Shipbuilding Industry - Term Paper Example

? Ship building industry in South Korea Introduction Japan was the leader in global shipbuilding industry until the 19990’s. However, the current financial crisis in Japan has affected the shipbuilding industry very much. China and South Korea are the major emerging players at the moment in global shipbuilding industry. In fact more than 90% of the global shipbuilding is take place in South East Asia. (See Appendix for more details). China is promoting shipbuilding aggressively to become the leader in this industry by 2015. China’s economic growth is number one in the world and hence they have ample resources to promote shipbuilding at will. South Korea’s shipbuilding industry is watching China’s growth with lot of concerns. It should be noted that China is using indigenous technology for shipbuilding whereas South Korea is importing such technologies from overseas countries. Moreover, cheap labor is another major asset of China in promoting shipbuilding industry. In any case, South East Asia (Japan, China and South Korea) dominates the present global shipbuilding industry. These three nations accounted for more than 78% of global ship production in 2005. “In the same year, Korean shipbuilders received 21,960,000 GT, 37% of world shipbuilding orders, while Japanese shipbuilders secured 14,230,000 GT, 24.5% of the world total, and Chinese firms received 9,640,000 GT, 16.6% of the world total”(Shin & Ciccantell, 2009, p.184). These statistics clearly suggest that South Korea is the current leader in global shipbuilding industry even though Japan and China are not far behind. Shipbuilding history in Korea has started even in the 16 th century. After getting independence in 1948, Korean government established a national company; Korea Shipbuilding and Engineering Corporation (KESC), to promote shipbuilding. Since then Korea witnessed huge growth in shipbuilding industry. This paper briefly explains the Structure, characteristics and future development of shipping industry in South Korea. Structure, characteristics and future development of shipping industry in South Korea Hyundai Heavy Industries (HHI), Samsung Heavy Industries (SHI) and Daewoo Shipbuilding (DSB) are the three major players in Korean shipbuilding industry at present. It should be noted that all the big three are well known companies in the world at present. In the Korean shipbuilding industry, the number of workers has been increasing, which reflects the high performance of the industry. The number of workers in the industry in 1995 was 77,330, and it increased to 97,323 by 2004. Korean shipbuilders enlarged the labor force of unskilled workers of subcontracting companies in order to reduce labor costs. Furthermore, Korean shipbuilders worry about the possibility of a shortage of young technicians, an aging labor force, and the general trend among young people to avoid working in the local areas where most dockyards are located (Shin & Ciccantell, 2009, p.182). Shipbuilding requires huge manpower. The role of machines in manufacturing ships is minimum compared to the role of manpower. As in the case of other industries, shipbuilding industry is also facing strong competition in international market. The emergence of China as the cheapest labor oriented country is causing problems to Korean Shipbuilding industry. The success of Korean shipbuilding industry can be attributed to three factors; First, major shipbuilders started to reduce production at a time when the demand for new ships increases. Second, South Korean government implemented meaningful strategies to exploit the opportunities. Third, South Korea managed to continuously develop and upgrade its production processes, sustaining its initial cost advantages through rationalization and innovation (Bruno & Tenold, N.d., p.21). In short, South Korea’s current leading position in shipbuilding was obtained due to the favorable trends in the market and the visionary policies implemented by the government. One of the major raw materials required for ship manufacturing is steel. Korea’s internal production of steel is sufficient enough to meet the demands of ship producers. However, ship building technology is not much developed in Korea at present. For many of shipbuilding