PONTIFICIA UNIVERSIDAD CATÓLICA DEL PERÚ

ESCUELA DE POSGRADO

Consulting Report - SIMA PERU

THESIS FOR THE DEGREE OF MASTER IN

STRATEGIC BUSINESS ADMINISTRATION

GRANTED BY THE

PONTIFICIA UNIVERSIDAD CATÓLICA DEL PERÚ

Presented by:

Janice Garreaud

Advisor:

Sandro Sánchez

Surco, October 2016

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Dedications

This paper is dedicated to my family and Antonio for their constant support. Without

you, this work would have not been possible.

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Acknowledgments

My greatest recognition to Clara Bouhamou, Mark Duchesne, Sujittra Kowpairot and

Will Zhang who participated in the investigation of the consulting project.

I would also want to thank Carlos Novoa, SIMA´s representative, for his trust and

support along the project´s development.

Finally, a special thanks to Sandro Sanchez, my thesis advisor, for guiding me during

the whole process.

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Abstract

The current report is a consulting project elaborated for SIMA (Servicios Industriales

de la Marina S.A.). The aim of the study is to analyze the company, focusing on SIMA

Callao and generate a report on current problems and an assessment of possible solutions.

The main problem SIMA Callao struggles with is low profitability. As they are a state-

owned company, they carry out most of their work for the government, securing only

sufficient funds to cover costs. For this reason, SIMA would become more profitable if it

they take up more contracts with private clients, most particularly in the ship repair sector

which offers higher contribution margins. Other secondary problems include, instability of

the workforce (naval officers with short contracts), lack of managerial skills, inflexible labor

force, inadequate wage and promotion policy, lack of a supplier's payment policy,

insufficient and obsolete infrastructure, among others.

SIMA Callao should use their increased capacity to serve private clients and shift

their focus to ship repair in order to improve the company profitability. In addition,

adjustments in the HR, procurement and finance need to be made to achieve both stability

and efficiency in the company. With these changes set in place, it is expected to raise

SIMA's annual profit to 5-6%. Opposition from SIMA’s direction is expected. However, it is

important to understand the social benefits that will be generated with an improved

profitability: new jobs would be created and a multiplier effect would be generated when

growth reaches other related industries.

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Resumen Ejecutivo

El presente informe es un proyecto de consultoría elaborado para SIMA (Servicios

Industriales de la Marina S.A.). El objetivo del estudio es analizar a la empresa, centrándose

en SIMA Callao y generar un informe sobre los problemas y plantear posibles soluciones. El

principal problema de SIMA Callao es la baja rentabilidad. Ya que son una empresa estatal,

llevan a cabo la mayor parte de su trabajo para el gobierno, los cuales no generan ganancias.

Por esta razón, SIMA podría generar una mayor rentabilidad tomando contratos con clientes

privados, especialmente en el sector de reparación que ofrece mayores márgenes de

contribución. Otros problemas secundarios incluyen, inestabilidad de la mano de obra

(oficiales navales con contratos de corta duración), falta de capacidad de gestión, fuerza

laboral inflexible, inadecuada política salarial y de promoción, falta de una política de pago

de proveedores, infraestructura insuficiente y obsoleta, entre otros más.

SIMA debería utilizar la nueva capacidad para atender al sector privado y cambiar el

foco de sus operaciones a la unidad de reparaciones navales para mejorar la rentabilidad de la

empresa. Asimismo, son necesarios ajustes en las políticas de recursos humanos,

adquisiciones y finanzas. Con estos cambios, se espera elevar el margen neto de SIMA entre

5% y 6%. Se espera cierta oposición por parte de la dirección del SIMA. Por ello, es

importante resaltar los beneficios sociales que se generarán con los cambios propuestos: la

creación de múltiples puestos de trabajo.

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Table of Contents

Chapter I: General Situation of the Organization ................................................................ 1

1.1. The Company ............................................................................................................. 1

1.1.1 History.................................................................................................................... 1

1.1.2 Vision, mission, strategic objectives ...................................................................... 2

1.1.3 Business units......................................................................................................... 2

1.1.4 Structure ................................................................................................................. 4

1.2. The Shipbuilding and Maintenance Industry ............................................................. 5

1.2.1 Industry information .............................................................................................. 5

1.2.2 Key successful factors (KSFs) ............................................................................. 11

1.3 Industry Attractiveness ............................................................................................ 11

1.3.1 Threat of new entrants ......................................................................................... 12

1.3.2 Threat of substitutes ............................................................................................. 12

1.3.3 Bargaining power of buyers ................................................................................. 13

1.3.4 Bargaining power of suppliers ............................................................................. 13

1.3.5 Competitive rivalry .............................................................................................. 13

1.4 External Analysis ..................................................................................................... 15

1.4.1 Political ................................................................................................................ 15

1.4.2 Economic ............................................................................................................. 16

1.4.3 Social.................................................................................................................... 18

1.4.4 Technological ....................................................................................................... 18

1.4.5 Environmental ...................................................................................................... 19

1.4.6 Legal .................................................................................................................... 20

1.5 Internal Analysis ...................................................................................................... 22

1.5.1 Administration and marketing ............................................................................. 22

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1.5.2 Operations ............................................................................................................ 22

1.5.3 Finances ............................................................................................................... 23

1.5.4 Human resources .................................................................................................. 24

1.5.5 Information systems and technology ................................................................... 24

1.6 Conclusions .............................................................................................................. 25

Chapter II: Key Problem ...................................................................................................... 27

2.1 Description ............................................................................................................... 27

2.2 Timing and Magnitude ............................................................................................. 27

2.3 Location ................................................................................................................... 28

2.4 Ownership ................................................................................................................ 30

Chapter III: Literature Review ............................................................................................ 31

3.1 Literature Mapping .................................................................................................. 31

3.2 Literature Review..................................................................................................... 33

3.2.1 Definitions............................................................................................................ 33

3.2.2 Rationale behind SOEs ........................................................................................ 33

3.2.4 Corporate governance .......................................................................................... 39

3.2.5 SOEs´ performance .............................................................................................. 41

3.2.6 SOEs´ failure ........................................................................................................ 43

3.2.7 Ownership structure ............................................................................................. 43

3.2.8 Privatization critics .............................................................................................. 46

3.3 Conclusions .............................................................................................................. 47

Chapter IV: Qualitative/Quantitative Analysis .................................................................. 50

4.1 Qualitative Analysis ................................................................................................. 50

4.2 Quantitative Analysis ............................................................................................... 50

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Chapter V: Root-Cause Analysis of the Problem ............................................................... 54

5.1 Identified Causes ...................................................................................................... 54

5.1.1 Management ......................................................................................................... 54

5.1.2 Workers ................................................................................................................ 56

5.1.4 Materials .............................................................................................................. 57

5.1.5 Machines and Infrastructure ................................................................................ 58

5.1.6 Marketing ............................................................................................................. 60

5.2 Main Causes of the Problem ................................................................................... 61

6.1 Alternatives to Solve the Problem ........................................................................... 62

6.1.1 Changes in HR policies ........................................................................................ 63

6.1.2 Changes in procurement and financial policies / practices .................................. 64

6.1.3 Shift of focus for projects .................................................................................... 65

6.1.4 Privatize a branch of the company ....................................................................... 66

6.2 Assessment of Alternatives ...................................................................................... 66

Chapter VII: Proposed Solution ........................................................................................... 68

Chapter VIII: Implementation Plan & Key Success Factors ............................................ 70

8.1 Activities .................................................................................................................. 70

8.1.1 Market Intelligence .............................................................................................. 70

8.1.2 Positioning Analysis ............................................................................................ 75

8.1.3 Segmentation and Positioning Results ................................................................. 96

8.2 Implementation Gantt Chart .................................................................................... 98

8.3 Key Success Factors .............................................................................................. 100

8.3.1 Enablers.............................................................................................................. 100

8.3.2 Risks................................................................................................................... 100

Chapter IX: Expected Outcomes ........................................................................................ 101

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Chapter X: Conclusions and Recommendations .............................................................. 104

10.1 Conclusions ............................................................................................................ 104

10.2 Recommendations .................................................................................................. 106

References ............................................................................................................................. 108

Appendix A: SIMA's Profit and Loss Statement 2015, 2014 ........................................... 121

Appendix B: SIMA's Unserved Ships ................................................................................ 122

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List of Tables

Table 1. Opportunities and Threats. ...................................................................................... 21

Table 2. Strengths and Weaknesses ....................................................................................... 25

Table 3. Distribution of SIMA Sales by Sector 2012-2016 .................................................... 28

Table 4. SIMA's Annual Sales and Net Margin 2005-2015 ................................................... 29

Table 5. Minimum Net Margin´s Objective by Business Unit ............................................... 30

Table 6. Comparison of Profitability Ratios of SIMA vs Competition .................................. 52

Table 7. Sales Distribution by Business Unit 2011-2015 ...................................................... 53

Table 8. Key Problem, Roots and Assessed Solutions ........................................................... 62

Table 9. Assessment of Solutions ........................................................................................... 67

Table 10. National Competitors of SIMA for Small and Medium Sized Boats ........................ 72

Table 11. SIMA's Competitors in the Large Sized Ships Segment ........................................... 74

Table 12. The Liner Shipping Connectivity Index 2015 .......................................................... 77

Table 13. SIMA Callao´s Docks............................................................................................... 79

Table 14. Description of MEC´s Docks ................................................................................... 89

Table 15. Hyundai Mipo Dockyard Co. Docks ........................................................................ 91

Table 16. Hyundai Samho Heavy Industries Co. Docks .......................................................... 91

Table 17. Shimonoseki Shipyard´s Docks ................................................................................ 93

Table 18. Japanese Yards Capacity ......................................................................................... 94

Table 19. SIMA and its Competitors Positioning Analysis .................................................. 97

Table 20. Expected Financial Outcomes ............................................................................... 103

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List of Figures

Figure 1. World seaborn trade evolution in comparison to the world merchandise trade,

world GDP and OECD industrial production index from 1975 to 2012 ............. 5

Figure 2. World new shipbuilding orders total and by markets (1990-2015) ......................... 6

Figure 3. World seaborne trade (1990-2015). ......................................................................... 7

Figure 4. New building and repair sales of Japanese SAJ members ....................................... 9

Figure 5. Annual growth rates of shipbuilding and repairing from EU 28. .......................... 10

Figure 6. Largest shipbuilding nations in 2015. .................................................................... 14

Figure 7. The top five world shipyards by market value. ...................................................... 14

Figure 8. SIMA's five forces analysis ................................................................................... 15

Figure 9. Literature mapping ................................................................................................. 32

Figure 10. Value creation/profitability matrix......................................................................... 35

Figure 11. Scope of public ownership index (scale 0-6), 2008. .............................................. 36

Figure 12. SOEs in the Fortune Global 500, % and revenues. ................................................ 37

Figure 13. Distribution of SOE across economy sectors in Fortune Global 500. ................... 38

Figure 14. The total impact measurement management framework. ...................................... 42

Figure 15. Scorecard dimensions ............................................................................................ 42

Figure 16. Fish-bone analysis of SIMA's small profits ........................................................... 54

Figure 17. Consequences and impacts of shifting SIMA’s focus to the repair and

maintenance business. ........................................................................................... 68

Figure 18. Global shipping routes. .......................................................................................... 71

Figure 19. SIMA’s national competitors in the repair business. ............................................. 73

Figure 20. Hourly compensation costs in manufacturing, US dollars 2010, 2013. ................. 76

Figure 21. Peruvian routes to the main ports of Asia Pacific. ................................................. 79

Figure 22. Cotecmar shipyard´s location................................................................................. 87

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Figure 23. Further steps Gantt. ................................................................................................ 99

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Chapter I: General Situation of the Organization

1.1. The Company

1.1.1 History

Servicios Industriales de la Marina (SIMA) is a Peruvian state-owned company with

experiences over 170 years. Founded in 1845, the company focuses on developing strategic

activities related to national security and defense. They were created to provide shipbuilding

and technical services to the Peruvian Navy (SIMA Memoria Annual, 2015). The first

shipyard was established in Callao Province in Lima, and then this was followed by the

construction of a similar, but smaller, location in Iquitos in 1864. This last project sought to

create development in one of the most unexplored regions of Peru: The Amazon (Servicios

Industriales de la Marina, 2012a).

SIMA was contracted to build ships and armaments for the navy during the War of

the Pacific in 1879. The shipyard was destroyed after the war and only operated to repair

small-size vessels. In 1938, the dry dock was inaugurated in Callao to serve large sea vessels.

In addition, the company entered into the shipbuilding business, and began constructing

vessels for the private sector. Later on, in 1958, SIMA constructed BAP Zorritos of 6,000

dead weight tonnage (DWT), which was the largest in Latin America at that time. Additional

docks and pipe workshops were created as a result of their increasing demand. The shipyard

began regularly constructing four large vessels at a time with capacities of up to 12,000 tons

(Servicios Industriales de la Marina, 2012a).

During the 1970's, SIMA became one of the leading shipyards in the region,

delivering one large vessel every year, which was a very competitive construction period.

Moreover, a significant merger between SIMA and Servicio Industrial de Iquitos (SIDI)

enhanced the building capacity for the company. In 1975, they built a new structural

boilermaker complex in Chimbote, where they focused on metalworking. In 1982, SIMA

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built their first warships for the west coast region. Over the past few years, the company

developed incremental technological innovations, and expanded their docks in Callao. Due to

the continuous developments, the company was able to achieve international certifications in

quality including the IMS, ISO 9001 and another certificates that guarantee the quality of

their services (Servicios Industriales de la Marina,, 2012a).

1.1.2 Vision, mission, strategic objectives

Vision. “Be recognized as the best shipyard in Latin America and become pride of the

Peruvian industry” (Servicios Industriales de la Marina, 2016).

Mission. The Industrial Services Marine SA, main shipyard in Peru, carries out the

maintenance, modernization and construction of the Peruvian Navy's ships and executes

projects related to shipbuilding and mechanical metal for the state and private sector, national

and abroad, with the most stringent quality standards, in order to contribute to the national

defense and the socio-economic and technological development of the country (Servicios

Industriales de la Marina, 2016).

Strategic objectives. The primary objective of SIMA is to serve the interests of the

Peruvian Navy and other state entities by developing the naval industry and complementary

businesses. It is also in charge of promoting the social, cultural, professional and technical

development of their employees. Additionally, SIMA serves the private sector in order to

bolster their profitability so that they can reinvest in the business (Servicios Industriales de la

Marina, 2016).

1.1.3 Business units

Shipbuilding. Shipbuilding is one of the most critical business units at SIMA Peru.

SIMA has built ships for over fifty years with experts and engineers from specialized sectors

to ensure high quality in addition to client satisfaction. The size of the shipyard allows the

company to build different sizes of vessels: tug boats, fishing boats, personnel carrier
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motorboats, naval units, large ocean liners, etc. The main shipbuilding operation is located in

Callao and has an area 300,000 m2 including docks and berths. The shipyard can receive

ships up to 50,000 DWT. Meanwhile shipbuilding in Chimbote is for building small boats.

The one in Iquitos provides berths and docks, which is capable of building personal carrier

motorboats, tanker barges, aluminum and steel ships (Servicios Industriales de la Marina,

2012b).

Ship repair. The ship repairs division is the core business of SIMA Peru. SIMA

provides maintenance and engineering services for vessels and fishing ships. Although

SIMA's principal client and priority is the Peruvian Navy, SIMA Callao also repairs for

clients with dry docks for ships up to 25,000 DWT. Their ship repair services include

sandblasting, hull, propulsion and steering system repair, boiler making works, and

maintenance of diesel engines. Its principal client in this unit is the government. SIMA has a

good quality of facilities and an experienced team. This allows SIMA to be able to serve local

clients and international sectors (Servicios Industriales de la Marina, 2012b).

Metalworking. SIMA Peru is also well-known for its activities in the metalworking

sector. Over the years, SIMA became involved with the construction of infrastructures

(especially bridges) across the country. Even though metalworking is not the core business of

SIMA, the company is able to work on different projects in Peru's infrastructure. The

metalworking unit is divided into four different segments: steel bridges, gates, pressure pipes

and various structures (Servicios Industriales de la Marina, 2012b). One of the most common

contracts carried out by this unit is constructing of bridges. SIMA has built 90% of bridges in

the country. Those bridges are located in dangerous or undeveloped areas of the country, and

SIMA is one of the only company that has the resources needed to develop those

infrastructures (Novoa, personal communication, July 7, 2016).

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After 30 years of conducting business in the metalworking industry, SIMA has now

distinguished themselves as the leading expert. SIMA metalworking is performed in the three

operation centers located in Callao, Chimbote and Iquitos. They have processing capacity

which exceeds 8,000 tons of steel a year. With this capacity, they are able to supply

metalworking goods to small and large engineering projects in any region of the country or

even abroad (Servicios Industriales de la Marina, 2012b).

Weapons and Electronics. SIMA also has divisions in the weapons and electronics

design industry. The company has a microelectronics design center and creates sonar, radars,

automated control systems, etc. SIMA is the only service representative in Peru which allow

them to “perform certified way maintenance of radars, turns and navigation equipment in

Units Surface Marina de Guerra del Peru and individual work mainly in merchant and fishing

vessels.” The main site for weapons and electronics operations’ is located in Callao

(Servicios Industriales de la Marina, 2012b).

1.1.4 Structure

As every state-owned company, SIMA's priority is to service the country and society.

Although it is part of the Defense Minister and regulated by FONOFE, SIMA maintains a

private administration and has an administrative, economic and financial autonomy, which is

led by the board directors (composed by Peruvian Navy Generals). Additionally, the

government focus and the short-term orientation of SIMA, makes it impossible to implement

process and client management orientation. Many of the officers lack the administrative,

managerial and technical skills that are required for the industry. Their military way of doing

things with strictly hierarchical organization obstructs communication and decision making.

Additionally, officers usually only serve the company for two years, which is too short to

manage the company and implement changes (Servicios Industriales de la Marina, 2008a).
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1.2. The Shipbuilding and Maintenance Industry

1.2.1 Industry information

The shipbuilding industry. During the last century, thanks to the escalation of

technology and economic trade agreements, international commerce has increased

considerably. For centuries, sea logistic services had been the only means of international

transportation. Today, despite the appearance of air logistics, maritime transportation still

accounts for 80% of the global trade (United Nations Conference of Trade Development,

2013). Figure 1 shows the evolution of global trade, seaborne trade and global GDP. The

maritime transportation preponderance should be noted in relation to the global

trade. Additionally, the figure shows the stretch correlation between the shipping industry

(seaborne shipments) and the global economy.

Figure 1. World seaborne trade evolution in comparison to the world merchandise trade,
world GDP and OECD industrial production index from 1975 to 2012 (1990=100).
Data are from “Recent developments and trends in international maritime transport affecting
trade of developing countries”, United Nations Conference on Trade and Development
(UNCTAD), 2013
(http://unctad.org/meetings/en/SessionalDocuments/cid30_en.pdf).

The shipbuilding industry started to become of national interest after the Second

World War. The governments noted the importance of this industry for international

commerce, the number of workers that it could employ, the supported industries that could be
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bolstered and the need for manufacturing and repairing national vessels (Gerasimou,

2014). As with many other strategic sectors, the shipbuilding industry has been subsidized

for long periods in order to maintain its competitiveness. Today Japanese, Chinese, Korean

and Spanish industries receive government support. The Chinese subsidies during the period

2006-2012, reduced the shipyard costs by 15-20%, and this allowed them to increase their

global market share (Kalouptsidi, 2014).

During the last years, the shipbuilding sector has been facing difficult times because

of the relation it has with the global economy. Before 2008, the industry had been growing at

exponential rates (The Naval Architect, 2010). The sales' peak was reached in 2007, with

169.6 million of new orders. However, ever since the global financial crisis, the industry has

entered in a depression, reaching its lowest peaks of 33.6 M and 38 M orders in 2009 and

2012 respectively (The Shipbuilder's Association of Japan, 2016). The evolution of

shipbuilding orders is presented in Figure 2.

Figure 2. World new shipbuilding orders total and by markets (1990-2015).

