July 15, 2010

Economics 101 for crew managers

Judging by the statements that come out from many shipmanagement setups regularly, Indian seafarers had better be cautious. They are too demanding when it comes to wages, and, unless they change their avaricious ways, they will ‘price themselves out of the market’. These arguments are usually accompanied by the other old shibboleth of ship owners that have run out of better retention ideas: a plea –almost a demand- for mariner loyalty.

I have been hearing the same monotonic applesauce for more than twenty years. Indian seafarer salaries, in Indian rupee terms, have grown multifold during this time, a fact that should tell these good folk that their arguments have failed. However, old habits die hard. More importantly and against this argument, salaries in dollar terms have not grown as much as believed- as I will show later.

I don’t think what I have to say will surprise these gentlemen; I am sure that many of them don’t really believe their own rhetoric anyway. However, their grand HRD plan has just one arrow in the quiver: staff ships in the cheapest way possible, and the palaver is meant to pressurise the presumably dumb sailor to accept lower wages, and to stick to the same shipping company for twenty years while doing so. On a daily wage basis; what I call the Lloyd’s Open Form for wages- No work, no pay.

The folly of expecting a daily wage earner to happily accept either a long term commitment or a lower salary would be hilarious if it wasn’t pathetic. That this patronising attitude attempts to hide a paucity of ideas is well sensed by mariners, who, when they have the choice, stay or leave companies on factors often unrelated to wages. True, a big difference in money will tempt anybody, but small differences are often ignored, especially by senior officers. Seafarers seem to expect market wages. If a company offers anything more than this then they will obviously choose it, and the better seafarers will eventually be found there. Simple fact of economic life.

These forces, people, are called market forces and for good reason. These forces multiply when applied to casual labour in any industry anywhere in the world. You don’t give seafarers any job security or pension; why on earth should they give you a long term commitment or accept lower than market wages? Would you do that?

Today, India lives in an age where a ten percent annual increase in salary is considered very disappointing by employees across industry ashore. Figures of wage hikes of fifteen percent are common, and higher not unusual. Shipmanagers wishing to employ officers from India better get used to this fact; they will do well, additionally, to read up on simple economics to understand inflationary pressures and how they impact salaries. They are competing with other industries in India for talent; they are not living in a cocoon at sea.

Shipping has been spoilt, in the last few decades, by the falling value of the Indian Rupee. Simply put, the US dollar today is six times the Rupee value it was when I first started sailing (although the exchange rate hasn’t really gone anywhere in the last few years, a fact I use to underscore a later point). This fact, as much as anything else, has allowed shipowners using Indian mariners to keep salaries low in dollar terms. Shipowners and managers have used this fact to essentially kill annual increments unless the demand and supply paradigm forced them to. Seafarers did not complain too much since they were taking more Rupees home. They were also, just by keeping dollars in Indian banks, getting returns exceeding twenty percent often: just the annual FCNR rate (got by keeping dollars in the bank, and getting dollars on maturity) during much of my sailing was nine percent and above. Combine this with the rupee depreciation, and one got handsome returns at zero risk.

That advantage has disappeared in recent times, and the situation will reverse. The Dollar/Rupee exchange rate is quite likely to work against seafarers in future, given the growing Indian economy and the economic mess in much of the West. In any event, the days of double digit returns with dollar deposits are over. What this means is that there will be greater pressure now on managers to raise salaries annually in dollar terms. These pressures will be in addition to the forces of demand and supply, which by all accounts, are likely to worsen in the next few years.

To illustrate with an example, a Master’s median salary, in dollar terms, was about 3000 or so around 1990 in an average foreign setup- I can recall earning around that much then. If I were to apply a 10 percent annual increment to this (remember, the 90’s were the start of a time when salaries in India started to take off post liberalisation), the equivalent salary, in dollar terms today, would be USD 20182. Yep, more than twenty thousand dollars.

This should kill the canard that salaries have zoomed. I would guess that a Master’s median salary today is less than half this figure on a foreign ship. So, if the industry thinks that Indian Masters are going to be satisfied, in the year 2020, with earning 9000 dollars or so every month (today’s rough levels), then they better think again, especially if the USD is falling.

Just one additional comment before I wind up. Another crew management litany is that Indians seafarers will suffer if Indian jobs are lost for any reason, including high wages. I beg to differ. Sure, some seafarers will suffer; those already in the profession and not senior enough to have saved enough or invested enough. What is more likely to happen, however, is that new talent will shun the industry and go elsewhere; it already is. These are not seafarers yet; they will not suffer the consequences of any downturn. Actually, the people who will suffer most are Indian shipmanagement companies themselves, who will see their body shopping revenues slowly going down the tube. This cycle has played out in many Western countries; India will be no different.

The industry had better come up with some new ideas for recruitment and retention. Not only did the old ones not work, but those are now very likely not applicable in the changing scenario. It is not Indian seafarers pricing themselves out of the market that is a threat to our industry. It is more likely that Indian shipmanagement will be mortally wounded if it runs out of sufficiently good ideas to attract quality talent. The threat is more from poor management than greedy seafarers.

Alternatively, managers and owners will just have to get used to paying higher and higher salaries- or continue playing the supply and demand game- and therefore should stop whining or trying to scare Indians into accepting lower salaries. Indian sailors are not as dumb as the shipmanagers think, or even hope.