KOREA FOCUS
Korea’s Shipbuilding Industry Still Ranks No. 1 in the World
Lee Eun-chang

Senior Research Fellow
Hana Institute of Finance


China's shipbuilding industry has become the global leader in production volume, thanks to extensive government support and consequent quantitative expansion, raising concerns that Korea's shipbuilding industry may lose its global hegemony. But the truth is the Chinese shipbuilding industry lags behind in terms of competitiveness.
 
Shipbuilding hegemony cannot be won only by governmental support and price competitiveness, in which China has an advantage. For a country to lead the global shipbuilding industry, it must be able to meet other crucial requirements such as product development ability, marketing that can satisfy diverse customers, production technology and strategic advances overseas.
 
The nation’s large shipyards still remain a dominant force in the global shipbuilding industry through their technological power, marketing superiority and clever strategy. Their high-technology vessels and plant products, such as offshore oil and gas platforms, very large containers, polar-navigating ships and environment-friendly vessels, will continue to lead the industry worldwide.
 
However, the difficult situations facing small- and medium-sized shipbuilders, who compete with their counterparts in China, are highly likely to continue, amplifying the need for closer cooperation among the domestic berths.
 
Rapid Volume Expansion of China’s Shipbuilding Industry
 
China selected shipbuilding as a strategic industry in 1990 and since then has extensively promoted the sector. In 2010, China’s shipbuilding industry became the global leader in new order receipts, backlog orders and vessel delivery. Although there are negative aftereffects of the breakneck expansion, including overinvestment and weak competitiveness of smaller shipyards, the industry’s overall competitiveness is rapidly strengthening.
 
In the wake of the global financial crisis, China has been restructuring its shipyards with excess capacity. It also continues to invest in shipbuilding; push steps to enhance production efficiency, optimize the industrial structure, develop equipment and materials and cultivate manpower; provide additional policy support to prevent delivery delays and contract cancellations; and promote new order receipts through financing.
 
Thanks to the government support to help prevent delivery delays and contract cancellations, Chinese shipyards could deliver 18.65 million compensated gross tons (CGT) of vessels in 2010, up 48.5 percent over the previous year, surpassing Korea’s 15.85 million CGT. Also, China’s new order receipts, which stood at one-third the level of Korea’s in the late 1990s and early 2000s, jumped to 18.65 million CGT to exceed Korea’s 18.48 million CGT, in 2008 and recorded 16.48 million CGT in 2010, widening the gap with Korea to more than 4.5 million CGT.
 
Because of their tendency to focus on new orders for low-priced vessels, however, Chinese shipyards are lagging behind their Korean counterparts in the value of new orders. China’s new order receipts surpassed Korea’s by 37.1 percent in terms of volume in 2010, but the total value of the orders was $1.5 billion less than Korea ($30.3 billion vs. $31.8 billion). Although the gap in the price of order per CGT between the two countries narrowed from $1,229 in 2008 to $805 in 2010, this can be seen as reflecting Chinese shipyards’ improved competitiveness, but a more rational analysis would be that the global financial crisis has sharply reduced Korea’s order receipts of high value-added vessels, and pulled down overall ship prices as well.
 
Experts had predicted that China’s shipbuilding industry would narrow the gap with Korea’s in the mid- to late 2010s, an expectation that still seems valid. Accordingly, it would be more correct to say that Chinese shipyards took a momentary edge over Korea’s due to the global financial crisis rather than actually catching up.
 
 
Factors of Hegemonic Change in Shipbuilding Industry
 
The United Kingdom enjoyed a global advantage in the shipbuilding industry in the early 1900s, as it could build iron vessels by adopting rivet construction. In the 1950s, Japanese shipbuilders were able to sharply improve productivity by adopting block construction based on welding. The great success of Japanese shipbuilders was also aided by government support. The changes in competitive paradigms in the British, Western European and Japanese shipbuilding industries are explained mainly by cost advantage, but it was the development of technology to build large ships and other manufacturing technology that allowed these countries to enjoy decisive cost advantages.
 
In other words, major factors of hegemonic changes were technological innovation, governmental support and cost advantages. Policy support of governments and efforts for market protection through industrial nationalization are also believed to have been major factors in the changing industrial dominance. Considering that Korea and Japan can no longer provide direct government support to their shipbuilders due to checks by European countries, the Chinese shipbuilding industry may well be envied because it can still receive extensive government support. 
 