Data are from “Shipbuilding Statistics”, The Shipbuilder's Association of Japan, 2016
(http://www.sajn.or.jp/e/statistics/Shipbuilding_Statistics_Mar2016e.pdf).
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With the shipping industry being affected by financial crisis, the demand for new

vessels decreased. However, this industry recovered rapidly and continued growing from

2010 onwards. Figure 3 shows the historic levels of seaborne trade since 1990 divided by

industry. Furthermore, the weak financial market affected the shipbuilding industry, and

limited credit services for producers and buyers. Finally, the falling oil prices worsened the

situation, since producers started cancelling orders for drill ships (Ji-Eun, 2015).

Figure 3. World seaborne trade (1990-2015).

Data are from “Shipbuilding Statistics”, The Shipbuilder's Association of Japan, 2016
(http://www.sajn.or.jp/e/statistics/Shipbuilding_Statistics_Mar2016e.pdf).

Moreover, new competitors coming from low labor cost countries have reconfigured

the shipbuilding market. During the post war era, the industry was dominated by the US and

Europe. However, due to the intensive-labor characteristics of the industry, the production

moved to low-wage countries, located mainly in Asia (The Naval Architect, 2010). Currently

the production is concentrated in the Korean, Chinese and Japanese shipyards (SIMA-Peru,

2016). China and Korea lead the production with 33% and 30.9% of market share, followed

by Japan with 26.9%. This leaves Europe with 3.7% and the rest of the world with 5.6% (The

Shipbuilder's Association of Japan, 2016).

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Other emerging nations who have entered the shipbuilding industry are Brazil, India,

Malaysia and Vietnam. One recent trend in the industry is that shipping companies are also

investing in shipyards as an integration strategy to gain control of the whole supply chain

(Global Industry Analysts, 2012). Additionally, some shipbuilders are outsourcing the

construction process of parts to producers of countries with lower costs. Finally, a last trend

related to the increasing steel prices, is the possible integration between shipbuilders and steel

producers (SIMA-Peru, 2016).

The declining demand of ship orders after the financial crisis, along with the

increasing competition, have caused an oversupply and excess of capacity in the world's

shipbuilding industry. Shipbuilders around the world have lowered their prices to attract

buyers, obtaining little profits or even incurring in a loss just to keep operations going

(Zhiming, 2016). The figures in the shipping industry are similar, with 50% of loss-making

enterprises during the last three years (Hellenic Shipping News, 2015).

The ship repair industry. There are three types of repair services: conversion or

reconstruction, repair of damages, and maintenance. According to Mackenzie’s 2004 report

(as cited in SIMA-Peru, 2016) the last category represents in average 75% of the total sales of

these three services. Ships must undergo periodic maintenance every two to three years to

keep their vessels operable and up to standards. Additionally, sometimes shipyards receive

unscheduled ships related with unexpected issues.

The size of the shipyards varies from larger companies with international presence to

small yards with regional and local presence (SIMA-Perú, 2016). In the last years, the

industry has been favored by the increasingly aging number of vessels and the decision of

owners to increase their lifespan. Repair is less costly to owners than buying new vessels.

Finally, environmental accidents and regulations have increased the pressure to improve

maintenance frequency (“Shipbuilding and Repairing”, 2016).

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According to the Organization for Economic Co-operation and Development (2008),

shipbuilding and ship repair businesses are complementary industries, enabling many

shipbuilders to counteract the effects of their cyclical and capital intensive business. These

two activities share many of the same types of equipment and infrastructure needed to carry

out in the same yard. Some of the facilities that are equally shared between the two industries

are: painting, the pipe and steel division, berths, warehouse and lifting installations.

Numerical data and statistics about the ship repair business is limited. However, there

is data available from the Japanese industry that suggest that this business is much smaller

than shipbuilding in monetary sales. Historically, from the total sales of Japanese shipyards,

the repair business has represented between 4.1% and 24% (The Shipbuilder's Association of

Japan, 2016). Figure 4 shows the evolution of sales of both businesses from 1990.

Additionally, this industry has similarly been affected by the global financial crises. It is

shown in Figure 5 that the European repair and maintenance markets decreased in 25% in

2008, even more than shipbuilding, which fell to 10% (Eurostat, 2015).

Figure 4. New building and repair sales of Japanese SAJ members.

Data are from: “Shipbuilding Statistic”, The Shipbuilder's Association of Japan, 2016
(http://www.sajn.or.jp/e/statistics/Shipbuilding_Statistics_Mar2016e.pdf).
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Figure 5. Annual growth rates of shipbuilding and repairing from EU 28.

Data are from “Annual Growth Rates of Ship Building and Repairing from EU 28”, Eurostat,
2015
(http://ec.europa.eu/eurostat/statisticsexplained/index.php/File:Annual_growth_rates_of_ship
_building_and_repairing_(NACE_Rev_2_activities),_EU-28,_2005%E2%80%9314.png).

Most ship owners program their maintenance services in ports along their routes;

deviation is uncommon nowadays. Generally, the cost of the service is the determining

criteria, though many clients also consider the quality of the repair and the steel which is

used. Within every ship route, there are cheaper areas: Poland and the Baltic States in

northern Europe, Turkey and the Balkan States in the Mediterranean/Southern Europe and

China in Asia (which is the cheapest worldwide). During the past two decades, Singapore

has become the leader in the repair industry. However, China has been recently increasing its

market share by offering lower prices. The Chinese shipbuilding industry is favored not only

by their cheap labor but by the steel production, which is also subsidized at US$1.00/kg

compared with Singapore's price over $2.00/kg (Thorpe, n.d.).

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1.2.2 Key successful factors (KSFs)

There are several key success factors which characterize the shipbuilding and repair

industry. First, the number of ships the company builds or gives services, factors directly into

their overall success (Lorange, 2008). By having a large number of vessels, the company will

have a stronger bargaining power with their suppliers. Also, by having different ships, the

company will improve their maintenance skills.

Second, especially for the repair business cost and location are fundamental aspects.

Ship owners would look for cheap shipyards that are located along their routes to reduce time

and costs. However, in the shipbuilding industry, many clients consider quality and the steel

which is used (Thorpe, n.d.). For instance, shipyards with ISO’s certifications and which are

environmentally responsible have higher demand.

In addition, an excellent location can guarantee not only an efficient shipping process

but also the volume that a shipyard can get. For instance, the location and connectivity of

nearer ports are essential to guarantee a strong demand of repair services. The connectivity

index would be explained later in Chapter VIII. Finally, it is crucial for a shipping company

to diversify their services. Diversification in the marine industry allows companies to achieve

long-term success. For instance, it is essential to offer maintenance services, to counteract

shipbuilding’s seasonality.

All in all, as a state-owned company, SIMA also has unique KSFs. They have a great

experience, an excellent reputation, sufficient funds and one of the cheapest labor costs of the

region. Also, during the last 30 years, SIMA has accumulated reliable experience at

metalworking. This is a strong resource to the shipbuilding and ship maintenance industry.

1.3 Industry Attractiveness

Michael Porter's model aim to assess the attractiveness of an industry by analyzing

five different forces, which shapes the overall market and its key players.
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1.3.1 Threat of new entrants

The threat of new entrants is low. In the shipbuilding and maintenance industry, the

barriers to entry are extremely high mainly because of the required initial investment. First,

the capital cost of building a shipyard is extremely high and finding a proper location is

difficult. Second, the construction of a ship is a long and complicated process and involve

extensive investment and intensive workforce. Third, it also requires high technical expertise

and experienced engineers. Fourth, the main raw material, steel, is unstable since the market

prices fluctuate often (Kakatkar, A, 2009).

However, even though the threat of new entrants is low, the industry has grown in the

last few decades with new key players who are challenging incumbents. For instance, the

China Shipping Industry Co. was founded in 1998 and is now a leader in the shipbuilding and

maintenance market (China Shipping Industry Co., 2009). For a long time, South Korea

dominated the cost-competitive commercial shipbuilding. However, due to the high

investment from the Chinese government in their shipbuilding industry, China is becoming

the biggest threat for incumbents (School, 2015).

Also, there is a shift in the global business world towards sustainability, and it will

affect the shipping industry. For instance, “The International Maritime Organization is

discussing regulations that may force ships to belch out less carbon dioxide and has

introduced tighter limits on other pollutants” (The Economist, 2010). These strict regulations

could deter newcomers from entering this risky and highly competitive industry.

1.3.2 Threat of substitutes

The threat of substitutes is medium – low. It could be argued that the threat of

substitutes depends on the type of ships. For instance, commercial ships are threatened by

airplanes; however, air transport is much more expensive than using container shipping for

transport. However, pipeline could be a better alternative over maritime transportation since
 13

it is safer and relatively inexpensive (School, 2015). Finally, the shipbuilding and

maintenance businesses that operate in a niche industry, allows them to be protected from a

threat of substitutes (Olsen, 2016).

1.3.3 Bargaining power of buyers

The bargaining power of buyers is relatively high. First, there are few buyers in this

industry and they are price sensitive. Also, the changing prices for buyers is insignificant,

especially during exchange fluctuation periods. Due to the high expensive prices of this

industry, the buyers retain a lot of bargaining power. Finally, due to the excess of capacity

and decreasing demand, the power of clients has increased in the last few years (Nam Sung,

2009).

1.3.4 Bargaining power of suppliers

The bargaining power of suppliers is medium - low. The most important material is

steel, which is a commodity. Therefore, suppliers cannot influence the price very much.

Additionally, there are a great number of steel manufacturers, so the changing cost of

suppliers remains low. Additionally, some parts of the ships are not manufactured by the

repair company. Rather, they are supplied by part manufacturers. The concentration of this

industry is low (Nam Sung, 2009). Finally, some components like navigation systems and

ships engines are outsourced from specialized companies, which have a medium power of

negotiation (Kakatkar, 2009).

1.3.5 Competitive rivalry

Based on Porter's forces analysis, the rivalry among competitors in the shipbuilding

and maintenance industry is high. It is highly concentrated in various regions, with Asia as

the largest producer. As it can be observed in Figure 6, production is concentrated in China,

South Korea and Japan. For instance, the five largest firms are located: Hyundai Heavy Ind

(South Korea), Daewoo (South Korea), China State Shipbuilding Corp. (China), Samsung
 14

(South Korea) and Imabari (Japanese). Figure 7 displays the five largest ship manufacturer's

sales.

Figure 6. Largest shipbuilding nations in 2015, based on completions in gross tonnage (in
1,000s).
Data are from “Largest shipbuilding nations in 2015”, Statista, 2016
(http://www.statista.com/statistics/263895/shipbuilding-nations-worldwide-by-cgt/).

Figure 7. The top five world shipyards by market value.

Data are from “Infographic”, World Maritime News, 2016
(http://worlmaritimenews.com/archives185935/infographic-top-5-shipyards).

Also, according to the US Bureau of Labor Statistic, the shipbuilding and repair “rank

among the most hazardous industries in the world” (Stellman, 1998). Additionally, the

industry is characterized by different ship buildings: commercial, army vessel, submarines,

 15

etc. Therefore, the industry is also divided among those segments. Another important

characteristic is that there is low product differentiation, with companies competing mainly

on price. Finally, exit barriers are high due to the great investments in facilities and

infrastructure which demotivate firms to leave the market. Figure 8 shows a summary of the

shipbuilding’s five forces.

Figure 8. SIMA's five forces analysis.

Adapted from Competitive strategy: Techniques for analyzing industries and competitors by
M. E. Porter, 1980, New York: Free Press.

1.4 External Analysis

1.4.1 Political

Due to the strategic nature of the shipbuilding industry, governments around the

world may give assistance to this sector in a variety of ways, such as direct subsidies, tax

incentives, cheap credits and restructuring assistance. In addition, governments should have

considerable interest in ship repair and conversion activities because of their significant

potential for direct and indirect employment of labor (Senturk, 2011). Moreover, countries
 16

which have strong shipbuilding sectors may benefit in the coming years. The Spring 2015

Industry Report noted: “nations enjoying increasing economic growth and in the midst of

rising geopolitical tensions may be increasingly interested in procuring more advanced naval

products from other countries” (Go Maritime, 2015).

However, in the political sphere, there are three main concerns that SIMA faces. First,

they depend on the government in turn and Ministry of Defense´s plans. During Ollanta

Humala’ s government (2011-2016) SIMA sales were mainly absorbed by the Peruvian Navy

and other public projects. Therefore, the company made little profits during this period. In

addition, the Callao terminal port, managed by the company APM have manifested expansion

projects that could jeopardize SIMA’s location. Finally, SIMA could suffer from

government´s corruption or mixed interests (Barzola, Bomble, Esquen & Koening, 2013).

1.4.2 Economic

Shipbuilding is one of the oldest, most opened and fragmented markets in the world

(Ahmed, 2016). This business is closely related to the shipping industry and for instance to

the international trade and global economy. Therefore, ever since the financial crisis the

shipbuilding and repair business have entered into a depression. Since then, shipyards have

been suffering from low profit margins, depressed prices and a significant number of

shipyards have gone out of businesses. The recovery is being slow and the industry is still

facing a decrease in demand of new orders (The Shipbuilder's Association of Japan, 2016;

Ahmed, 2016).

Moreover, shipbuilding is highly dependent on the price of its main material, steel,

which presents high volatility. Its highest latest peak was in 2012; however, in the last years

its price has been falling from 4,000 CNY/Metric Ton in 2012 to 2,000 CNY/Metric Ton in

2015 (Evans-Pritchard, 2015). Although SIMA has benefited from the falling prices during
 17

the last four years, commodities prices are uncertain and tendencies could turn around in any

moment.

From a local perspective, Peru has achieved economic stability during the last years

characterized by low levels of interest rates and inflation. Also, the international commerce of

Peru have grown under different trade agreements. “In recent years, under presidents Alan

Garcia (2006-2011) and Ollanta Humala (2011-2016), economic activity has benefited from a

favorable international context, particularly from improving terms of trade” (“Peru Economic

Outlook”, 2016). Peru recently count with several trade agreements with South American

countries, the US, China, EU, Japan, Mexico etc.

Furthermore, Peru stands out as an ideal strategic partner for China and Asia, both for

its strong economy and its geographical location. In its role as a gateway from Latin America

to China, Peru can strengthen its position as a logistics hub on the continent, thus taking

advantage of investments in mining, energy and infrastructure. If Callao becomes a shipping

hub, large vessels with a capacity of 15,000 containers would arrive creating more

connections and more destinations for Peruvian exports (MINCETUR, as cited in Barzola

et.al, 2013).

During the last years the Peruvian government has privatized their ports, giving the

concession to international companies. These ports are: (a) South Port Terminal of Callao, (b)

Port of Matarani, (c) Paita Port Terminal, (d) Terminal boarding Mineral Concentrates in the

Callao Port Terminal, (e) Multipurpose North Terminal (Callao Port Terminal) and (f) New

Port Terminal of Yurimaguas. The purpose of this privatization program was to modernize

the infrastructure an increase traffic of boats. This results in an opportunity for SIMA which

has a larger demand of vessels that may require maintenance and / or repair when they reach

the Peruvian territory (Barzola et.al, 2013).

 18

1.4.3 Social

The shipbuilding industry employees are known as shipwrights. These are highly

skilled workers specialized in different types of ships or job positions (Ahmed, 2016). Peru

has a good amount of talented engineers and qualified persons to accommodate a shipyard

expansion. However, there is also a great level of illiteracy in the workforce which must be

taken carefully into consideration when handling such delicate projects. The company

employs more than 1100 workers at the shipyard in Callao alone and most of these gain a

valuable amount of skills and education (Novoa, personal communication, July 7, 2016).

In addition, since the shipbuilding industry is labor intensive, labor costs are

significant and could represent a competitive advantage or disadvantage depending on the

countries’ wages. If comparing Peru to other countries of the region, this country has one of

the lowest minimum wages ($258) in comparison to Chile ($373) and Panama ($529). This

represents a great opportunity to SIMA, which could differentiate by offering lower prices

(Federacion Interamericana de Asociaciones de Gestion Humana, 2016).

1.4.4 Technological

One challenge SIMA Callao will encounter in the close future is staying up to date

with the new technologies used in the shipbuilding industry. Today, there are several

international shows where new technologies are presented such as The International

Workboat Show and the Maintenance World Expo. Some of the most important

developments in the shipbuilding industry are green technologies oriented to reduce carbon

footprints, which are explained in the environmental analysis (Ahmed, 2016).

Also, rubber airbags, known also as MAX airbags, rubber inflatables or marine air

bags are new technologies used to perform maintenance and repair services. “With airbags,

shipbuilders are able to build and repair in massive scales without having to turn down

businesses and stay extremely competitive without having to build costly docks/rails to
 19

increase their capacity” (Chan, 2015). Lastly, advanced outfitting is a concept that involves

assembling the outfit components like machinery, seating structures and piping into a small

unit at the same time that the vessel hull is fabricated. With this technology, the building

cycle time is reduced as well as the production costs (Chan, 2015).

3D printing technology is starting to be used by the industry but few are affordable

and sustainable. Recently, NSWC Carderock constructed a hospital ship using 3D printing.

This technology could be used to build complex geometries of ship and quick replacement of

ship’s part for repairing purpose. Also, shipbuilding robotics are being developed as a driver

of efficiency and a method to prevent workers for doing dangerous tasks. It could also solve

the shortage of skilled labor in many countries. As an example, the South Korean shipyard,

Geoje, operates using robotic systems, which represent 68% of its production processes

(Kumar, 2015).

1.4.5 Environmental

The industry, like many other sectors, is trending towards increasing demanding green

goals. From an environmental point of view, the SIMA Callao’s location needs to take

reasonable precautions for any potential tsunami or earthquake. Furthermore, as mentioned

above, there are stricter environmental policies and norms today which need to be met and

followed.

BIMCO, the world's largest shipping association (more than 2,200 members

globally), updates and distributes a document called The Guide to Maritime Environmental

and Efficiency Management. In these guidelines, the organization outlines a number of

important topics ranging from efficiency, oil and air pollution, sewage, underwater noise, etc.

(BIMCO, 2014). Some of the latest green technologies are: greener engines that minimizes

nitrogen oxide, ultra-efficient optimized cooling systems, minimal friction hull paint to boost
 20

fuel efficiency, ultra-efficient propeller designs, solar cell hybrid system and diversification

of fuel mix (Chan, 2015).

Finally, Liquefied Natural Gas (LNG) engines are emerging as an environmental

friendly alternative. “In the LNG engines, CO2 emission is reduced by 20-25% as compared

to diesel engines, NOX emissions are cut by almost 92%, while SOX and particulates

emissions are almost completely eliminated” (Kumar, 2015). The industry is also trying to

develop technologies to utilize renewable sources of energy such as wind and sun. However,

the largest solar powered ship is just 100 metric ton and seems not viable to make a 100%

solar commercial ship. However, there are many technologies today which support the big

ships to reduce fuel consumption, Eco Marine Power is one of the most popular (Kumar,

2015).

1.4.6 Legal

As mentioned before, SIMA is regulated by FONOFE. This institution sets

regulations and controls of Peruvian state-owned enterprises and is responsible for approving

the annual budget and investment proposals. Some relevant legislations that regulates SIMA

operations are law No. 27073 and No. 28583. In particular, the aforementioned Law No.

27073 (1999), The Law of Industrial Services of the Marine, regulates the activities of the

company within the scope of the defense ministry and establishes its main purpose that is to

preferably serve the Navy of Peru. Private customers should be addressed only to self-finance

the company. This regulation constitutes a great disadvantage of SIMA compared to their

local and regional competitors, since the law limits the scope of decisions of this firm

(Barzola, et.al, 2013).

Another important regulation is the law No. 28583 of Reactivation of the National

Merchant Marine (2005). It was created after the 90s, period in which the merchant navy

broke and virtually disappeared due to the release of loads and increase of charges for ship´s
 21

purchases. These measurements threat the shipbuilding and repairs industry since demand

slow down during this period (Barzola, et.al, 2013). Other important laws are: No. 1138, Law

of the Peruvian Navy; No. 1138, Law of the organization and functions of the Defense

Ministry; No. 1031, Promotion of efficiency of state businesses and strategic planning and

guidelines from The Defense Ministry, Peruvian Navy and FONAFE. Finally, it is important

to note that although it is part of the Defense Minister and regulated by FONOFE, SIMA

maintains a private administration and has an administrative, economic and financial

autonomy.

