Spectacular phenomenon

Growth has propelled South Korea to the top of the world?s shipbuilding league. Its ship builders are currently responsible for building 43% of new ship capacity on order at yards worldwide. This clearly demonstrates just how far South Korea has come. Especially in the context that until the 1960s the industry was small, rather unsophisticated, and catered mainly for the domestic market by building fishing boats and small cargo ships. The reasons behind this success and why Europe and, to a lesser extent, Japan have fallen behind are several and, to understand how this all came about, it is useful to take a brief look at the background. Undoubtedly the driving force behind this phenomenal growth was the government sponsored economic programme in the 1970s. This aimed at restructuring the nation?s dated industry into a modern, technologically advanced one, able to compete worldwide. Special emphasis was placed on the heavy industry and chemical industry sectors of the economy. In this context, the shipbuilding industry was perceived as a leading export industry, due to its comparatively large-scale trade volumes (in terms of value) and the fact that there was an abundant cheap, educated and high-quality workforce available in Korea. The country was also strongly motivated to create the right environment for the shipbuilding industry to flourish since it has few natural resources and has had to rely on exports to develop its industrial base. These factors allowed the Korean shipbuilding industry to compete on equal terms with existing shipbuilding centres: places such as Europe, where there has been a move away from traditional labour-intensive heavy industries during the past 20 years. The first signs of big time shipbuilding came in 1973 when Hyundai Heavy Industries completed construction of its first shipyard. This was followed in 1978 with Daewoo Shipbuilding and Heavy Machinery (Now renamed Daewoo Shipbuilding & Marine Engineering) completing its No. 1 dock while, in the following year, Samsung Heavy Industries constructed its first drydock. By the 1980s newbuilding output had progressed sufficiently for Korea to be ranked number two in the world shipbuilding league behind Japan in terms of market share. High technology vital to success In the second half of the 1980s, Korea?s penetration of the world market rose from 10% to 25%. This was mainly attributed to the massive investment programme in shipyard facilities resulting in dramatically increased production capacities. The area where most progress has been made among Korean shipbuilders has been the investment programmes in production automation and management rationalisation. As a result, the country?s yards achieved a 20% increase in annual production throughout the 1990s and are continuing efforts to maintain this level of productivity improvement. This, together with the growth of supporting industries has, among other factors, made it possible to increase shipbuilding volume without having to add new facilities. Korean shipyards have primarily built bulk carriers, tankers and containerships but in recent years they have invested heavily in R&D with a number of shipbuilders operating and funding their own research institutes. By concentrating on acquiring technological know-how and, with their highly trained naval architects and engineers, Korea can meet almost any ship owner design requirement with the possible exception of cruise ships. The nation?s yards can now deliver complex vessels such as gas carriers, offshore rigs and FPSOs. The first domestically produced LNG carrier was delivered in June 1994 while, more recently, a number of passenger carrying vessels were completed. Shipowners worldwide have come to regard Korea as being synonymous with high quality ships at reasonable prices. Newbuildings surge ahead According to data released by the Korean Shipbuilders Association (KSA), new orders placed with domestic shipbuilders in 2000 amounted to 10.4 million CGT. This is a big increase compared with 6.6 million CGT in the previous year. With productivity improvement and upgrading of production facilities through the introduction of high-technology equipment, the volume of ship completions in 2000 stood at 6 million CGT, an increase of 21.8% over 1999 figures. In the meantime, the order book, as of the end of 2000, stood at 16.4 million CGT, up 32% compared to a year earlier. This represents a workload of approximately two and half years. The Korean ministry of commerce expects the value of ships built to surpass $9 billion this year against $8.23 billion last year. During the first half of this year, Korean shipbuilders exported newbuildings worth $5.7 billion, over 44% higher than the same period last year when $3.9 billion was delivered. Ship repair and conversion Most ship repair and conversion projects have been undertaken by Hyundai Mipo Dockyard, Hanjin Heavy Industries & Construction (HHIC) and Daewoo. These companies account for more than 90% of domestic market share. Despite a wide range of experience with general repairs, damage repairs, and conversion work of special types of vessels and offshore facilities, this section of the industry has continuously suffered from a decline in business. This is largely attributed to strong competition from other countries in the region which have lower labour costs, particularly China. Since about 80% of ship repair cost is labour, it is hardly surprising that this situation has arisen. As a consequence, a number of yards, including Hyundai Mipo, have allowed ship repairing to take a back seat and concentrate almost entirely on newbuilding activity. Essential work force As of the end of 2000, a total of 54,000 shipbuilding workers were employed by the nine main shipbuilders, an increase of about 6,000 over the previous year. Assuming that investments in productivity improvement and technology development will continue, it is anticipated that current manpower will remain at the same level for the time being and probably fall in the long-term. The growth potential of the Korean shipbuilding industry is largely dependent on increased productivity improvements since labour costs are now increasing in Korea which explains the growing presence of China in the shipbuilding market. The workforce currently has an average age of 39, much younger than its Japanese counterpart. While Japan is experiencing difficulties in recruiting skilled staff to the shipyards, Korea does not have this problem. This is in part due to the perception of the industry as a high-status employment by those working in shipyards. Despite this, South Korean shipyards are currently lobbying their government to reinstate training programmes for shipbuilding workers that were scaled back in the wake of the Asian economic crisis. Hyundai Mipo, in particular, has been actively recruiting new workers, sometimes from other yards, to cope with a surge in newbuilding orders after converting a second drydock to newbuilding. Other yards have been attempting to make do with their present workforce, but are starting to feel the strain, particularly for welders, fitters and grinders who are performing the most labour-intensive jobs in the yards. The economic crises has also forced many of the shipyards to cut back some on their own in-house training programmes for unskilled workers. With a weakening economy, shipbuilders are hoping the government can persuade skilled workers from other industries to seek employment in shipbuilding. According to industry sources, the Korean Shipbuilders? Association (KSA) confirms that the yards were appealing for a supportive government labour policy, but denied there was a crisis brewing. “I do not think that young Korean people are afraid of hard work. There is a lot of unemployment now so I do not think we have any problem in hiring or retaining workers.” South Korean workers have also earned their best bonuses for years at the traditional Chusok holidays, which took place early last month. What does the future hold? Since 1999, South Korea has held the top spot in the world?s shipbuilding league table ahead of Japan. How long this situation will last will depend on a number of factors such as the state of the world economy and the strength of the won but, on current form, Korea will prove hard to beat. In the medium to long-term, the main threat to its ascendancy will likely come from China, which has occupied the number three position for a number of years and is in the midst of a massive expansion programme. This involves the construction of four to five large newbuilding docks capable of accommodating vessels up to VLCC and ULCC size, while a lot of effort is going into improving productivity and the build quality of newbuildings. Korean shipbuilders are seeking to transform quantitative growth into a qualitative one by focusing on securing a larger proportion of orders for high value-added ships thus giving higher profit margins. In addition, the country?s three major shipbuilders, i.e. Hyundai, Samsung and Daewoo, have, or are in the process of, gaining independence from their respective chaebol groupings and are now reaping the benefits of the country?s industrial regulations to liberalise business activities and promote competition. The only fly in the ointment is the possibility that the World Trade Organisation might force Korean yards to increase their prices as a result of EU pressure. This would likely give the competitiveness of low-cost Chinese yards a massive boost. Whether it would achieve the EU goal of protecting the European shipbuilding industry is questionable.