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SECTORAL REPORT NATIONAL BANK OF GREECE * July 2016 Greece, albeit a small country, has managed to stand out as a global leader in shipping – with Greek ship-owners controlling about 16 per cent of the merchant fleet. Apart from the widely acknowledged boost from net shipping receipts to the Greek economy, a critical issue is to explore additional channels through which the economic power of Greek ship-owners could feed into the Greek economy. Marine Equipment Industry: How Greek shipowners could stimulate the manufacturing sector While global shipbuilding activity is largely concentrated (with 90 per cent being built by Asian shipyards), the market for marine equipment is highly diversified in an extensive network of global supply chains. NBG Research estimated that Greek ship owners “control” about 1/10 of this market, by creating an annual demand of about €8 billion in marine equipment. Against this background, Greek marine equipment manufacturers appear to be in an advantageous position to access global value chains, using the influence of Greek ship-owners. However, this opportunity appears to be underexploited since Greek production is in the range of just €0.15 billion (about 0.1 per cent of global production). The weak spots of the Greek marine equipment industry are mainly concentrated in its supply-side characteristics (low cluster formation/sophistication, and limited innovative activity). While Greek marine equipment manufacturers exhibit signs of dynamism and a relatively healthy financial performance, they still have a long way to go towards the EU average. Based on NBG Research estimates, in the event technological investments and cluster development reach the level of the EU average, the Greek marine equipment production will reach €0.7 billion (from €0.15 billion in 2015) or 0.6 per cent of the global market (from 0.1 per cent in 2015). In order for this potential to be realized, the priorities are (i) to double R&D expenditures and channel them to niche markets (e.g. smart shipping) and (ii) to develop sector’s clusters, improve linkages with ship-owners associations and research centers, and form partnerships with similar clusters in the EU countries. Besides the abovementioned direct effects, the gradual increase of Greek participation in global value chains could lead to an additional economic benefit – mainly through technology spillovers and introduction to global high-tech networks. Paul Mylonas, PhD According to our estimates, these externalities (excluding the above-mentioned direct effect of additional €0.6 billion) average €0.4 billion, but in fact they could NBG Group +30 210-3341521, e-mail: [email protected] range from zero to €1.4 billion. Our view is towards the upside of this range of potential spillover effects, as the “neighboring”-to-marine equipment industries (i.e. manufacturing of metals, machinery and electrical equipment) are: (i) sizeable sectors (producing €10 billion per year and thus covering 30 per cent of the Greek manufacturing sector); and (ii) among the most competitive industries in Greece. Economic Analysis Division Eolou 86, 10232 Athens, Greece Research Coordinator: Jessie Voumvaki, Senior Economist +30 210 3341549 e-mail: [email protected] Greece, albeit a small country (covering just 0.5 per cent of world GDP), has managed to stand out as a global leader in shipping – with Greek ship-owners controlling about 16 per cent of the merchant fleet. The magnitude of this achievement appears impressive, considering that even Greece’s natural competitive Analysts: Athanasia Koutouzou, Economist +30 210 3341528 e-mail: [email protected] Georgios Sakkas, Economist +30 210 3341547 e-mail: [email protected] advantage – tourism – rates significantly lower in global ranks (with Greek tourism receipts accounting for 1.4 per cent of the world market). Apart from the widely acknowledged boost of net shipping receipts to the Greek economy (€8 billion per year during the past decade, equivalent to 4 per cent of GDP), a critical issue is to explore additional channels through which the economic power of Greek Eirini Zampeti, Economist +30 210 3341646 e-mail: [email protected] ship-owners could feed into the Greek economy. Against this background, an obvious channel could be their shipbuilding expenditure which amounts to more than €9 billion per year. While the global shipbuilding activity is highly concentrated (with 90 per cent being built by Asian shipyards), the market for marine equipment (65 per cent of the final vessel value) is highly diversified in an extensive network of global supply chains. NBG Research estimated that Greek ship owners “control” almost 1/10 of this market, by creating an annual demand of about €8 billion in marine equipment (either indirectly through shipyards or directly through their repair and maintenance activity). However, while EU countries produce more than ⅓ of the world supply of marine equipment, Greek