Meeting challenges

Korean shipbuilders are faced with a number of problems as the industry in their country matures. Traditionally they have competed against Japan largely on a price basis. Now they need to look over their shoulders at China on price. Talk has now turned to productivity and quality of product, the very defence Japan has used to protect its position against Korea.

Price competitiveness though remains an important weapon in Korean shipbuilders armoury. While anxious to increase ship prices, having endured a number of years of weak demand and subsequent weak pricing, Korean shipbuilders realise that raising prices too high could encourage Japanese shipbuilders to reactive drydocks or re-enter markets they had all but given up as lost.

“If we increase price too high Japanese shipbuilders will be more competitive with our members and they will get more orders,” laments Song Deuk Lee, director of the Korea Shipbuilders? Association.

Efficiency is key

The inference is that Korean shipbuilders will be better able to increase profit through increasing production efficiency and thereby cutting cost rather than trying to increase revenue too greatly. If Korean yards are as efficient as Japan, they will benefit from lower labour costs. Korea?s GDP per capita is about two thirds that of Japan (China?s GDP per capita is about quarter that of Korea).

Despite the danger of increasing price, the recent weakness of the US dollar against the Korean Won has left Korean shipbuilders with little option if they are to maintain or even raise profits. Wages are paid in Won and most equipment is paid for in Won (Samsung reckons foreign products represent just 10-15% of ship price). Income though is received in US dollars. Without an increase in the dollar price, Korean shipbuilders income in Won will depreciate as the dollar weakens, thus threatening profitability.

“That?s the big problem to the shipyards,” says James Yeon, general manager of sales planning and coordination at Samsung Heavy Industries.

The yards are employing taskforces with experience in the foreign exchange business to counter the threat to their balance sheets. They are engaging in currency swaps and hedging to minimise their exposure to big swings. They are also thinking of other solutions.

“If feasible maybe we can think of the Euro- or Yen-based contract,” says S C Jung, general manager of the ship sales department in Hyundai Heavy industries shipbuilding division.

In the yard?s favour is the fact that Japan?s shipyards are faced with the very same issue. The same is true for the impact of possible war in Iraq, with a long conflict potentially harming shipbuilders everywhere, not just in Korea.

China is undoubtedly viewed as a lingering threat, but the general feeling of Korean shipbuilders is that issues such as low drydock turnover, production delays and product quality will allow them to defend their position in the immediate future. There is also a view that an increase in output at Chinese yards will simply take up China?s expected impact on world trade growth (e.g. ships to cater to China?s increasing crude oil demand etc.).

The other brooding issue with a potential impact on Korean shipbuilders business is the trade dispute with the EU. Lee says Korea will counter-sue any action brought against his members. He says the EU is putting forward baseless arguments to push its case, many of which are designed to get subsidies reinstated. He adds that there is a future for EU shipbuilders in a subsidy-free environment if they consolidate or restructure and concentrate on selling smaller ships.