Table 1 presents a summary of the opportunities and threats found in the external

analysis.

Table 1
Opportunities and Threats

Opportunities Threats

 Shipbuilding receives the support of  SIMA´s public demand depends on

many governments around the world the government in turn
as it is considered as a strategic  SIMA´s location could be threatened
industry. by an expansion of Callao´s terminal
 International trade of Peru would port.
likely grow under different trade  The shipbuilding industry is closely
agreements and due to its politic and related to the global economy.
economic stability. Therefore, since the financial crisis it
 Peru´s location stands out as an ideal has been suffering from low profit
partner for China and Asia, creating an margins, depressed prices and low
opportunity on becoming the hub of demand.
South America.  The industry is highly dependent on
 The privatization of ports during the the price of steel which is presents
last years have increase the traffic of high volatility.
boats.  The industry is having stricter
 Peru has a good amount of talented demands to reduce its environmental
and qualified engineers and one of the impact.
lowest labor costs of the region.  SIMA´s main purpose is to serve the
 Development of new technologies are Peruvian Navy and private customers
oriented to increase productivity and should be addressed only to self-
reduce environmental impact. finance company.
 22

1.5 Internal Analysis

1.5.1 Administration and marketing

One of the biggest issues of SIMA is related with its ownership structure. As a state-

owned enterprise SIMA´s objectives are set by the government. Therefore, the firm´s priority

is to serve the Peruvian navy and other projects of metalworking required by the government.

By performing these projects SIMA makes no profits, limiting the firm´s growth and the

possibility of generating a higher social impact.

In the other hand, SIMA maintains a private administration and has an administrative,

economic and financial autonomy. However, the direction is composed by Peruvian navy

generals, who usually count with technical skills but lack from administrative and managerial

capabilities. In addition, they usually serve the company for a short period that inhibits the

continuity of plans and the implementation of a long-term strategic planning (Novoa,

personal communication, July 7, 2016).

Moreover, they are not allowed to promote their services. In this area, the

government limits their publicity. SIMA is only allowed to use direct marketing. For

instance, they have to advertise in a specialized manner to a narrow audience since the

government needs most of their time for their projections. They also lack from market

intelligence, which means that they do not fully know their competition and positioning

strategy. At the same time, SIMA doesn´t count with a segmentation and positioning strategy

to differentiate from its rivals (De Izcue, personal communication, July 7, 2016).

1.5.2 Operations

In the Administrative aspect of the Callao shipyards, a key strength SIMA has is the

ISOs certifications. They meet the requirements and are up to date on these standards, and so

a high level of credibility comes with the projects they carry out. Another important strength
 23

is the privileged location that SIMA Callao´s shipyard occupies along the South American

coast (De Izcue, personal communication, July 7, 2016).

However, when talking about its infrastructure and capacity SIMA has the weakness

of not being able to service every sort of ocean liner. In addition, their machinery and

equipment are obsolete and outdated. There is also insufficient infrastructure of dry work of

small and medium sized ships, limited parking space, inadequate equipment for submarine

repairs and lack of infrastructure for the attention of large vessels (Novoa, 2012).

This affects three other related areas: sales, operations and logistics. Not having

enough capacity and the proper industrial machines makes them loose sales and decreases

levels of efficiency and productivity. Lastly, purchasing errors are also common generating

production delays and bottlenecks since the work is performed manually and operators are

not fully trained (Novoa, 2012).

1.5.3 Finances

Related to this weakness, SIMA is limited financially. The net margins of the last

years have been small even though the total revenues have been increasing (Servicios

Industriales de la Marina, 2016). As a result, the company does not have the funds to

improve their infrastructure, increase capacity and invest in R&D. The government’s projects

that SIMA takes on are not for profit. In addition, although the goal is to break even, the

company ends up losing money because of setbacks and mistakes along the way (Novoa,

personal communication, July 7, 2016). Chapter II and IV shows a complete analysis of profit

margins and sales, which are disaggregated by business unit and by sector to explain

differences and financial results.

Moreover, SIMA lacks from policies in the procurement and financial division. The

company lacks from a supplier´s payment policy which has forced the company to deal with
 24

smaller suppliers. In addition, their international operations are not secured by financial

instruments, having the risk of scams and bankruptcy of the counterpart.

1.5.4 Human resources

SIMA's human resources is a strong point in the industry because of the professionals

they hire at a low cost. The navy counts with highly qualified engineers and specialists on

shipbuilding tasks. Today, SIMA gives work to 1100 workers at their main shipyard (Novoa,

personal communication, July 7, 2016).

However, the organization is highly hierarchical and there is small communication.

Employees are not encouraged to think creatively to find solutions and new opportunities

because they are used to following orders. In addition, SIMA lacks from a wage and

promotion policy that results in low motivation of the workforce. Promotions are now based

in experience and seniority which creates a feeling of injustice and demotivation specially of

new workers. Lastly, the employees are over specialized in a single job, which inhibits them

from rotating to other positions according to counteract demand (Novoa, 2012).

1.5.5 Information systems and technology

For communications and information systems, the company needs to replace or

update their equipment to perform their work more effectively. A good portion of their

technology is obsolete. SIMA works with Microsoft Office packages but lacks from an ERP

software to integrate all the firm´s information. Thence, it is extremely important for the firm

to invest in an ERP system in order to integrate data, improve efficiency and take better

informed decisions. SIMA also needs to create a R&D division focused on improving quality

and generating competitive advantages (Novoa, personal communication, July 7, 2016).

Table 2 presents a summary of SIMA´s strengths and weaknesses that have been

elaborated based on the internal analysis.

 25

Table 2

Strengths and Weaknesses

Strengths Weaknesses

 SIMA maintains a private administration  SIMA´s objectives are set by the government.
with economic and financial autonomy. Attending public projects limits the firm´s
 SIMA counts with international ISO growth and possibility of generating higher
certifications, which enhance its social impacts.
reputation.  SIMA´s direction is composed by Peruvian
 Its privileged location in South America naval generals who lack from administrative
constitutes a competitive advantage over and managerial capabilities.
its rivals.  High turnover rates of naval officers inhibit
 The firm counts with highly qualified long-term planning.
engineers at a low cost.  SIMA has marketing restrictions and could
not promote its services on media.
 They also lack from marketing intelligence
and a segmentation and positioning strategy
to differentiate from its rivals.
 Its machinery and equipment are obsolete and
infrastructure and capacity is insufficient to
attend demand.
 It also presents procurement and financial
problems due to the lack of policies.
 Net margins during the last years have been
small even though total revenues have been
increasing.
 The organization is highly hierarchical and
there is small communication.
 The firm lacks from a wage and promotion
policy based in results.
 Employees are overspecialized in a single job
which does not allow rotation.
 The firm lacks from an integrated
information system and a R&D division.

1.6 Conclusions

The shipbuilding industry is slowly recovering from the world´s financial and facing

low profits margins and depressed prices. The repairs unit however, has not been affected in

the same level as ship-owners prefer to repair their vessels rather than buying new ones. In

addition, increasingly aggressive competition in the world market like China, is threatening

SIMA´s worldwide position.

 26

Moreover, SIMA Callao's greatest strength is also its biggest weakness: the

government's close ties to the company could either push the project forward or deter any

future opportunity for the potential shipyard. As explored above one of the key problems is

the small profits SIMA generates, which inhibits them from growing and increasing their

capacities. Other weaknesses of the company are related to the lack of policies the obsolete

and insufficient infrastructure and the lack of a long-term planning.

Ultimately, its high skilled and low cost workforce, its ISO certifications a its great

location should be taken into consideration to formulate its positioning strategy and

competitive advantages. Therefore, SIMA needs to move on and improve its facilities if they

want to remain competitive on the market, not only with China but with other neighborhood

countries like Panama and Chile, which have more capacity and higher technology levels.

Expanding the maintenance and repairs capacity at SIMA Callao would open Lima up to a

number of opportunities.
 27

Chapter II: Key Problem

2.1 Description

SIMA´s key problem has been formulated after recovering information from different

sources: observations during a visit to SIMA´s facility at Callao, interviews with Carlos

Novoa (Strategic Planning Manager) and the marketing team (lead by Carlos Alberto De

Izcue), information handed by the firm and diverse external sources. After the investigation it

has been determined that SIMA´s key problem is related to a financial weakness: the small

profits obtained during the last years. Different problems located at different divisions and

levels of the organization are related to the firm´s profitability. They are explained in Chapter

V.

Net margins have been bordering upon 2.3% during the last two years, despite of

having increased revenues. In 2015, the company increased its sales to 318.9 M soles in

comparison to the 250.9 M soles of 2014. However, the net margin remained essentially

unchanged: 2.38% in 2015 and 2.35% in 2014 (Servicios Industriales de la Marina, 2016).

Appendix A shows the Profit and Loss Statement of the year 2015.

2.2 Timing and Magnitude

In order to study the financial results, it has been compiled SIMA´s sales and net

margins of the last 10 years which are shown in Table 3. It can be noticed that sales levels

have increased year after year starting in 106M soles in 2005 and growing up to 328M soles

in 2015. However, net margins do not show a clear tendency and have large variations in 1-

year periods. They also present a large dispersion, ranging from -12.24% in 2006 to 2.38%

obtained last year.

The average net margin of the last 10 years is 0.29%. However, the last two years,

SIMA has obtained the highest profit margins of the 10-year period. Profit margins could

have fluctuations since it depends on the proportion of public against private sales. They also
 28

depend in the distribution of sales among business units which is explained in the next

section.

Table 3
SIMA's Annual Sales and Net Margins 2005-2015

Year Sales (PEN) Net Margin

2005a 106’661,417 0.18%

2006 b 108’730,636 -12.24%

2007b 150’741,312 2.06%

2008c 184’358,965 0.48%

2009c 198’894,319 1.70%

2010 d 171’595,938 2.24%

2011 d 220’843,686 1.95%

2012 e 215’380,796 1.22%

2013 e 213’322,867 0.84%

2014 f 250’913,520 2.35%

2015f 328’946,739 2.38%

a
Servicios Industriales de la Marina (2006, pg.65), bServicios Industriales de la Marina (2008, pg.65), cServicios
Industriales de la Marina (2010, pg.65), dServicios Industriales de la Marina (2012, pg.65), eServicios
Industriales de la Marina (2014, pg.65), fServicios Industriales de la Marina (2016, pg.65).

2.3 Location

To find the location of the problems it is important to analyze the distribution of sales

by sector and by business unit. First, the low profits can be attributed to the sales distribution

by sector, as shown in Table 4. In the last four years, more than 70% of total sales have been

performed to the public sector, which are orders that do not generate profits for the company.

The other 30% of sales comes from the private sector. However, during the first six months

of the current period, SIMA has reversed the distribution of sales, with only 15% of public

sales and 84% destined to the private sector.

 29

Table 4
Distribution of SIMA´s Sales by Sector (2012-2016)

Year Public Sales Private Sales

% %

2012 70% 30%

2013 88% 12%
2014 91% 9%
2015 84% 16%
2016 Jan-Jun 15% 84%

Note. Data are from “Consultas Tesis” by C. Novoa, 2016.

It is also important to analyze the distribution of sales by business unit since they

present different profitability ratios. First, the shipbuilding unit is currently facing difficulties

trying to generate profits. As mentioned above, the declining demand for ship projects after

the financial crisis, along with the increasing competition from low-wage countries has

caused an oversupply in the industry. As a consequence, shipbuilders have lowered its prices

to attract buyers. The low prices and the increasing costs of steel are leaving producers with

minimum profits and some shipyards are even incurring losses to maintain their operation

going.

Meanwhile, ship repair's margins have not been affected in the same scale. SIMA's

net objective margins by business unit are shown in Table 5. The margin's objectives have

been set according to historic levels and profit goals of the company. Shipbuilding has the

lowest margin of 5%, followed by metal works with 8% and maintenance and repair with

15%.
 30

Table 5
Minimum Net Margin Objective by Business Unit

Business Unit Net Margin

Objective

Shipbuilding 5%

Ship Maintenance and Repair 15%

Metal Works 8%
Note. This minimum margins were set in memorandum DES-2011-065 in April 2011.
Data are from “Consultas Tesis” by C. Novoa, 2016.

2.4 Ownership

The problems stated above correspond to the finance division of SIMA. However, it is

also related with other problems that exist in and around the organization, which are

explained in Chapter V. One of the main problems could be attributed to the public

ownership of the organization, which main objective is social rather than economic. It is

focused on serving the Defense Ministry and the Peruvian Navy.

In this way, the production capacity during the last years, which was directly

influenced by Ollanta Humala's government, has been used to serve the public sector. This

left little time to carry out private orders. The government and other public institutions are

caught up with the social role of SIMA, causing them to miss economic opportunities.

Furthermore, the possibility of generating a higher profitability would also positively

influence their social impact, which is explained in Chapter VII.

 31

Chapter III: Literature Review

3.1 Literature Mapping

Today, most developed economies are based on opened markets and private

organizations. However, in many countries, especially in emerging economies, state-owned

enterprises still play an important role over GDP, employment and capitalization

(Organization for Economic Co-operation and Development, 2015). Most of the studies that

are reviewed in this section demonstrate that privatization improves firms´ financial and

operating performance. Nevertheless, government´s ownership could be convenient in

specific cases.

The following section analyzes the literature related to state-owned enterprises

(SOEs) as SIMA. Figure 9 presents a synopsis of the topics and literature that are covered in

this chapter. The themes discussed in this section are: definitions, rationale behind SOEs,

trends, corporate governance, SOEs’ scorecard, SOEs’ failure, effects of ownership structure

and privatization critics. The chapter begins by defining some concepts, followed by the

rationale behind government enterprises and global trends and statistics related to public and

private companies. Then, as corporate governance is a critical point on SOEs´ management,

the challenges related to this topic are covered, followed by some guidelines of the

Organization for Economic Co-operation and Development (OECD) which are

internationally agreed standards for and efficient and transparent operation of SOEs.

Moreover, since SOEs have multiple goals beyond financial ratios, new measurement

models are presented. They all include additional KPIs such as social, human, innovation,

citizen and welfare, and environmental indicators. In addition, there are explained some of

the reasons why SOEs have declined during the last decades.
 32

State-Owned
Enterprises

Definition Rationale Trends Corporate Governance Scorecard Failure Ownership Structure Privatization Critics

• Chong & Lopez, •

• OECD, 2015 • Forfas, 2010 • Asian • Alchian & Demsetz, 1973 Beslerova & Varcholova, • Chong & Lopez, 2003
2003 Challenges
• Goodman & • OECD, 2015 Development • Jensen & Meckling ,1976 2013 • Goodman & Loveman,
• Forfas, 2010 •
Loveman, 1991 • PricewaterhouseC Bank, 2007 • Niskanen, 1971 Bozec, Breton & Cote, 1991
• PricewaterhouseC •
• PricewaterhouseCoo oopers, 2015 Forfas, 2010 • Pricewaterhouse • Shleifer & Vishny, 1996 2002 • “Critics of
oopers, 2015 • •
pers, 2015 OECD, 2015 Coopers, 2015 • Tullok, 1976 Chong & Lopez, 2003 Privatization”, n.d.
• PricewaterhouseC • The World Bank, • Vickers & Yarrow, 1988 • Chung & Kim, 2007
oopers, 2015 2014 • Ehrlich, Gallais-
Hamonno, Liu & Lutter
1994
Guidelines • López-Morales &
Vargas-Hernández, 2014
• OECD, 2015 • Megginson, Nash &
• PricewaterhouseCoo Randenbourgh, 1994
pers, 2015 • Omran, 2002
• World Bank, 2002 • Ongore and Vincent,
2011

Figure 9. Literature mapping.

 33

3.2 Literature Review

3.2.1 Definitions

The definition of state-owned enterprises differs across countries. The Guidelines of

Corporate Governance of SOE´s define them as “any corporate entity recognized by national

law as an enterprise, and in which the state exercises ownership” (Organization for Economic

Co-operation and Development, 2015). They are also known as government´s corporations,

government’s business enterprises, state linked companies, parastatals, public enterprises and

so on (PricewaterhouseCoopers, 2015). It includes joint stock companies, limited liability

companies and partnerships limited by shares, which means that the state can share the

ownership with a private entity (Organization for Economic Co-operation and Development,

2015).

In the other hand, a private company is a firm whose ownership is private and

privatized firms refer to previously state-controlled companies where private owners

presently have control and the level of state ownership is reduced (Beslerova & Varcholova,

2013). Privatization however, includes a great range of activities such as the sale of public

assets to private owners, the simple cessation of government programs, contracting out to

private firms’ services formerly provided by state organizations, and the entry of private

producers into markets that were formerly public monopolies (Goodman & Loveman, 1991).

3.2.2 Rationale behind SOEs

During the mid 1950´s SOE´s became popular in many nations due to the economy

situation and nature of many industries (Chong & Lopez, 2003). The rationale of government

enterprises corresponds to a mix of social, economic and strategic interests. The ultimate

purpose of SOE´S is to maximize the value for society, through and efficient allocation of

resources (PricewaterhouseCoopers, 2015). Some of the rationales include:

 34

 Provide public and merit goods such as national defense, public parks, health and

education, which benefit the entire society (PricewaterhouseCoopers, 2015).

 Job creation and improvement of labor relations in “strategic” sectors

(PricewaterhouseCoopers, 2015).

 Increase access to public services. In some circumstances the private sector refuses

to serve less desirable customers. In this situations the state intervention is justified

by creating a public company and providing subsides to reduce the prices of basic

services and goods (Forfas, 2010).

 Control of abuse in natural monopolies. Some industries are natural monopolies

since entry barriers are extremely high (railways, water and electricity). In such

circumstances, suppliers can abuse from their position by charging high prices. In

this situations governments could opt for SOEs in order to eliminate the abuse and

charge rational prices (Forfas, 2010).

 Eliminate capital market failures. When the private sector is unable or unwilling to

finance projects with high returns in the long-term but high risks in the short-term,

the state funds this projects by creating joint ventures. However, the presence of

more advanced capital markets is reducing the need for public funding (Forfas,

2010).

It is of extremely importance to review the rationale behind the SOEs and consider

whether a more efficient allocation of resources to benefit the society could be achieved

through an alternative ownership or taxation structure (Organization for Economic Co-

operation and Development, 2015). Some countries have established procedures to review

these issues periodically, the German budget law is a clear example. It requires the

government to review the arguments for state ownership every two years. If the arguments

are rejected in the budget bill, then the SOE is automatically privatized (Forfas, 2010). The
 35

following value creation/profitability matrix provides a framework for state´s decisions over

SOE´s ownership (PricewaterhouseCoopers, 2015). In the quadrants with societal value

deterioration the state should opt whether to close or sale the company or re-formulate the

SOE mission with a societal value adding activity.

Figure 10. Value creation/profitability matrix.

Data are from “State-Owned Enterprises Catalysts for public value creation?”,
PricewaterhouseCoopers, 2015
(https://www.pwc.com/gx/en/psrc/publications/assets/pwc-state-owned-enterprise-psrc.pdf).

China has a particular history of SOEs. After the long period of war that precedes the

establishment of The People´s Republic of China in 1949, SOEs were created to rebuild the

country. They provided not only employment, but also social services, education and

healthcare. However, ever since the economic reform and opening up policies from 1978,

China has overcome a privatization transformation. The number of SOEs fell from 196 in

2003 to 115 in 2013 (Gang & Hope, 2013).

Nevertheless, China´s main SOEs in strategic industries continue playing an

important role in the internal and international market. Many global partners have

complained about the unfair competition originated by policies favoring SOEs. Some of them

are justified such as the argument that SOEs enjoy preferential treatment in licensing and
 36

obtaining government´s public contracts. However, they do not have preferential financing

and they compete aggressively in competitive markets. “In May 2012, China committed to

developing a market environment of fair competition and treating all enterprises without

discrimination” (Gang & Hope, 2013)

3.2.3 SOEs’ Trends

Although SOEs gained great popularity during the 1950´s the public ownership of

commercial enterprises has declined since the end of the 20th century (Forfas, 2010). The

entire world has embraced privatization after the poor performance, inefficiency and failure

of state-owned enterprises (Chong & Lopez, 2003). Figure 11 shows the decline of public

ownership in many OECD countries from 1998 to 2008. It can be noted that in 17 out of 27

countries the state ownership has been reducing its participation, five countries have

maintained it and only six countries have increased it.

