Korean Shipbuilders Meet China’s Challenge
By Cho Jin-seo
Shipbuilding and computer memory chips are two of a few industry sectors in which South Korea has achieved strong leadership. This year, while the semiconductor industry suffered a global slump, Korean shipbuilders are riding so high that they meticulously refuse to take less profitable orders and leave them to their competitors in Japan and China.
Their stock prices are also hitting record highs day after day. When Hyundai Heavy Industries, the industry leader, announced its quarterly net profit had jumped more than 16 fold from a year ago, the share price rose by 4.82 percent on Monday alone.
It was just another fine day for Hyundai’s shareholders. Compared to January 2, the stock price has sky rocketed from 125,000 won to over 270,000 won. Now Korea’s leading shipbuilder has become the fifth largest firm in the nation in terms of market capitalization, after Samsung Electronics, POSCO, Kookmin Bank and KEPCO.
Morale is also high in other shipbuilders. All of the six major shipbuilders that are listed on the main stock market have enjoyed more than 30 percent growth in their market capital, thanks to healthy market conditions, efficient management and aggressive expansion.
Last year, the top three players Hyundai, Samsung and Daewoo accounted for 36.4 percent of all orders received by shipbuilders worldwide _ and seven Korean firms are on the list of the global top 10. Their contribution to the domestic economy is as substantial as it looks, as more than 90 percent of the ship parts are bought from local suppliers, according to the industry’s association.
Analysts expect a further boost in their performance though there are signs of China closing in on the Korean firms.
``Is Korea being overtaken by China? No. The Korean shipbuilding industry is enjoying it,’’ said Cho Yong-jun, an analyst for Shinyoung Securities, in a report. ``The industry will continue to prosper through 2008 as supply on the global market is falling short of demand, especially for bulk carriers,’’
The promising augury was first seen last year. South Korea clinched record-high orders because of strong demand for crude carriers and offshore exploration equipment amid lofty oil prices. Korean shipbuilders have topped three major categories _ new orders, order backlogs and the volume of vessels built, according to Clarkson, an industry research firm.
``Korea has never slipped from top place this decade,’’ said a public relations manager of the Korea Shipbuilders’ Association (KSA), adding that the country had maintained more than a 30-percent global market share even in bad years, such as 2005. ``And it seems that we will continue to be at the top in the future.’’
The report also showed that last year approximately one in every three new vessels was constructed in Korea. Korea built ships totaling 10.6 million compensated gross tons (CGTs), or 34.6 percent, becoming the first nation to breach the 10 million CGT mark. Japan followed with 9.1 million, and the European Union and China had 4.9 million and 4.5 million, respectively.
``The earnings will improve by a great deal in 2007, not only for Hyundai Heavy Industries and Hyundai Mipo Dockyard that are already riding high, but also for Daewoo, Samsung and STX, which have showed mediocre results before,’’ Cho said.
The firms proved that last year’s splendid performance was no fluke. Samsung Heavy Industries, the second-largest shipbuilder, said on April 30 that it has received $6.8 billion in new orders this year, more than half of its 2007 target of $11 billion. The figure included a contract won in February to build four of the world's largest liquefied natural gas carriers for a record $286 million each. Hyundai Mipo has won a total of $2.93 billion worth of shipbuilding orders so far this year.
Such robust growth was possible because of the shipbuilders’ relentless efforts to raise dockyard efficiency and to introduce innovative manufacturing methods.
According to a report compiled by Yonhap News Agency earlier this year, South Korean companies were found to have more than doubled their workers’ manufacturing efficiency over the past 15 years while their revenue grew 19 times.
The average man-hours needed for constructing one CGT in the three top shipbuilders _ Hyundai Heavy Industries, Samsung Heavy Industries and Daewoo Marine Engineering & Construction _ has improved from 23.3 hours in 1990 to 9.2 hours in 2005. At the same time, the annual revenue of the entire industry has grown from 1.48 trillion won to 28.26 trillion won, the KSA said.
To maximize the limited resources, Samsung has used a large barge as a floating dock for small ships, to save the money needed to dig a dry dock on land. From 2004, Hyundai has built ships on land when their nine dry docks are full. Upon completing construction, the ships are slid into the water along lubricated rails, pushed by hydraulic jacks.
China Peril Overemphasized
In March, patriotic local media vociferously raised their alarm bell as China was found to have surpassed Korea in the orders received. China took 3.8 million CGTs of new orders in the first two months of the year, while Korea had only 2 million.
The news was followed by a red light. Clarkson said a Chinese shipbuilding yard entered the global top five in terms of order backlog in March, beating Korea’s Samho Heavy Industries and STX Shipbuilding. In total, sixteen Chinese shipbuilding yards made the top 50 list, exceeding the number of Korean companies on the list.
Some even worried that it marked the beginning of the Chinese era in the shipbuilding industry. But the KSA flatly refuted such depressing news.
`’We should pay attention to the situation, but we don’t worry too much about China. Our member companies have secured enough backlog for the next four years,’’ an official of the association said. ``Chinese builders are only capable of constructing inexpensive bulk carriers, while Korean firms are focusing on natural gas carriers and container carriers.
Statistics also support the analysis. According to Clarkson, Korean builders have secured over 14 million CGTs of orders for both 2008 and 2009, while China had less than 10 million for each year. But for 2010 and after, Korean firms are deliberately taking a wait-and-see strategy while China sweeps up orders for cheap bulk carriers.
Ship prices, in general, tend to go up as the buyer demands a shorter delivery time. By leaving their manufacturing capacity open for the year 2010, Korean shipyards can start selling slots from now on at higher prices to buyers.
According to analysts, shipyards in Japan and China had already filled more than 70 percent of their dock operating schedules for 2010, while Korean builders only received orders amounting to 35 percent of their annual capacity. In other words, they can more flexibly meet the demands from shipping companies that urgently need new vessels.
``Korean firms are enjoying the situation. With the initiative of the deal in their hands, they are weighing the prices and the manufacturability of the ships,’’ Cho said.
Finding Fortune in Cruisers
After mastering the sophisticated natural gas carriers and super-size tankers over the past decade, domestic shipbuilders are now tapping into the cruise shipbuilding business.
Last month, the heads of Hyundai Heavy, Samsung and Daewoo gathered at a Seoul hotel to attend a meeting hosted by Commerce, Industry and Energy Minister Kim Young-ju.
``The government and industry experts will research cruise shipbuilding in the first half of the year and give full-fledged support in the latter half,'' said the minister.
Luxury cruising is yet an unfamiliar item for most Korean vacationers and shipbuilders alike. While Korean, Japanese and Chinese firms dominate the oil and cargo carriers building, Europe has a firm grip on cruise ships with three major firms sharing more than 90 percent of the market.
``With our manufacturing technology, we can build cruise ships better than anyone else. But the problem is the interiors,’’ said a Hyundai Heavy official. Cruisers are more like culture than just a ship, and local shipbuilders find it hard to find suppliers who can furnish the top-of-the-line decor, he said.
``The key to entering this market is attention to details, and meeting the stringent requirements of shipping companies that place paramount importance on quality,’’ Kim said.