How One Polish Shipyard Became a Market Competitor
How One Polish Shipyard Became a Market Competitor
How One Polish Shipyard Became a Market Competitor
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Imagine a large, vertically integrated company with no marketing or sales department and no distribution channels. Suppose that for decades this company was so insulated from competition that it was able to survive with products of poor quality and outdated, inefficient production systems. Imagine that it grew bloated with excess employees and was heavily weighted down with debt. Such a company, confronting competition from around the globe, is a company with tremendous challenges. Add to its list of infirmities limited access to new capital, ambiguous enterprise governance, and an unfamiliarity with competitive markets, and you have summed up the circumstances facing most large state enterprises in postcommunist countries. Although large Western companies have faced difficult conditions when deregulation or new competition has forced dramatic change, many have had the protection of considerable market power and few have been afflicted with such a daunting list of serious problems.
Since the fall of communism in Poland in 1989 and the subsequent liberalization of the Warsaw Pact allies, one of the greatest economic and managerial transformations of this century has been occurring in Central and Eastern Europe. Radical macroeconomic measures, known as “shock therapy,” have been instituted in some countries with great success, while other countries struggle to find a coherent reform strategy. However, all postcommunist countries face a common, fundamental problem: what to do with the thousands of large state enterprises inherited from the communist period. These sprawling enterprises, with their vertical integration and large numbers of employees, have been heavily concentrated in industrial sectors such as manufacturing, mining, and transportation. Historically, they have employed the vast majority of nonagricultural workers and have, accordingly, been the focus of much attention from politicians, researchers, and businesspeople.
We began studying enterprise adjustment in 1990, during the early months of the reform process in Poland. Over the past five years, we have followed the experiences of privatized businesses, state enterprises, and hundreds of new small companies. As we noted in “Starting Over: Poland After Communism” (HBR March–April 1995), we believe that entrepreneurship has been the major force for restructuring the Polish economy: Thousands of new businesses have generated millions of new jobs, attracted considerable capital to the private sector, and provided a multitude of new products and services to businesses and consumers. Yet while the private sector has been spurring economic renewal in Poland and other postcommunist countries, the essential task of restructuring state enterprises has remained uncompleted. For Western investors and managers, the future of restructuring and privatization in large-scale state enterprises is a subject of considerable interest.
The opportunities and difficulties associated with enterprise restructuring have received a great deal of attention in the popular press and among academics. But most commentators rely on incomplete anecdotes or on large-sample studies that they use to make general inferences across a wide range of industries and circumstances.
In contrast, we examine managerial activities at the enterprise level to develop a grounded understanding of the central tasks associated with state-enterprise reform and the managerial strategies for accomplishing those tasks. We selected a shipyard to study because of the high visibility of shipbuilding and because the Polish government considered it among the most promising candidates for reform.
Shipbuilding has a long and distinguished history in Poland. Even during the years of communist rule, when exports to other communist states drove production, the shipyards maintained a level of quality and sophistication that compared more favorably with international standards than did the output of most other Polish industries. With large facilities on the Baltic Sea well positioned for trade with European shippers such as Germany and Scandinavia, the Polish government hoped to revitalize its shipyards and make them more competitive. These hopes were bolstered by Western consultants’ reports, prepared in the early months of economic reform, which identified the shipyards as among the enterprises most likely to be competitive once they were restructured and privatized.
In choosing a site for research, we did not want to bias the case against large-state-enterprise reform by selecting an enterprise with doubtful prospects for success. One of Poland’s three largest shipyards, the Szczecin shipyard had already begun a process for restructuring that many observers considered a model for state-enterprise reform in postcommunist economies. Furthermore, the path Szczecin was pursuing stood in sharp contrast to what was happening at the better-known shipyard of Gdańsk. (See the insert “Meanwhile, in Gdańsk”…)
Meanwhile, in GdaÅsk...
While Krzysztof Piotrowski was helping the Szczecin shipyard prosper in free-market Poland, managers at the GdaÅsk shipyard showed little will to implement difficult reforms. Hans Szyc, a lifelong laborer and engineer at the GdaÅsk yard, was appointed managing director in 1990. His man date was to lead the shipyard into a market economy, but his management ideas were in fluenced strongly by communist ideology. In stead of tackling restructuring, he pressured government officials to reinstate the subsidies that had propped up the yard under communist rule.
The GdaÅsk shipyard was confronting problems similar to those facing Szczecin. In 1990, its primary client, the disintegrating Soviet Union, canceled all orders for new ships, forcing the yard to abandon three nearly completed fishing vessels. However, the economic reality did not motivate Szyc to streamline his operation. Despite a lack of orders for new ships, he continued to make plans to increase the size of his workforce from 9,000 to 15,000, confident that the government would never let the GdaÅsk shipyard fail. Szyc also refused to dispose of nonessential such as vacation resorts for employees chauffeured limousines.