companies currently cover a mere 0.1 per cent of the market. In the following analysis, we will focus on: (i) the potential dynamics of the Greek sector of marine equipment in the event Greek ship-owners exercise the maximum force of their influence in the shipbuilding market; as well as (ii) the potential spark that will ignite the Greek manufacturing industry through the increased participation in high-tech global value chains. While the global shipping sector is expanding, Greek shipowners remain leaders Following the increase in seaborne trade (by 6 per cent annually during 1990-2015), the world merchant fleet capacity has tripled 1 NATIONAL BANK OF GREECE Sectoral Report July 2016 over the past 25 years, from 350 million GT in 1990 to 1.030 million GT in 2015. With oil tankers capacity increasing marginally (by 5 per cent annually) and general cargo ships’ capacity shrinking, the two main drivers of fleet expansion have been: (i) bulk carriers mainly carrying raw materials to Asia (reaching 43 per cent of total capacity in 2015 from 35 per cent in 1990); and (ii) containerships, which facilitate intermodal transport (reaching 13 per cent of the world fleet in 2015 from 4 per cent in 1990). Moreover, driven both by cost-cutting efforts as well as the need to conform to new environmental regulations, the global merchant fleet went through an extensive modernization phase concerning emissions, waste water treatment etc., with the average age of the world fleet decreasing to 13 years in 2015, from 15 years in 1990. Following this period of expansion and transformation, Greek shipowners continue to rank first, controlling 16 per cent of the world merchant fleet capacity (and about 25 per cent of bulk carriers and oil tankers, which account for 70 per cent of global capacity), followed by Japan (14 per cent) and China (11 per cent). This development has been achieved through extensive investment in new ships by Greek ship-owners. In particular, during the past decade, Greek-ship-owners have been placing ship orders of 10 million GT on average per year, corresponding to €9 billion (18 per cent of world shipbuilding value)1. The payoff of this process is also evident in the lower age of the Greek-controlled fleet. Despite the upward bias stemming from the over-aged fleets of the smaller companies, the average age of Greek-controlled vessels of more than 1,000 dwt was reduced to 10 years in 2015 from 18 years in 1990 – reversing its gap with the world average to 3 years younger in 2015 from 3 years older in 1990. The expanding world fleet boosts – mainly Asian – shipyard activity… Shipbuilding activity has peaked during 2010-2012 with average annual newbuilding capacity of about 100 million GT, before This dominant position is expected to be sustained, as Greek interests cover about 15 per cent of shipbuilding volume and current orderbook (based on February 2016 data) – similar to China – while Japan follows with 10 per cent of shipbuilding and 13 per cent of merchant fleet orderbook. 1 NATIONAL BANK OF GREECE Sectoral Report July 2016 2 returning in 2015 to its 10-year average of about 70 million GT. Most of the shipbuilding activity takes place in Asian shipyards, as China, South Korea and Japan cover 92 per cent of shipbuilding volume in 2015 compared with 40 per cent in 1990 - with China being the most prominent player (accounting for a share of about 40 per cent in 2015 versus 6 per cent in 2000). Other shipyards with a smaller but growing orderbook are located in India, Vietnam, the Philippines and Brazil (often controlled by Korean or European companies). European shipyards have been gradually losing market share in shipbuilding volume, from 25 per cent in 1990 to less than 3 per cent in 2015, mainly due to low cost competition from Asia. However, while Asian shipyards are focused on ship types of low complexity such as small tankers and bulk carriers (covering more than ½ of Asian orderbook, compared with less than 10 per cent in the EU), European shipyards have managed to retain most of the shipbuilding activity of high-value-added ship types such as cruise ships and special purpose vessels (LPG/LNG, offshore, navy)2. These vessel types are priced higher than €2,000/GT, compared with about €500/GT for bulkers and general cargo vessels. As a result, in terms of shipyard turnover (taking into account both new shipbuilding and repair/conversion activities), European countries cover 20 per cent of the world market. Merchant fleet orderbook (Dec. 2015) Shipyard China S. Korea Japan Other Total Greek-owned Total* (mil. GT) mil GT % of shipyard 75 56 40 29 201 7,5 11,4 1,9 7,1 27,9 10% 20% 5% 24% 14% * concerning cargo carrying ships Source: The Shipbuilder's Association of Japan Based on market estimates, shipbuilding activity is expected to remain close to the current level of about 70 million GT until 2020, as weak industrial production in Asia (mainly China) creates a state of overcapacity. Driven by the “usual suspects” (i.e. global economic upturn and the need for fleet replacement mainly reflecting stricter environmental requirements), the shipbuilding cycle is expected to peak during 2025-2030, at about 90-100 million GT (close to the previous peak level of 2011). Most of the shipbuilding and repair/conversion activity is concentrated in large shipyards like Meyer Werft in Germany, building container ships, cruise and special purpose vessels, Fincantieri in Italy, mainly building cruise ships and ferries and its subsidiary Vard in Norway and Romania, building cruise, offshore and other specialized vessels. 