MAR3047 Marine Production Business

Lecture 1: Introduction
Paul Stott
29th January 2015
 Introduction to the subject

I have never met a shipowner’s representative in a shiprepair yard

that doesn’t think that they couldn’t repair the ship better than the
shipyard is doing.

What important point are they missing in this thought?

 Introduction to the subject

I have never met a shipowner’s representative in a shiprepair yard

that doesn’t think that they couldn’t repair the ship better than the
shipyard is doing.

What important point are they missing in this thought?

The ship repairer isn’t running a business to repair ships. They are
running a business trying to make money through repairing ships.
Making the money is far more difficult than repairing the ship.
 Introduction to the subject

It is not the intention of this module to give a general business

education but it will be useful to start with some general framework
and definitions:

1. What is a business?
2. Why are exchange rates so important?
3. What is a business plan?
 What is a business?

What is a business? – In Groups, please come up with a definition.

 What is a business?

What is a business? – In Groups, please come up with a definition.

The Oxford English Dictionary has 22 definitions for the word

business. The most important are (definition 14):

“Trade and all activity relating to it, esp. considered in terms of volume or
profitability; commercial transactions, engagements, and undertakings
regarded collectively; an instance of this. Hence more generally: the
world of trade and commerce”

AND

“A commercial company, firm, or enterprise conducting such activity.”

 What is a business?

What is a business? – In Groups, please come up with a definition.

Wikipedia provides a more concise definition:

“A business (also known as enterprise or firm) is an organization involved

in the trade of goods, services, or both to consumers.”

Do businesses necessarily have to be concerned with goods and

services?

Do businesses necessarily have to be involved with trade and

commerce?
 What is a business?
Many businesses provide goods and services for the military:

Devonport dockyard is a commercial business

but its customer is not involved directly in trade
or commerce.
 What is a business?
There may be some overlap in some charity sectors:

RNLI is a charity (not for profit) that

provides search and rescue services
around the UK coast – it needs
facilities, personnel, cashflow and
other business functions even though
it is not a commercial business.
 What is a business?
There may be some overlap in some charity sectors:

Trinity House is a charity (not for profit)

that provides services to assist safe
navigation around the UK coast, for
example maintenance of lights and
buoys – it needs facilities, personnel,
cashflow and other business functions
even though it is not a commercial
business.
 What is a business

We will involve ourselves in this module primarily in the area of

businesses that provide goods and services to the “commercial”
marine sectors.

• Commercial shipping
• Offshore energy production
• Yachting
• Recycling (scrapping)

We will exclude the military sector and other peripheral sectors, but
the same principles apply to those sectors as will be learned in
relation to the commercial sectors.
 What is a business?

The normal model for a business is that one or more investors risk
capital to create or purchase a company, in the expectation of future
financial gain.

Is this always the case?

Government investment in large scale shipbuilding has historically had the aim of
economic advantage for a developing nation as a whole: in Japan following WWII,
then in South Korea in the 1970s and, most recently, in China.

The Nakilat shipyard in Qatar was developed to serve a strategic imperative for the
nation.

In these cases, for example, national strategic gain may be more

important than financial returns – although a financial return is
likely also to be pursued.
 What is a business?

Nakilat is a commercial venture with Keppel, but it also fulfils an

imperative to maintain the country’s large gas carrier fleet, on which the
national economy relies: it is not purely a commercial venture.
 What is a business?
A typical very simple model for a business is:

Investors might be
individuals, Returns mostly come
Investors
companies, funds or in the form of
dividends, which are

Capital
organisations (such

Return
as national a share of the profit,
governments) and increased value
of the business,
Capital is normally of The business – the entity which can be
two forms: capital or organisation set up to realised eventually
investment to create provide the goods and on sale to other
the business and services investors.
working capital to
services
Goods/

fund operations

Consumers
 What is a business?

What is profit?

“A financial benefit that is realized when the amount of revenue gained from a
business activity exceeds the expenses…” Investopedia

“A financial gain, esp. the difference between the amount earned and the amount
spent in buying, operating, or producing something” OED

“Annual income twenty pounds, annual expenditure nineteen nineteen six, result
happiness. Annual income twenty pounds, annual expenditure twenty pounds
ought and six, result misery” Wilkins Micawber, “David Copperfield” by Charles
Dickens
 What is a business?
What is profit?

Investors are seeking opportunities to make their money “work” to

generate more money – this is the essence of capitalism.