Losses mounted, and bankers denied the shipyard additional credit. Unable to make timely payments to suppliers, Szyc proposed terms for postponement. However, the shipyard’s vendors balked; the yard’s main source of engines threatened to stop deliveries, and other suppliers followed suit.
The GdaÅsk shipyard’s credit problems worried Western clients, who had begun refusing to make advance payments to Szyc’s unstable operation. Furthermore, the government stood firm against subsidies. The yard was in danger of collapse. By September 1993, Szyc had grown weary of fighting a losing battle. He resigned as managing director and pursued a career in politics.
The GdaÅsk shipyard—teetering on the verge of bankruptcy, saddled with debt, and plagued by combative unions—found it difficult to attract promising candidates willing to succeed Szyc. The post remained open until six months later, when the supervisory board finally called Ryszard Goluch, one of the yard’s former managing directors, out of retirement. Goluch, a veteran laborer, had led the GdaÅsk yard from 1984 to 1987. For a shipyard desperate to break with the past, the appointment of someone like Goluch seemed to be a step backward.
Lenders immediately exerted pressure on the yard to cut costs. Shipyard workers feared that such pressure would lead to layoffs, and they threatened to strike. Rather than antagonize the unions, Goluch to appease them, announcing a pay increase of $45 per month. He implemented the pay increases at a time when shipyard workers were already earning well above the national average and in spite of the fact that the yard owed the government more than $13 million payroll taxes. Furthermore, management was announcing losses of $10 million on revenues of $110 million for 1993. In 1994, the shipyard’s debt to suppliers, bankers, and the government surged to $86.4 million. The GdaÅsk shipyard seemed doomed.
Early in 1995, however, 500 of the shipyard’s creditors, mindful that they would not be paid if the yard failed, softened their resolve. In January, raw-materials suppliers agreed to cancel 40% of their $14.4 million claims and to allow a one-year moratorium on all payments related to the remaining 60%. In addition, the government decided to provide credit guarantees for new bank loans.
The agreement gave the GdaÅsk shipyard a new lease on life. Since then, the yard has secured an additional $65 million in financing from Bank Handlowy and has purchased the raw materials it needs to complete several slated for export.
Western clients, attracted by low Polish wages and reassured by the yard’s improved liquidity, have accelerated ship orders. Currently, the GdaÅsk shipyard has 25 orders from Western fleet owners.
In the meantime, the shipyard’s bankers have taken a firmer stance in dealing with managers. Indeed, lenders have insisted that Goluch adopt many of Piotrowski’s management practices. Specifically, the banks have required the GdaÅsk shipyard to remove two of its six slipways from production, thereby reducing product-cycle times, and to concentrate its manufacturing efforts on container ships and bulk carriers. (Of the 25 new orders placed with the shipyard over the past year, 22 are for those two types of vessels.) Further financing will be contingent on the sale or lease of unutilized property. By the end of this year, the shipyard to relinquish more than one-third of its land and production facilities.
Although the GdaÅsk shipyard will show losses once again in 1995, revenue for the year will approach $300 million. By 1996, inspired by the Szczecin shipyard’s example, it may at last earn a profit.
The experience of the Szczecin shipyard and its progress thus far underscore some of the major challenges inherent in restructuring a state enterprise. To begin with, they illustrate the need to confront fundamental issues throughout the organization—in marketing, operations, human resources, finance, and control—in ways that are internally consistent and aligned with an overall business strategy. However, the Szczecin case also highlights the pivotal role that leadership and vision can play in successful organizational transformations. Indeed, we have found that, because the task is so difficult, successful state-enterprise restructuring depends more heavily than we originally suspected on insightful and inspiring leaders. An effective individual is able to create a compelling vision of how the enterprise can compete and is then able to implement that vision.
Making a state enterprise competitively viable hinges on a confluence of positive outcomes along several dimensions.
In our view, the Szczecin experience demonstrates that establishing competitively viable enterprises hinges on a confluence of positive outcomes along several dimensions—a situation that means long-term success will be the rare exception rather than the rule.
Shipbuilding Under Communism
During Poland’s communist era, the national shipbuilding industry was administered by the Industrial Shipbuilding Union, which was directly accountable to the Ministry of Industry. Strategists at the Industrial Shipbuilding Union believed that manufacturing a wide range of vessels would minimize imports and ensure that each yard was able to maintain full employment when demand for particular types of ships slumped. The three largest yards-located in Gdańsk, Szczecin, and Gdynia- were capable of producing more than 30 types of ships. Competitors in Korea and Japan, by contrast, had product lines that were much more focused, enabling those producers to obtain tremendous advantages in cost and productivity through learning and refinement of design. They also enjoyed economies of scale in materials acquisition and capital utilization. The Polish shipyards, by maintaining their highly diversified product portfolios, had been unable to develop world-class expertise or manufacturing efficiency in any one particular model.