2 3 NATIONAL BANK OF GREECE next Sectoral Report July 2016 It is important to note the importance of Greek ship-owners for the activity of Asian shipyards (where about ¾ of current Greekcontrolled orderbook is directed). In particular, Greek orders cover 20 per cent of Korean shipyards’ turnover, 10 per cent of Chinese shipyards’ turnover and 5 per cent of Japanese shipyards’ turnover. … while the increasing shipyard activity, in turn, supports the globalized marine equipment industry Shipbuilding and ship repair activities create a demand for marine equipment, concerning products such as machine engines, navigation systems, electrical and electronics systems, as well as metal products and materials, paints, ropes, wires etc. This market is clearly diverse and not easily specified. It is estimated that the global marine equipment market covers about 65 per cent of the cost of shipbuilding (varying among different ship types and the level of required sophistication). Driven by increasing shipbuilding orders during the previous decade, the global production of marine equipment reached €120 billion in 2015 (almost double compared with 2000). While shipbuilding activity has become increasingly concentrated, marine equipment production is more dispersed in the context of an extensive network of global value chains. Specifically, 37 per cent of marine equipment market is served through international trade flows in 2015, compared with 25 per cent in 2000. Against this background, shipbuilding has become a sector with one of the highest participation rates in global value chains (GVCs)3 (about 32 per cent versus a world average of 26 per cent), reflecting mainly the above-mentioned high share of marine equipment being imported. Trade of marine equipment flows both inter-regionally (mainly from EU to Asia) and intra-regionally (mainly intra-EU): Turning to inter-regional trade, the EU produces a surplus amounting to around 6 per cent of the global market (as Along with the increase in global trade during the past twenty years, there is a growing development of GVCs, meaning a higher use of imported inputs for a production process as well as a higher share of exported outputs. 3 NATIONAL BANK OF GREECE Sectoral Report July 2016 4 EU countries have a share of 34 per cent in supply and 28 per cent in demand), which mainly is directed to cover Asia’s deficit (as Asian countries generate 49 per cent and absorb 55 per cent of the world marine equipment production). Regarding intra-regional trade, EU countries depend more on intra-regional trade (covering approximately ⅓ of the region’s demand), while Asian countries appear to be the most self-sufficient (with intra-regional trade covering 14 per cent of the region’s demand). EU countries are the most export-oriented, exporting 57 per cent of production (about 45 per cent concerning intra-EU trade). Germany is the largest EU exporter (supplying more than ⅓ of EU exports), followed by Italy, the UK, The Netherlands and France, each having a market share of about 8-10 per cent. During the past decade, EU exports increased by about 25 per cent from €20 billion in 2005 to about €25 billion in 2015, covering 55 per cent of world exports (down from 67 per cent in 2005). This increase mainly reflected higher demand from Asia (covering 30 per cent of EU exports in 2015 compared with 17 per cent in 2005), while the level of intra-EU trade remained broadly unchanged. Note that China, in particular, absorbed 13 per cent of EU exports in 2015 compared with 7 per cent in 2005. As higher demand from Asia was also covered through intra-Asia trade, the abovementioned increase in EU exports to Asia was just enough to maintain EU penetration in Asian markets at the same level (about 40 per cent). It should be noted that there are certain differences concerning specific types of marine equipment. For instance, EU countries appear to cover more than ½ of Asian imports of propulsion systems (machine engines), compared with only 14 per cent in navigation systems (mainly covered from intra-Asia imports). This type of marine equipment is the main focus of German exports, which is a key player in marine equipment destined for Asia, covering 45 per cent of EU exports to Asia compared with 31 per cent of EU exports to other destinations. 