navy Inspector Andreas Krause also noted that German maritime security is essential for Germany's economic prosperity; this fact had been put into sharp relief due to the refugee crisis. Chancellor Merkel, the day before, had thanked shipowners for saving so many refugees at sea.

VIII. Panel Discussion: Training and Education and Harbor Policy

Lower Saxony Minister for Economics, Employment and Harbors Olaf Lies noted that the state has three maritime schools but that well trained specialists are needed. On this point, Martin Günther, Mr. Lies' ministerial counterpart from the Free Hanseatic City of Bremen, added that this is one aspect, but these people need work later so that they are able to complete their two year on-board training period. If we train students but they do not later have a professional perspective, this is a problem that needs rapid fixing.

Saathoff suggested the tax breaks and non-wage labor cost rebates are an "offer" to shipowners for the sake of perfecting the "mariner training and education contract" to which the federal government and shipowners have both contributed millions of euros. But there is no such thing as a 100% guarantee: nobody can promise the availability of employment at sea.

Herbert Behrens noted that, apart from increasing tax exemptions to 100%, a demand by shipowners for cash subsidies could come next! Without a binding agreement to employ more German mariners specifically, no further subsidies should be given.

Rüdiger Kruse and Dr. Valerie Wilms debated the 40 to 100 percent exemption for non-wage labor costs on the part of shipowners. Kruse noted that it was resolved last week; the goal was to make German shipowners internationally competitive. The method was less important. An adjustment to non-wage labor costs was the most direct and straightforward way forward, although providing a different incentive structure would also have been conceivable ("ends justify the means").

In the subsequent discussion, Olaf Lies and others affirmed that the "national harbor concept" need to be regarded as a cooperative effort, rather than a competitive one; the real threat to German ports is Amsterdam/Rotterdam/Antwerp, as the largest and closest foreign entry points, which are also in many respects far more cost-competitive.

Rüdiger Kruse argued that ships arrive in Hamburg due to its excellent inland connections - the relative cheapness of Rotterdam is only a secondary consideration, given that the goal is to deliver goods, not save money per se.

Finally, on wind energy, LNG and the North Sea, it was agreed that a "CO2-free industrial revolution" would be attempted - on-shore wind is not an option because of the extensive local resistance to construction projects, a topic that presumably would be easier to handle in less inhabited parts of the USA.

Enak Ferlemann, Parliamentary State Secretary for Traffic and Infrastructure, remained silent - perhaps trying to start a reputation as a behind-the-scenes puppet master.

The opinions expressed herein are the author's and not necessarily those of The Maritime Executive.