The Polish shipyards sold primarily to Eastern bloc countries, particularly the Soviet Union, which bought more than 60% of the Polish shipbuilding industry’s total output. However, the yards themselves never interacted directly with fleet owners. Rather, a large state-operated trade company called Centromor handled all inquiries from customers and negotiated contracts on behalf of the shipyards, taking a commission of 2% of a ship’s selling price. Centromor paid the yards in domestic currency upon completion of each shipbuilding project. With Centromor to represent them, Poland’s shipyards had developed neither marketing nor sales capabilities.
The shipyards relied on the Polish government not only for marketing assistance but also for financial backing. The government was accustomed to propping up the shipbuilding industry with generous subsidies and interest-free loans. It tolerated staggering losses at the shipyards because they employed thousands of workers and because shipbuilding had become a point of Polish industrial pride. Rather than find ways to earn profits, managers clung to a strategy geared toward extracting government concessions.
Under communism, the yards relied on the Polish government for both marketing assistance and financial backing.
Management systems and practices in the shipyards were typical of state-enterprise management under communism. Well suited to a context of central planning, shipyard management required radical change to respond to the economic liberalization that accompanied democratic political reform in 1989. Indeed, the transition from a planned economy to a market economy always necessitates a reorientation of enterprise management on a scale that dwarfs the organizational-change tasks common to large Western companies. (See the exhibit “State-Enterprise Restructuring Demands a New Managerial Framework.”) At a minimum, enterprises embarking on restructuring must be able to price, market, and sell their output; develop a sensible strategy based on analysis of competitive positioning; establish profit-based incentives and measurement systems; improve operational efficiency; and manage their finances in a professional way. But although these are necessary preconditions for restructuring, they in no way ensure that an enterprise will be successful. What’s more, they do not take into account the importance of leadership vision for integrating and directing organizational reform.
State-Enterprise Restructuring Demands a New Managerial Framework
The End of the Communist Era and the Rise of Solidarity
In 1989, amid a wave of democratic reforms, the Solidarity trade union crushed its communist opposition in the first Polish elections since World War II in which a portion of the seats were actually contested. The new Solidarity government quickly embarked on a program of radical free-market reforms. The program included a set of macroeconomic stabilization policies, liberalization of international trade, and plans for the elimination of subsidies to state-owned enterprises. It also made the Polish currency convertible. The idea was to create the market conditions necessary for the widespread privatization of businesses in the state-owned sector.
The formation of a Solidarity government and the free-market reforms that followed had far-reaching implications for the centrally administered shipbuilding industry. To begin with, the Industrial Shipbuilding Union was abolished and Centromor withdrew its marketing assistance to the yards, leaving Poland’s shipbuilders to fend for themselves. In order to survive, the shipyards had to assume responsibility for identifying future clients. Furthermore, they lost all forms of government financial support, including inexpensive credit from the National Bank of Poland. At the same time, the breakdown of Eastern bloc trade and the collapse of the Soviet Union deprived the shipyards of their traditional export markets. Each shipyard was suddenly under pressure to establish an independent customer base in a highly competitive international marketplace.
The disappearance of the Soviet market was a staggering financial setback for the Szczecin shipyard. In 1990, 8 of the 11 ships in the yard’s production bay were being built for Soviet clients. On short notice, all eight orders were canceled. Furthermore, the yard had recently completed 3 ships that the USSR could not afford to purchase. Because the ships had been built to nonstandard specifications, the yard was unable to sell them to Western fleet owners. The Soviet Union’s inability to meet its contractual obligations resulted in losses at the shipyard of 700 billion zlotys (equal to $74 million at that time).
The Szczecin shipyard soon was engulfed in financial crisis. Emergency loans and Soviet insolvency pushed the yard from a debt level of nearly zero in 1990 to a total debt of approximately 1.8 trillion zlotys ($190 million) by 1991. The cash-strapped shipyard was forced to delay payments to more than 1,500 suppliers and to a number of commercial banks. When it appeared that the yard would be unable to repay its debts, uneasy creditors began to threaten legal action. Distressed shipyard workers paraded about the production bay with megaphones, providing coworkers with daily updates on what appeared to be the yard’s impending bankruptcy. Rather than attempt to implement reforms, shipyard manager Zenon Grabowski—ultimately the last of the yard’s communist managers—demanded that the Polish government advance cash to bail out the shipyard. Word of the Szczecin shipyard’s financial difficulties quickly spread throughout the world’s shipbuilding industry, and international fleet owners began to express serious reservations about placing orders, for fear of losing their investments.