5 NATIONAL BANK OF GREECE Sectoral Report July 2016 Turning again to the Greek ship-owners’ prominent position in the markets related to shipping, NBG Research estimated that Greek ship-owners create an annual demand of about €8 billion in marine equipment, of which €6 billion concern the building of new ships (through shipyards) and the remaining €2 billion concern direct expenditure by shipping companies for repairs and fleet maintenance (spare parts, etc.). Supply-side weaknesses hinder Greek manufacturers from capturing a sizeable share of the global marine equipment market Combining the above-mentioned points, Greek marine equipment manufacturers appear to be in an advantageous position to gain access to the GVCs’ network of the shipbuilding sector, using the influence of Greek ship owners. Specifically, during the shipbuilding process, there is a dynamic interaction between ship-owners and shipyards concerning the selection of marine equipment suppliers. At first, the list of eligible suppliers is prepared by the shipyard by taking into account the recommendations of the customer. Then, from this list and based on the desired specifications for each type of delivery (considering factors such as quality, cost and degree of sophistication), the final choice is made by the shipyard. In this context, Greek ship-owners could use their influence in order for the Greek manufacturers to be included in the shipyards’ suppliers list and thus have a fair chance to be the selected suppliers (in case they offer the best price-quality combination). In this case, Greek ship-owners (i) will intensify the competitive forces during the selection process (with favorable results regarding lower prices and/or higher quality), (ii) will have easier communication with the suppliers – in cases that Greek manufacturers would be selected, and (iii) could move towards vertical integration by acquiring shares in Greek marine equipment companies. However, this opportunity appears to be underexploited since Greek production is in the range of just €0.15 billion – corresponding to 0.1 per cent of the global market. The marine equipment output of Greek companies mainly concerns: (i) ship operation equipment (mainly mooring equipment) and cargo NATIONAL BANK OF GREECE Sectoral Report July 2016 6 handling equipment (mainly wire ropes, cables, anchors); as well as (ii) high value added products such as auxiliary systems for environmental protection and safety (e.g. ballast water treatment), navigation and bridge control and other electronics and IT systems. In fact, focusing on the sub-segments that Greek manufacturers are more active (cargo handling equipment, ship operation equipment and auxiliary systems, covering ⅓ of the total market), Greece’s market shares in the respective markets remain extremely low (in the range of 0.3 per cent). In order to explore the potential growth of the sector of marine equipment and determine what factors may currently limit its development, NBG Research has constructed an econometric model (see Appendix) based on a global sample of 33 countries, examining the combined effect of two broad types of variables: Demand variables index: (i) each country’s share in the world shipyard activity; and (ii) each country’s share in the world fleet Supply variables index: (i) each country’s size; (ii) technology level; and (iii) cluster sophistication. From the demand side, marine equipment production is directly absorbed by shipyards or by shipping companies (for repairs and replacement of parts). However, as mentioned above, there is also an indirect channel through which ship-owners can influence the shipyards’ choices. Turning to supply side considerations, an integral part of marine equipment competitiveness is technology, especially as specifications become more complex, with advanced systems required in terms of mechanics, navigation, safety and environmental protection. Based on our Technology Index 4, most developed countries in this area are Korea, Finland and Sweden. Moreover, cluster sophistication appears to be an important tool for entering high-tech global value chains, with countries like Germany, the US and Italy being the most advanced in this area. 4 To approach the technological level of production we have constructed a technology index, consisting of three, equally weighted components: Business enterprise R&D as percent of GDP, Number of researchers per 1,000 employees, Index for the availability of latest technologies reflecting the views regarding the degree of absorption of latest technologies by the business sector (sources: OECD and WEF). 