18-05-2016

Why the Korean shipbuilding sector is struggling and how the industry

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Korea’s shipbuilding industry, the former global industry leader, is now on the brink of collapse. Last month Korean shipbuilders were dealt a shocking blow of failing to win a single order for the first time in history. Now they face an onslaught of merciless restructuring. Today we invited Mr. Lee Hang-gu이항구, senior research fellow with the Korea Institute for Industrial Economics & Trade, to discuss the Korean shipbuilding industry in crisis.

Korea overtook Japan in 2001 to take the top spot in the global shipbuilding industry and overcome the 2008 global financial meltdown to take 70% of the world’s shipbuilding orders for 2009 and 2010. As a result, Korea’s shipbuilding industry became the most robust in the world and rose to the number five spot, powering Korea’s rise as a maritime powerhouse. But shipbuilding orders for Korea suddenly dropped two years later. In 2012, orders for Korean shipbuilders amounted to only 37.8 billion dollars, while China received 39.2 billion dollars in orders. To make matters worse, the U.S.-based management consulting firm, Boston Consulting Group, projected that Korea’s three biggest shipbuilding companies – Hyundai Heavy Industries, Daewoo Shipbuilding & Marine Engineering, and Samsung Heavy Industries – would only receive orders amounting to between 15 and 21 billion dollars out of 70 billion dollars’ worth of shipbuilding orders worldwide. The BCG’s projection is only half the combined goal of 38 billion dollars presented earlier in the year by Korea’s three shipbuilding giants. Such a dismal prediction has worsened the sense of crisis spreading throughout the industry.

Ever since Hyundai Heavy Industries jumped into shipbuilding in 1968, the sector has become one of Korea’s flagship export industries, which accounted for 10% of all Korean exports. In 2003 Korea topped all three areas of shipbuilding – new orders, order backlogs, and shipbuilding tonnage. Seven Korean companies were among the world’s ten largest shipbuilders in 2008 based on order backlogs. But Korean shipbuilding companies could not escape the impacts of an ongoing worldwide recession and had to hand over the title of industry leader to China in 2012. Even offshore plant projects, which the Korean shipbuilders had focused on to overcome the crisis, were hurt by record low crude oil prices. This plunged the Korean shipbuilding industry into even deeper trouble.

In the years following the global financial meltdown, orders for offshore plant construction fell sharply due to plunging crude oil prices. Additionally, Chinese ship makers used their edge in price competitiveness, while their Japanese counterparts benefited from the forced depreciation of Japanese yen. As a result, Japanese shipbuilders saw an increase in new orders and an increasing number of Japanese shippers began relying on local shipbuilders to build their vessels.

As the worldwide recession has driven down the number of new shipbuilding orders, the three biggest Korean shipbuilders suffered a deficit of 8.5 trillion won or more than 7.2 billion U.S. dollars last year. In contrast, China and Japan are making great strides. While Korean shipbuilders failed to win a single order in April, China, armed with low prices, won orders for 720,000 compensated gross tonnages or CGT, representing 48% of all new orders worldwide. Japan, which had less than a 10% global market share a mere decade ago, has now expanded its market share to 30% through a weak yen and help from local shipping companies. The pressure to overhaul the Korean shipbuilding industry began to mount as the Korean shipbuilding industry continues to struggle and its competitors grow stronger. The Korean government is demanding that the shipbuilders lay off their workers and design tough self-rescue plans. Corporate mergers and acquisitions are also emerging as a viable option.

Korea is losing out to China in price competitiveness, but the country’s overall competitiveness is still ahead of China. So some experts argue that it’s premature to demand extensive downsizing of the shipbuilding industry. There is still room for positive outcomes and recovery given the current order backlog situation and global market conditions. The British shipping market service provider, Clarksons Group, announced on May 3rd that the order backlog for Daewoo Shipbuilding and Marine Engineering’s Okpo shipyard amounted to 118 vessels, or around 7.82 million CGTs. This is the world’s largest backlog for a single shipyard. Also, the recent Korea-Iran summit has renewed discussions on Iran’s 1.2-billion-dollar shipbuilding order for Hyundai Heavy Industries’ Mipo shipyard.

The future of the Korean shipbuilding industry is not all doom and gloom. It’s order backlog is still the largest in the world and Hyundai Heavy Industries has succeeded in recording a surplus in the first quarter of this year. Above all, Korea has the experience gained from sustaining its number one position for many years and requisite technology. Still, the shipbuilding industry needs to reorganize itself in order to overcome the crisis. So, what solutions are out there for Korean shipbuilders?

When the global economy rebounds, trade volume and oil prices are bound to increase. When the prices of crude oil go up and the Arab oil producing nations adjust their productions to accommodate the world’s changing needs, the Korean shipbuilding industry must undergo restructuring to strengthen its competitiveness again. In the future environment-friendly or “green” vessels will be a lucrative field, but manpower is the most urgent issue when building such ships. Underperforming sections of the shipbuilding industry should be downsized, but still competitive parts should be maintained and strengthened so that they can branch out to more promising areas. Korea should find ways not only to overhaul the industry, but also to boost its competitiveness once the industry rides out the current hardship.

Industry experts project that the shipbuilding sector’s recession will end within the next five years as crude oil prices rebound. Therefore, ailing parts of the industry should be removed at once and new specialty areas discovered to allow the Korean shipbuilding industry to enjoy a more promising future. What the Korean shipbuilders need to do now is to find ways to enhance their competitiveness in the global stage.

Source: KBS World

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