As the crisis mounted, a management search committee turned to one Krzysztof Piotrowski to help commercialize the yard, with the goal of privatizing it down the road. As a student at the University of Gdańsk during the late 1960s, Piotrowski had chosen an unusual course of study for a talented young man living in the communist bloc: shipyard management. While many of his peers studied engineering and design, Piotrowski turned his attention to such managerial issues as the organization of production systems and the structure of compensation plans. After completing his studies, he took a job as a laborer at the Szczecin shipyard and rose quickly through the manufacturing hierarchy. He also worked closely with a group of renegade Polish economists on developing ideas for transforming the shipyard into a more efficient, market-oriented operation. In 1985, however, he was dismissed from the yard for his increasingly aggressive pro-reform activities.
Szczecin’s new manager focused on reducing the shipyard’s massive debt and streamlining wasteful production operations.
For the next few years, Piotrowski lectured and studied at the Polytechnic Institute in Szczecin, where he earned a doctoral degree in maritime engineering. In 1991, in the wake of Poland’s economic reforms, a management search committee whose members included government officials from the Ministry of Industry and a panel of shipyard union representatives called Piotrowski back to the yard to discuss what he thought was necessary for successful restructuring. He outlined two broad objectives: First, the shipyard would have to reduce its massive debt; second, it would have to streamline its wasteful production operation. The committee offered him the position of managing director in April 1991.
Financial Restructuring
When Piotrowski took charge of the Szczecin shipyard, it was in debt to more than 1,500 suppliers, banks, and government revenue departments. For assistance in restructuring the debt, he sought help from the Polish Development Bank, a newly created government bank designed to ease restructuring of large-scale enterprises. The PDB’s agreement to become involved at Szczecin was to a large extent a vote of confidence for Piotrowski and his team of reform-minded managers. Two members of the six-person management group—the directors of finance and production—had themselves been considered for the job of managing director. Both also had been longtime shipyard activists, as had the newly appointed technical director.
After spending a month developing strategies that would enable them to achieve debt reduction, shipyard negotiators and PDB experts initiated a series of discussions with the shipyard’s largest creditors. More than 5,000 stubborn creditors demanded immediate repayment of all outstanding debts, and they threatened to initiate a lawsuit if payment was not forthcoming. The negotiations dragged on for nearly ten months. The shipyard and the PDB insisted that if the shipyard’s suppliers initiated bankruptcy proceedings, the yard would be forced to shut down its operations, in which case creditors would receive nothing. Shipyard representatives pointed out that the yard’s closing also would jeopardize the survival of many suppliers. On the other hand, successful debt restructuring could lead to future orders.
Creditors gradually came to accept that debt restructuring offered the only realistic prospect for repayment. When Piotrowski proposed a plan that called for cancellation of a third of the shipyard’s $190 million debt as well as an extended repayment schedule that allowed the remaining two-thirds to be amortized over five years, a majority of creditors accepted the terms. The deal was touted in the national press as a resounding success, and Poland’s finance ministry expressed hope that it would become a restructuring model for other financially troubled state-sector enterprises.
Industrial Restructuring
While Piotrowski was negotiating with creditors, he also was beginning to implement sweeping changes in the Szczecin shipyard’s production operation. From the start, he believed that it was essential for the shipyard to narrow its product focus and define a niche market. He formed a market research team, and he directed its members to analyze trends in the world shipbuilding industry in order to identify a niche market for Szczecin. Sifting through industry data, the analysts discovered that container ships were selling at a premium and that demand was substantial, particularly in a medium-size class that the Szczecin shipyard was well suited to supply. Based on this analysis, Piotrowski shifted virtually all of the shipyard’s manufacturing capacity to the production of container ships. By early 1993, 44 of the 48 orders on the yard’s books were for container ships. From an insignificant market presence in 1990, the Szczecin shipyard gained 40% of the international market for 12,500-ton container ships and became the world’s dominant producer of vessels in this category.
Szczecin cut the time for building a single ship to a competitive 11 months.
Once he had selected a product focus, Piotrowski turned his attention to reducing product-cycle time—the time required to build a single vessel. Reducing product-cycle time would help the shipyard in two ways. First, by accelerating cash flow, it would allow the yard to decrease its borrowing and become more financially independent. Second, it would attract customers that needed more timely delivery of ships. To decrease cycle time, management had to institute major operating changes. For example, the yard had to limit the number of shipbuilding projects it undertook at any one time, and, to eliminate pockets of unutilized production time, it needed to perform manufacturing operations serially rather than, as it used to, in parallel. To facilitate these changes, two of the yard’s six slipways were removed from operation, and 1,500 workers from elsewhere in the yard were reassigned to manufacturing jobs in the production bay. The changes permitted Piotrowski to concentrate more workers on fewer projects. Between 1991 and mid-1993, these changes generated phenomenal results. Turnaround time for a single ship was cut from between two and four years to 11 months—a period at least as short as the production cycles of competing shipyards around the world.