The value of an investment will be judged by the “return” it provides

in relation to the risk taken in making the investment.

The size of return is extremely variable and it is not possible to

generalise.

The decision whether or not to take the risk may depend on what
alternatives are available for the capital being invested.
 What is a business?
Judging investment potential:

$ $

Investment in a shipyard Investment in a savings accoun

Expected return 5% Expected return 1.5%
Risk high Risk negligible

Which investment would you make?

 What is a business?
Expected return depends entirely on the investors motivations and
expectations.

I have known an investor reject a sound investment yielding a

dividend of 25% of their investment per year (4 years to recover the
investment) because the country risk was deemed to be too high.

I have known investors to invest in opportunities where the return

was below 5%.

“I’m really not interested in earning 5% or 6% on my capital. This is

pretty unappealing although in these times of zero interest rates, it
is hard to do better without taking on some leverage. Generally
we’ve managed in a lumpy form to earn something of the order of
18 to 19 percent pre-tax with limited leverage, 12 to 13 percent after
tax”. Charles Fabrikant, Chairman SEACOR Holdings, 2012
(reported in Dynasties of the Sea, Lori Ann Larocco, Marine Money
Inc., 2012)
 What is a business?

Is it always necessary for a business to make a profit? In groups,

please discuss.

There may be many reasons why an investor would not be expecting profit:

• Starbucks is a good recent high profile example – the portions of the

business located in high taxation regimes are sacrificed in terms of profit
to ensure that profits are made elsewhere in the Group where taxes are
lower – but the group as a whole will be profitable.
 What is a business?

Is it always necessary for a business to make a profit?

There may be many reasons why an investor would not be expecting profit:

• In the dot com era many companies were not profitable but were funded
in expectation of high future capital value.
 What is a business?

Is it always necessary for a business to make a profit?

There is no law that says a company has to be profitable, providing that

someone (normally investor, parent company or Government (through subsidy))
is willing and able to fund the losses.

If this is not the case, i.e. the directors of the company trade in a way that is
likely to lead to bankruptcy, this would not be legal and the directors will be liable
to prosecution and may be personally liable for debts (even if the company has
limited liability).
 Cashflow

Cashflow is at least as important a consideration for a company

than profit.

Any business has to generate enough cash to pay wages, suppliers

and other bills – including tax.

It is lack of cash that normally sends a business into bankruptcy,

not lack of profit (although the two are to some degree related).

Liquidity is the term used to describes sufficient cash availability to

cover the company’s obligations.

Lets look at an example, based on a real business started by one of

my fellow classmates about a decade after leaving Newcastle
University.
 Cashflow?

A scenario

Existing product New opportunity

Is this a good opportunity for your business?

 What is a business?

Undoubtedly this is a profitable deal if it reaches the end, but what

about the cash flow?
Price $2,000,000
Materials $750,000
Labour and overhead $1,050,000 87,500 per month
Profit $200,000

Month
0 1 2 3 4 5 6 7 8 9 10 11 12
Cash in $200,000 $450,000 $450,000 $450,000 $450,000
Material Spend $250,000 $500,000
Cash out
Labour and overhead $87,500 $87,500 $87,500 $87,500 $87,500 $87,500 $87,500 $87,500 $87,500 $87,500 $87,500 $87,500
Cash balance Cash balance -$50,000 $62,500 -$25,000 -$362,500 -$450,000 -$537,500 -$675,000 -$762,500 -$400,000 -$487,500 -$125,000 -$212,500 $150,000

By the end of
month 3 your By the end of
cash shortfall is month 7 your
3.2 x your cash shortfall is
overdraught 7.6 x your
limit overdraught
limit
 What is a business?

Existing product New opportunity

By the end of month 3 you are unable to pay the wages or pay your
suppliers.

What are you going to do?

Without a major injection of capital this business is bankrupt,
despite being notinally profitable on paper and being in possession
of a valuable and highly profitable contract.

The bank is unlikely to give you that much funding and other
commercial funders are likely to take your business in return for
bailing it out.
 What is a business?

Existing product New opportunity

The scenario is on Blackboard – re-create the cashflow for

yourselves so that you properly understand this vital subject.
 What is a business?

Is it always necessary for a business to make a profit?

It is important to note that profitability does not necessarily mean viability. It is

lack of cash flow that normally leads to bankruptcy, not necessarily directly as a
result of lack of profit.

Profitable companies can go bankrupt.

 What is a business?

What is a limited company?