 
However, it is not sufficient to explain that the Chinese shipbuilding industry has become a global leader owing merely to price competitiveness, government support and domestic orders, without considering other factors such as technological competitiveness. In general, governments in emerging countries support their industries to help the private sector secure technological competitiveness by meeting domestic demand amid market protection.
 
To secure and maintain international competitiveness, non-price factors such as technology and marketing play more important roles. It is because a country can secure and maintain industrial competitiveness when its innovative technology changes industrial paradigms and increased productivity ensures price competitiveness.
 
For example, various factors played their parts when Korea’s shipbuilding industry earned and retained its global supremacy in the 1990s and 2000s. Since the 1990s, Korea’s competitiveness has derived from mammoth docks that made the construction of very large vessels possible, flexible designing and manufacturing by excellent engineers, active development of overseas markets and pricing. During slumps, Korean shipyards’ marketing and technological power played a significant role in satisfying fastidious clients, and during booms, they secured and maintained market dominance through technology that enabled the construction of high value-added vessels, innovation of manufacturing technology using floating docks, and continuous development of overseas markets.
 
After the oil shocks of the 1970s, when Korean shipyards expanded their docks and maintained large-scale facilities, Japan scaled down its shipbuilding industry and made it turn toward a domestic demand-dependent pattern through two rounds of industrial restructuring. The Japanese shipbuilding industry’s competitiveness has weakened as Tokyo shifted to enhancing the competitiveness of other industrial sectors. Japanese shipyards could neither expand nor reduce their docks easily because of government regulations.
 
Meanwhile, the marketing competitiveness of Japanese shipbuilders also weakened as they shied away from uncertain and volatile overseas markets and turned toward stable domestic markets. Moreover, Japan fell short of cultivating manpower, and focused on winning orders for low value-added vessels under its standardized shipbuilding policy to save costs. All of this resulted in handing over the market leadership in high value-added vessels to their Korean competitors.
Increasing Importance of Technology in Future Shipbuilding Industry
 
In the future, the shipbuilding industry will likely be greatly influenced by environment-friendliness, new technology and cost-cutting by builders. The demise of single-hull oil carriers is well under way, and the industry is also paying attention to the disposal of ballast water as well as the reduction of carbon dioxide and other air pollutants. To cope with environmental problems, it is necessary to develop more up-to-date technology in designing and manufacturing shipbuilding equipment and materials (engine, water disposal, paint, etc.).
 
An era of high oil prices will continue owing to the depletion of natural resources. This also explains why the domestic shipyards have continued to receive heavy orders for offshore oil and gas platforms. In addition, as the global warming has opened the Arctic sea routes, there is a new demand for polar-navigating vessels, the construction of which is impossible without the state-of-the-art material technology.
 
As the world’s major shipping companies are struggling to cut unit transportation costs through saving fuel expenses, a new navigational trend of slow streaming has emerged, which in turn makes it important to develop high-efficiency engines and hull forms that suit low-speed sailing. The recent appearance of 300,000 ton-class China MAX bulk carriers and very large containers is an example that demonstrates the new strategy of shipping companies to reduce unit transportation costs through ship enlargements.
 
Meanwhile, since the Common Structural Rules (CSR) have been applied on bulk carriers and double-hull tankers since 2006, the world’s major ship classifiers may support the development of technology to analyze and design these types of large-scale carriers. Consequently, this is narrowing the technological gap between developed and developing countries.
 
Also, in the long run, marketing will likely be an important factor in winning orders for low value-added vessels in view of the possibility that China, one of the world’s largest coal importers, would cut down on coal imports by sea due to its successful coal mine development in Mongolia. Besides, shale gas production has kept increasing at a time when the popularity of gas as an environment-friendly energy is rising. This could result in risks in high value-added shipbuilding areas, as the marine transportation of gas as well as the construction of offshore platforms will be adversely affected. But the trend could also bring about long-term changes in the industry. 
 