7 NATIONAL BANK OF GREECE Sectoral Report July 2016 Finally, it is important to control the effect of the size of the economy of each country, as high impact countries such as China (covering 14 per cent of world exports), the US and Germany (about 10 per cent each) have a natural advantage in gaining excess to highly competitive global markets (through exploiting both bargaining power and economies of scale). By combining the above factors through econometric modelling, the share of each country in the global production of marine equipment production is explained to a large extent (R2= 87 per cent), with countries with powerful combinations of demandrelated and supply-related attributes (mainly China, Japan, Korea, the US and Germany) capturing double-digit shares of the world market. Under this approach, Greece produces a fair value share in the world marine equipment market close to its realized one (0.1 per cent of the market), as: In the demand index, Greece ranks rank close to the EU average (7 per cent lower) as, despite being a world leader in terms of fleet ownership, this effect is counterbalanced by the very limited shipyard activity – covering about 0.2 per cent of world shipyard turnover (lower even than its share in world GDP which is about 0.5 per cent). Note that European countries such as Norway, Italy and Germany maintain a relatively high ranking both in terms of fleet control and shipyard activity. However, in terms of supply-related variables, the characteristics of the Greek business environment lead to an index 47 per cent lower than the EU average (ranking last among the examined sample). This is a combined result of low rankings in the three main index components: (i) being a small country, Greece has a low share of about 0.1 per cent in total world exports (excluding fuel), which translates into limited access to global networks; (ii) cluster formation in Greece is considered underdeveloped (based on the Global Competitiveness Index), ranking 33 per cent lower than the EU average; and (iii) the NATIONAL BANK OF GREECE Sectoral Report July 2016 8 technology level5 in Greece is about 35 per cent lower than the EU average (mainly because of limited R&D investments), while the most developed countries are Korea, Finland and Sweden. Therefore, the weak spots of the Greek marine equipment market are mainly concentrated on its supply-side weaknesses, mainly limited innovative activity and clustering). The Greek marine equipment sector exhibits signs of dynamism While shipbuilding activity in Greece has declined significantly during the past decade (with shipyard turnover about €50 million in 2013 compared with about €0.5 billion during 2003-2005), marine equipment manufacturers have managed to take advantage of the increase in global demand and more than double production during the past fifteen years. Specifically, sales of marine equipment reached about €150 million in 2015, from €60 million in 2000. This was achieved through a significant export orientation, either through direct exports or through sales of spare parts to shipping companies in Greece and then exported to shipyards. In fact, about 60 per cent of their turnover is directed abroad (compared with 15 per cent on average for Greek manufacturing – excluding fuel), while their extroversion has increased by 11 per cent annually on average during the past decade (compared with 4 per cent for Greek manufacturing – excluding fuel). Concerning export destinations, about 40 per cent is directed to other EU countries and the rest mainly to Asian countries (China, South Korea and Japan). These positive characteristics are reflected in a healthy financial performance, as the sector: (i) remained profitable throughout the economic crisis, (ii) performs better than the rest of the Greek manufacturing sector (excluding coke manufacturing) and (iii) has similar ratios with European marine equipment producers (including listed companies with a global presence). Specifically: Greece’s low technology index is the weighted average of the following sub-indices: (i) Business enterprise R&D (%GDP) (ii) Number of researchers per employee and (iii) The WEF index for the availability of latest technologies. 5 9 NATIONAL BANK OF GREECE Sectoral Report July 2016 During the high growth period of 2005-2008, the sector grew by 18 per cent annually on average, compared with 15 per cent in Europe and 4 per cent in Greek manufacturing. Financial performance 2005-2008 GR marine GR EU marine equipment manufact. equipment* Average annual sales growth 18% 4% 15% ROA (pre-tax) 11% 4% 7% ROE (pre-tax) 20% 10% 20% EBITDA margin Net profit margin (pre-tax) 17% 12% 14% 12% 6% 9% Asset turnover 0,86 0,76 0,80 Debt to Equity 0,9 1,4 1,5 Debt to EBITDA 1,7 3,5 2,1 Interest coverage 8,7 3,7 6,3 237 178 71 Operating Cycle (Days): -Accouts receivable -Stock -Accouts payable With an advantage in terms of profitability, a slightly higher asset turnover manufacturers and lower outperformed leverage, both Greek marine benchmarks in productivity, with ROA at 11 per cent, compared with 7 per cent in Europe and 4 per cent in Greek manufacturing. During 2009-2014, the sector posted a slowdown, however, sales continued to grow at an average annual rate of 4.7 per cent, while Greek manufacturing posted an average annual drop of 5 per cent. The significant lead in the high 194 158 69 119 106 82 76 86 80 * The European sector for marine equipment concerns listed groups with global presence