Defence Industry

Shipbuilders dilemma and the way ahead
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Issue Vol 25.4 Oct-Dec 2010 | Date : 14 Mar , 2011

The global economic crisis has brought steepest decline in the shipbuilding industry across the world. The shipbuilding industry is facing tremendous head winds with no significant relief in sight. New orders are sparse even with falling prices. Many existing orders are in peril due to lack of financing and tight credit facilities. The shipbuilder’s dilemma can be steered through “Mergers”, “Consolidation”, “Diversification” and “Exports”. These are national issues and will need respective governments active support and directions.

The examples of nations who have successfully achieved and adopted the above measures have been illustrated in this paper. In addition, the lean time available to the shipbuilding industry can be utilized with focus on offshore sector, emerging technologies, military ships and rapid delivery of naval auxiliaries like OPVs to meet the new threats of terrorism, piracy etc at sea.

The above ‘way ahead’ through mergers and acquisitions across state lines (country boundaries) have not been attempted and need to be explored in the interest of healthy shipbuilding industry in the long run.

Shipbuilding Boom (2000 to mid 2008)

Shipping and shipbuilding are vital to the economic growth. There was consistent boom in the shipbuilding since the year 2000. The main reason for this was the rise in the volume of international trade due to healthy long range economic and energy demands. In addition, the replacement of single hull oil tankers had also contributed to growth in shipbuilding. The above trend in the growing demands for new shipbuilding had been known and predicted. In order to take advantage of this boom in the shipbuilding in the world, countries like Japan, S. Korea and China took timely steps to enhance their shipbuilding capacity and opened new shipyards. These countries have been reaping the benefits of their timely actions. During the year 2007, orders for 155m GRT ships were placed to keep pace with the growing economy.

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The total shipbuilding on order was about 300m GRT as in Dec. 2008. To deliver this huge order book on schedule, the shipbuilding capacity would have needed to double last year’s output. However the capacity shortfall problem is self correcting with a down turn, as contracts are cancelled and new orders significantly decrease and some contracts get renegotiated for later deliveries.

Cyclic Nature of Shipbuilding Industry

Till July, 2008, everything was fine and the shipping and shipbuilding industries were growing steadily. The boom lasted for 7 to 8 years. The shipbuilding capacity had expanded at an unprecedented rate, both at established and new Greenfield Shipyards. A considerable percentage of the world order book is now with new and inexperienced shipyards. This will result in growing percentage of slippage of scheduled deliveries.

The European region shipyards have completed a lengthy process of consolidations and mergers. There exists one major shipbuilder within each of the big countries.

The current financial crisis since 2008 has brought the steepest decline in the shipping industry. The economic slow down has reduced the shipping demands, hurting some market sectors more than others. There would be significant demand destruction over the next few years. Many contracts are in peril due to lack of financing. The Greenfield ship yards and the expansion plans are at risk. The world shipbuilding order book will steadily decline over the next few years as the deliveries outpace the new orders.

The new shipbuilding cancellations and scrapping levels will dramatically increase. The steel prices will sharply drop. The new ship prices will continue to decline with some yards going out of business. Owners are pushing delays until market improves. Lack of anticipated capacity will continue due to dropped expansion plans. The shipyards are deliberately slowing production to preserve work force.

Steering Through Shipbuilders Dilemma

Immense pressure is being placed upon the shipbuilding sector as the global economic crisis continues to loom large over the entire world. Government procurement contracts may sustain the selected industry in the short term, but these will be completed within next few years. In anticipation of the axe falling on the ship acquisition programmes, the shipbuilders are striving to identify and develop an industrial strategy that will ensure further prosperity.

Survival through Mergers — European Example

The European region shipyards have completed a lengthy process of consolidations and mergers. There exists one major shipbuilder within each of the big countries. Six large companies dominate the European naval shipbuilding. These include a mix of state owned and privately owned yards. In UK, BVT surface fleet was created in June 2008 as a privately owned joint venture (JV) between BAE systems surface fleet Solutions and VT Group’s shipbuilding interests. The JV took place at the behest of the UK government to create a national shipbuilder.

