A Tale of the Three Shipbuilding Nations – A long long tunnel

The global shipbuilding market, which has stayed caught in a trap of overcapacity, is still struggling to exit from the long and dark tunnel. According to Clarkson Research, the global NB orders contracted this year to September totals 1,388 ships (92.02 mil dwt, 30.80 mil cgt, $352 million), declining 32% on-year in terms of dwt, whilst decreasing 21% in value terms. For the first nine months, China bagged 691 ships (44 mil dwt, 13.20 mil cgt), trailed by Korea with 238 ships (25 mil dwt, 8.5 mil cgt), and Japan with 285 ships (16.40 mil dwt, 5.70 mil cgt), declining 31%, 34%, and 31%, respectively.

Even this mediocre performance to date is attributable to a noticeably sizable growth seen in the number of NB orders scored in gas carriers (130 units, $133 million). In case of gas carriers being excluded, the NB orders of commercial vessels taken in by the three shipbuilding nations are appraised to have declined to a much larger extent. Whilst LPG gas carriers prevailed in 2013, LNG carriers of 150K to 180K-cbm class are dominating the NB market this year. To date, global demand for LNG was met and supplied by the LNG produced in the process of oil-drills in the Middle East or in the North Sea. In recent years, USA turned to an LNG exporting country from an importing nation as the evolving gas drilling technology enabled USA to drastically increase its shale gas outputs and to cut back production costs. US shale gas has become the main talk of the global shipping market as its shipment is expected to commence at the end of 2017. This explains why new orders in LNG carriers started soaring this year. Each of Korea’s Big Three yards has secured NB orders for up to 30 new LNG carriers, thus timely filling in some essential spaces in their construction schedules. A beaming light signaling the end of the tunnel, however, did not become visible as yet.

Of the global NB orders penned in September alone, China won 920,000 cgt, followed by Japan with 550,000 cgt, and Korea with 420,000 cgt, each taking up a world market share of 45.3%, 23.1%, and 20.7%, respectively. When combined, the three nations dominated 93% of the world shipbuilding market in terms of NB order intakes. September saw Korea defeated by Japan for the third time in terms of NB order volume as was in April and June this year. As Korea remains deliberately less aggressive in taking orders under the prevailing downbeat circumstances, the market share has less meaning at present. Despite this, one can easily sense the substantial changes taking place in the market flows, compared with a couple of years ago when Korea was able to retain the prestige of the world No 1 shipbuilding nation without putting in great efforts. Whilst its intakes in NB orders are declining due to a protracted market slow-down, Korea’s leading yards are suffering from the rapidly worsened profitability stemming largely from the low-priced NB orders signed in 2010 to 2012.

Though weathering ups and downs at times, Korean shipbuilding has run smoothly most of the time in sound financial health for the past 40 years since the outset of its modernization. As Korea’s leading yards have so far been accustomed to the operations in the black, they do not find themselves fully prepared to face heavy financial losses being inflicted on them this year. From this background, their worst financial results posted this year to date are all the more embarrassing and traumatizing to the Korean yards at large.

SHI had conducted a massive internal auditing in the first half of this year since early Feb against its adverse operational profitability. Its executives are known to have undergone psychologically grueling torture in the whole course of its ‘draconian’ audits. ‘Like the tide inside the glass’ when seen from outside, SHI managed to tame the crisis quietly without bringing out structural changes on the surface. Through a merger with Samsung Engineering, SHI paved the way for breaking through its limits in technological power.

Now turning to HHI, the market was completely taken aback at the report that HHI generated an operating loss exceeding KW1.0 trillion in the second quarter. Analysts had foreseen HHI’s deficits well beforehand. In store for the upcoming adversity HHI has retained abundant cash reserves well in advance. But the news came as a bolt from the blue, shockingly shaking up the whole market and HHI as well. Immediately, HHI implemented a reshuffling of its top management: letting go of up to 30% of its senior executives, whilst newly appointing CEOs of both HHI and HMD. The sales operations of the three HHI Group affiliates were re-jigged into one single sales unit in HHI Seoul office. HHI’s ‘high-profile’ self-healing reform started making excessive noises, thus sending a heavy shockwave to both owners and its subcontractors. Should HHI consider it a must to activate such an extreme therapy in rectifying its structural obesity, ‘NOW’ is deemed the right time for HHI to implement it whilst market still remains in recession.

DSME was no exception as to low profitability. Nor did DSME have any particular capabilities of escaping from its shocking losses. The creditor banks, who are practically in control of DSME, knew how to mitigate the shockwave in a way considered more objective and less traumatic.