operations, Korea is currently importing technology from external world. The following tables provide rough idea about the technology imports by two of Korea’s most prominent shipbuilders. Hyundai?s purchased design technology from abroad Design technology Purchased from Time of purchase Price 80,000 DWT tanker Naiereorm (Ger.) February 1979 281,000 DM 40,000 DWT bulk carrier and 130,800 DWT bulk carrier B&W (Den.) March 1982 11,110,000 USD 45,000 DWT OBO B&W (Den.) October 1982 51,000 USD 170,000 DWT bulk carrier and 80,000 DWT bulk carrier BWS (Den.) November 1983 100,000 USD Multipurpose cargo carrier NVLaskey (Can.) November 1983 60,000 USD Samsung?s purchased technology licenses from abroad Technology/Areas Partner Period Details Managing shipyards B&W (Den.) 3/78-12/84 Management Managing shipyards B&W (Den.) 3/81-12/87 Techno. Consulting/ Design Contract Managing shipyards IEC (Jap.) 9/87-11/90 Management of Production Process Design/ Manufacturing AUTOKON (Nor.) 10/82-11/90 Computer Programmes for Design Design/ Manufacturing MARCON (Ger.) 4/83-8/89 Design Technology Design/ Manufacturing MONNECKE (Jap.) 4/83-1/92 Design Technology Design/ Manufacturing IHI (Jap.) 6/86-6/89 Consulting Production Technology Design/ Manufacturing Sanoyath (Jap.) 12/86-12/96 Technological Training (Bruno & Tenold, N.d., p.18) The above statistics clearly suggest that Korea should concentrate more on developing indigenous technologies for shipbuilding. The over dependence on foreign technologies in ship building may not help Korea to maintain its top spot for longer periods. It should be noted that China is currently emerging rapidly in shipbuilding industry and they are spending lot in developing indigenous technologies in ship building. “During the period from 1962 to 1987, South Korean shipbuilders purchased 159 licences from overseas countries, paying a total of 117 million USD”(Bruno & Tenold, N.d., p.18). This is not a good sign for the future growth of shipbuilding industry in Korea. Shortage of skilled manpower is another problem facing by South Korean shipbuilding industry at present. Even though unskilled labor availability is not a problem, the services of skilled manpower are necessary to utilize the services of unskilled labor. South Korea is currently importing skilled manpower from Europe and America to cater the needs of shipbuilding industry. “The expatriates, such as the European engineers who were at HHI in the first three years of operation, include Dane Kurt J. Schau from Odense shipyard, and numerous European and Japanese engineers” (Bruno & Tenold, N.d., p.19). They should reduce the reliance on overseas workforce as much as possible to streamline the growth of shipbuilding in the right direction. Ship building price “The value of a 1000GT of South Korea’s new ship order was $1.5 million (2000) but in 2008 it had increased to $3.4 million. Productivity levels still holding up though wages have been on the upward trend, and South Korea appears to be still ahead of its competitors except China” (Chen et al, 2010, p.20). The above statistics tell that ship building price in Korea has been doubled during the eight year period from 2000-2008. Ship building costs are increasing day by day everywhere in the world. Increasing manpower and raw material cost are the major factors behind the price hikes in shipbuilding industry. Moreover, inflation is currently causing big problems all over the world. It is an economic phenomenon in which the prices of all goods and services increase. Since shipbuilding involves the utilization of too much raw materials, price hikes of raw materials cause price hikes in shipbuilding also. New orders In September 2008, the new building boom that ran since 2003 ended sharply. The crisis didn’t have pity neither for leaders nor for ordinary players. Even at the end of 2010, despite the signals of economic recovery, order book for new building was decreasing continuously. By the end of September 2010, new global building portfolio was 26% smaller in comparison to the quantities of the same period in 2008 (Mickeviciene, N.d., p.201) Even though the ongoing financial crisis is causing problems in shipbuilding industry, Korean shipbuilders seem to be less affected by these problems. In 2011, Korean companies