Figure 11. Scope of public ownership index 2008 (Scale 0-6).

Data are from “The Role of State Owned Enterprises: Providing infrastructure and
Supporting Economic Recovery”, Forfas, 2010
(http://www.forfas.ie/publication/search.jsp?tp=Infrastructure)
 37

Despite the downward trend of SOEs around the world, state ownership has been

rising in influence over the past decade. This can be noted in the proportion of SOEs among

the Fortune Globe 500, which has grown from 9% in 2005 to 23% in 2014. It has mainly

been driven by the increasing presence of Chinese SOEs in the top rankings.

In fact, there are three Chinese companies that have reached the top ten since 2010:

Sinopec Group, China National Petroleum and State Grid (PricewaterhouseCoopers, 2015).

Figure 12 shows the participation of Chinese and the rest of the world´s SOEs in the Fortune

500 companies. It can be noted a growing trend of SOEs in terms of quantity and total

revenues.

Figure 12. SOEs in the Fortune Global 500, % and Revenues.

Data are from “The Role of State Owned Enterprises: Providing infrastructure and
Supporting Economic Recovery”, Forfas, 2010
(http://www.forfas.ie/publication/search.jsp?tp=Infrastructure).

SOEs are usually concentrated in public services and strategic industries such as

petroleum refining, utilities and financial services. On the contrary, few countries have
 38

government presence in competitive industrial sectors such as manufacturing, construction

and retail. However, it is interesting to observe some SOEs´ emerging sectors such as motor

vehicles and parts, telecommunications, mail, aerospace and defense. Figure 13 shows the

distribution of SOE´s across economy sectors in Fortune Global 500 companies. The sectors

that have increased its presence during the last ten years are mining, energy, engineering and

insurance.

Another important trend of SOEs is that they have become global companies. The

increased international competition for finance, talent and resources have positioned SOEs as

tools to compete in the global economy. For instance, those countries with the highest SOEs’

shares (China, United Arab Emirates, Russia, Indonesia, Malaysia, Saudi Arabia, India and

Brazil) have become important traders, representing together more than 20% of the global

trade (PricewaterhouseCoopers, 2015).

Figure 13. Distribution of SOE across economy sectors in Fortune Global 500.
Data are from “State-Owned Enterprises Catalysts for public value creation?”,
PricewaterhouseCoopers, 2015
(https://www.pwc.com/gx/en/psrc/publications/assets/pwc-state-owned-enterprise-psrc.pdf).
 39

3.2.4 Corporate governance

SOEs´ challenges. Some common challenges faced by SOE are related with

governance. State interference is one of the most recurrent problems, together with unclear

lines of responsibility and lack of accountability. On the contrary, some cases are related with

distant ownership by the state that leads SOE managers to self-serving behaviors instead of

serving the best interest of the society (Organization for Economic Co-operation and

Development, 2015). Additionally, some other issues found at SOE´s governance are

corruption, bribery and inefficiency (PricewaterhouseCoopers, 2015).

Another important challenge is to fulfill its multiple and conflictive goals: the

financial objectives and the public policy role (Forfas, 2010). The differences between the

public and private sector lie in the motivations and objectives of these organizations. While

the private sector uses their business activities to achieve financial objectives, the public

sector uses finances as a mean to achieve social objectives. In other words, SOEs need to

remain financially sustainable and commercially competitive to create value for the society

(PricewaterhouseCoopers, 2015).

Guidelines on corporate governance of SOEs. In order to maximize value creation

SOEs should follow some guidelines and principles. The OECD Guidelines on Corporate

Governance of SOEs are internationally agreed standards for governments to ensure that

SOEs operate efficiently, transparently and in an accountable manner (Organization for

Economic Co-operation and Development, 2015). The term corporate governance has been

defined as “organization and rules that affect expectations about the exercise of control of

resources in firms” (World Bank Development Report as cited in Beslerova & Varcholova,

2013). In public companies conflict of interest and difficulties arise, being necessary to

follow guidelines and systems to handle these problems.

 40

The first principle is to establish a clear purpose and mission, linked with the desired

social and economic objectives. It should be communicated to the whole organization.

Second, key positions such as the board of directors and top managers should comply with

the “4C´s” which stands for: clarity, capacity, capability and commitment to integrity”. Third,

transparency and accountability are required, through the publication of financial and other

performance indicators. Fourth, it is important to co-create value with other stakeholders in

society (universities, public sector, NGO´s, citizens) who could provide guidance and inputs

on the direction of the SOE (PricewaterhouseCoopers, 2015).

It is also important to clarify the state´s role over SOEs´ operations. The government

should participate actively, ensuring transparency and accountability on the governance of

the SOE. In this line, the state should simplify and standardize the SOEs’ corporate norms.

However, the state should guarantee the full operational autonomy of public organizations

avoiding interventions in the SOEs’ management. The board of direction should be the

responsible of the SOEs´ operations. This does not mean that the government should not have

decision power, but that its authority should be limited to strategic issues and public policy

objectives (Organization for Economic Co-operation and Development, 2015).

Additionally, the ownership of SOEs should be centralized in a single entity that

supervises the whole range of public companies. It should be clearly identified to a specific

ministry or a separate administrative entity. Finally, it is important to clarify the codes of

ethic for state officials serving as SOE board members (Organization for Economic Co-

operation and Development, 2015).

 41

3.2.5 SOEs´ performance

Measuring an organization´s performance is necessary and vital. The purpose is not

only to know how a firm is performing but also determine how to improve indicators (Asian

Development Bank, 2007). Performance-monitoring systems refers to institutions, processes

and documents that are used by governments to control the financial and non-financial

performance of SOEs. This system involves three key elements: (a) setting strategies and

objectives, (b) structuring performance agreements between SOEs and governments and (c)

developing key performance indicators and targets (The World Bank, 2014).

Traditional systems measure performance using financial indicators such as revenue

growth and profitability (Asian Development Bank, 2007). However, it is important to note

that since SOEs have multiple objectives, its performance should be measured with additional

KPIs beyond financial. The total impact measurement management (TIMM) framework

developed by PricewaterhouseCoopers (2015), is a useful tool that could be used to identify

the value creation of the social, environmental, social and economic activities of a company.

This framework is presented in Figure 14.

The balance scorecard (BSC) is the most widely adopted system today (Asian

Development Bank, 2007). Unlike traditional performance systems, the BSC includes

different KPIs such as social, human, innovation, citizen and welfare, and environmental

capitals (PricewaterhouseCoopers, 2015). Governments could either design a BSC for the

country´s entire SOE sector or stimulate each SOE to design specific BSCs (Asian

Development Bank, 2007). Figure 15 shows the dimensions that should be captured in an

SOE’s scorecard.
 42

Figure 14. The total impact measurement management framework.

Data are from “State-Owned Enterprises Catalysts for public value creation?”,
PricewaterhouseCoopers, 2015
(https://www.pwc.com/gx/en/psrc/publications/assets/pwc-state-owned-enterprise-psrc.pdf).

Figure 15. Scorecard dimensions.

Data are from “State-Owned Enterprises Catalysts for public value creation?”,
PricewaterhouseCoopers, 2015
(https://www.pwc.com/gx/en/psrc/publications/assets/pwc-state-owned-enterprise-psrc.pdf).
 43

3.2.6 SOEs´ failure

The literature talks about two principal reasons of state ownership failure. First, the

incorrect monitoring and poor incentives for SOEs’ managers that is related with the lack of

control of financial entities and stock holders since the state is the owner and lender of SOEs.

Additionally, the board of directors take most decisions based on political rather than market

forces (Vickers & Yarrow, 1988). The second issue is related to the political interference

over the firm´s production, which results in excessive employment, inefficient investment

and poor quality (Shleifer & Vishny, 1996).

Bozec, Breton and Cote (2002, pp. 383-405) summarized three theories that support

privatization of public companies: (a) property rights theory (by Alchian & Demsetz, 1973),

(b) public choice (by Niskanen, 1971; Tullok, 1976) and (c) agency theory (by Jensen &

Meckling ,1976). The first theory argues that under state ownership, property rights are

poorly determined and there is no bankruptcy threat. As SOEs’ managers are not constraint

by these type of controls, they are less inclined to maximize profits.

The public choice theorists talked about the problems in government administration

arguing that “managers of the state-owned firms are more concerned to maximize their own

power, their prestige and the amount of resources under their control, while the politicians,

members of the government care more about re-election than for monitoring the managers of

the public firm”. Finally, the agency theory states that managers have a conflict of interest

since they look for maximizing their own advantage, different from a business owner or a

private firm manager who is disciplined by outside and inside control systems.

3.2.7 Ownership structure

Different authors have studied how differences in ownership structure could affect the

financial and operating performance of the firm. In other words, they compare the

performance of SOEs against privatized firms. There is a generalized belief that private
 44

enterprises perform better than public companies since these last ones are perceived as being

mismanaged and squandering assets and resources (Bozec et.al, 2002, pp. 383-405).

Most of the studies presented suggest that privatization of state-owned enterprises

leads to better performance. Despite the cases of privatization failures, the total record shows

that privatization programs lead to increased profitability and productivity, quality

improvements and fiscal growth. In the contrary, privatization failures are related to

inadequate re-regulation, poor contract design, corruption and high costs of capital (Chong &

Lopez, 2003).

Chung and Kim (2007) concluded that the efficiency of private companies is

considerably better than that of state-owned enterprises and partially better than privatized

enterprises. Ehrlich, Gallais-Hamonno, Liu and Lutter (1994) found productivity differences

between SOEs and privatizes companies. Their study proved that privatization can increase

productivity up to 2% a year and reduce costs by 1.9%. They also found that productivity was

not affected by the degree of market competition or state regulation.

Another study performed by Megginson, Nash and Randenbourgh (1994),

demonstrated that privatization leads to increases in profitability, efficiency, output,

employment and payment of dividends. Similarly, Omran (2002) found a significant increase

of profitability, efficiency, capital expenditures and dividends that newly privatized firms.

However, this last study in contrast to Megginson’s et.al (1994), found a decline in

employment, debt and risk with privatization.

Some other studies are focused in the effect of ownership structure in transition

economies. With the liberation of the economies the share of the private sector in the GDP

increased from 60% to 90% (Beslerova & Varcholova, 2013). Ongore and Vincent (2011)

performed and investigation in Kenya. Results showed that ownership concentration and

government ownership have a significant negative relationship performance. On the other

 45

hand, foreign, private and diffuse ownership had a positive relationship. Nevertheless, a study

of Latin American firms performed by López-Morales & Vargas-Hernández (2014)

suggested that the type of ownership is not relevant to the financial performance in this

context.

However, Bozec et.al (2002, pp. 383-405) argued that these studies are distorted since

private and public firms do not have the same goals. They indicated that SOEs have specific

mandates, some of them incompatible with economic results and identified in the literature as

non-commercial goals. They encompass political and social dimensions which sometimes

bring extra costs or a reduction of revenues of the firms. The studies that have been

mentioned ignore in their calculations the social advantages of SOEs.

Nevertheless, Bozec et.al (2002) realized a study in Canadian companies which

included non-commercial goals. Their results suggested that SOEs may have a negative effect

on performance when it has specific goals other than profit maximization. Additionally, they

discovered that public managers can manage as well as private managers, when they have the

same goals. Finally, their results contradicted the property theory, establishing that is not a

question of ownership but instead of goals what affects the firm´s performance. In this line,

the profitability of public companies could be improved without privatization if the goals of

the firm are reduced to financial performance.

Another study on the performance of state-owned enterprises by Chung and Kim

(2007) illustrates the effects of privatizing pressures over SOEs´ efficiency. They performed

a comparison between 22 Korean SOEs between different periods, one under privatization

pressure (1998-2002) and the other period without a government pressure. They found a

significant relationship between the privatization pressure and the operating efficiency of

SOEs. For instance, during the period 1998-2002 where the government imposed tighter

fiscal control on SOEs while implementing a privatization program, efficiency increased in

 46

these organizations. However, the degree of improvement by pressure was smaller than that

of already privatized companies.

3.2.8 Privatization critics

There are several theories against privatization. Critics are based in the belief that

gains in privatized firm´s profitability are achieved at the expense of the society. Goodman

and Loveman (1991) argue that private ownership does not necessarily translate into

improved efficiency. He added that private sector managers may have no remorse on making

essential services unaffordable or unavailable if they lead to higher profits. Therefore,

privatization would just be effective if private managers have the incentives to act in the

public interest.

Chong and Lopez (2003) argued that profitability gains are obtained from the losses

of other actors: (a) from the society through the use of market power, (b) from workers by

means of lower salaries, and (c) from the government. However, empirical evidence

presented by the same study contradicts such arguments. First, the abuse of market power has

been rejected by data from Latin America, which shows that changes in profitability are

generally larger in competitive rather than non-competitive sectors. In Mexico, operating

margins from privatized firms in competitive sectors increased in 14.5% and only 8.5% for

non-competitive industries. Similarly, non-competitive sectors in Peru increased their

profitability in an average of 27% while the mean of the whole sample was 32%.

Another important argument is that when privatizing firms, governments loose the

firm´s profitability and put it in hands of private firms. Nevertheless, there is also empirical

evidence that shows that SOEs are less efficient than private firms and that privatization leads

to profitability increases (Shleifer & Vishny, as stated in Chong & Lopez, 2003). Moreover,

tax collection from SOEs actually increased after privatization in most Latin American
 47

countries (Chong & Lopez, 2003).

However, worker exploitation critics have not been disregarded. First, it is important

to note that labor cost reductions are caused by fewer workers or lower wages. Some studies

shown in Chong and Lopez (2003) confirm that employment costs fell between 20% to 30%

after privatizations in Latin America, which are mainly related to layoffs. However, the same

study demonstrates that industry wages usually increase after privatizations, by about 100%

in Mexico and Peru.

Furthermore, some economists agree that it is the quality of the state rather than the

fact that assets are owned by the state that matters. In developing countries, characterized by

market and information failures, the state should play and important role in promoting long-

term development. Therefore, in many developing countries, privatization has resulted in

weakening the government without a strengthened private sector. Moreover, privatization has

negatively affected labor markets and consumers, expressed in higher prices and on the

exclusion of large segments of the population (“Critics of Privatization”, n.d.).

3.3 Conclusions

Although SOEs gained great popularity during 1950´s the public ownership of

commercial enterprises has declined since the end of the 20th century. Most economies have

embraced privatization after the poor performance, inefficiency and failure of state-owned

enterprises. However, SOEs have been rising in influence, increasing its participation among

the Fortune Globe 500.

Despite SOEs’ criticism, government´s ownership could be convenient in specific

cases: to provide public and merit goods, to eliminate monopolies and market failures and to

create jobs and have a direct management over strategic industries. In addition, governments

should review continuously, the rationale behind SOEs and consider whether a more efficient

allocation of resources to benefit the society could be achieved through an alternative

 48

ownership. Also, sine SOEs have multiple objectives its performance should be measured

within a new scorecard with additional KPIs beyond financial ratios such as social, human,

innovation, citizen and welfare, and environmental capitals.

Good governance is also critical to ensure their positive performance and expected

contribution to their economies. The OECD Guidelines on Corporate Governance of SOEs

are internationally agreed standards that could lead governments to an efficient and

transparent administration of SOEs. Some of the principles are: to establish a clear purpose

and mission, to ensure transparency and accountability and to clarify the role of the state over

the SOEs’ operations. The state should guarantee the full operational autonomy of public

organizations avoiding interventions in the SOEs’ management.

Finally, different authors have studied how differences in ownership structure can

affect the financial and operating performance of the firm. Overall, the total record shows

that privatization programs lead to increases profitability and productivity, quality

improvements and fiscal growth. However, studies are distorted since private and public

firms do not have the same goals. Bozec et.al study concluded that public managers can

manage as well as private managers when they have the same goals and that it is not the

difference in ownership but the difference in goals what affects the firm´s performance.

The literature review has provided valuable insights related to SIMA´s financial

problem. First, it has been mentioned the extremely importance of reviewing the rationale

behind SOEs. It was stated that products and services related to national defense are

considered strategic industries. Also, since shipbuilding is labor intensive it provides

numerous job positions. Therefore, SIMA´s state ownership responds to social and strategic

interests. From this, it can be argued that SIMA should remain as a public company to have a

better control of a strategic industry and maintain its social role.

 49

Second, it was discussed that SOEs have both financial objectives and a public role.

Therefore, it needs to remain financially sustainable and commercially competitive to create

value for the society. This idea suggests that a significant part of SIMA´s capacity should be

advocated to the private sector in order to generate profits. This is the only way that the firm

remains competitive by investing in infrastructure, technology and R&D.

 50

Chapter IV: Qualitative/Quantitative Analysis

4.1 Qualitative Analysis

As shown in Chapter II, SIMA has been generating small profits during the last ten

years. Even though net margins have recently improved (see Appendix A), they are too small

to perform the long-term investments that are required. SIMA´s actual capacity does not

allow them to attend private clients since it is all taken by government´s projects. It was also

mentioned in Chapter III that the firm needs to remain financially sustainable to continue

with its operations and that the only way of creating profits is by serving private orders.

Therefore, SIMA needs to increase its capacity to be able to serve the private sector.

Likewise, it has been mentioned in the internal analysis that the firm´s infrastructure

and equipment are obsolete and outdated. Therefore, SIMA needs to invest in new

technologies and infrastructure if they intend to remain commercially competitive. Their

local competition in Chile and Panama are generating competitive advantages by having the

latest technologies. This would not only increase its competitiveness but also its productivity.

There are other minor problems located around the company that could be affecting

its financial indicators. It was mentioned that the company lacks from human resources,

procurement and financial policies. The first one is affecting motivation levels and

productivity, the second causes delays and bottlenecks on production and the last one

increases the firm´s financial risk and supplier´s prices. As it is known, productivity, and

bottlenecks have a direct relationship with financial losses.

4.2 Quantitative Analysis

In order to determine if SIMA's profit margins are attractive or unattractive, the

company profitability ratios have been compared with its competitors: ASMAR (public

company) and ACENAV (private) both from Chile, China Huarong Energy Company

Limited (private), China Shipbuilding Industry Co. (public) and CSSC (public) from China.
 51

Additionally, the information is also compared with the profitability of the Chinese

Shipbuilding Industry in the last five years. The indicators that are compared in Table 6 are:

Gross Margin, Operating Margin, Net Margin and ROE.

In the years 2014 and 2015, SIMA obtained a small gross margin, because the

majority of sales were made to government entities. Detroit Chile presents that highest

margins since it is a private company, which gives an idea of the gross margin that SIMA

could obtain if they increase private sales. On the other hand, it can be noted that even China

Huarong Energy Company Limited, which is also private, obtained a small gross margin due

to price reductions.

The Chinese industry was significantly affected following the financial crisis. Today

only 100 out of the 300 Chinese yards have day-to-day operations in comparison to the 3,000

yards in 2010 (“The Good and Bad Outlook”, 2016). China Huarong Energy Company

Limited has barely been operating due to shortage of funds and the lack of availability of

banking facilities required for accepting new orders. Finally, the group was still carrying high

operating expenses and finance costs (China Huarong Energy Company Limited, 2015). On

the other hand, CSSC have responded to the declining orders by consolidating its yards and

reducing costs (“The Good and Bad Outlook”, 2016).

When analyzing operating margins, it is noted that SIMA obtains negative results in

comparison to the positive results of its competitors (with the exception of China Huarong).