Because of these changes in the industrial environment, the competitiveness gap in low value-added vessels will likely narrow while the technological competitiveness in high value-added ships and offshore oil drilling platforms will be further differentiated. While the domestic shipyards are equipped with sufficient technological competitiveness and yet continue to further develop technology, their Chinese counterparts are failing to do so.
 
Under these circumstances, China’s shipbuilding industrial policy is forced to focus on nurturing a small number of large-scale berths armed with competitiveness. Under the shipbuilding industry’s mid- to long-term development policy announced in December 2007, the Chinese government has discouraged small-scale facility expansions, merged small- and medium-sized builders, pushed for shipyard specialization, and funneled foreign investment into R&D areas – all for the sake of securing advanced technology.
 
Under its seventh new strategic industrial plan and 12th five-year economic development plan, Beijing stresses the need for strengthening competitiveness in offshore plants and related equipment and materials. The Chinese government plans to provide extensive policy support for offshore drilling equipments, marine engines and motor systems, and deep-sea natural gas developing equipments.
 
Beijing also included measures to enhance offshore platforms in its 12th five-year economic plan, signaling the start of China’s industrial advances to offshore plant sector. Particularly, China is investing in the development of offshore oil and gas resources, and is expected to expand its investment, enabling its shipyards to jump into offshore drilling with the backing of their government.
 
Korean Shipyards’ Sustainable Competitive Advantage
 
Orders for commercial vessels have been dwindling since the global financial crisis erupted, intensifying competition among global shipyards. Now, the fiercest battle is being waged between Chinese shipyards aided by state support and large Korean shipyards armed with technological power. At issue is whether the Chinese shipyards, which still don’t have the ability to build high value-added ships, will continue to receive government support until their technological power reaches a sufficiently sophisticated stage.
 
Conversely speaking, it is a matter of whether the Korean shipyards maintain technological gap with their Chinese competitors in such areas as offshore plants and futuristic shipbuilding technology. As scale and technology are the two keys in shipbuilding industry, it is deemed appropriate to assess the competitiveness of individual nations by the competitiveness of their large shipyards.
 
In this vein, Korean shipyards’ competitive advantage is predicted to remain intact for the time being, because the continued supply glut of ships will likely throw Chinese shipyards into greater financial difficulties in comparison to their Korean peers despite Beijing’s support. Especially because manufacturing know-how and machinery technology heavily depend on investment and experience (time, in other words), the gap of time in technological development will remain quite wide.
Owing to the supply glut of bulk carriers and tankers, container carriers and offshore drilling platforms will likely determine the shipbuilding market for a certain period, which means Korea’s large shipyards will be able to maintain market dominance thanks to their technological advantage. This is because new order receipts for containers, offshore plants and their supporting vessels, and gas carriers, which have represented about 20 percent of the total during the global financial crisis, are expected to account for 37 percent of the market in 2011 and more than 40 percent after 2012, while the portion of bulk carriers, which once approached 50 percent of total orders, is foreseen to fall to around 15 percent.
 
The global delivery of new vessels stood at 51.7 million CGT in 2010, but Clarkson's estimate of new order receipts for the 2011-2019 period hovers around 31.1 million CGT on the annual average, accounting for just 60.2 percent of construction capacity. The decline in bulk carriers and tankers means that Chinese shipyards will more acutely feel the damage from a global supply glut. In addition, the Chinese shipbuilders are expected to gradually lose their price competitiveness because of China’s currency appreciation, rising labor cost and relatively low ability to produce high value-added equipment and materials.
 
 
As mentioned earlier, the key part of the competition lies in how much the Chinese shipyards can close the gap in technological competitiveness against their Korean counterparts. This will have to be attempted as the Chinese berths lose their price competitiveness.
 
The Chinese shipyards’ competitive edge in low value-added vessels is expected to continue as long as government support remains in place. It will be difficult for Korean shipyards to regain their advantage in low value-added ships. But they are expected to maintain their market share thanks to their superior marketing power compared to their Chinese and Japanese peers. 
 
Korea’s share in the bulk carrier market stood at a mere 3.0 percent in 2005 but soared to 23.2 percent in 2009, which indicates the domestic shipyards have taken away Japan’s market share in competition with Chinese shipyards. Korean shipbuilders’ market shares in other vessels than low value-added ships still remain at high levels, but fell in the 2008-2009 period, as the portion of order receipts for low value-added vessels temporarily rose amid the global financial crisis.
 