A New Compensation Scheme
A key component of Piotrowski’s strategy to reduce product-cycle time was an overhaul of the compensation system. In the past, shipyard employees had been paid a piece rate for each task accomplished as opposed to an hourly wage. Although this system had been designed to provide them with an incentive to work quickly and productively, the results often were not what management had intended. With the system’s encouragement, production people worked quickly, but they also worked carelessly, necessitating significant amounts of corrective effort. For example, welders, who were required to make three welding passes in order to close a seam on a ship’s hull, often used much thicker electrodes than specified and made only two passes because they wanted to save time. However, the thick electrodes, which generated more heat than standard electrodes, warped the steel in the vicinity of the welded seam. Consequently, metal-shop workers often spent many additional hours smoothing the steel seams after the welders had completed their work. The time spent correcting low-quality work resulted in substantial losses in productivity.
It was clear to Piotrowski that one way to improve productivity was to restructure employees’ compensation. Therefore, he and Jan Kiryluk, the shipyard’s director of human resources and compensation, set out to create and install an entirely new system. In a series of detailed discussions in mid-1991, Piotrowski and Kiryluk decided to assign shipyard workers to professional qualification categories that reflected their occupational training and their years of experience. Workers were assigned hourly wages depending on their job classification, and they could advance to higher levels by passing occupational exams. Each step up led to an automatic 50% increase in an employee’s hourly wage, while each additional year of experience resulted in a 10% increase through the eighth year of employment and every other year thereafter. All workers were required to put in eight hours per day, and there was no overtime pay.
Under communist management, physical labor had been valued much more highly than intellectual labor. At the shipyard, production workers earned more money than managers, engineers, or even members of the supervisory board. But under Piotrowski’s system, the hierarchy was reversed: Managers and engineers could attain higher professional qualification ratings.
The shipyard’s four employee unions had seen Szczecin cut 7,000 workers in the 1980s. To Piotrowski’s credit, he was nevertheless able to persuade them to accept further cuts (mostly in areas not related to production). Even more important, he enlisted their support for his changes in compensation structure. Szczecin was thus able to avoid the strikes that had paralyzed Poland’s shipyards during previous wage negotiations.
The unions supported the changes because many workers expected that they would earn more under the new system than they had under the old one. (Indeed, the average monthly salary at the shipyard by February 1993 was $280—well above the national average of $155.) The unions feared, moreover, that without reform the shipyard would collapse, in which case all workers would be worse off. The new compensation structure resulted in higher productivity and higher-quality workmanship at the shipyard. According to a shipyard engineer, “Under the new compensation system, a welder will seal a seam three times rather than two because he will be paid for eight hours of work no matter what he does. It does not make sense to avoid work simply to save time. Furthermore, if he has to go back and rework a seam, he will exceed his allocated number of hours and will not be paid for the additional work.”
The workers went along with Piotrowski’s changes because many expected they would earn more under the new system.
In October 1991, the new hourly wage scale was introduced as a pilot project in one of the shipyard’s steel shops. Over the next several months, productivity in the steel shop soared. In April 1992, the Szczecin shipyard’s management team implemented the new compensation system throughout the yard. The shipyard was soon operating at unprecedented productivity levels. With its 5,000 efficient workers, the yard planned to complete 14 ships in 1993—nearly as many as it produced during its best years in the 1970s, when the bloated workforce numbered 13,000.
Marketing
When the state-owned trade company Centromor lost its monopoly on foreign trade in 1989, the Szczecin shipyard became responsible for pursuing its own clients. It was soon clear that there would be no further orders from the Soviet Union, so the Szczecin yard set up a marketing office and began courting Western clients. Because Szczecin was located on the German border, only two hours from Berlin, it was easily accessible to German fleet owners. In fact, since the early 1970s, the Szczecin yard had sold a total of 19 freight ships to German-owned shipping companies.
In 1988, the Szczecin shipyard signed contracts for four container ships to be built for Hamburg-Sud and Rickners Rederei, German fleet owners renowned for placing stringent technical demands on ship producers. Because of the well-known quality of their fleets, the two fleet owners had become opinion leaders among German shippers. Word that they had contracted for four new container ships from the Szczecin yard spread quickly. When the first ship was delivered in December 1991, the buyers were impressed by the ship’s highly developed technology and timely delivery, and their satisfaction served to bolster the Szczecin shipyard’s reputation in Germany. A flurry of new orders followed. In the first ten months of 1992, the shipyard signed contracts with German fleet owners for an additional 13 container ships worth $300 million.