This suggests that SIMA is not including administrative and sales costs in the price of public

projects. Additionally, SIMA obtains positive and similar net margins than those of ASMAR,

but lower than Detroit. Chinese companies obtained negative gross margins in the last two

years but it is still positive in the evaluation of the last five years. SIMA’s positive net

margins are related to financial incomes. Finally, SIMA obtained higher ROE than ASMAR

but lower than Detroit. It is important to note that this last company is involved in
 52

shipbuilding, maintenance and repair which represents 65% of its sales; the other 35%

corresponds to motor sales.

Table 6
Comparison of Profitability Ratios of SIMA vs Competitors

SIMA SIMA ASMAR ASMA Detroit China Huarong CSIC CSSC Chinese
(2015)a (2014)a (2015)b R Chile Energy (2015)e (2015)f Industry
(2014) b SA Company (5Y)f
(2014)c Limited (2014)d

Gross 2.73% 7.05% 20.01% 16.26% 50.24% 8.19% 5.18% 6.63% 20.13%
Margin

Operating -5.65% -2.41% 4.58% 0.97% 19.51% -159% -7.16% 4.93% 2.71%
Margin

Net 2.38% 2.35% 1.75% 3.89% 9.15% -213% -4.38% -0.42% 0.64%
Margin

ROE 5.52% 4.55% 0.72% 1.83% 7.7% -81% -4.47% -0.24% 4.55%

a
Servicios Industriales de la Marina (2016, p.65), b Astilleros y Maestranzas de la Armada (2016, p.56), c
Detroit Chile (2015), dChina Huarong Energy Company Limited (2015, p. 53), e Market Watch, 2016
(http://www.marketwatch.com/investing/stock/601989/profile) f Fusion Media Limited, 2016
(http://www.investing.com/equities/cssc-steel-ratios).

It has been shown that in comparison to other public companies of the industry, SIMA

presents similar or superior profits. However, Detroit Chile has shown the potential profits

that SIMA could obtain if it increases its capacity to serve private clients. Also, SIMA should

avoid negative operating margins by including operating costs in the budget of public

projects.

Additionally, it has been shown in Table 6 that the most profitable business unit is

repair and maintenance with net margins of 15% in comparison to the 5% of shipbuilding and

8% of metal works. Table 7 presents the distribution of SIMA’s sales by business unit. It

should be noted that in the last years, SIMA’s shipbuilding sales have fallen while its

maintenance and repair sales have risen. In the period 2011-2013, SIMA’s sales were focused

in shipbuilding. However, 2014 and 2015 the repair and maintenance division have been the

focus of work.
 53

Table 7
Sales Distribution by Business Unit 2011-2015 (expressed in soles)

Business Unit 2011 2012 2013 2014 2015

Shipbuilding 39% 47% 61% 18% 1%

Repair & Maintenance 33% 36% 22% 51% 77%

Weapons and Electronics 1% 2% 3% 18% 16%

Metal Works 27% 15% 14% 2% 4%

Others 0% 0% 0% 11% 3%
Note. Data are from “Memoria Anual Año 2015” by Servicios Industriales de la Marina (SIMA), 2016, p.42.
 54

Chapter V: Root-Cause Analysis of the Problem

5.1 Identified Causes

In order to analyze the roots of the problem, a fish-bone analysis has been performed.

Roots has been detected in different areas of the company: management, workers, working

conditions, materials, machines and technology and marketing. The fish-bone analysis is

shown in Figure 16.

Workers
Management
Over Specialization of Labor
Government Regulation

Inflexible Labor contracts

High Rotation of Officers

Inadequate Wage and Promotion Policies

Lack of Managerial Skills
Military Culture
Social Role Blindness
Inadequate Working Conditions

SI MA´sSmall
Profits
Lack of a Supplier's Payment Insufficient & Obsolete Infrastructure
Policy
Insufficient infrastructure for small
and medium sized ships Lack of Market Intelligence
Limited parking space

Purchasing Process errors Obsolete equipment for repair services

Inadequate infrastructure for submarines´

repair. Lack of Segmentation and
Positioning Strategy
Floating Prices of Materials Lack of infrastructure for large vessels

Inadequate Use of Infrastructure

Materials Marketing
Machines & I nfrastructure

Figure 16. Fish-bone analysis of SIMA's small profits.

5.1.1 Management

Government-regulated. As stated before, SIMA is a public company with private

administration. It has administrative, technical, economic and financial autonomy, managed

by the board of directors. However, it is regulated by the Defense Ministry and the National

Financing Funds of Public Companies (FONAFE). The first one is their most important client

(stakeholder) and the second one a stockholder (Servicios Industriales de la Marina, 2008a).

As SIMA's main objective is to serve the Peruvian Navy and due to the small

capacity, in continuous occasions SIMA has been forced to reject or stop private projects to
 55

work for the Peruvian Navy. Therefore, it is difficult for SIMA to create long-term

relationships with private clients and this situation has created a negative reputation for the

firm (Novoa, personal communication, July 21, 2016).

High turnover of officers. It has been mentioned before that the career progression of

marine officers does not allow them to stay in SIMA for more than two years, except for the

General Command Specialist officers and other justified cases (Servicios Industriales de la

Marina, 2008a). This inhibits, many times, the continuity of stable management, the

development and implementation of strategic planning and the establishment of long-term

goals. Big projects such as the development of the current shipyard or the creation of a

PANAMAX yard are not in their plans since they are only focused in short-term objectives.

Additionally, high turnover implies higher costs of hiring and training, and affects

productivity and authority levels (Servicios Industriales de la Marina, 2008a).

Lack of managerial skills and vision. SIMA is directed by marine officers of

different specialties. Sometimes the skills of the officers meet the required capabilities.

However, there are many occasions where there is a lack of managerial and technical skills

(Novoa, personal communication, July 21, 2016).

The blindness of their social role. SIMA’s main objective is to serve the national

government and the Peruvian navy by building ships and other metal infrastructure and

giving maintenance and repair services. However, SIMA’s private administration allows

them to serve private clients. It has been explained that public projects do not generate profits

and among the private businesses, ship maintenance and ship repair are the most profitable.

However, private orders are just carried out when their public contracts are not in demand.

This prevents SIMA from working with private clients and as explained before, this affects

the reputation of the company for rejecting orders.

 56

It is believed that SIMA’s economic role is not opposite but complementary to its

social role. If SIMA increases its capacity in order to serve private clients, the company will

be able to generate profits and reinvest them in R&D and technology, increasing SIMA’s

competitiveness. Additionally, the increasing demand will generate more jobs, and further

contribute to their goal of positive social impact.

5.1.2 Workers

Over specialization of labor. One of SIMA’s labor problems is that employees are

over specialized in one function. In several occasions the firm had tried to assign employees

to different functions according to the demand with negative results. SIMA needs to hire

multifunctional workers or train their labor force in different activities to achieve a higher

flexibility and productivity (Novoa, personal communication, July 21, 2016).

Inflexible labor contracts. One of the social objectives of SIMA is to generate job

positions. Since shipbuilding, maintenance, repair and metal works are labour intensive

activities, SIMA employs more than 2,500 workers between their three locations. In the past

the company had employed larger labor forces of more than 5,000 workers. However, due to

its social role, the firm avoids firing workers even during slow business periods (Novoa,

personal communication, July 21, 2016).

Inadequate wage and promotion policies. SIMA does not has an adequate wage and

promotion policies that recognizes efficacy and efficiency. The lack of formal indicators and

the fact that bonuses are given to some employees without a common understanding, creates

a feeling of injustice among the workers. Promotions and bonuses are given based on

employees' loyalty, experience and seniority. They do not consider other indicators such as

productivity and competencies to measure their performance. In addition, the low wages have

generated an outflow of talent to competitors' firms (Servicios Industriales de la Marina,

2008a).
 57

Military commands. Since the firm is directed by marine officers, the company works

by military commands. Workers are used to receiving and following orders. They are not

encouraged to think creatively to find solutions and new opportunities (Servicios Industriales

de la Marina, 2008a).

Inadequate working conditions. The deteriorating conditions in which services are

provided could affect the motivation of workers, and this could, for example, affect the final

service given to the client in their work (Novoa, 2012).

5.1.4 Materials

Lack of a supplier's payment policy. SIMA does not counts on a supplier’s payment

policy, which means that they are not guaranteed payments for their contracts. This has

forced the company to deal with smaller suppliers who are usually more expensive.

Additionally, because of this payment policy, SIMA often faces several problems with

suppliers such as: delays, delivery failures, quality issues and quotation errors. Additionally,

international purchases are performed by bank transfers without letters of credits or any other

financial instrument to protect and guarantee the contract. In this way, SIMA takes the risk of

losing the money if suppliers go out of business (Servicios Industriales de la Marina, 2008a).

Purchasing process errors. The purchasing department does not always program the

orders in advance, and this generates production delays and bottlenecks. Also, the purchasing

documents usually contain errors, causing delays and re-processing of orders (Servicios

Industriales de la Marina, 2008a). It is necessary to train this division and implement

indicators to measure the performance.

Floating price of materials. Shipbuilding is highly dependent on the price of its main

material: steel. Other important materials include copper, aluminium, zinc and nickel. Steel

plates are imported from China, the world's leader of the steel market, representing more than

46% of the total production (Gilberg, 2012). Before 2012 steel prices had been increasing;
 58

however, in the last years its price has been falling from 4,000 CNY/Metric Ton in 2012 to

2,000 CNY/Metric Ton in 2015 (Evans-Pritchard, 2015). Even though SIMA has benefited

from the falling prices, the last years' fluctuation can turn again and the material prices can

rise in the future.

5.1.5 Machines and Infrastructure

Insufficient and obsolete infrastructure

Insufficient infrastructure for dry work of small and medium sized ships. There is a

tendency of the national fishing fleet to use more and larger vessels. However, the existing

capacity is limiting SIMA to serve the business demand, especially during fishing off

seasons, when ships take advantage of the free time to carry out their maintenance services

(Novoa, 2012). The existing infrastructure has a limited capacity. It consists in one dry dock

and three floating docks that can serve up to seven small ships at the time (Novoa, 2012).

However, SIMA is already building a new shipyard, and the first phase will be

inaugurated in February 2017. This new shipyard will be able to serve four more ships and

one submarine at a time. The rest of the project is expected to be completed in two years,

increasing the capacity to working on 17 ships simultaneously. This new yard will also use an

elevator that will allow to access the 17 ships (Novoa, personal communication, July 21,

2016).

Limited parking space. This issue is contemplated in the new shipyard, which counts

with enough parking to work 17 ships at the same time (Novoa, personal communication,

July 21, 2016).

Obsolete equipment for shipbuilding and repairs. The current equipment used for

electricity, compressed air, gases, water do not allow the installation of new equipment to

increase its capacity (Novoa, 2012). Also, SIMA counts with an adequate software for the

design of small boats. However, the software used for the design of large vessels and naval
 59

engineering is obsolete, limiting the competitiveness of SIMA in the shipbuilding business

(Servicios Industriales de la Marina, 2008a).

Additionally, the largest shipyards in the world have automated processes. Their

production lines employ modular construction systems in dry docks equipped with overhead

cranes of large capacity, intelligent systems and robotics. This saves time, costs and improves

productivity (Servicios Industriales de la Marina, 2008a).

Inadequate infrastructure and equipment for submarine repair. The current division

does not have adequate equipment to perform submarine repairs such as bridge cranes,

cutting equipment, high-performance compressors and specialized equipment. Additionally,

the current infrastructure cannot service adequately the Angamos 209 submarine type, which

constitutes the first line of defense of the country. This submarines have been in use for more

than 30 years, and are in urgent need of repair. Finally, the submarines repairs have not

turned a profit for the company in the last 12 months in comparison to the ship maintenance

(Novoa, 2012).

Lack of infrastructure for the attention of large vessels. Nowadays, the ships crossing

the Panama channel have grown in length to the extent that the Panamax ships cannot enter

the SIMA dry dock (Novoa, 2012). So they are currently evaluating the possibility of

building a Panamax dock, which would represent a high investment. However, it would open

up the shipping hub in Callao to potentially becoming a much more competitive service

location (Novoa, personal communication, July 21, 2016).

Inadequate use of infrastructure. Dry docks are used to repair ships of low and

medium board. They do not have the ability to conduct and develop business with large sized

vessels. Although this dock can receive ships of smaller size, when this is done, the income

does not cover the costs. So this is a point SIMA needs to pay careful attention to avoid

losing revenues (Novoa, 2012). Clients must wait for service outside the harbor, creating
 60

bottlenecks if any ship service is concluded before or after the others. The size of the port

always causes traffics problems for the incoming and outgoing vessels (Novoa, 2012).

The lack of infrastructure and capacity present the following problems. First there is

not a sufficient capacity for small and medium sized ship for repairs and maintenance.

Second, the lack of ability to perform services for large vessels and submarines is a

reoccurring problem. These problems force SIMA to delay service attention and even reject

potential clients.

The consumer response to these service problems has been diverse. There is a small

group of loyal customers who prefers to wait days or even months to be served by SIMA

because they value the quality of service. However, they are still unsatisfied by the waiting

times. Another group looks for other shipyards when SIMA is full and they come back when

they find free capacity. However, there is group of clients who will not seek SIMA’s services

again once they are rejected. Appendix 2 shows these numbers. In 2011, more than 60 ships

were rejected due to capacity issues.

5.1.6 Marketing

Lack of market intelligence. The social role and the blindness of SIMA to see

economic opportunities is holding them back. The company is used to receiving projects

from the government without a commercial or marketing division ever proactively seeking

out work and securing new contracts. For instance, since the company has not had the need of

looking for private clients and compete with international firms, SIMA has not developed any

sort of market intelligence. Now that they have more space to work on vessels, SIMA will

have extra capacity to serve private clients. Now it is critical that they develop a marketing

plan. The company needs to analyze the market and their competitors in order to find the

attributes which are most valued by clients and the competitive advantages of their rivals.
 61

Lack of segmentation and positioning strategy. As a result of the poor marketing

activities, SIMA has not developed a segmentation, targeting and positioning strategy. It is

important that once they identify their competitors and their competitive advantages, SIMA

needs to think in what segment they want to compete and what attributes they want to focus

on to develop and stand out for. They could compete in cost, location, specialization, time or

any other attribute valued by the clients. This formulation will be the basis for the

development of the rest of SIMA’s marketing plan.

5.2 Main Causes of the Problem

In order to increase profits, the most important measure to take is to shift the focus of

their business from shipbuilding to repair and maintenance, which has higher margins. For

this reason, it is important to remove the social role from the administration which is causing

the company to underperform. Additionally, to be successful in this industry, it is also

important to correct the marketing shortages, beginning with a new push for market

intelligence with a positioning strategy for SIMA. In this way, the Implementation Section

shown in Chapter VIII would develop a market intelligence and positioning strategy for

SIMA.

From the other roots presented above, it is important to mention that the company has

already started changing their machines and infrastructure, with the expansion of the Callao’s

shipyard. Additionally, the HR division needs to change some policies and take some actions

to work on the management, workers and working conditions roots. Finally, it is also

important to establish some purchasing policies to minimize losses in the projects carried out.

All these alternatives among others are developed in the following chapter.
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Chapter VI: Assessed Solution Alternatives

6.1 Alternatives to Solve the Problem

The solutions have been elaborated based on the different ideas presented in the

literature review. As explained before an SOE has different types of impacts and KPIs to be

considered: social (job creation, education, payroll and benefits), economic (profits, tax

impact), innovation (R&D investment), brand image and environmental. Therefore, different

improvements need to be done around the whole organization which are presented in Table 8.

Table 8
Key Problems, Roots, Proposed Solutions

Problem Area Roots Proposed Solutions

Human Government regulation Privatize a branch of the firm
Resources High turnover of officers Motivation / Wage and Promotion Policy
Lack of Managerial Skills Hire civilians with Business studies
Social role blindness Shift focus to repair business
Over Specialization of Labor Training in different specialties
Inflexible labor contracts Training during slow business periods
Inadequate wage and promotion Creation of a wage policy based on results
policies and productivity
Military commands “Work-out” program
Inadequate working conditions Motivation / Improvement of space

SIMA’S Procurement Lack of a supplier's payment policy Creation of policy / Use of financial
Small and Finance instruments
Profits Purchasing process errors Procurement process manual / Training /
New indicators / Automated orders
Floating prices of materials Use of financial instruments (options)

Machines and Inefficient and obsolete Expansion of shipyard / new docks /

Infrastructure infrastructure acquisition of high tech machines

Inadequate use of infrastructure Creation of an infrastructure manual

Marketing Lack of market Intelligence Conduct competitor analysis

Lack of segmentation and Creation of positioning strategy

positioning strategy
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6.1.1 Changes in HR policies

Important changes have to be addressed is in the human resources department. First,

the two-year rotation of officers is not ideal for fostering a sustainable change within the

company. Marine officers do not have the opportunity to establish a long-term goal. A

possible solution for SIMA to overcome these challenges would be to extend the rotation of

marine officers offering new opportunities. SIMA should develop new HR policies that allow

naval officers to have a long term careers as a manager within the company. By developing a

new plan, SIMA will be able to have a stronger and more efficient workforce.

Second, there is a lack of managerial skills among marine officers at SIMA. They do

not have degrees in business and lack the necessary managerial and business communication

skills. Despite their extensive knowledgeable in the shipping industry, they need to improve

their knowledge of the business world. It will be interesting for SIMA to have a business

training for those marine officers to increase their performance. The company could also

consider the incorporation of skilled professionals (civilians) into the board of directors and

managerial positions.

Third, SIMA’s current wage and perk offers are not attractive. It is common for

public companies to provide lower wages because they are offering secured positions. It is

clear that SIMA’s current wages are not attractive, and their promotion policy is not fostering

efficiency. Employees are being promoted based on seniority, loyalty, and experience. A

recommended change for the shipping company to implement is to promote their employees

based on their overall productivity and efficiency.

Finally, because of its public sector status, there is a lack of communication between

staff and managers at SIMA. Additionally, it is highly hierarchal, and the government of Peru

controls processes. Therefore, there is a lack of creativity and innovation. Another possible

solution is to create a culture of a small company, where all workers feel engaged and
 64

everyone has a voice. General Electric's (GE) applied this idea through a program called

“work-out”. It consisted of sessions where employees were invited to share views about their

business and recommendations on how to improve it. Employees did not only have the

opportunity to speak their minds but also got immediate responses from their leaders. This

zero-cost initiative reduced unnecessary bureaucracy and increased creativity and

productivity at GE (Bartlett & Wozny, 2005).

By promoting innovation within its workforce, SIMA will have the possibility to

develop new efficient ways of building or repairing ships. In addition, it will improve the

motivation of their staff. It is crucial for SIMA to have a strong and loyal workforce that will

help the company to strengthen their position within this risky industry.

6.1.2 Changes in procurement and financial policies / practices

As materials are the largest cost, their optimization is not only essential to improve

efficiency, but also to increase profitability. First of all, the lack of suppliers' payment policy

restricts SIMA to make business with larger firms. As a result, the costs and the risks would

increase due to the lack of economies of scale and the high bargaining power of suppliers.

One possible solution to fill this gap is to establish a supplier's' payment policy. Certain

policies should be implemented to guarantee the whole process of payment. Regarding

international purchases, SIMA should use financial instruments such the bill of credit method

to guarantee payment and merchandise’s delivery.

A manual purchasing process is also needed to avoid delays, bottlenecks, and re-

processes. Employee’s training should also be carried out to explain the process and avoid

mistakes. Additionally, certain indicators should be implemented to examine the performance

of the employees. Finally, a procurement system that incorporates suppliers could also be

implemented to automatically send purchasing orders when materials reach low stock levels.
 65

Since materials play an important role in the shipbuilding industry, their price directly

affects the cost of sales and ultimately the company´s profitability. Therefore, SIMA has to

implement certain financial instruments to minimize the influence of the fluctuation of the

material price. One possible solution to reduce uncertainty is to purchase options. In this way,

negative fluctuation of prices would not affect SIMA at the expense of a small amount of

premium fees.

6.1.3 Shift of focus for projects

Despite that the social role is a priority, it has been mentioned in Chapter III that that

state-owned companies uses their finances as mean to achieve social objectives. For instance,

SOEs need to remain financially sustainable and commercially competitive to create value

for the society. In order to generate higher social impacts, SIMA needs to take more private

projects to generate profits. They could be reinvested on increasing its capacity and investing

in R&D that would create additional job positions.

