Funding cut threatens the resurgence of Britain's shipyards

British shipbuilding's fragile first signs of revival after 40 years of decline are under threat already because state aid, on which new contracts have been dependent, is about to be withdrawn, industry leaders have warned.

British shipbuilding's fragile first signs of revival after 40 years of decline are under threat already because state aid, on which new contracts have been dependent, is about to be withdrawn, industry leaders have warned.

The sector, which has been an emblem of British manufacturing decline since the 1950s amid heavily subsidised, cut-throat competition from South Korea, won the first contract for British-built cruise liners in 25 years last week. Seven days earlier, it received a Ministry of Defence order for six roll-on-roll-off ferries.

The liners - the first vessels built at Merseyside's Cammell Laird shipyard since 1993 - take the industry into one of the most lucrative markets. But they will be among the last to be subsidised by the Shipbuilding Intervention Fund (SIF) which is to be abolished across the European Union from 31 December, after providing 9 per cent of shipbuilding costs for the past 23 years.

The industry insists it does not want to be propped up but is infuriated by the circumstances of SIF's withdrawal. Two years ago, when it supported EU leaders' decision to abandon it, the collapse of the South Korean economy seemed certain to end its government's subsidies to shipbuilders and enable Britain to compete on level terms.

But the collapse last month of a bilateral agreement with the South Koreans now appears to have saddled British yards with the same level of competition that has shrunk its market share from 38 per cent to less than 1 per cent since 1950.

The DTI insists there will be other means of support but the British Shipbuilders and Shiprepairers Association (BSSA) is lobbying for a temporary, three-year, reprieve of the SIF to give yards the chance to become independent of government support.

At stake is a slice of the growing market for cruise liners, which offers new hope to the 52 British yards currently turning out 25 new ships a year - only half their capacity. About 50 liners are being built or are on order around the world and industry analysts predict a further 50 in the near future.

Britain - which built the Canberra in the 1950s and the ill-fated Titanic in 1911 - has not produced a cruise liner since the Vistafjord was completed for Cunard at the Swan Hunter yard on the Tyne in 1972. Since then, the once-great yards have been dicing with extinction.

The Government was forced to find a buyer for Govan on Clydeside when its Norwegian owner Kvaerner pulled out last year. Earlier this year the failure of Harland & Wolff, in Belfast, to win a £450m contract led to 1,300 lay-offs.

Survival has been dependent on smaller, niche-focused shipyard owners who were prepared to abandon the cachet of shipbuilding as Britain has known it. Cammell Laird's owner has been the best proponent of the strategy, focusing on high-margin repair work which is less price-sensitive. It bought the yard for £2m, bringing 2,000 jobs back to the Mersey, and has since bought similar businesses from Tyneside to Gibraltar.

The innovations of Jaap Kroese, the Dutch entrepreneur who bought Swan Hunter five years ago for £4m, include "kit ships", which allow different yards to work on different parts of the same ship simultaneously. The yard believes its Ikea-style prefabricated vessels could revolutionise design and production, slash costs and take on the Asian firms.

This is the kind of focus that unionised British shipbuilders lacked for years, as they courted UK ship owners instead of grooming export markets, as the continentals were. Now, it seems, the industry's boat has come in at the right time. The obsolescence of ships and the growth in trade have raised demand for merchant vessels by to the highest levels since in 1975.

The UK yards believe their share of international merchant work - which accounts for about £550m of its £2bn turnover - can be doubled, not in the old volume production of shipping tankers and container ships but high-value niche vessels - cruise liners, ferries and ships for offshore industries.

The industry admits that a 20 per cent improvement in productivity is needed to compete even with continental yards, which can typically undercut UK quotes by 5 per cent, but first South Korea must be dealt with. "A 300,000ton supertanker can be built in South Korea for $72m [£50m]," said Nick Grainger, the BSSA's director. "Knowing what we do about steel, labour and capital costs there is no way that can be done. [The real price] has got to be around $100m. Either these payments stop, or we get handouts of our own."