Largely as a result of the shipyard’s penetration in Germany, the new marketing department was able to fill its order book with remarkable speed, despite the breakdown of trade among the Warsaw Pact members of the trading bloc called the Council for Mutual Economic Assistance. In 1992, the shipyard produced 13 ships valued at $185 million—three times the value of the five ships that it had produced in 1991. By July 1992, the yard had contracts to build 48 ships—valued at a total of $1.2 billion—to be completed through 1995. In a 1992 industry study, A.T. Kearney/Hestia Consultants of Gdynia ranked the Szczecin yard number 22 in the world in terms of total number of contracts for new ships.
Cost Control
In addition to streamlining production and developing a marketing operation, Piotrowski slashed operating costs. He divested the yard of cash-draining assets that had little benefit for shipbuilding operations. For example, he sold a fleet of vehicles, including buses and luxury automobiles, which previous shipyard managers had used for personal travel. He eliminated many expensive perquisites, such as subsidized meal plans and fully paid vacations at shipyard-owned resorts. Other divestitures proved more complex and more controversial: for example, the shipyard’s apartments.
Because apartment rents were controlled by law and because it was nearly impossible in Poland for landlords to evict established tenants, the fully occupied apartment complexes at the Szczecin yard had limited market value. However, as owner, the shipyard had an obligation to provide ongoing maintenance as well as to ensure compliance with fire and safety codes. By 1991, more than half of the 3,500 apartments maintained by the shipyard were no longer occupied by shipyard employees but by descendants of former shipyard workers. Firmly entrenched and legally protected, the current occupants had no interest in purchasing their apartments. The shipyard was saddled with what amounted to an exorbitant community housing project. So in 1991, Piotrowski took a novel approach to avoiding further operating losses: He gave all the yard’s apartments to a local housing cooperative—at no charge. Such wholesale relinquishing of hard assets would have been unthinkable to the shipyard’s empire-building communist management. However, Piotrowski was able to justify the write-off in terms of its positive impact on the shipyard’s cash flow.
Piotrowski also ceded to the local school authority ownership of several technical schools located on the shipyard’s grounds. The shipyard would no longer be responsible for paying teachers’ salaries or providing maintenance services at the schools but would still have the ability to hire the schools’ graduates. Piotrowski followed the same approach with a well-equipped and well-staffed medical center located on the shipyard grounds. He tactfully donated the facility to the city in exchange for a guarantee of free medical services for shipyard employees. In contrast to less progressive state-owned enterprises, the Szczecin shipyard was quickly becoming a lean operation. “We are, after all, in the business of building ships, not providing housing or running schools or hospitals,” pointed out a member of Piotrowski’s management team.
The shipyard also owned an expensive building in downtown Szczecin. The building, called the House of Culture, contained a cinema, sporting facilities, and other amenities for shipyard employees. Because the shipyard provided these amenities free of charge, the House of Culture generated no revenue, and it proved to be little more than a cash drain. However, the building’s prominent location made it attractive to Western investors, who had begun to flock to Poland’s larger cities. In one of the few asset transfers that actually produced additional income for the shipyard, Piotrowski negotiated a 15-year lease on the property with Shell Oil, which planned to convert the House of Culture into a large Western-style service station.
As Piotrowski eliminated unnecessary shipyard services and removed costly production facilities from operation, he found that the shipyard had more space than it needed. He decided that rather than allow the space to remain idle, he would try to lease it to other companies. For example, he was able to strike a deal with Denmark’s Burmeister and Wain Skibsvaert in late 1991. The Danish shipyard wanted to reduce its labor costs—which accounted for approximately 65% of its domestic shipbuilding costs—in order to compete more effectively with Korean and Japanese producers. Burmeister and Wain calculated that by using Polish labor, it could reduce its costs by 45%. The company approached Piotrowski about leasing two idle Szczecin shipyard production halls, where it planned to make heavy metal products, including masts, ladders, and steel doors. The two shipyards negotiated an agreement that enabled Piotrowski to convert the idle space into a new profit center. In fact, Burmeister and Wain established a new private company on the Szczecin shipyard’s grounds, called PolFab. After an initial investment of $100,000 for capital improvements, the Danish parent planned to add another $500,000 in modern capital and equipment, then an additional $500,000 in training for Szczecin shipyard employees who eventually would operate the new equipment.
Ship-Construction Financing
With a restructured debt portfolio, a vastly improved production system, and a tightly controlled cost structure, Piotrowski turned his attention to locating new sources of financing for ship construction. In the past, the state-owned National Bank of Poland had provided guarantees for deposits, thereby inducing customers to make advance payments on orders placed with the shipyard. Ship construction was financed with a combination of customer prepayments and subsidized credit from state-owned banks. Regardless of whether or not a particular product was profitable, the state-owned banks always provided guarantees and subsidized loans.