Moreover, as mentioned above the shipping industry is one of the most competitive

industries in the world and highly globalized. Therefore, it is crucial for companies to

develop a strong position within this market. A first possible alternative for SIMA would be

to focus their resources more on ship repairs and maintenance. The ship repairs and

maintenance market is the most profitable, whereas the shipbuilding market is costly and

unattractive. SIMA is currently building a new dry dock that will allow them to work on 17

medium size ships at the same time (>1000 tons) and on vessels up to 2500 tons. This new

dry dock is the first step for SIMA to become a leader in ship repair and maintenance.
 66

6.1.4 Privatize a branch of the company

The third option would carry out various extensive changes to the company structure

by privatizing the ship repairs and maintenance division of SIMA Callao. The repairs and

maintenance is the most the profitable branch of the company. If privatized, it would be

much more free to pursue competitive work and dedicate time to growing the business as

normal companies do outside the control of the government.

The social impact SIMA Callao has on the local community is deeply felt in Lima

with an incredibly positive influence, as mentioned in the first chapter. The local economy is

also always greatly affected by the shipyards. France gives us a clear example. Three years

ago, the French shipyard in Saint-Nazaire asked the government to nationalize their

shipbuilding company. Their request was dismissed as Hollande did “not want another

manufacturing failure on his hands” (Boselli, 2013).

For this reason, the company is managed more safely with the stability provided by

the government. Although there is the possibility of turning more profits if it were entirely

private, but the economic risk of failure is too great. Additionally, it is believed that this

alternative would receive high opposition from the government.

6.2 Assessment of Alternatives

In order to assess the best possible solution, the alternatives have been scored (in a 1-

3 scale, being 3 the highest) in relation to urgency, suitability, feasibility and acceptability.

The most suitable solution is the one that generates the highest impact. Then, feasibility

refers to the economic viability of the alternatives. Finally, acceptability makes reference to

the position of SIMA´s management regarding the changes. Results are presented in Table 9.
 67

Table 9
Assessment of Solutions

Solutions Urgency Suitability Feasibility Acceptability Total

(Impact) ($)

Changes in HR policies 3 1 2 3 9

Changes in Procurement and 2 1 3 3 9

Finance policies

Shift of Focus 3 3 3 2 11

Privatize a branch 1 2 3 1 7
Note. 1-3 scale, being 3 the highest score.

The alternative that obtained the highest score is shift of focus (with 11 points),

followed by changes in HR policies and changes in procurement (both with 9 points) and

finally, privatization of a branch (with 7 points). It was mentioned that a shift of focus to the

private sector and the repair and maintenance unit is urgent since SIMA needs to increase its

profits to be financially sustainable and commercially competitive. Also, this is the

alternative which has the largest expected impact in net margins. It is also economically

feasible since SIMA is already building a new shipyard. This new capacity would be

sufficient as a starting point. Finally, it is expected some resistance from SIMA´s direction

and government entities since they are blind by the social role of the firm.
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Chapter VII: Proposed Solution

The results of the assessment on the solutions indicates that a shift in SIMA’s

business focus is the most important solution to be implemented. It has the highest impact, it

is economically feasible and it is an urgent measure to increase SIMA profits in the short-

term. It is very likely to receive opposition by SIMA's direction once presented. However, it

is necessary to explain the social impacts that this change could generate.

Figure 17. Consequences and impacts of shifting SIMA’s focus to the repair and
maintenance business.

As explained in Figure 17, the shift of focus will increase SIMA’s profitability

because the repairs business unit offers higher margins. It was shown in Table 5 that net

margins of this unit are around 15% in comparison to shipbuilding´s 5% and metalworking´s

8% margins. In the short term, profits should be invested in R&D and in the acquisition of

high-tech equipment to remain commercially competitive and attract private clients. The

increased quality and service will also increase SIMA's sales. In the long term, profits should
 69

be invested in infrastructure to increase capacity. New jobs will be created as a result of the

additional capacity. At the same time, the increased capacity will generate additional sales

and profits. Meanwhile, SIMA’s growth will positively impact sales and profits of related

industries. Lastly, these industries will increase its capacity as demand expands, resulting in

the creation of new jobs. For instance, it is expected that the shift of focus would create a

multiplier effect in the long-term.

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Chapter VIII: Implementation Plan & Key Success Factors

8.1 Activities

As explained before, the strategy of shifting the focus from shipbuilding to repair and

maintenance, and from public to private sector, requires SIMA to develop a complete

business plan. The first step is to analyze the industry (especially competitors) and build a

segmentation and positioning strategy which will serve as the roots of the business plan.

These two parts are analyzed in the following section. The rest of the business plan and

implementation will be carried out by SIMA. A Gantt chart is provided to serve as guidance

for the implementation. It presents the detail of the following phases and the time that each

phase / activity should take.

8.1.1 Market Intelligence

It is important for SIMA to identify its competitors and their positioning strategy. It

has been mentioned before that shipbuilding’s competition is worldwide since clients will

look for the shipyard that best fit their requirements and budget. However, in the repair and

maintenance business, the radius of competition is reduced to the shipyards that are located

near the ship's routes. In this business, distance and time are crucial since owners incur losses

during the days that ships remain inoperative.

For small and medium sized boats, SIMA’s competition is local since this type of boat

moves only along the Peruvian coast. Meanwhile, the competition spectrum for large and

Panamax vessels (if SIMA decides to invest in Panamax docks in the future) is multi-

regional, involving all the shipyards of the Pacific routes (Novoa, personal communication,

July 21, 2016).

Figure 18 presents the map with the global shipping routes, where all the countries

involved in the Pacific routes can be observed. It can be noted that SIMA’s competitors

involve not only South American shipyards but also Central American, North American and
 71

Asian ones as well. The level of maritime commerce around the world can also be seen,

which is categorized by colors. It is observed that the most frequented commerce routes are

made between North America and Europe and North America and Asia. South American

routes are still fewer but have large opportunities for growth.

Figure 18. Global shipping routes.

Data are from “Map of the Day: Global Shipping Routes”, U. De la Torre, 2013
(http://www.divergingmarkets.com/wp-content/uploads/2013/04/2013.04.16.Global-
Shipping-Routes.png).

SIMA’s competitors for small and medium sized ships are made up by some

seventeen Peruvian shipyards. They are located along the coast in the ports of Callao in Lima,

Chimbote and Paita at the North, and Ilo at the South. The complete list is shown in Table 10.

Additionally, there are three shipyards that are working but are not authorized by DICAPI

(General Direction of Peruvian Coastguards). The first belongs to the fishing company

Diamante. The second is the Paita Shipyard S.A. commercially called ASPASA. The third is
 72

Ancor, which is located in the Callao Naval Base. Figure 19 shows the location of the

competitors and their capacities.

Among the competitors, only three of them have exit to the ocean, which poses direct

competition for SIMA: Construcciones A. Maggiolo, ASTASA, Varadero Sur and ASPASA.

Additionally, if considering capacity and sales terms, only Maggiolo represents a direct

threat. This firm together with SIMA dominates the market as an oligopoly. Lastly, it is

important to mention that the quality and technology levels of national competitors are very

low.

Table 10
National Competitors of SIMA for Small and Medium Sized Boats

Firm Port Ocean Exit

Andina de Desarrollo S.A. "ANDESA" Callao Not working
Construcciones A. Maggiolo S.A. Callao Yes
Factoría Naval S.A. Callao No
H.M. Representaciones S.A. Callao Not working
Ind. Tecn. Naval Sctensa Callao No
Servicios Nav. Indust. Callao S.A.C. Callao No
Ast. Serv. y Mant. Nav. "Serviman S.A." Callao No
Maestranza Portuaria EIRL Callao No
J.C. Astilleros S.A. Chimbote Not working
Astillero Luguensi E.I.R.Ltda. Chimbote No
Astillero y Servicios Bamar S.A. Chimbote No
ASTASA Chimbote Yes
Corporación Pesquera Hillary S.A.C. Chimbote No
Kon Tiki E.I.R.L. Ilo No
Varadero Sur Perú S.A. Ilo Yes
Servicios Tecn. Indust. Metal Naval E.I.R.L. Paita No
San Francisco Paita No
Note. Data are from “Market Study of Vessels up to 2000 DWT” by Servicios Industriales de la Marina
(SIMA), 2012c.
 73

Figure 19. SIMA’s national competitors in the repair business.

Data are from Análisis Competidores by Servicios Industriales de la Marina (SIMA), 2012e.

On the other hand, the large vessels industry is composed by bigger and more

competitive firms mainly located in Chile, Panama, North America and China. Unlike the

local competition, these companies can handle high capacity and carry out qualified work

with the latest technology in equipment and infrastructure (Barzola, Bomble, Esquén &

Koenig, 2013). Table 11 provides further information for the shipyards mentioned above.
 74

Table 11

SIMA's Competitors in the Large-Sized Ships Segment

Country Company Name Business Max.

Capacity
Panamá MEC NR Panamax
Ecuador Astinave NR 8,000 Ton
NC 350 Ton

Asenabra NR 20,000
Dwt *

NC 700 Ton

Vatadur NR 2,500 Ton

NC 2,500 Ton
Chile Asmar Talcahuano NR 96,000
Dwt
NC 50,000
Dwt

Asmar Valparaíso NR -

Asmar Magallanes NR 3,570 Ton

Sociber NR 10,000 Ton

Asenav NC 1,000 Ton

NR 1,000 Ton

Marco Chilena Iquique NC 1,000 Ton

NR 1,000 Ton

Marco Chilena NR 1,000 Ton

Talcahuano

Detroit Chile NC 1,200 Ton

NR 1,200 Ton

Ascon NC -
Colombi Bocagrande NR 96,000
a Dwt
Mamonal NR 96,000
Dwt
Note. RN= Naval Repair, NC= Naval Constructions. Data are from “Market Study of Vessels up to 2000 DWT”
by Servicios Industriales de la Marina (SIMA), 2012c.
 75

8.1.2 Positioning Analysis

In order to analyze the positioning and competitive advantages of SIMA’s

competitors, five possible attributes of differentiation have been identified: (a) quality, (b)

location, (c) cost, (d) capacity and (e) connectivity. Quality can be measured by the number

of ISOs and certifications of each firm. Location is measured by the distance to important

markets by sea and land.

Costs are determined mainly by the labor wages of each country, since the repair

business is labor intensive. Therefore, labor costs differences among countries directly relates

to a competitive advantage for the ship repair business. Figure 20 shows the hourly

compensation costs in the manufacturing industry for a number of different countries. It can

be noted that Latin America labor costs (represented by Mexico, Argentina and Brazil)

fluctuates around $6 and $20, Japan $35, South Korea $21 and China less than $5. In

summary, China is the cost leader, followed by Latin American countries, South Korea, and

Japan.

In order to analyze the labor costs in the region, minimum wages have been

compared. Colombia has the lowest minimum wage between compared countries of $233.

They are followed by Peru ($258), Ecuador ($366), Chile ($373) and Panama ($529)

(Federacion Interamericana de Asociaciones de Gestion Humana, 2016).

Capacity refers to the number, type and size of vessels that a shipyard can give

service. It depends in the size of the shipyard and the parking space, the type of docks, the

use of cranes and specialized equipment. For example, in South America only Chile and

Panama have docks for Panamax ships. Also, they have specialized equipment for cutting

submarines that few shipyards have.

 76

Figure 20. Hourly compensation costs in manufacturing, US dollars 2010, 2013.

Compensation costs include direct pay, social insurance expenditures and labor related taxes.
Data from “International Comparisons of Hourly Compensation Costs in Manufacturing,
2013”, The Conference Board, 2014
(https://www.conference-board.org/ilcprogram/index.cfm?id=28269).

Finally, connectivity and integration to the international maritime system can be

measured with the LSCI (Liner Shipping Connectivity Index). This index aims to gage the

country's level of integration with the existing liner shipping network by measuring liner

connectivity. The index is calculated based on four major components: (a) number of

shipment calls, (b) capacity of containers, (c) number of shipping companies, liner services or
 77

vessels per company, (d) and average and maximum vessel size (Rodriguez, 2016). As

displayed in Table 12, Peru’s maritime connectivity places above Ecuador and slightly higher

than Chile. If this index is compared to other pacific countries such as Colombia, Panama, it

suggests that Peru has still a lot of growth potential, related mainly with the port

infrastructure and the repair and maintenance services supply.

Table 12

The Liner Shipping Connectivity Index 2015

Country LSCI
Ecuador 21.7
Chile 36.3
Peru 36.9
Colombia 42.3
Panama 45.6
Japan 68.8
USA 96.7
South Korea 113.2
China 167.1

Note. Data are from “The Liner Shipping Connectivity Index 2015”, The World Bank, 2015
(http://data.worldbank.org/indicator/IS.SHP.GCNW.XQ).

SIMA

General information

Description. SIMA is a Peruvian state-owned company with experiences over 170

years. It was created to provide shipbuilding and technical services to the Peruvian Navy.

Operations are performed in their three facilities: Callao, Chimbote, Iquitos.

Mission. The Industrial Services Marine SA carries out the maintenance,

modernization and construction of the Peruvian Navy’s ships and executes projects related to
 78

Shipbuilding and Mechanical Metal for the state and private sector, national and abroad, with

the most stringent quality standards, in order to contribute to the national defense and the

socio-economic and technological development of the country (Servicios Industriales de la

Marina, 2016).

Technology. It has been explained that some of the equipment used at SIMA is

obsolete, especially the machines used for electricity, air compression, and the gas and water

supply setup. In comparison to the largest shipyards of the world equipped with latest

systems, it is clear that SIMA has a lot to improve.

Positioning criteria

Quality. The company has an Integrated Management System (IMS) oriented to

provide goods and services that meet quality standards and customer’s demands. The IMS

incorporates mechanisms for environmental impact, pollution prevention, and workplace

injuries prevention. They also have systems in place to deter any possible breaches of the

company or civil law, which directly affects workers and stakeholders. SIMA has obtained

the following certifications (Servicios Industriales de la Marina, 2014b):

 ISO 9001 (quality of products and processes)

 ISO 14001 (environmental practices)

 OHSAS 18001 (health and safety management)

 BASC (safety)

Location. Peru has a privileged location at the center of the South American west coast.

Callao port is a competitive distance to most Asian countries. Also, as stated before, the

maritime commerce in the Pacific Ocean has large opportunities for growth, especially with

the Asian market. For this reason, it is of special importance for Peru to develop the required

infrastructure to receive large Panamax Vessels and become the entrance port to the country.

Figure 21 shows the Peruvian routes to the main ports of the Asia Pacific.
 79

Figure 21. Peruvian routes to the main ports of Asia Pacific.

Data from “Peru: la Puerta al Comercio Exterior de América del Sur”, Voz Democrática,
2012
(https://vozdemocratica.wordpress.com/2012/06/20/peru-la-puerta-al-comercio-exterior-de-
america-del-sur/)

Costs. As shown in Figure 20, Peru has the lowest labor costs of the region together

with Colombia. The average wage is also below Japan's, and Korea's but above China's.

Capacity. SIMA counts on three facilities to perform repair services: Callao with

capacity for vessels up to 25,000 DWT, Chimbote with capacity up to 1300 tons and Iquitos

for river boats. The facility of Callao, which is the largest and most important, has an area of

300,000m2. Repair services are performed in the four docks presented in the Table 13.

Table 13

SIMA Callao´s Docks

Docks Length Beam Cranes

Dry Dock 194.8m 26.8m 2

Floating Dock ADF 104 115.8m 23.3m 2

Floating Dock ADF 106 87.8m 13.7m -

Floating Dock ADF 107 126m 15.5m -

Note. Data are from “Plan Estrategico 2009-2013” by Servicios Industriales de la Marina (SIMA), 2008a.
 80

SIMA’s repair unit serves the following type of ships: tankers, bulk carriers, container

ship, tuna fishing ships and fishing boats for national and non-national shipowners. The main

repair services they provide are: sandblasting, hull repair works, propulsion and steering

systems repair, boiler making works, maintenance of diesel engines, among others.

Connectivity. As shown in Table 12, Peru has lower levels of connectivity in

comparison to Asian countries. In the region, it has similar levels to Chile but higher levels

Ecuador but lower than Panama and Colombia. This may be explained by the trade volume in

the country, and the development of shipping infrastructure.

Construcciones A. Maggiolo

General information

Description. Maggiolo is a private shipyard founded in 1942 at the Callao Port. It is

focuses on shipbuilding, maintenance and repair (Construcciones A. Maggiolo, 2016a).

Mission. “Provide services related to the repair, construction and modification of

ships and craft solutions; based on our competence, creativity and commitment; exceeding

the expectations of our customers” (Construcciones A. Maggiolo, 2016a).

Technology. Oquendo shipyard counts with four cranes up to 100 tons, generators and

compressors, tanks, underwater welding arc machines, oxicorte and plasma cutting machines

and elevators (Construcciones A. Maggiolo, 2016b).

Positioning criteria

Quality. Maggiolo counts with the following certifications (Construcciones A.

Maggiolo, 2016c):

 SGS: Repair and construction of artifacts and marine vessels.

 ISO 9001: Repair and construction of artifacts and marine vessels.

 American Bureau of Shipping: Certification Service of hull's thickness

measurement and welding procedure specifications and qualification of welders.

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 Bureau Veritas: Certification Service of hull's thickness measurement.

 Det Norske Veritas: Certification Service of hull's thickness measurement.

 American Welding Society: Inspectors of welding and nondestructive trials.

Location. A Maggiolo is also located as Callao, Lima having a privileged location

over other south American countries.

Costs. As shown in Figure 20, Peru presents the lowest labor costs of the region

together with Colombia. The average wage is also below the level found Japan and Korea but

above the prices China offers.

Capacity. The company owns two shipyards: Chucuito and Oquendo. Chucuito

occupies a total area of 10,000 m2. It has 2 docks for ships up to 52 m. long and weighing

1,000 ton. This shipyard serves up to 100 boats a year. In 2010, the company started the

operations of the new facility of Oquendo. It has the capacity to serve ships of up to 110

meters long and 2,500 ton. The shipyard has one dock, a mounting unit of 250 meters and a

launch skid for oil platforms (Construcciones A. Maggiolo, 2016d). Maggiolo is specialized

in maintenance for the following type of boats: fishing, harbour tugs and Offshore Supply

Vessels (OSV), barges between 60 and 100 meters, tankers and gas carriers of up to 100

meters and foreign fishing vessels (Construcciones A. Maggiolo, 2016a).

Connectivity. As explained in SIMA’s section, Peru has low levels of connectivity but

has a promising future for growing their business.

Asmar and Asenav, Chile

General information

Description. Between the three main ship repair companies in Chile, Asmar, Asenav,

and Detroit S.A., Asenav presents itself as the most competitive for the commercial

shipbuilding and repair industry. Asmar is a publically owned and operated company and

was founded in 1895. Like SIMA, a good portion of their time is spent on government
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contracts. Asmar builds primarily for the Chilean and Ecuadorian navy, and for the Icelandic

government (Astilleros y Maestranzas de la Armada, 2015). Lastly, Asenav was founded in

1972; by 2012, they had produced over 170 vessels of varying sizes. They offer a range of

services for the maintaining and repair of vessels (Asenav, n.d.)

Positioning criteria

Quality. Asenav promotes their industry work as being competitive with the major

European shipbuilding companies, they do not publish any certifications (Asenav, n.d.).

Asmar, on the other hand, has a number of them: International Standards ISO-9001:2008

(Quality), OSHAS 18001:2007 (Safety and Occupational Health) and ISO 14001:2004

(Environment), (Asmar, 2015).

Location. Asenav offers competitive locations for vessels needing service in sense

that they have three shipyards along the south Chilean coast (Asenav, n.d.). However, Peru's

more central location offers a more logistical point for repairs than Chile's repairing ports in

Valparaiso, Talcahuano and Valdivia (refer to Figure 19) since they are so far south. The

Callao shipyard caters well to the Asian Pacific routes. Unless going around the southern tip,

the Chilean repair ports would be too often out of the way for most shipping routes.