got 25 orders for LNG carriers. Moreover they were able to win 3 out of 5 drill ships and 5 out of 7 large-sized container ships orders that took place in 2011. These statistics clearly suggest that Korean shipbuilders are able to win a substantial portion of global shipbuilding orders despite the poor economic conditions. Vessel Supply Even though vessel supply history of Korean shipbuilders is comparatively good, problems with delayed delivery also happen at times. “Hamburg-headquartered shipowner and ship manager E.R. Schiffahrt reports that it has cancelled orders placed with the Korean shipyard Sekwang for four anchor handling tug supply vessels "due to ongoing delays in completion and the resulting difficulties of safely securing charters for the vessels"” (E.R. Schiffahrt cancels AHTS orders at Korean shipyard, n.d.). As mentioned earlier, shortage of manpower is causing problems in Korean shipbuilding industry. Even though lot of overseas workers are working in Korean shipbuilding industry, still shortage of skilled and trained employees is a problem in this sector. “Most ship owners purchase their ships in an international market as well, either as second-hand ships or as new buildings” (Bruno & Tenold, N.d., p.3).Problems in getting new ships in time force ship purchasers to look for other options. “According to data recently released by Bloomberg, quoting Clarkson Plc, the top shipbroker, Korean shipyards had backlogs of $212.4 billion in late October 2008, or 38 percent of the $556.7 billion worth of worldwide global orders” (Scarlatoiu, n.d., p.1). In short, delay in ship production is currently forcing ship owners to look for second hand ships. Freight rate & Time series analysis Freight refers to the price charged by shipping companies to transport a cargo from one place to another. Freight rate increases when the availability of cargo ships decreases. Korean shipbuilding industry is actually controlling the global freight rate at present. As mentioned earlier, Korean shipbuilders are responsible for supplying the major share of cargo ships to countries all over the world. Failure of Korean shipbuilding industry to deliver new ships in time for cargo transportation may definitely create shortage of cargo ships in the logistics market. Ship building price and freight rate are directly proportional to each other. In other words, whenever shipbuilding price increases freight rate also will increase and vice versa. In other words, financial and economic time series in shipbuilding industry is not stable. In short, the relationship between freight rate and shipbuilding price can be labeled as an economic relationship which may affect the ship building industry in the long run. “The time lags from freight rate to the shipbuilding price are approximately two months. The existence of time lags indicates that the information flow between these two markets is not in a timely manner. This information delay is expected because the market players are different in these markets”(Xu et al. N.d. p.493) GDP & Trade Volume Even though failure of delivery of ordered ships in time is common, Korean shipbuilding industry witnessed huge growth in exports of ships during difficult times. It should be noted that the 2008-2009 period was worst for global industries because of recession. Yet Korean shipbuilding industry was able to witness an increase of 56% in ship exports. “Korean shipbuilders, in particular Hyundai and Samsung, are expected to deliver ships worth $53 billion in 2009” (Scarlatoiu, n.d., p.1). Global ship orders dropped 53 per cent in the first nine months of this year amid oversupply. But Korean companies have fared better than Chinese and Japanese rivals as they continued to win orders for higher-margin oil drilling ships, liquefied natural gas carriers and offshore oil production facilities. South Korea won new orders worth $18.9bn, compared with China’s $10.2bn and Japan’s $2.8bn, according to the shipbroker Clarkson (Jung, 2012). Revenue from shipbuilding industry is contributing heavily to the GDP growth in South Korea. Even though the big three shipbuilding companies in South Africa failed to reach the targeted business in 2012, they still contribute substantially to the GDP growth. “Net profits at Samsung and Daewoo