India does not have a Shipbuilding Ministry in the Central Government to steer, support and direct shipbuilding in the national interest. Indian shipbuilding industry is like a ship sailing without a rudder”¦

In France, State owned Shipbuilder DCNS was created in April 2007 with the sale of Thales Naval Business to DCN. In Germany, Thyssen Krupp Marine Systems (TKMS) became the national shipyard in 2005 with the merger of three main shipyards ie Blohm+Voss in Hamburg, Nordseeverke in Emden and HDW in Kiel. In Spain the military yards of shipbuilder IZAR were transferred to government owned company Navantia in 2004 which became the national shipbuilder. In Italy, the Fincantieri builds both commercial and military vessels and has grown through gradual mergers of government owned yards since its creation in 1959.

Dutch owned Damen Shipyard group is a global commercial and naval shipbuilder with yards in 17 countries worldwide that comprise activities such as maintenance, repair as well as new construction. In Netherlands, after nearly two decades of government ownership, the government privatized Royal Shelde by selling it to the Dutch owned Damen Shipyards group in 2000.

Survival through Consolidation

Russian shipbuilding is one of the largest national industries. This industry has been going through the process of consolidation. On March 22, 2007, President Vladimir Putin signed the decree on the creation of the state run “UNITED SHIPBUILDING CORPORATION” (USC) joint stock company. The United Shipbuilding Corporation will have sub-holdings partners comprising Nevoskoye Design Bureau JSC, the Western Shipbuilding Center JSC, the Northern Shipbuilding center JSC and the Far Eastern Shipbuilding and Ship repair Center JSC. The Severodvinsk-based Zvyozdochka Machinebuilding Enterprise FSUE has been reorganized in Zvyozdochka Shiprepair Center JSC.

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Several companies have joined the new center. Five dozens of design, scientific, research and development organisations and institutions have been grouped under the umbrella of the holdings such as Granit-Electron Concern JSC, Morinformsystema-Agat Concern JSC, Avrora Scientific and Production association Concern JSC, and Electropribor-Central Scientific and Research Institute Concern JSC. The State run Krylov Central Scientific and Research Institute has been reorganised in the Krylov State Scientific Center FSUE. All the Russian State run central design bureaus are reorganised in joint stock companies under the control of the United Shipbuilding Corporation (USC). These design bureaus include Severnoye Design Bureau, ALMAZ Central Marine Design Bureau, Zelenodolsk Design Bureau, Rubin Central Design Bureau of Marine Engineering, Malakhit Saint-Ptersburg Marine Design Bureau and Onega Scientific and Research Design Bureau.

The world famous Central Research Institute for Shipbuilding Technologies FSUE has been reorganised in the Center for Shipbuilding and Shiprepair Technologies JSC. The consolidation process is not yet complete in Russia. For example the future is not clear for the concern of medium and small tonnage shipbuilding JSC (CMSS), the Marine oil and gas projects JSC and Fast Fleet Financial and production group.

Survival through Exports

BVT, the national shipbuilder of UK has plans to stabilize its internal UK business using its guaranteed work load to derive value for money. This will allow BVT to expand its capabilities into a through life support business, which will, in turn, enable more success in the export markets. BVT has already secured export orders for building OPVs for Thailand, Oman and Trinidad and Tobago. BVT has also obtained export orders for building Super Vita fast attack craft for Greece. BVT has recently signed a Joint venture (JV) with Abu Dhabi Shipbuilding for service and support network in the Middle East region. This is just one of the international partnerships that BVT is pursuing.

DCNS, the national shipbuilder of France has large order book to sustain its operations in the short term. It is also aggressively expanding its operations beyond European shores to reduce its reliance on domestic orders. Presently, It has export orders for SSKs from India, Malaysia, Chile and Brazil. DCNS has recently received export order for FREMM frigate for Morocco. On 13 may 2009, DCNS signed a MOU with Singaporean Shipbuilders ST Marine for the through life support of six new Formidable-class frigates of the Republic of Singapore Navy. It has also set up a subsidiary office in India for targeting second line of SSK construction.

IDR_subscriptionFincantieri, the national shipbuilder of Italy, has also been exposed to the downturn in commercial shipbuilding. The yard is engaged in domestic orders from the Italian navy for ten numbers FREMM frigates and Type 212 SSKs. Fincantieri has bagged export orders for two anti submarine Corvettes for the United Arab Emirates, two Fleet Tankers for the Indian Navy, four patrol boats for the Iraqi Navy. Fincantieri has also been engaged in the propulsion system integration for the Air Defence Ship for the India.Thyssen Krupp Marine Systems (TKMS), the national shipbuilder of Germany, has had down trends in commercial building; however, military shipbuilding has remained stable and also secured export orders through overseas acquisitions. TKMS continues to rely on internal orders from the German Navy. Presently, TKMS is engaged in Type 125 frigates, K-130 corvettes, K-131 future generation corvettes. The wide spread export market for TKMS includes MEKO range of frigates and OPVs, Type 214, 212A, 209 SSKs and Dolphin-class submarines. TKMS owns Kockums shipyards in Sweden and Hellenic shipyards in Greece.