Costs. As mentioned in the section above, the labor costs are significantly lower in

Latin America. However, as explained before Chile and Panama have the highest labor costs

in the region.

Capacity. Of the three main Chilean Shipyards, Asmar offers the most extensive

services. They offer both dry docks and afloat repairs, depending on the needs of the client.

They have a broad range of specializations in Valparaiso which include: Thermal Insulation,

Boilers and Heat Exchangers, Piping, Carpentry, Diesel Engines, Turbochargers, Gas

turbines, Electrical Machinery, etc (Astilleros y Maestranzas de la Armada, 2015).

 83

In the Talcahauno Shipyard, the facilities include: two dry docks, five floating docks

(two of them roofed), over 1,100 m of berths and mooring sites with associated services, a

new building slipway, and modern production centers in areas such as structures, electric,

mechanics, diesel engines, machine-tools, boilers and piping, electronics, weapon systems,

weapon mechanics, etc that support maintenance, repair, modernization, conversion, refit,

and shipbuilding activities (Astilleros y Maestranzas de la Armada, 2015).

Connectivity. Peru offers a strategic point for a good volume of ship routes who

regularly cross the Asian Pacific. Perhaps SIMA Callao is not as competitive as the port in

Panama since it has access to ships on both sides of America, but it still presents itself as a

central point in shipping routes for South America.

Astilleros Navlaes Ecuatorianos (ASTINAVE), Ecuador

General information

Description. ASTINAVE is a private maritime company based in Guayaquil,

Ecuador. The shipbuilding company was created in 1907 when the president of Ecuador

“decreed a regulation to create a marine Arsenal in the Guayaquil Port” (Astilleros Navlaes

Ecuatorianos, 2015).

Mission. “Develop, produce and maintain solutions to enhance the defense, security

and the maritime industry” (Astilleros Navlaes Ecuatorianos, 2015).

Technology. ASTINAVE has two different plants and each plant has its own

workshop. The central plant and the south plant both have eight different workshops:

welding, metalworking, electricity, electronic system, engines, auxiliary system, habitability

and accessories, and surface preparation and painting.

Positioning criteria

Quality. ASTINAVE has an Integrated Management System (IMS) which allows

them to deliver high quality service to their customers. In 2014, ASTINAVE was awarded by
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the Ministry of Industry and Productivity. The company was recognized for having an ethical

strategy which meets the four pillars of corporate social responsibility (Astilleros Navlaes

Ecuatorianos, 2015). ASTINAVE EP also holds the following certifications:

 ISO 9001: quality management

 ISO 14001: management of environmental responsibilities

 OHSAS 18001: international occupational health and safety management system

specification (OHSAS 18001, 2015)

Cost. Ecuador presents a medium-high labor cost in the region ($366).

Capacity. ASTINAVE has a floating dock and provides both shipbuilding and ship

repairs’ services. ASTINAVE has two main plants. The central plant has the capacity of

building ships up to 2,000 tons. They can repair vessels up to 700 tons and also provide

design and production for command and control systems. The second main plant provides

maintenance for vessels up to 6,000 tons (Astilleros Navlaes Ecuatorianos, 2015).

ASTINAVE is specialized in maintenance and can carry out repairs for the following vessels:

 Coastal combat boats: LR-AST-0702

 Reaction and interceptor’s boats: LP-AST-0802, LP-AST-1103, LP-AST-1304

 Coast guards boats: LG-AST-2606, LG-AST-4207

 Line defense vessels: CM-AST-9813

 Multipurpose vessels: BM-AST-8213

Recently, the ship company has awarded from Daman Shipyards Group a contract for

a fourth patrol vessel. “In the last few years, ASTINAVE has built a great number of vessels

in cooperation with Damen, including tugs, cutter suction dredgers, fast crew suppliers and

patrol vessels” (World Maritime, 2014).

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The company is planning on building a world class shipyard with two docks that will

produce four Aframa vessels per year. Their main customer for these ships is the state-owned

company FLOPEC in Ecuador. This new dry dock will allow the company to hire 3,000 more

employees while improving their position for Ecuador in the shipbuilding industry. In

addition, ASTINAVE will relocate its plant to improve its capacity. They will be able to

create two offshore supply vessel (OSV). The company will create 500 more jobs

opportunities (Ministerio Coordinador de Sectores Estratégicos, 2014).

Connectivity. As shown on Table 12, the Liner Shipping Connectivity Index 2015,

Ecuador scores 21.7, placing it at the bottom of the list. It shows that Ecuador has a poor

connectivity shipping infrastructure.

Cotecmar, Colombia

General information

Description. Cotecmar Shipyard is located in Cartagena, Colombia. The shipbuilding

company was created by the Colombian National Army thanks to an association with

Nacional University. Cotecmar develops vessels for the army and private customers. In

addition, the company is offering full line of ship repair and marines services such as diesel

engine installation and repairs. Coctemar is a science and technology corporation that have

strong relation with university-company and prioritize research and development in new

technology and business practices (Cotecmar, 2016).

Mission. Cotecmar offers advanced solutions to the maritime community in various

sectors: military, industrial, commercial or private (Cotecmar, 2016).

Technology. The company owns machines and propulsion lines, welding and piping

systems, electrical equipment and diesel engines (Cotecmar, 2016).

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Positioning criteria

Quality. Cotecmar Shipyard fulfills the requirement of Llyod's Register. Cotecmar

operates in accordance with CT DE and EPA NESHAP regulations. In addition, the company

has the ISO 9001-2008 certification.

Location. The shipyard is based in the Cartagena's Bay and is only 180 miles away

from the Panama Canal (Cotecmar, 2016). Figure 23 shows its privileged location with

access to the routes of the Atlantic Ocean and to the pacific through Panama's Canal.

Cost. As stated before, Colombia has the lowest labor costs of the region ($233). The

average cost is below Japan and South Korea’s prices, but above China's.

Capacity. The company possess two different facilities. The first one, Mamonal has

eight docking positions and four different afloat repair locations. In addition, at Mamonal,

Coctemar have the capacity to lift vessels up to 3,600 tons and 117m of length. The second

facility, Bocagrande, has the capacity of lifting 1,900 ton ships up to 66.5m of length.

Cotecmar is specialized in the field of scientific and technology research in the maritime

industry. The company has a strong competitive advantage in the area by being an innovative

leader in the ship industry (Papadakis Shipyards Brokers & Co., n.d.).

Connectivity. From Table 12 which shows the Liner Shipping Connectivity Index

2015, Colombia scored 42.3. This country has a low-medium connectivity of shipping.

However, in the Latin America area, Colombia is the second country after Panama with the

highest LSCI.
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Figure 22. Cotecmar shipyard´s location.

Data from “Astillero Naval”, CAC Marine Services, n.d.
(http://shipyard-shipdelivery.com/naval-shipyard).

MEC Panama

General information

Description. MEC is a major international ship repair facility located in the port of

Balboa, Panama. MEC Panama is under the control of a Corporate Governance. MEC

Panama established its strategies based on its directors and stakeholders needs by enhancing

the context of the social, regulatory and market environment (MEC Panama, 2016).

Mission. It is the mission of the entire staff of MEC Panama to provide the best value

in ship repairs for the North and South American continents. “Our goal is to provide proper
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ship repairs at a reasonable price, in a predictable and agreed allotted time, at an acceptable

level of quality” (MEC Panama, 2016).

Technology. MEC Panama is specialized in the ship repair industry and they are the

only company that possess a hyperbaric chamber in the region. The diving time of their

operator surpasses all other companies' by more than 40% (MEC Panama, 2016). They also

own underwater brush cleaning machines that improve the speed of their customers' ship. The

Balboa Shipyard has a 400 ton hydraulic press, an automated MIG, TIG welding equipment,

a steel plating unit and pipe shops with computerized cutters (MEC Panama, 2016).

Positioning criteria

Quality. MEC’s shipyard demonstrates strong quality policies. They have received

the ISO 9001 and 2008 certificates in 2014.

Location. MEC Panama owns two different shipyards. Balboa Shipyard is located in

the port of Balboa at the Pacific Entrance of the Panama Canal. The second shipyard,

Veracruz is located at the West of Balboa (MEC Panama, 2016). Panama has a privileged

location with access to the pacific and Atlantic Ocean.

Cost. As observed before, Panama has the highest labor cost of the region ($529) and

is above Japan, South Korea and China.

Capacity. MEC Panama owns three dry docks for vessels up to Panamax size with

over than 12,000 sqm of fully equipped workshop (MEC Panama, 2016). In addition, the

shipbuilding company provides 24 hours’ afloat repairs service. Veracruz Shipyard has the

capacity to repair eight ships at a time: four vessels up to 40 meters, two vessels up to 20

meters, and two vessels up to 70 meters. The description of MEC’s Docks is shown in Table

14.
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Table 14

Description of MEC´s Docks

Dock Maximum Keel Block

No. Size Entrance Draft Height

1 318m x 39m 33m 7.9m 1.75m

1043ft x 128ft 110ft 26ft 5ft 9in

2 130m x 30.5m 26m 6.4m 1.75m

426.5ft x 100ft 85ft 21ft 5ft 9in

3 70m x 17m 17m 4.3m 1.46m

230ft x 55ft 55ft 14ft 4.8ft

Note. Data are from “Shipyards”, MEC Panama, 2015
(http://www.mecpanama.com/shipyards.html).

Connectivity. Panama got a score of 45.6 and this is the best score among the Latin

American countries. However, it is still below Japan, USA, South Korea and China.

Hyundai Heavy Industries, South Korea

General information

Description. Hyundai Shipbuilding Division, is the world's number one shipbuilder.

Chung Ju-yung, the founder of Hyundai Group, stepped into the ship industry during the

1970’s, creating Hyundai Heavy Industries (HHI). Only 10 years after its first delivery, the

firm reached a production size of 10 million DWT in vessel size. Since that time, the

company has maintained its leading position in the shipbuilding industry. The company

operates in two dockyards: Samho Heavy Industries and Hyundai Mipo Dockyard

(Organization for Economic Co-operation and Development, 2012a).

Mission. “To consistently deliver unrivalled products and services. We are also

committed to delivering superior satisfaction to our customers, more rewarding careers for

our employees, and greater value to our clients” (“Mission Statement”, 2016).
 90

Technology. Hyundai counts on their innovative and cutting-edge technology. Their

industrial robots have been designated as world-class by the Korean government. They also

have a strong green energy division (Organization for Economic Co-operation and

Development, 2012a).

Positioning criteria

Quality. HHI has the ISO 14001, OHSAS 18001 and ISO 9001(Hyundai Mipo

Docyard, 2016a).

Location. South Korea has a great location, since it has access to different shipping

routes on the Pacific and Atlantic. However, it is located close to its big competitors like

China who offer cheaper labor costs for services.

Cost. Korea's labor cost is medium-high, above Japan, slightly higher than Latin

American countries and significantly higher than China.

Capacity. Hyundai Mipo Dockyard Co., Ltd. has four docks and four quays with the

capacity of serving PANAMAX vessels (Hyundai Mipo Docyard, 2016b). The capacity is

detailed in Table 15. Additionally, Hyundai Samho Heavy Industries Co., Ltd. (HSHI) has

two mega docks with a building capacity of 3.7 million GT per year and five Goliath cranes

of a maximum lifting limit of 1200 tons and 900 tons (Hyundai Samho Heavy Industries,

2013). See Table 16 for details. With Panamax capacities and facilities, HHI builds and

repairs a wide range of vessels: bulk carriers, tankers, container carriers, multipurpose

carriers, car carriers, gas carriers, drill ships, offshore support vessels, offshore barges, tug

dredgers, naval ships (Hyundai Corporation, n.d.).

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Table 15

Hyundai Mipo Dockyard Co. Docks

Dock Capacity Dimension Crane/Service

L(m) W(m) H(m)

No.1 Dock 400,000DWT 380 65 12.5 200Ton Kib Crane 3

80Ton Kib Crane 1

No.2 Dock 400,000DWT 380 65 12.5 200Ton Kib Crane 2

No.3 Dock 400,000DWT 380 65 12.5 200Ton Kib Crane 3

80Ton Kib Crane 1

No.4 Dock 350,000DWT 380 76 12.5 200Ton Kib Crane 2

Note. Data are from “Facilities: Dock”, Hyundai Mipo Dockyard, 2016b
(http://www.hmd.co.kr/english/02/03.php).

Table 16

Hyundai Samho Heavy Industries Co. Docks

Assortment NO.1 Dock NO.2 Dock

Size (L x B x D) 504m x 100m x 13m 594m x 104m x 13m

Max. Building Capacity 800,000 DWT 1,000,000 DWT

Crane (Type & Goliath 600 Ton x 2 Goliath 900 Ton x 2

Capacity) Jib 80 Ton x 1 Jib 40 Ton x 2
Jib 40 Ton x 4
Note. Data are from “Shipbuilding Division: Introduction Capacity”, Hyundai Samho Heavy Industries, 2013
(http://eng.hshi.co.kr/business/business01_2.asp).

Connectivity. Korea's connectivity index score of 113.2 places them in second place

after China. This indicates that South Korea has great shipping infrastructure, and a

developed shipping system. As a result, this country receives a great number of ships to work

on for repair and maintenance services.

Mitsubishi Heavy Industries (MHI), Japan

General information

Description. Yataro Iwasako is the founder of the private Mitsubishi Heavy Industries

(Mitsubishi Heavy Industries, 2016a). There are three company subsidiaries that offer
 92

shipbuilding and repair services: Yokohama Dockyard & Machinery Works, Nagasako

Shipyards & Machining Works and Shimonoseki Shipyard & Machine Works (Mitsubishi

Heavy Industries, 2014).

Mission. MHI has established “Our Technologies, Your Tomorrow” as its corporate

identity. This represents MHI's commitment to providing an sure future where people can

lead safe, secure, and enriched lives for the sustainability of the earth and humankind with

help from MHI's impressive technologies and passion (Mitsubishi Heavy Industries, 2016b).

Technology. The company use high tech design to reduce environmental impact.

“MHI has integrated the 3D plant measurement technology at its nuclear power sector with

the 3D CAD vessel design technique, actively promoting the engineering to repair vessels

currently in service” ((Mitsubishi Heavy Industries, 2013).

Positioning criteria

Quality. MHI counts with the following certifications (Mitsubishi Hitachi Power

Systems, 2016).

 ISO 9001: Quality Management System

 ISO 14001: Environmental Management System

 OHSAS 18001: Occupational Health & Safety Assessment Series.

Location. Japan has the shortest distance to America. However, as it is an island it has

no connection by land to other countries and thus has low chances of becoming a hub.

Cost. As shown in Figure 20, Japan has the most expensive labor cost in comparison

to the other Asian and American countries. There is a significant gap of over $30 USD in

relation to that of China.

Capacity. Nagasaki Shipyard & Machinery Works (main plant) has three dry docks

that support vessels up t o 270,000 DWT. Shimonoseki Shipyard & Machinery Works has

three dry docks, one floating dock, seven piers, and 10 jib cranes. The dock can facilitate
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ships up to the 270,000 DWT (Mitsubishi Heavy Industries, 2016a). “We can perform all

kinds of damage repair work” (Mitsubishi Heavy Industries, 2016c).

With Panamax capacities and facilities the company is able to service all kinds of

repairing works for LNG (Liquefied Natural Gas) ships, naval vessels, ferries, passenger

ships, foundation improvement barges, replacement of propeller shafts and damage repair

work (Mitsubishi Heavy Industries, 2016d). Table 17 shows the capacity of Shimonoseki

Shipyard´s Docks.

Table 17

Shimonoseki Shipyard´s Docks

Dock Length(m) Width(m) Depth(m) Deadweight Crane

No. Capacity(t) (t x m)

No.1 350.0 60.0 08.8 270,000 16/64x40/80

80/35x40/65

No.2 270.0 60.0 09.8 120,000 80/35x40/65

40/15x40/65
16/6x40/80

No.3 180.0 30.0 10.7 038,000 10/5x40/60

16/6x40/80
Note. Data are from “Ship repair: Dry docks”, Mitsubishi Heavy Industries, 2016e
(http://www.mhi-global.com/products/detail/dry_docks.html).

Table 18 shows the capacity of Japanese yards in number of docks and berths. MHI

has the largest number of berths (6), Tsuneishi has the highest number of docks (5) and

Universal Shipbuilding company the largest dock length (620m) ((Organization for

Economic Co-operation and Development, 2012b).

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Table 18

Japanese Yards Capacity

Shipbuilder Yard # # Berths Dock Dock Yard

Docks length beam ranking by
(m) (m) global
order book
Oshima Shipbuilding Oshima 1 - 299 80 8
Company
Tsuneishi Zosen Numakuma 5 2 380 59 15
Namura Shipbuilding Imari 1 - 450 70 17
Mitsubishi Heavy Nagasaki 3 6 375 56 19
Industries
Imabari Shipbuilding Marugame 2 - 370 57 22
Universal Shipbuilding Tsu 2 4 500 75 33
Imabari Shipbuilding Saijo 1 1 420 89 34
Sanoyas Mizushima 3 - 270 80 41
Koyo Dock KK Mihara 5 5 378 59 47
Universal Shipbuilding Ariake 2 1 620 85 50
Note. Data are from “Peer review of the Japanese shipbuilding industry: Yard capacity-dock statistics”, The
Organization for Economic Co-operation and Development, 2012b
(https://www.oecd.org/industry/ind/PeerReview-Shipbuilding-Japan.pdf).

Connectivity. The Liner Shipping Connectivity Index of Japan is 68.8. It is

significantly lower than China and South Korea but it is higher than Latin American

countries.

China State Shipbuilding Corporation (CSSC), China

General information

Description. CSSC was formed in July 1982 by a group of several shipyards and

association of marine equipment manufacturing and research companies. The company

mainly focuses on shipbuilding, maintenance and repair as well as the production of Marine

auxiliary vessels (Krishnan, 2011).

Mission. “Follow the market and capabilities, to grasp the rhythm, and control risk”

(CSSC, 2007).
 95

Technology. CSSC has advanced mechanized equipment in the repair docks and a

variety of test equipment. Also dozens of world-renowned brands of marine equipment have

been established in the repair center to further improve the quality of service (CSSC, 2007).

Positioning criteria

Quality. The firm counts with the following quality certifications (CSSC, 2007):

 ISO 9001: Quality Management System

 GB/T 24001: Guobiao standards

 ISO 14001: Environmental Management System

 OHSAS 18001: Occupational Health & Safety Assessment Series

 Pattern: CSSC has over 1000 patterns till 2015

Location. Regarding geographic location, it can be argued that Hong Kong together

with London, Singapore and Busan have been ranked as the best ports around the world.

Some of the criteria includes the volume of the port and the environmental conditions

(Jakobsen, Mellbye & Sørvig, 2015).

Cost. China’s labor cost is significantly lower in comparison to the other countries. It

gives them an important competitive advantage, allowing them to offer the lowest repair

prices of the world's industry.

Capacity. In 2011, CSSC achieved the shipbuilding goals of 57 ships, which is

approximately 9.33 million tons of capacity. In 2015, CSSC accomplished a total ship repair

goal of 301 ships. CSSC services rank from civilian ships, conventional tankers and bulk

carriers to large container ships with the contemporary international advanced level. This

forms a multi-species, multi- grade service system (Krishnan, 2011).

Connectivity. As Table 12 suggests, China has the highest levels of connectivity of all

the other countries. In Asia, South Korea has the closest index, being an important

competitor.
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8.1.3 Segmentation and Positioning Results

The results of the positioning analysis are shown in Table 19. It can be noted that

China is the most competitive country offering good quality and location, the lowest costs in

the industry, high capacity of attention with Panamax services and the highest connectivity

between the analyzed countries. It is followed by South Korea, Panama and Japan. The South

American Countries are ranked at lower positions, SIMA being the most competitive

company in the region.

SIMA offers the best combination of price (cost) and quality and location in the

region. Although SIMA competes with other South American countries in quality, it beats

them in cost and location. However, Chile and Panama have a higher capacity which includes

Panamax repair services. Therefore, if SIMA wants to increase its competitiveness, a

Panamax dock is needed plus an increase of capacity for medium and large size vessels.