in the marine equipment sector Source: ICAP, Factset, NBG estimates growth period kept the sector close to its European counterparts. The combination of a still high EBITDA (13 per cent) and low leverage (debt to equity less than 1) allows the sector to have a healthy net profit margin before taxes (9 per cent, compared with 8 per cent in Europe and -0.3 per cent in Greek manufacturing) and to easily cover its loan obligations (with a debt-to-ebitda ratio of 2.3 compared with 7.7 for Greek manufacturing). Financial performance 2009-2014 GR marine GR EU marine equipment manufact. equipment* Average annual sales growth By intensifying, supporting and broadening this effort, the 4,7% -5,0% 4,4% ROA (pre-tax) 6% 0% 6% ROE (pre-tax) 11% -1% 15% EBITDA margin Net profit margin (pre-tax) 13% 7% 13% 9% 0% 8% Asset turnover 0,71 0,66 0,72 Debt to Equity 0,9 1,6 1,4 average. Based on NBG Research estimates, in the event Debt to EBITDA 2,3 7,7 2,2 Interest coverage 5,8 1,0 6,5 technological investments and cluster development reach the levels 254 189 64 Operating Cycle (Days): -Accouts receivable 199 172 76 -Stock 156 113 69 -Accouts payable 102 96 82 * The European sector for marine equipment concerns listed groups with global presence in the marine equipment sector Source: ICAP, Factset, NBG estimates marine equipment industry could directly boost Greek GDP by €0.6 billion per year… While the efforts of Greek marine manufacturers appear to be in the right direction, they still have a long way to go towards the EU of the EU average, the Greek sector of marine equipment has a dynamic to reach sales of €0.7 billion (from €0.15 billion in 2015). Specifically, the technology upgrade could increase the Greek market share from 0.1 per cent to 0.4 per cent of world market, which is equivalent to an annual sales benefit of €0.3 billion. To reach the EU-average, Greek manufacturers should intensify their innovation activities by doubling their R&D expenditures to 5 per cent of sales (i.e. the average of EU marine equipment manufacturers) from 2.5 per cent of sales in 2015. Apart from NATIONAL BANK OF GREECE Sectoral Report July 2016 10 higher R&D expenditures, it is equally important to target this innovation effort strategically (i.e. towards high-growth segments and away from segments that are already controlled by large players e.g. German manufacturers in propulsion systems). Indicatively, we distinguish “smart shipping” concerning the development of specialized software and applications (e.g. for engine monitoring or weather routing) for optimum ship operation in terms of safety and energy efficiency. In addition, the improvement in cluster sophistication to the EU average could further increase the Greek market share to 0.6 per cent of world market, thus producing additional annual sales of €0.3 billion. According to the literature6, the key strategic priorities that would improve Greek sector’s effectiveness and close the gap with the more mature EU clusters are: to form partnerships and affiliations with mature clusters in other EU countries, such as the Industrial Association of German marine and offshore equipment (VDMA), to improve linkages with (i) clients’ associations (e.g. Union of Greek Ship-owners) through working groups and advisory committees, as well as (ii) research and academic institutions which would foster more effective R&D activity (especially for the smaller enterprises), and to develop industry clusters with presence in strategic locations through permanent offices or representatives (which is beneficial in terms of lobbying and interaction with local partners). Therefore, in this scenario, Greece could capture the 0.6 per cent of the global marine equipment market (from 0.1 per cent in 2015) – corresponding to 1.5 per cent of the relevant for Greek manufacturers markets (from 0.3 per cent in 2015, see p. 7). 6 i) Michael E. Porter, “Clusters and the New Economics of Competition”, Harvard Business Review (Nov-Dec 1998), ii) Clusters Linked over Europe (CLOE), “Guidelines for the development and management of cluster initiatives”, EU INTERREG IIC program 2006, iii) EU-INNO Germany AG, “Clusters and clustering policy”, 2010. 11 NATIONAL BANK OF GREECE Sectoral Report July 2016 … while the indirect benefits through technology spillovers could amount to up to €1.4 billion Besides the above-mentioned direct effects, the gradual increase of Greek participation in global value chains (GVCs) could lead to an additional economic benefit – mainly through technology spillovers and introduction to global high-tech networks. Note that this development could act as a critical trigger, since the participation of the Greek industry to GVCs is low (with 43 per cent of our exports being either raw materials for foreign exports or have an imported input component, compared to an average global ratio of 52 per cent). In particular, past experience indicates a correlation of about 65 per cent between the growth rate in the GVC participation