China also zigzagged in its policy-making towards shipbuilding. China’s shipbuilding industry, so to speak, begins with the government-led policies and ends also with them. Chinese shipyards are now split into two — white-listed yards and blacklisted ones. Its 51 yards are now placed on the white-list, eligible to apply for various benefits from the government. Due to the restructuring reforms introduced by the Chinese government, their 3,000 yards as at 2010 were boiled down to 300 units, some of whose survival is still at risk. This represents the government’s willingness to spearhead a program rectifying the shipbuilding overcapacity and restructure its entire industries at the same time. It appears that China’s ultimate goal is to reduce the number of yards to 10 integrated mega units, which will then be made responsible for producing more than 75% of its shipbuilding. The Chinese government is putting in all-out efforts to boost its shipbuilding industries and activating a policy to ‘transport Chinese goods on China-built ships’. Tens of VLCCS are currently being built in China in line with this policy. Over a long term, however, such policy adds another burden to the global shipping market that is already being plagued by surplus tonnage.

Shinzo Abe’s policy, dubbed Abenomics, to devalue the Yen that began in 2012 played an important role in helping Japanese yards recover their price competitiveness. The policy, however, is not powerful enough to have Japan retrieve its old reputation of the world No 1 shipbuilding nation it had enjoyed in the 1990s. But Japan took back some of the global market which had been lost to Korea and China. In sync with the market upturn, Japan is expanding overseas production facilities, and is stepping up the development of eco-friendly shipbuilding technology. The set-up Tsuneishi put in earlier in the Philippines has now grown into its major shipbuilding base. The capacity of Tsuneishi’s Filipino yard is being expanded from its current 20 ships to 30 ships by 2016. On top of this, it plans to open a new yard towards 2017.

Its Chinese yard in Zhejiang Province also has a plan to enlarge its facilities. Mitsui continues to snag NB orders overseas after having successfully developed a 100K-class eco-friendly bulk carrier. KHI is running its Chinese joint venture yard — ‘NACKS’ ((Nantong COSCO Kawasaki Shipbuilding), now busy churning out high-tech ships such as LNG-fueled PCTCs and liquefied hydrogen carriers. Mitsubishi partnered with Imabari in creating MI LNG yard to build LNG carriers destined for lifting US shale gas, whilst KHI, Mitsui, and JMU (Japan Marine United) have also teamed up to cooperate with each other. Namura has successfully scaled up its yard through a merger with Sasebo. But Japan was discouraged to invest into shipbuilding during the past ‘20 lost years’. Japan’s shipbuilding, therefore, keeps serious critical elements left unresolved, for example, lacking in experienced high-tech personnel. As a result, Japanese yards are not ideally placed to be able to harvest full benefits from the Abenomics.

In Korea, people living in the cities neighboring shipyards, say, in Ulsan and Geoje, are rated comparatively higher in their income levels. As coming nearer to these places, the atmosphere is felt different, and people look relatively ‘posh’. This apparent air of affluence does reflect a relaxed life shared with the prosperity of a shipyard situated in the vicinity. The labor union of this leading Korean yard is obstinately intent on going for a strike. Their preposterous demeanor is thought of as categorically inexcusable. The shipyard prodding up their livelihoods is facing a critical crossroad of ‘life or death’ because of its weakened competitiveness resulting from the protracted market slowdown and the Yen depreciation. In defiance of this economic climate, the labor union holds on to its original plan for a walkout. It is of vital importance to get back to the basics. The shipyard was built on a muddy ground near the fishing village with the empty bare hands at the time when Korea remained one of the poorest countries in the world with its per capita income less than U$100 a year. One should not forget the hardships of the pioneering days when the shipyard’s sales personnel travelled the world knocking at the doors of global shipping houses whilst, at times, hearing the doors being slammed in their faces. It would not take long for our life to plunge back into a dark abyss of Korea’s pre-industrialized days the moment the basics are forgotten.

One should also remain mindful of this: Korea’s shipbuilding is no longer a third-class ‘backward’ industry. Even a slightest mistake, if made in Korea out of carelessness, can be made known immediately to the entire global town, thereby adding to the difficulties that Korea need to tide over in the market. Over the past 40 years, Korea underwent a succession of ups and downs in the economic cycles, whilst wisely tiding over all of these rough streams. The hardship currently lying ahead before our eyes is just one of the multiple obstacles down the road that must be cleared and broken through. It is now high time that all parties — Korea’s national authorities, shipyard executives and labor unions — must meet face-to-face and start working together cooperatively in ironing out effective solutions contributing to the sound advancement of this ‘sacred calling’ of shipbuilding. Written by Hwang Sung Hyuk, CEO of HWANG & COMPANY, LTD.