• The limited liability company was, arguably, one of the most

important inventions of the Victorian era.
• It basically means that investors’ risk is limited to the amount of
capital put into the company only – not their personal wealth. (In
this era, personal wealth may be risked as loan collateral).
• Prior to the limited company investors were personally liable for
all debts and risked ending up in debtors prison for debts they
were unable to pay, which could be a life sentence.
• The invention of limited liability provide a boost to the availability
of capital to develop industry and has had an incalculable effect
on the world’s economy.

Ltd, LLC, SA, AS, Ltda, GmbH, Private Limited, Kft, ……there are many abbreviations for limited liability
around the world
 What is a business?

What is a limited company?

• The majority of businesses are limited liability, although there are

alternatives.

If you start a company, always hire an accountant.

If it is to be of any significant size, always consult a lawyer also.

Ltd, SA, AS, Ltda, GmbH, Private Limited, Kft, ……there are many abbreviations for LLC around the world
 Introduction to the subject

It is not the intention of this module to give a general business

education but it will be useful to start with some general framework
and definitions:

1. What is a business?
2. Why are exchange rates so important?
3. What is a business plan?
 Why are exchange rates so important?

A scenario

At the end of 1997 the exchange rate of the Won changed from its long
term level of around 800 to the $US to just under 1,700 to the $US.
1800

1600

1400

1200
Won:$US

1000

800

600

400

200

Date

1. Did the Won strengthen or weaken?

2. Was this a good thing or a bad thing for Korean shipbuilders?
 Why are exchange rates so important?

1. The Won weakened over this period.

2. A weakening currency is generally good for exports, because
revenues in foreign currency are more valuable when translated
into the local currency – and ships are generally traded in $.
3. It is not only the direct labour cost in the shipyard, paid in Won,
that will benefit, but the cost base of all suppliers who pay
workers and their suppliers in Won.

$US1 revenue @ 800 = 800 Won

$US1 revenue @ 1,600 = 1,600 Won

The downside of a weakening currency is that it can be inflationary,

as all imports (e.g. energy and raw materials) become
proportionately more expensive.
 Why are exchange rates so important?

1. The weakening of the Won enabled South Korean shipbuilders to

significantly reduce prices overnight and increase market share.

This is what Clarkson’s

newbuilding price index
looks like when adjusted by
currency movements in the
main shipbuilding supplier
currencies
 Why are exchange rates so important?

• Currency fluctuations can be significant.

RMB:US$ exchange rate

China has seen a 25% reduction in $ competitiveness since partial

flotation of the RMB in 2005, compounding labour cost rises in RMB
 Introduction to the subject

It is not the intention of this module to give a general business

education but it will be useful to start with some general framework
and definitions:

1. What is a business?
2. Why are exchange rates so important?
3. What is a business plan?
 What is a business plan?
A business plan is a statement of the goals a business is targeting,
how and when those goals will be achieved and the business result
expected by reaching those goals.

The plan has a number of intended audiences:

1. Internal, so that everyone inside the business knows what they

are trying to achieve.
2. External, so that all stakeholders know what the business is
trying to achieve (note: circulation outside the company may
exclude confidential details, particularly of finance.
3. Investors, so that potential investors know what the business is
trying to achieve and can consider investing in the business.

The credibility of the plan is extremely important and investors

often hire consultants with a known brand to create a business plan
to add credibility to it.
 What is a business plan?
The content of plans can be very variable, but generally will cover
similar sections:

Section Purpose
Market study Identification of the opportunity that the business aims to
exploit
Competitors Who is expected to be targeting the same opportunity
and their characteristics
Operating plan What investment is needed, how the business will run
and the expected costs
Investment How much it will cost to develop the business
Strategic review Identification of the risks, the up-side and the down-side
Market share and What share of the opportunity the business expects to
revenue win and the revenue that will result
Financial review The expected financial result
 Materials on Blackboard
1. Powerpoint presentation
2. The RIB Scenario
3. Formative questions for study

Definition of a business Business Studies, Section 1, pp 1 to 8

Cash Flow Business Studies, Section 45, pp 322 to
329
Return on Investment Business Studies, Section 56, pp391 to
402
Business Plan Business Studies, Section 5, pp 37 to 41
 Recommended further reading

From the recommended text book:

Definition of a business Business Studies, Section 1, pp 1 to 8

Cash Flow Business Studies, Section 45, pp 322
to 329

Return on Investment Business Studies, Section 56, pp391 to

402

Business Plan Business Studies, Section 5, pp 37 to

41