Large Korean shipyards will likely be able to maintain their advantage in competition with their Chinese and Japanese counterparts thanks to their strength in high value-added vessels and offshore plants, but competition will inevitably intensify. The prolonged shortage in new order receipts will heat up competition with Chinese shipyards and even among the domestic berths, aggravating overall profitability.
 
Besides, the domestic small and medium-sized shipyards' order receipts for high value-added vessels still remain low, forcing them into intense competition with their Chinese counterparts. The consequential polarization between large and small berths at home will be an additional burden on the Korean shipbuilding industry.
 
 
Increasing Need for Mutual Cooperation among Smaller Shipyards
 
Korea will need to continue to seek ways to maintain the competitiveness of its small and medium-sized shipyards. The smaller shipyards can learn from two foreign examples: how the Japanese coped with a slump and China's shipbuilding policy.
 
When the enlargement of high value-added vessels, such as container and gas carriers, weakened the competitiveness of Japanese shipyards because of their limitations in facility expansion, and strengthened the competitiveness of Korean shipyards, Japan's typical countermeasures included cutting costs and shortening construction periods by standardizing hulls, strengthening advanced designing and adopting the semi-tandem method.
 
Imabari Shipbuilding and Tsuneishi Shipbuilding were reportedly able to attain excellent turnovers and profitability through this strategy. The two shipyards’ construction of standardized-hull ships set target costs beforehand and optimized designing. Just as automakers assemble cars according to buyers' suggestions, these shipyards developed and built ships by knowing clients’ demands in advance, thus differentiating themselves from their domestic peers.
 
Japanese shipyards couldn't expand facilities and suffered from falling cost competitiveness until government restrictions on facility expansion were lifted in the late 2000s, but some of the successful berths evaded the regulations and enhanced competitiveness by setting up shipyards abroad. More recently, the Japanese shipyards have begun to help one another to diversify order receipts as orders have been rapidly falling since the global financial crisis.
 
As a means of making up for their insufficient designing manpower and R&D compared with Korean shipyards, the Japanese berths, finding it no longer possible to stick to standardized-hull vessels, are stepping up cooperation with affiliated firms and builders of similar vessels. Some shipyards are merging with berths they had spun off, shifting to a system that allows them to more easily provide financial and manpower support.
 
China relies on two state-run shipbuilding groups, China State Shipbuilding Corporation (CSSC) and China Shipbuilding Industry Corporation (CSIC), which have 11 and seven shipyards, respectively. As of March this year, out of the country’s 30 largest shipyards in terms of backlog orders measured by CGT, 14 were state-run berths, and 10 of them belonged to CSSC and CSIC. The two leading shipbuilders play the role of distributing (or permitting) order receipts, making facility investment and managing assets and costs, in ways to maximize the competitiveness of shipyards under their umbrella.
 
Seen on a group level, the shipbuilding volumes, new order receipts and backlog orders of CSSC and CSIC closely follow those of Hyundai Heavy Industries, and are considered to have sufficient efficiency in terms of economies of scale and overall management. Their management pattern is similar to that of Hyundai Heavy, which is managing Hyundai Mipo and Hyundai-Samho Heavy Industries as subsidiaries to maximize its competitiveness.
 
As seen in aforementioned examples, the most desirable ways to maintain the domestic small and medium-sized shipyards is to establish a cooperative system with larger shipyards or create a group system of smaller berths. This is because group management can help enhance competitiveness through joint designing and equipment and material purchases, as seen in the cases of most global shipbuilding groups, which show high degrees of industrial concentration.
 
If large shipyards and their smaller peers can cooperate to differentiate themselves by vessel types, they will likely be able to improve competitiveness not just in costs and designing capacity but also in marketing power to maintain considerable advantage in competing against Chinese shipyards in low value-added vessels, too.
 
The shipbuilding industry has large-scale business cycles spanning 20 to 30 years and major Korean shipyards have experiences in getting out of slumps. If these giant shipyards share such capabilities and experiences with their smaller partners, Korean shipbuilding industry’s competitiveness will be enhanced even further on a national level.
 
[Monthly Hana Finance, April 2011,
published by the Hana Institute of Finance]