But with the arrival of banking reform in 1989, financing for ship construction changed dramatically. Because there was no longer a centralized industrial plan, the Polish banks were now free of the mandate to provide guarantees and low-cost loans. Bankers worried that if a yard operated without any government safety net, nothing would stop it from taking money lent to finance ship construction and using it for unrelated purposes, such as paying off its creditors.
Furthermore, from a shipyard’s point of view, interest rates for commercial loans were high: In 1991, they ranged from 50% to 80% per year as the liberalized banks responded to very high inflation rates and increases in the National Bank of Poland’s benchmark lending rate. Constrained by international competition, the Polish yards could not raise prices to compensate for higher borrowing costs. At least for the near term, bank borrowing did not appear to be a viable means of financing ship construction. Piotrowski was desperate to find a financing mechanism that would allow him to continue laying keels on the slipways of his newly restructured yard.
The yard became more competitive in part because it chose to specialize in container ships.
Fortunately, the Polish Development Bank understood what was required and agreed to step in. The PDB, confident that the Szczecin shipyard was destined to become a profitable producer, offered to provide guarantees for fleet owners’ prepayments under a special set of conditions. The basic financing format was introduced in late 1991. The PDB and the Szczecin shipyard would create a joint stock company called Kontenerowiec (meaning “container ship”), with each owning 50%. The new company would build a single ship—an $18 million container ship that was ordered by a Hamburg-based freight company called Hansa Treuhand. In contrast to the old financing configuration, the German buyer was required to provide an unusually high 65% of total construction costs in prepayments. The PDB, in turn, would guarantee that Hansa Treuhand would not lose its prepayments, which would serve as working capital for construction of the vessel. The PDB would provide the remaining 35% in the form of loans. Because the ship technically would be built by Kontenerowiec (and not by the Szczecin shipyard), the shipyard’s creditors would have no claims on the working capital channeled through the PDB.
Construction of Hansa Treuhand’s ship began in December 1991 under a regimen of stringent cost control. The Polish Development Bank released working capital to Kontenerowiec only as it was needed. Workers maintained a tight production schedule, and the finished vessel was delivered in November 1992—several months ahead of the promised completion date. Harald Block, a Hansa Treuhand representative, was ecstatic about performance at the Szczecin shipyard. “I’m paying 20% to 30% less and getting delivery six months earlier than I could have got in Germany last year,” he said (Financial Times, June 30, 1992).
The Kontenerowiec financing experiment was a significant breakthrough for the shipyard. Not only did it enable the yard to obtain badly needed working capital, it also allowed Piotrowski to showcase the capabilities of his revamped production process. Confidence in the yard’s future prospects soared, fleet owners placed new orders, and additional Polish banks proved willing to issue similar guarantees for working capital provided by Western clients. Of the 14 ships that the yard delivered in 1993, all were financed by customer prepayments guaranteed by major Polish banks.
Privatization
By 1993, the Szczecin shipyard had made phenomenal progress in its restructuring program. Product-cycle time and operating costs had been reduced substantially, the financing challenge was under control, and the yard’s order book was filled through mid-1995. Although the shipyard was still losing money in 1992 as a result of debt repayments, Piotrowski predicted that it finally would turn a profit in 1993. In his view, the Szczecin shipyard was ready for privatization.
In January 1993, Piotrowski and the shipyard’s four unions met with Poland’s minister of privatization to sign a letter of intent to privatize the yard. According to the privatization plan, the shipyard would be turned over to a consortium of banks, industrial companies, workers, and management. Of the shipyard’s 10 million shares, 30% would be allocated to four Polish banks, 30% to shipyard employees, 9% to shipyard management, and 15% to the yard’s ten largest suppliers. The government would retain 10%, and 6% would be offered for sale. The reallocation of shares would take place that year, and the shipyard’s new owners would not be permitted to sell their shares for a period of six years, to allow the yard sufficient time to complete its restructuring program.
Transferring the shipyard’s ownership to a consortium of private investors was a major landmark for Piotrowski and his management team. Ever since the shipyard had been commercialized, Piotrowski had been uneasy about the Polish government owning 100% of the stock. He knew that the government had a strong incentive to sell off commercialized companies as rapidly as possible in order to raise revenue and to finance Poland’s privatization program. Shipyard management had little input into the treasury’s decisions about selling stock, and Piotrowski feared that the yard might be sold to a larger, Western shipyard and relegated to the role of manufacturing low-cost, prefabricated keels for an erstwhile competitor. The transfer of a majority of the shares to private-sector Polish investors eliminated that threat. Piotrowski now believed that, over the next several years, the Szczecin shipyard would be able to prove its ability to compete in an increasingly demanding market.
