JAKARTA - Asian shipbuilding is in crisis. This should worry all of us because Asian yards build more than 90% of the world’s ships. Japan became top nation in the 1970s, South Korean took the crown in the 1980s and 1990s, and the years since 2000 have seen China’s rise to prominence in the number of shipyards and across many sectors of the industry. So successful have these nations become that they now drive the construction industries in Vietnam and the Philippines.
But size is no guarantee of robustness. Japanese yards reflect the national demographic: an ageing workforce and a shortage of young apprentices mean that within five years Japanese builders will need to refocus. The problem for China is not its workforce but debt. The pursuit of market share without attention to the need for profitability has left yards deeply indebted at a time when newbuilding orders have dried up.
Of greater concern is South Korea, from where the news is bleak and has already seen Hanjin filling for court receivership. In September last year, the government, business leaders, and unions drafted a tripartite agreement on labour market reform as part of President Park’s prioritising economic growth over what was already a pretty flimsy social security net. Within a few months, both of Korea’s largest umbrella unions had withdrawn from the agreement, leaving the way open to strikes and disruptive protests over salaries, corporate debt restructuring, redundancies, and employee rights.
Partial strike action at Samsung Heavy Industries, Hyundai Heavy Industries, and Daewoo Shipbuilding & Marine Engineering has already taken place, and is likely to become a regular feature of the industrial process the longer the dearth of newbuilding orders goes on. It is feared that protest action both in Seoul and in shipbuilding communities including Ulsan will involve thousands of workers and could cause some violence.
In June, President Park called for a “bold restructuring” of shipbuilding by downsizing the overgrown workforce and a tighter control over costs. If this doesn’t happen, she said, the future of Korean shipbuilding – and the national economy – will be threatened. What’s the background to this, and how significant is it to shipping in 2016?
In the 1960s and 1970s, a series of five-year plans was set up to build a self-sufficient and increasingly modern industrial structure; among the sectors prioritised were steel, machinery, and chemicals. The Third Development Plan (1972-76) achieved rapid progress in building an export-oriented structure focusing on iron and steel, transport machinery, household electronics, petrochemicals, and shipbuilding. Critical industries were built up in the south of the country – which had the benefit of being far from the border with North Korea but also of providing work for deprived rural areas.
Shipbuilding was identified as a strategic industry in the Fourth Development Plan (1977-81) because it was technology-intensive and skilled labour-intensive. The government’s generous financial assistance programme ensured that Korean shipbuilding focused on high-quality products at a competitive price at a time when more advanced economies were cutting their investment in heavy industry.
By the time of the Sixth and Seventh development plans of the late 1980s and early 1990s, the focus had shifted to micro-electronics, new materials, fine chemicals, bioengineering, optics, and aerospace. South Korea had moved beyond heavy industry and shipbuilding, leaving the world’s largest yards increasingly separated from the country’s economic theory.
Since the 1990s, South Korean shipyards have shifted up the scale to container ships, chemical and product tankers, offshore vessels and floating production storage and offloading vessels. But sophisticated ships carry higher risk. Revenue at fourth-largest builder STX Offshore & Shipbuilding hit the buffers when offshore exploration and production collapsed after the oil price plunge in late 2014. The business is now owned by Korea Development Bank, NH Bank, Export-Import Bank of Korea, Woori Bank, Shinhan Bank, and Korea Exchange Bank. Auditors believe STX O&S is unlikely to post an operating profit before 2021.
This is an industry in a dark place, and shipping is seriously worried. It is lamentable that what’s happening right now with the yard situation in South Korea is a tremendous event that will impact us in the long term. Tens of thousands of people are losing their jobs there, capacity is being rationalised, and the banks are in charge. It will impact the pricing decisions of the yards for many years to come.
The evolving trend here is clear: decisions taken this year about the future of South Korean shipbuilding will feed through to state support for yards, newbuilding pricing, and the supply of tonnage in future. (*)
By Richard Clayton, Principal Analyst, IHS Maritime & Trade