Also, the firm needs to replace its obsolete equipment with newer technology in order to

guarantee quality and increase productivity.

Finally, in segmentation SIMA is participating in the repair and maintenance industry

from small to large vessels up to 194.8m. Currently, they do not have a dock for Panamax

ships. Finally, they are now building new infrastructure to serve submarines up to 2000 tons,

which is projected to be finished in March 2017.

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Table 19

SIMA and its Competitors Positioning Analysis

Indicators Measurement SIMA Maggiolo Asenav Asmar Astinave Braswell- Boca Mitsubishi Hyundai CSSC
(Peru) (Peru) (Chile) (Chile) (Ecuador) MEC Grande, Heavy Heavy (China)
(Panama) Cotecmar Industries Industries
(Colombia) (Japan) (South
Korea)

1. Quality # Certifications 5 4 3 5 5 4 4 5 5 5

2. Location Distance to 3 3 2 2 2 5 2 4 3 5
large markets

3. Cost Labor Costs 4 4 3 3 3 2 4 2 3 5

4. Capacity Docks capacity 3 2 5 3 3 5 3 5 5 5

and diversity of
vessels and
services

5. Connectivity LSCI 2 2 2 2 1 3 3 3.5 4 5

TOTAL 17 15 15 15 14 20 16 19.5 20 25
Note. Scale 1 to 5, being 5 the highest possible score.
 98

8.2 Implementation Gantt Chart

The report has provided the three first steps of a business plan: industry analysis,

competitors analysis and segmentation and positioning strategy. The first step, the industry

analysis, is provided in Chapter 1. Competitors analysis and segmentation and positioning

strategy are developed in the previous sections of this chapter.

Now, SIMA has to finish the strategy formulation and continue with the rest of the

marketing plan and implementation. A Gantt Chart is shown in Figure 24 with the detail of

the following phases. In the implementation phase it has been considered the other two

solutions assessed in Chapter VI: Changes in HR policies and Changes in Procurement and

Financial Practices. Other recommended activities such as attendance at The International

Workboat Show and The Maintenance World Expo are detailed in the implementation plan.

Not all the activities of the implementation plan require an investment since most of

the proposed solutions are directed to policy changes and negotiations that should be

developed by managers of SIMA’s divisions. For instance, the administration, HR, finance

and procurement activities related to policies, training, internal communication and

negotiations do not require investment. The marketing activities, which includes SIMA’s

attendance to two ship repair’s shows and the firm’s website remodeling are valued at

$15,000. One large investment would be the acquisition of the ERP software. These can vary

between $2M to $17M depending on the brand (SAP, Oracle and Microsoft) (Wailgum,

2009). Lastly the purchase of new machines and equipment are already considered by the

firm´s management in the expansion plan of the new shipyard, which is valorized in 430MM

soles (Novoa, personal communication, September 20, 2016).

 99

Responsible
Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Dec-16 Jan-17 Feb-17 Mar-17 Apr-17 May-17 Jun-17 Jul-17 Aug-17 Sep-17 Oct-17 Nov-17 Dec-17 Division Investment
1. Market Analysis Done -
Industry Analysis DONE
Competitors Analysis DONE
2. Strategy formulation Marketing -
Segmentation and Positioning Strategy DONE
Formulation of the Value Proposition
Vision and Mision Reformulation
3. Formulation of the Marketing Plan Marketing -
Product
Price
Distribution
Promotion
People
Process
Physical Environment
4. Implementation Plan
Marketing and Sales Marketing $15,000
Attendance to the International Workboat Show (Nov. 30- Dec 2)
Attendance to the Mantainance World Expo 2017 (6-7 June 2017)
Website remodeling
Submit Website in International Directories as http://www.shipyards.gr
Direct Marketing activities to current / past clients
Administrative CEO -
Renegotiation with government about marketing restrictions
Human Resource Management HR -
Creation of Wage & Promotion Policy
Creation of Motivation Plan
Communication of wage, promotion policy
Training of different specialties
Equipment Plan Procurement $130MM
Attendance to the International Workboat Show (Nov. 30- Dec 2)
Attendance to the Mantainance World Expo 2017 (6-7 June 2017)
Identification of latest equipment & infraestructure
Contact with suppliers / Quotations/ Equipment Plan
Presentation of Equipment Plan to the Direction
Approval of FONAFE if needed
Purchase equipment
Procurement Procurement
SAP $16.8
Analysis of possible ERP softwares to control stock and integrate suppliers million; Oracle
Proposal of software $12.6 million;
Purchase of software if authorized and Microsoft
Implementation of ERP (20 months aproximately) 20 months $2.6 million.
Creation of a purchasing process manual
Creation of new indicators to minimize errors
Communication and Training
Finance Finance -
Creation of payment policy
Search and Negotiation of financial instruments
Comunication to suppliers
Finding new suppliers

Figure 23. Further steps Gantt.

Planning activities do not require a monetary investment since they should be developed by the firm´s managers.
 100

8.3 Key Success Factors

8.3.1 Enablers

In order to shift the business focus and be successful, diverse enablers are required.

First, it is important to convince marine officers who are at the direction of the company. The

approval of FONAFE may also be needed or any other government entity. Additionally, to

achieve growth and higher profits, SIMA needs to acquire high-tech equipment and increase

its capacity. The shipyard expansion that is planned for 2019 has to be concluded.

Additionally, in order to grow at a higher scale and transform Callao´s Port into a

shipping hub, SIMA needs to invest in a Panamax dock. It is also important to negotiate

growth with the government and eliminate some of SIMA’s marketing restrictions (as

publishing advertisements) in order to attract new clients.

8.3.2 Risks

The risks are related to the enablers. The proposal's major risk is that SIMA direction

or the government rejects it. Thus it is important to convince them, explaining the large social

benefits that will be generated. Another possible scenario is to get small collaboration from

employees. However, this event has low probabilities since changes include a new wage and

promotion policy that is beneficial for them. These policies should be planned carefully so

that SIMA maintains its labor cost advantage over other South American countries. Finally, it

is possible that Maggiolo increases capacity and quality or offers better prices in comparison

to SIMA. Therefore, it is necessary to track all the movements of competitors.

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Chapter IX: Expected Outcomes

After switching their business focus to ship repairs and maintenance, SIMA will enjoy

both positive financial and social outcomes. It is crucial for SIMA to invest in research and

development concerning offers of the best technology and business practices in the region.

Then, if SIMA improves its infrastructure, their capacity will also increase.

The first expected outcome of switching business focus is financial. Indeed, as

mentioned above, SIMA never has experienced a financial profit above 3%. The shipbuilding

industry is highly competitive and offer small profits. Therefore, SIMA needs to change its

focus to the repair and maintenance business unit that offer higher margins. For instance,

MEC Panama is one of the most competitive companies in the region, and they specialized

their primary business in repair and maintenance (MEC Panama, 2016).

It is crucial to define the impact of implementing the solution. By switching its focus

to ship repairs and maintenance, SIMA would be able to attract more private customers and

improve its current services. Therefore, the Peruvian company will be able to enhance its

profits. It is interesting to compare different companies, to assess the possible effect of the

solution in SIMA’s margins.

Detroit Chile is a perfect example of a ship company that is successful. As shown on

Table 6, the Chilean company obtained a profit of 9.15% in 2014. However, it is essential to

acknowledge the fact that Detroit is a private corporation, and SIMA is a state-owned

company. Therefore, a reasonable financial expected outcome from switching its business

focus will be between 5-6% of profit.

The second expected result would be to improve the social impacts of SIMA. New

profits would be invested in the expansion of the shipyard which would create new job

opportunities for Peruvians. For instance, Ecuador is investing in a new shipyard that would
 102

allow the company to have two more dry docks and hire more than 3000 workers (Ministerio

Coordinador de Sectores Estratégicos, 2014).

Additionally, SIMA´s profits could also be invested in quality infrastructure and

technology to meet private client´s expectations. This would allow SIMA to increase

productivity and reduce costs and their services’ times. In addition, this would increase

SIMA’s reputation as offering quality services.

In a nutshell, by switching its business focus, SIMA will improve its financial profits

and will be able to invest in new technologies. Also, the company will support the Peruvian

economy by offering new job opportunities for Peruvians. In addition, SIMA´s growth would

also affect related industries. Their local suppliers would also grow as a consequence,

creating new job positions. Finally, tax collection would also increase with revenues growth

of SIMA and its related businesses.

The expected financial results are explained in Table 20. In 2015, repair sales of

SIMA accounted for 123MM soles with a capacity of repairing seven small ships at a time in

Callao´s shipyard. The repair´s sales of 2015 are considered a good basis since during that

year non shipbuilding works were performed and the whole capacity was used in the repair

and metal working business units. Sales to private clients represented 16% and the firm

obtained a 2.3% net margin.

Next year, the new shipyard would be inaugurated which has the capacity to serve

four more ships at the same time. Therefore, it is expected to increase sales to 200MM soles.

The new capacity should be used to serve private clients; therefore, private sales are expected

to represent 40% of total revenues. If private sales increases in the repairs’ business thence,

net margins would also increase. The objective for 2017 is to increase it from 2.3% to 5%.

Finally, the second phase of the new shipyard would be ready for 2019. By then,

SIMA Callao would be able to repair 17 ships at the time and sales would increase to 300MM
 103

soles. The proportion of private sales should increase to 50% against total revenues. Lastly,

the objective net margin for this year is 6%.

Table 20
Expected Financial Outcomes

Year Capacity c Repair’s Sales Private Clients’ Net

(medium sized (soles) Sales (%) d Margins
ships)
2015a 7 ships 123MM 16% 2.3%
2017b 11 ships + 1 200MM 40% 5%
submarine
2019b 17 ships + 1 300MM 50% 6%
submarine
Note. a Data are from “Memoria Annual” by Servicios Industriales de la Marina (SIMA), 2016.
b
Data from 2017 and 2019 are projected. c Capacity refers to the number of small sized ships and submarines
that can be repaired at the same time in Callao’s shipyard. d Private Clients’ Sales are calculated by the formula
private sales/ total sales.
 104

Chapter X: Conclusions and Recommendations

10.1 Conclusions

The shipbuilding industry is slowly recovering from the world´s financial crisis and

facing low profits margins and depressed prices. The repairs unit however, has not been

affected in the same level as ship-owners prefer to repair their vessels rather than buying new

ones. In addition, increasingly aggressive competition in the world market like China, is

threatening SIMA´s worldwide position.

Moreover, SIMA Callao's greatest strength is also its biggest weakness: the

government's close ties to the company could either push the project forward or deter any

future opportunity for the potential shipyard. The small profits SIMA generates inhibits them

from growing and increasing their capacities. Other weaknesses of the company are related to

the lack of policies, the obsolete and insufficient infrastructure and the lack of a long-term

planning. In the other hand, its high skilled and low cost workforce, its ISO certifications a its

great location should be taken into consideration to formulate its positioning strategy and

competitive advantages.

The key problem identified is the small profits that have been obtained in the last

years. Net margins had been fluctuating around 2.3%. In particular, the type of ownership of

SIMA (public company) and its social role is restricting its financial results. As suggested by

the quantitative analysis, there is a potential increase in profits if SIMA increases its capacity

to serve private clients. Profit margins could increase at rates around 6% to 7%, taking the

Chilean Detroit as benchmark.

Through a fish-bone analysis, the key problem has been broken down into its main

causes: management, workers, working conditions, materials, machines and infrastructure

and marketing. First, SIMA´s management is blinded by its social role, impeding them to see

the economic opportunities. Moreover, there are other problems related to workforce as fixed
 105

contracts and highly specialized labor force and the lack of a wage and promotion policy

based on productivity and results. Regarding materials, the firm lacks a payment policy and

does not use financial instruments as letter of credits in their international operations. Also,

purchasing errors are generating delays and bottlenecks in the process. Furthermore, the

insufficient and obsolete infrastructure is related to the lack of capacity and the loss of sales

and clients. Lastly, the company lacks good market intelligence and a clear positioning

strategy.

In order to increase profits, SIMA needs to change its focus from the shipbuilding to

the repair and maintenance industry that offers higher margins. Additionally, the HR division

must undergo some changes in its policies combined with new action to eliminate the

problems presented. Some recommended actions are to establish a wage and promotion

policy based on productivity, train employees in different positions, hire civilians with

business studies and increase motivation to reduce rotation. Furthermore, a supplier's

payment policy has to be created, including the use of financial instruments to protect

international operations. Also, SIMA needs to invest in new equipment and infrastructure

(expansion of shipyard, construction of new docks, Panamax docks etc.) to increase their

capacity.

Lastly, in order to be successful in repair and maintenance, SIMA needs to start from

the bottom by developing a new business plan. The first parts of the plan have been

developed in this report, which includes: industry analysis, competitor’s analysis and

formulation of a positioning strategy. After comparing SIMA to its competitors, it is

concluded that SIMA offers the best relationship between cost and quality and the best

location in the region. However, if SIMA wants to increase its competitiveness, a Panamax

dock is needed plus an increase of capacity for medium and large size vessels. Also, the firm

needs to replace its obsolete equipment for high technology in order to guarantee quality and
 106

increase productivity. If all the recommendations are performed, then the firm can increase its

profitability to rates around 6%.

10.2 Recommendations

First, in order to shift the firm's focus, it is important for the Strategic Planning

Manager to convince SIMA´s board of directors and government regulators by explaining the

social benefits that would be generated with higher profits. Chapter VII can serve as a guide

to elaborate the arguments. It is also important to implement changes in the HR division. In

order to create stability in SIMA’s direction, HR should increase the marine officers labor

period to at least five years and recruit civilian’s managers with business backgrounds.

Thereby, the firm could begin thinking strategically, planning long term initiatives and

investments.

Workers are essential to guarantee the quality of the service. Thus, the HR division

needs to motivate the workers by creating incentives and a fair wage and promotion policy

based on productivity. It is necessary a salary raise, however SIMA should be careful to keep

it at a limit where they maintain its cost leadership in the region. Additionally, employees’

results could be tracked on a daily/weekly basis and set clear and realistic goals. Also,

training is essential to create a multi-disciplinary workforce and keep them updated on the

latest techniques and use of new equipment.

Also, in order to increase its competitiveness, the management should prioritize

investments in new equipment and infrastructure, expanding the shipyard for small to large

size vessels, and building a new dock for Panamax ships. It is recommended that the

procurement and operation managers attend The International Workboat Show and The

Maintenance World Expo 2017 to search for new technologies to improve quality and

productivity. It is also recommended to invest in an ERP software in order to integrate

 107

information across the business units. In addition, procurement and finance policies should be

implemented to standardize and formalize processes.

Additionally, a more proactive role of the marketing department is needed. They have

to start searching for clients now through direct marketing initiatives which are allowed.

However, SIMA needs to negotiate with the government to eliminate the marketing

restrictions that have been imposed and that are impeding them on reaching new clients.

Furthermore, the workout sessions are highly recommended, since employees are the best

source for identifying problems and finding out solutions. In this way, SIMA’s continuous

improvement could generate lower costs and higher revenues every year. Also, it is the best

way to eliminate bureaucracy and speed up processes.

Finally, the key for keeping the government satisfied is to comply with the projects

that are required by the navy or other government agency. Also, despite that a shift of focus

has been recommended, SIMA must continue providing shipbuilding (but in a lower scale),

since the knowledge needed for repair services is obtained in the building process.
 108

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Appendix A: SIMA's Profit and Loss Statement 2015, 2014

Table A1

SIMA's Profit and Loss Statement 2015, 2014

2015 (PEN) 2014 (PEN)

Revenues
Revenues from Goods 318,393,204 250,802,432
Revenues from Services 553,535 111,088
Total Revenues 318,946,739 250,913,520

Operational Costs -310,240,249 -233,223,422

Gross Earnings 8,706,490 17,690,098

Sales and Distribution Expenses -1,531,880 -732,379

Administrative Expenses -27,567,482 -24,589,945
Other Operating Revenues 2,419,804 1,629,969
Other Operating Expenses -51,527 -37,050
Operating Earnings -18,024,595 -6,039,307

Financial Revenues 10,271,370 6,488,202

Financial Expenses -1,932,091 -1,989,605
Exchange rate Earnings 43,050,668 15,458,347
Exchange rate Loses -21,865,500 -4,299,637
Earnings before Taxes 11,499,872 9,618,000

Sales Taxes -3,914,478 -3,711,523

Final Result 7,585,394 5,906,477
Note. Data are from “Memoria Annual Año 2015” by Servicios Industriales de la Marina (SIMA), 2016.
 122

Appendix B: SIMA's Unserved Ships

Table B1

SIMA's Unserved Ships During 2011

Client Ship Length

AMAPE SEYKO 52 -
AMAPE TOEY 15 -
TRAMARSA DALMOR II 94

DOLMAR CARMELA 69

DOLMAR REYNA DE LA PAZ 81.7

UMC YING SHUN 368 59.2

UMC KENYO MARU 1 47.32

UMC KENYO MARU 2 50.8

DOLMAR PRIMERO DIOS 30.4

TRANSGAS VIRGO GAS I 75

SEGANPORT CERVERA 41

DOLMAR DRENEC 80.5

DOLMAR URGORA 49

MGP FM-53 114

MGP FM-57 114

IMI ENERGI 9501 101.8

MARIT D WORDL XIN SHI JI 8 55.97

GYOREN KINEI MARU 138 58

Excelsior Shipping Co. Limited ANGELES B 140

Note. Data are from “Estudio de Preinversión a Nivel de Perfil: Ampliación de la Capacidad de Reparaciones de
Naves de Bajo y Medio Bordo del Astillero de SIMA-CALLAO” by C. Novoa., 2012.
 123

Table B1 (continuation)

SIMA's Unserved Ships During 2011

Client Ship Length

MARIT OCEANICA HAI ZHI XING 601 38.73

DOLMAR B/T MONTECRUZ 97

MARIT DEL WORDL CHENG KAI YU LENG 2 70

PESQUERA PELAYO DOÑA ADY 41.5

PESQUERA PELAYO AMAZONAS 26.13

GYOREN KINEI MARU 88 55

MARIT OCEANICA HONG YUN Nro. 1 50.5

MARIT OCEANICA HONG YUN Nro. 3 50.5

IMI ENERGI 9501 101.8

AMAPE MARIANE 39.8

ASIA MARITIMA 05 DONG IL 60.09

M/N FRIO CANARIAS 112

GYOREN ISOMAE MARU 21 53

GYOREN WAKASHIO 85 70

DOLMAR CONTADORA 1 83.1

DOLLMAR LUCILE F 78.85

CODRALUX DN - 125 51.6

SEGAMPORT NVO XEIXAL 37.6

TRAMARSA R/M PACHACAMAC 26.5

TRAMARSA ALETA AZUL 70

MGP BAP DUEÑAS 48.6

TASA TASA 417 38.83

DOLMAR M/N LA MANCHE 172.1

Note. Data are from “Estudio de Preinversión a Nivel de Perfil: Ampliación de la Capacidad de Reparaciones de
Naves de Bajo y Medio Bordo del Astillero de SIMA-CALLAO” by C. Novoa., 2012.
 124

Table B1 (continuation)

SIMA's Unserved Ships During 2011

Client Ship Length

OLCESE ADI 05 ExARD-31) 150.6

SIMAC ADF-107 147

AMAPE KAIO MARU 81 57.81

AMAPE KAIO MARU 108 58.6

IMI BAHIA BAYOVAR 73.02

MGP BAP UNION 158.9

PORT LOG GERMCS 120.43

MARI DEL WORD E/P HAE IN 21 61.09

MARIT DEL WORDL HUA YING 1 59.96

SEGAMPORT SIEMPRE SOCIO 38

DOLMAR CURIMAGUA 76.1

MARIT DEL WORDL 5 DONG IL 67.9

COSMOS JULIE L 71.5

INMARSA R/M NEPTUNO 30.5

Note. Data are from “Estudio de Preinversión a Nivel de Perfil: Ampliación de la Capacidad de Reparaciones de
Naves de Bajo y Medio Bordo del Astillero de SIMA-CALLAO” by C. Novoa, 2012.