fell 26 per cent and 33 per cent respectively in the second quarter of 2012” (Jung, 2012) Future of Shipbuilding industry in Korea Even though Korea is not facing any immediate threats to its number one position in the shipbuilding industry, the emergence of China is causing huge concerns to them. China is well set to become the number one shipbuilder by 2015. It should be noted that China has technological dominance over Korea. Moreover, cheap labor availability would definitely help them to compete effectively with Korean shipbuilders in terms of price in international market. Korea should reduce their over reliance on Europe and America for the import of technology. They should develop indigenous technologies and should become self-sufficient in this area as soon as possible. Moreover, Korea should concentrate more on developing skilled manpower so that the extra money paid to the foreign skilled labors can be avoided. Conclusions South Korea is the leader in shipbuilding industry at present. Japan was the leader in this industry until recent times. However, the financial problems in Japan caused a decline in the growth of shipbuilding. At the same time, China is currently emerging as a new player in the shipbuilding industry. South Korean ship builders may face tough competition from Chinese ship builders in future. China is developing indigenous technology for ship building whereas Korea still relies on foreign technologies for the same. Korea should reduce their reliance on foreign technologies and concentrate more on developing indigenous ship building technologies. Another problem facing by Korean shipbuilding industry is the shortage of skilled manpower. At present Korean shipbuilders are importing skilled manpower from Europe. Korea should avoid their over reliance on foreign human capital and they should try to develop local human capital as much as possible. References Bruno LC & Tenold S. N. d. The basis for South Korea’s ascent in the shipbuilding industry, 1970-90 [Online] Available at: http://www.ebha.org/ebha2010/code/media_168359_en.pdf [Accessed 05 March 2013] Chen, J. Galstyan M., Huynh D, Selvendran, Katheerayson & Mendoza V. 2010. Shipbuilding cluster In the republic of Korea. [Online] Available at: http://www.isc.hbs.edu/pdf/Student_Projects/Korea_Shipbuilding_2010.pdf[Accessed 05 March 2013] E.R. Schiffahrt cancels AHTS orders at Korean shipyard, N.d. [Online] Available at: http://www.marinelog.com/index.php?option=com_content&view=article&id=381:2011jan001803[Accessed 05 March 2013] Jung, S. 2012. Korean shipbuilders diversify to stay afloat. [Online] Available at: http://www.ft.com/intl/cms/s/0/26c00d8e-19c6-11e2-a379-00144feabdc0.html#axzz2MdsnYYV5[Accessed 05 March 2013] Mickeviciene,R. N.d., Global Competition in Shipbuilding: Trends and Challenges for Europe. [Online] Available at: http://cdn.intechopen.com/pdfs/16925/InTech-Global_shipbuilding_competition_trends_and_challenges_for_europe.pdf[Accessed 05 March 2013] Review of maritime transport, 2012. UNCTAD. [Online] Available at: http://unctad.org/en/PublicationsLibrary/rmt2012_en.pdf[Accessed 05 March 2013] Scarlatoiu, G. n.d. Weathering the Storm: Korea’s Shipbuilding Industry. [Online] Available at: http://www.keia.org/sites/default/files/publications/08December.pdf[Accessed 05 March 2013] Shin K & Ciccantell, P.S. 2009. Journal Of World-Systems Research. American Sociological Association, Volume XV, Number 2, Pages 167-192 Xu JJ, Yip TL & Liu L., N.d. Dynamic interrelationships between sea freight and shipbuilding market. [Online] Available at: http://www.icms.polyu.edu.hk/Papers/IFSPA08-Papers/5_JX-TLY-LL.pdf[Accessed 05 March 2013] Appendix Shipbuilding (Completion) Statistics by Year, Measured in Million Gross Tons Korea Japan CESA China Others Year GT % GT % GT % GT % GT % 1982 1,075 9.6 5,570 49.8 2,096 18.7 108 1.0 2,338 20.9 1986 3,056 24.1 5,518 43.6 1,667 13.2 356 2.8 2,067 16.3 1992 2,213 17.3 5,208 40.7 2,361 18.4 994 7.8 2,023 15.8 1996 6,737 28.8 9,159 39.1 3,692 15.8 1,665 7.1 2,156 9.2 2002 9,719 33.6 12,363 42.8 1,411 4.9 3,070 10. 62,335 8.1 2005 21,959 37.7 14,227 24.5 6,616 11.4 9,641 16. 6 5,740 9.9 Source: Lloyd’s World Shipbuilding Statistics; cited from Korea Shipbuilders Association (Shin & Ciccantell, 2009, p.181) Read More