Lessons from Szczecin
The results of Piotrowski’s restructuring plan are impressive by any measure. The Szczecin shipyard has reduced its product-cycle time from an average of three years to less than one year, and the productivity of its employees has soared. Between 1991 and 1993, productivity per worker improved from 20 corrected gross tons (CGT) per year to 28.5. (CGT is the deadweight tonnage of each ship divided by the number of labor hours required to produce the ship and then adjusted by a factor that reflects the complexity of labor input.) But perhaps the most important indicator of the success of the Szczecin shipyard’s restructuring is the degree to which the yard has been able to compete effectively in international markets.
Piotrowski attributes the Szczecin shipyard’s new competitive capability to three factors: container-ship expertise, a rapid production cycle, and the low cost of Polish labor. By focusing on container-ship production, the yard has managed to capture 40% of the worldwide market for midsize container vessels. The 11-month production cycle impresses clients who are accustomed to an industry average more than twice as long. Finally, whereas shipyard workers in Western Europe earn more than $20 per hour, the average hourly wage at the Szczecin shipyard is approximately $2.50. Low labor costs have been particularly important for Piotrowski because almost every Western industrialized country has provided substantial subsidies to its shipbuilding enterprises.
Despite Szczecin’s significant progress, Piotrowski recognizes that the shipyard’s future is by no means secure. Although productivity has improved dramatically, it still lags behind Korea and Japan, where per employee productivity is 40 CGT and 80 CGT, respectively. Furthermore, Poland’s low wages are vulnerable to competition from rapidly growing shipbuilding industries in China and Brazil.
Accordingly, Piotrowski and his management team know that they cannot rest on their laurels. Instead, they must continue to build on their accomplishments by undertaking further initiatives to enhance the shipyard’s competitive position. As engineers refine ship designs and workers learn to build ships more efficiently through repetition of standard procedures, productivity should improve. Further gains will come if Piotrowski is able to find sources of funding to update the shipyard’s outdated capital stock and to gain access to modern shipbuilding technology. The arrangement with the Danish company Burmeister and Wain offers a good example of how management can improve the shipyard’s performance without large infusions of capital resources. Of course, ongoing success also depends heavily on Piotrowski’s ability to maintain the support and motivation of his workforce in a setting where, until very recently, strikes and labor unrest have been common.
The circumstances facing the Szczecin shipyard in 1991 were typical of those facing most large state enterprises in postcommunist economies, and Piotrowski’s experience highlights what managers must accomplish if enterprise restructuring is to lead to long-term competitiveness. Piotrowski put forth a compelling vision and supported it with a coherent set of management interventions designed to address all major categories of activity necessary for enterprise restructuring. For an enterprise to succeed in the transformation from a planned to a market system, a leader must reorient management systems and practices completely, articulate sensible market-based strategies, and create new functions while doing away with others. Perhaps most important, managers also need to communicate the vision of an organization that can be both competitive and self-supporting. Still, Piotrowski’s efforts would almost certainly have failed if he had been unable to implement any one element of his strategy: Successful restructuring depends on “clearing the bar” on each of several complementary initiatives. Furthermore, Piotrow-ski’s program for reform benefited from the support not only of his workforce but also of like-minded government officials in Warsaw. According to former Prime Minister Jan Bielecki, “We were willing to help those enterprises that helped themselves. The Szczecin shipyard had undertaken a program of massive internal restructuring. Management eliminated all activities not directly related to ship construction, laid off redundant employees, improved product-cycle time, and proved that they could build ships profitably without government subsidies. We felt that the Polish Development Bank could help them in a constructive way by assisting in negotiations with creditors.”
Success requires a leader with vision and a team that can handle the varied initiatives needed to implement that vision.
U.S. corporations have abundant resources at their disposal and less extensive problems than their Polish counterparts, but, even for them, undertaking large-scale organizational change is a struggle. The challenges for state-run enterprises in Eastern Europe may seem insurmountable by comparison, yet the experience at the Szczecin shipyard demonstrates that when reforms are well orchestrated, successful restructuring can occur in post-communist countries. By imposing the incentives conducive to effective managerial action, privatization can help, but privatization per se does not generate solutions to the broad array of difficult strategic issues. The difference between failure and success is, to a great extent, a leader with vision and a management team capable of undertaking with creativity and determination the varied initiatives necessary to implement that vision.
A version of this article appeared in the November–December 1995 issue of Harvard Business Review.
Simon Johnson is an associate professor of economics at Duke University’s Fuqua School of Business in Durham, North Carolina.
David T. Kotchen is an associate at CID Equity Partners, a venture capital firm in Indianapolis, Indiana.
Gary W. Loveman is the CEO of Harrah’s Entertainment, in Las Vegas.
This article is about ECONOMY