Shipbuilding companies face tough future
This is the 11th in a 12-part series of “The Korea Times ? the Boston Consulting Group (BCG) Joint Project” designed to identify new realities in the post-crisis world and provide winning strategies for leading Korean firms in 11 key industries. In cooperation with BCG, The Korea Times will look into a wide variety of issues both in the global economy and major indstries. ― ED.
By Kim Tae-gyu
In the 2000s, the shipbuilding business was a cash cow for Korea Inc., which accommodates many of the
world's foremost players ― Samsung Heavy Industries, Hyundai Heavy Industries, STX Heavy Industries and Daewoo Shipbuilding & Marine Engineering.
However, the flourishing segment was hit hard by the global financial distress, which dented the economy in unprecedented ways ― yearly orders of new ships shrank to about 600 in 2009 from 5,000 in 2007.
Although the aforementioned shipyards have recovered this year in line with the stabilizing economy both at home and abroad, observers point out that they will face difficult times down the road.
``The shipbuilding industry bottomed out in terms of share prices and new orders. But that does not mean an instant return to the good old days before the financial crisis,'' Korea Investment & Securities analyst Yang Jeong-dong said.
``In the 2000s, up to 2,400 vessels were demanded on average per annum with the figure peaking at 5,000 in 2007. But the number plummeted to approximately 600 in 2009 and is not likely to rebound dramatically to more than 2,000 any time soon.''
Yang said that the London-based Clarkson Research's Newbuilding Price Index also supports his prediction as the index still struggles in the neighborhood of 140 from as high as 190 during the summer of 2008.
He said that even the recent rise of new orders, up 40 percent from last year, has failed to jack up the index.
Daishin Securities researcher Feynman Jeon concurs.
``One thing is certain that the worst is behind us. But we cannot be complacent. The mid-2000s boom was boosted by the replacement demand for dilapidated ships and the rising volume of cargo. The former was met in the 2000s by and large, and the latter headed down during the recent recession. Hence, shipyards received a double blow during the financial crisis,'' Jeon said.
``The latter shows signs of rising of late but the former will not come to the fore in the near future because wear and tear does not cause ships to become worn out overnight. Accordingly, the resumption of overall demand will be limited.''
China ready to surpass Korea
Another big issue lingering in the industry is the rapid rise of China, which is expected to nudge past Korea to take the lead in the global shipbuilding business by around 2020.
``It is a matter of when not whether China will outrun Korea, which caught up with Japan to soar to supremacy decades ago. The consensus is that China will be the No. 1 country sometime by 2020,'' Woori Investment & Securities analyst Martin Song said.
``Korean companies are also well aware of that consensus. Subsequently, they have put forth efforts to maintain their competitiveness in a variety of ways.''
Korea Investment & Securities said that China already outstripped Korea last year in terms of new orders ― the world's most populous nation took 44 percent of the market against Korea's 41 percent.
Jeon at Daishin points out shipyards of Asia's fourth-largest economy has no choice but to expand their business horizons to non-shipbuilding sectors in order to stay afloat.
``Domestic entities have been forced to develop a competitive edge in building highly-valued special vessels ― a sector where it would take time for their Chinese rivals to be able to compete in the global scene,'' Jeon said.
``In addition, they don't have the luxury not to diversify their business portfolio in a world where Chinese shipbuilders are carving out the largest portion of the market. Our firms are now making forays into the offshore plant or renewable energy sectors with good reason.''