South Korean shipbuilding looming over a cliff as it’s overtaken by Japan

Posted on : 2017-01-05 17:36 KST Modified on : 2019-10-19 20:29 KST
Slumping global and nonexistent domestic demand, along with competition from China and Japan, spell trouble for S. Korean companies
A disused Shina SB Yard Co. dock in Tongyeong
A disused Shina SB Yard Co. dock in Tongyeong

The South Korean shipbuilding industry has been teetering on the brink of the “order cliff” for several years now, and the industry has finally fallen behind Japan in its order backlog. This is leading to concerns that South Korea’s status as a shipbuilder is in jeopardy 17 years after it overtook Japan to become the global industry leader in late 1999.

On Jan. 4, Clarksons, a British firm that tracks market conditions in the shipbuilding and shipping industries, estimated that the South Korean shipbuilding industry (including companies such as Hyundai Heavy Industries, Daewoo Shipbuilding & Marine Engineering and Samsung Heavy Industries) had an order backlog of 19.89 million CGT (473 ships) as of the end of 2016, while Japan had 20.06 million CGT (835 ships) in its order backlog. According to these figures, Japan was ahead of South Korea by about 170,000 CGT.

CGT, standing for compensated gross tonnage, is a standardized tonnage measure. The order backlog represents the amount of shipbuilding work left to do at shipyards at a given point of time.

But South Korea is still ahead of Japan in yearly orders. Last year, the South Korean shipbuilding industry was behind China in the number of new orders at 1.57 million CGT to 3.51 million CGT, but led Japan, which had 1.12 million CGT.

South Korea had maintained its advantage over Japan in the order backlog since it gained a lead of 20,000 CGT in late 1999. When the shipbuilding industry was in its heyday at the end of 2008, South Korea‘s order backlog was double that of Japan. Today, China has the largest order backlog, while South Korea and Japan are vying for second and third place.

The primary factor for South Korea falling behind Japan is thought to be the severe global slump in orders. The South Korean shipbuilding industry is vulnerable to a much greater shock from a downturn in the global industry than Japan. South Korean shipbuilders get about 90% of their work from global clients, while 50% of the vessels built by Japanese companies are destined for the domestic market.

Japanese shipyards received orders for a total of 48 vessels between Jan. and Nov. 2015, of which at least 40 were reportedly ordered by large Japanese shippers like Mitsui OSK Lines (MOL).

“Japanese shipyards are holding on because they have lots of orders from their domestic shipping companies, but Korean shipyards haven’t received a single order for a new ship from domestic shipping companies over the past few years since every shipping company has been facing a severe liquidity crisis,” said a source at Hyundai Heavy Industries.

“When the global shipbuilding industry faces a shortage of orders, domestic orders can serve as something of a safety valve,” said Hong Seong-in, an analyst with the Korea Institute for Industrial Economics and Trade (KIET).

This is leading some to say that the collapse of the industrial ecosystem in which the shipbuilding industry and the shipping industry sustained each other’s momentum has also played a part in precipitating this crisis.

“The government has lavished huge subsidies on the shipbuilding industry because it was called the best in the world. It even provided export financing to global shipping companies on the pretext of helping the domestic shipbuilding industry win more orders. At the same time, domestic shipping companies have barely received any subsidies or benefits since they say we have a poor credit rating,” said a source at one shipping company. The government’s restructuring of the shipbuilding and shipping industries was imbalanced because it failed to recognize the big picture of the industrial ecosystem, the source alleged.

Order backlogs in South Korean and Japanese shipbuilding industries (as of the end of the year)
Order backlogs in South Korean and Japanese shipbuilding industries (as of the end of the year)

To be sure, another factor allowing Japan to regain the upper hand in the order backlog was the huge number of ships that South Korean shipbuilders completed last year and handed over to their owners. South Korea delivered 11.41 CGT of new ships last year, while Japan delivered just 6.70 CGT.

With Hanjin Shipping basically headed for liquidation, the order shortage for South Korean shipyards could get even worse in the future. “Even if there is a recovery in the shipping industry, global shippers will probably be able to meet their needs for ships by purchasing ships formerly owned by Hanjin Shipping, which means there could be a major decrease in the number of new orders from overseas shippers,” Hong said.

But others think that Japan‘s turnaround is likely to just be temporary. “The Japanese shipbuilding industry didn’t regain the lead over South Korea because it had become more competitive in scale or technological ability. The chances are very low that this reversal will be a continuing trend in the future,” Hong said.

Looking at historical shifts in influence in the global shipbuilding industry (focusing on the volume of orders), Japan overtook Europe in the mid-1960s. After that, Hyundai Heavy Industries became the world’s single largest shipbuilder in the early 1980s. The South Korean shipbuilding industry as a whole surpassed Japan to become number one in the world in 1999.

South Korean shipbuilding firms enjoyed an unprecedented boom that began in 2005 and lasted for several years, but they have yet to recover from the global financial crisis in 2008 and from the failure of the offshore platform project. In the meantime, South Korea has surrendered its number one ranking to Chinese shipbuilders, which have been advancing backed by demand and financing provided by the Chinese government.

By Cho Kye-wan, staff reporter

Please direct questions or comments to [english@hani.co.kr]

 

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