ECONOMY

China and Vietnam set to lead world shipbuilding

Europe, once the center of the shipbuilding and ship repair business, has now given way to Japan and South Korea, with China soon set to take over at the helm of the industry. Recent developments indicate that the shipbuilding heart is shifting toward countries where investment costs are low, as the industry is aware that investment plans are very costly and by default prohibit high labor costs. However, the especially high cost of ship engines, devices and auxiliary equipment are the primary factors that determine the final overall cost of constructing a ship. The largest part of the costs involved in the construction of a tanker relates to a variety of materials used, whose total costs may reach up to 70 percent of the ship’s total cost. Steel accounts for 15-20 percent of a ship’s total cost, while in terms of weight, steel makes up 74 percent of the ship’s overall weight. Labor costs could be divided into two groups: productivity and work hours. An increase in productivity would lower work hours, leading to a reduction in labor costs, even though in some cases the difference is minimal owing to the higher salaries of skilled workers. The high labor costs in Japan and Korea is offset by both countries’ high productivity. Emerging markets, such as China and Vietnam, are generally characterized by low labor costs, but they will not see productivity increase unless they take advantage of such low labor costs. Modern technology has contributed a great deal to enhancing productivity. Samsung has become specialized in shipbuilding, through construction of secondary large ship parts, which are subsequently welded together to build the ship. Recently, Samsung’s shipyard announced the use of a new method in shipbuilding, which involves the construction of two separate blocks of the ship, which are then welded together. This new method helps increase productivity by reducing assembly time, thus enabling an additional 10 ships to be built annually at the same installations. In 2015, China is expected to exceed 12 million tons in capacity and take the industry’s second place after South Korea, with 13 million tons in capacity. At the same time, Vinashin, Vietnam’s state-run shipyard, also aspires to grow into one of the globe’s largest shipbuilding forces. With such highly ambitious plans and programs of Far East states, smaller shipyards in Europe and the US are being forced to revise their strategies, if they wish to survive. As can be seen in the table, several smaller shipbuilding nations have already secured a good number of orders, in spite of competition from Far East countries. Most of these smaller shipyards have already survived for a long time, but their order rates cannot even compare with China’s 51 percent, which does not even take into account shipyards that are yet to be built. Interestingly, Japan’s shipbuilding orders currently stand at 4.0 percent, but most of the world’s currently operating ships have been constructed at Japanese yards. The golden era As the newly built ship market enjoys rapid growth, most shipyards are booked for the next three years, while smaller ones are happy with their current business allowing them to operate under especially profitable conditions. However, they are aware of the negative repercussions when order programs are concluded. Their concerns are focused on their future business and they would have to consider new survival strategies, as well as becoming specialized in more complicated shipbuilding activities, entering partnerships with local shipowners, making further investments in new technology and even securing state subsidies in order to survive. Prospects for shipbuilding orders beyond 2011 are gloomy owing on the one hand to high prices and, on the other, new stricter environmental regulations. Even with continued technological advances, an increase in productivity and low labor costs, it is hard to imagine a better and more profitable period than the present one. However, one must not ignore the fact that oversupply, declining demand and gradually increasing costs are almost certain to have a negative impact on newly-established shipyards.