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Russian shipbuilders have export market comprising Aircraft Carrier and frigates for India, SSKs for China, SSKs for Algeria, SSKs for Iran, Hovercraft for Korea, and corvettes for Vietnam.

Survival through Diversification

China has set up a large number of new shipyards and they have acute problem with decline in world shipbuilding. They are diversifying their product range. Presently they are benefiting from captive cargoes and State projects like LNG, iron ore and oil imports, semi submersible drilling units. Focus is also on conversions and ship recycling. Some of the new inexperienced yards will have to close down.

The other alarming fact is that the Indian overseas trade carried by Indian owned vessels is only 13.7 percent”¦

In Japan, the shipyards are most efficient and they would like to keep an edge over the technology and know-how. They are limiting the product range and specialising.

In Korea, the focus is shifting to offshore work, military ships and ew products like compact drill-ships, FLNG.

Southeast Asian Shipyards are concentrating on Mobile Offshore Drilling Units and Offshore Supply Vessels.

Indian and Vietnamese Shipyards are making all purpose ships. The available capacity and low costs of production are being tapped by European owners for niche vessels.

Plight of the Indian Shipbuilding Industry

It must be realized that labour intensive, cyclic in nature shipbuilding industry requires active support from the respective State governments for the shipbuilding industry to grow, sustain and meet the challenges of survival due to global economic crisis. All the leading international shipbuilding industries in Korea, Japan, China, Europe and Russia, enjoy the full support and directions of their respective governments and decisions are taken in their national interests.

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However, the Indian Shipbuilding industry is not so lucky. India does not have a Shipbuilding Ministry in the Central Government to steer, support and direct shipbuilding in the national interest. Indian shipbuilding industry is like a ship sailing without a rudder or without a captain or the gyro. The Indian shipbuilding has survived through captive Navy customer and some European owners have utilized the facilities for some niche vessels. It may be alarming to note that that the Indian owned Fleet (7.75m GT) of foreign going vessels is even less than one percent of the total world 810m GT.

The other alarming fact is that the Indian overseas trade carried by Indian owned vessels is only 13.7 percent and the balance 86.3 percent is carried by foreign vessels. India needs to take effective and immediate steps to create a Shipbuilding Ministry with professionals at the central government to address the issues of this industry and take midstream corrections as we go along to cope with the changing economic environment.

The issues of survival and growth through Mergers, Consolidation, Diversification, Exports and focus on emerging technologies need active support and directives from professionals in the central shipbuilding ministry when formed.

Conclusions

Shipbuilding is in a transition stage. The world order book which had peaked in November, 2008 will continue to decline with deliveries outpacing new orders. The delivery slippages will continue to increase and some deferred by owners. The cancellation of orders are expected to continue. New ship prices will continue to decline with some shipyards going out of business. The shipbuilding industry is facing enormous head winds with no significant relief in sight. The new orders have been sparse even with falling prices. Many existing orders are in peril due to lack of financing and tight credit.

The Greenfield shipyards are at risk and expansion plans are cancelled. The owners are renegotiating terms, pressured to delay or cancel existing contracts. The offshore sector is the only bright spot near term though comparative volume is low. There is time available for emerging technology projects around the world i.e. Floating CNG concepts, Innovative gas unloading system and sub-sea cryogenic pipes etc. Time is also opportune to focus on military vessels specially those required for vigil and watch at sea round the clock to meet new threats of terrorism and piracy at sea. The declining order books and ship prices will create huge challenges for shipbuilders, fundamentally changing the shipbuilding landscape over the next decade. Mergers can to some extent reduce idle capacity and provide optimum utilization of resources.

IDR_subscriptionMergers can create National Champions. Mergers and Consolidation of shipyards within national boundaries have proved successful and useful. Mergers and acquisitions across State lines have substantial obstacles but need to be pursued and attempted at least amongst friendly and like minded entities with mutual benefits in their economies.

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The views expressed are of the author and do not necessarily represent the opinions or policies of the Indian Defence Review.

About the Author

Vice Adm Rajeshwer Nath

Vice Adm (Retd) Rajeshwer Nath.

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