index and the increase in GDP per capita (see graph). Based on this observed pattern, the increase in GVC participation by 2.5 per cent (caused by the higher marine equipment exports) is expected to increase Greek GDP by 0.6 per cent (€0.6 billion directly and €0.4 billion indirectly). Note, however, that the nature of the spillover effects has, by definition, a high random component. In practice, the indirect effect appears to vary between ½ of the average estimate (e.g. in the case of Indonesia) to double the average estimate (e.g. in The Netherlands). Therefore, these externalities for Greece (excluding the direct effect of €0.6 billion on marine equipment manufacturing) average €0.4 billion but, in fact, they could range from zero to €1.4 billion. Our view is towards the upside of this range of potential spillover effects, as the “neighboring”-to-marine equipment sectors (i.e. manufacturing of metals, machinery and electrical equipment) cover 30 per cent of the Greek manufacturing sector (excluding fuel) with annual sales of €10 billion, and are among the most competitive industries in Greece. In fact, these Greek sectors: invest 0.8 per cent of their annual sales in R&D, compared with 0.3 per cent in Greek manufacturing are export-oriented and have a high share of exports with competitive advantage (40 per cent of their exports compared with 16 per cent in Greek manufacturing), NATIONAL BANK OF GREECE Sectoral Report July 2016 12 are comparable with their European competitors in terms of labor productivity, while other manufacturing sectors have a considerable gap of about 40 per cent. 13 NATIONAL BANK OF GREECE Sectoral Report July 2016 Appendix: Econometric model NBG Research estimated a model to determine the potential of Greek marine equipment production. Specifically, the model is based on cross-section data for a global sample of 33 countries, accounting for about 90 per cent of world marine equipment production. To estimate the fair value of the market share in global marine equipment production (dependent variable), we have considered two types of explanatory variables: Demand Index, which represent the main sources of demand for marine equipment, which are shipyards and ship-owners. We calculate a Demand Index as follows: Demandi = 70%*[shipyardi] + 30%*[ownershipi] Where: Shipyardi = the share of country i in world shipyard turnover Ownershipi = 50%*[share of country i in fleet ownership] + 50%*[share of country i in shipbuilding volume] The weights of each variable in the demand index are a result of a separate regression. Supply Index, which represent country-specific factors affecting the quantity and quality of marine equipment production. Specifically, we consider: i) the size of the economy (based on exports); ii) the technological level; and iii) the degree of cluster development. We calculate the Supply Index as follows: Supplyi = 40%*[technologyi] + 40%*[clustersi] + 20%*[exportsi] Where: Technologyi = ⅓*[Business R&D (%GDP)] + ⅓*[share of researchers in employment] + ⅓*[index of availability of latest technologies (WEF)] for country i Clustersi = index of cluster development (WEF) for country i Exportsi = share of country i in world merchandise export value. The weights of each variable in the supply index are a result of a separate regression, while all its subcomponents are expressed relative to the EU average (for comparability purposes). The combination of these variables appears to interpret, to a large extent, the current Greek share in world marine equipment production through the following function: MEi = -29.1 + 1.34 Demandi + 3.58 Supplyi (-2.15) (9.01) (2.68) R2 =0.87, DW=2.08 Where: MEi: the market share of country (i) in world marine equipment production Demandi: Demand Index for country i (EU=100), calculated as described above Supplyi: Supply Index for country i (EU=100), calculated as described above i: Austria, Belgium, Bulgaria, China, Croatia, Cyprus, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Japan, Latvia, Lithuania, Malta, The Netherlands, Norway, Poland, Portugal, Romania, South Korea, Slovakia, Slovenia, Spain, Sweden, Turkey, the UK, the USΑ. NATIONAL BANK OF GREECE Sectoral Report July 2016 14 SECTORAL REPORT July 2016 NATIONAL BANK OF GREECE This report is provided solely for the information of professional investors who are expected to make their own investment decisions without undue reliance on its contents. Under no circumstances is it to be used or considered as an offer to sell, or a solicitation of any offer to buy. Any data provided in this bulletin has been obtained from sources believed to be reliable. Because of the possibility of error on the part of such sources, National Bank of Greece does not guarantee the accuracy, timeliness or usefulness of any information. The National Bank of Greece and its affiliate companies accept no liability for any direct or consequential loss arising from any use of this report. 15 NATIONAL BANK OF GREECE Sectoral Report July 2016