global shipbuilding industries

Griffith University 2705942

Industry Analysis

Shipbuilding Industry

Presented to – Prof. David Lim

Date- 9,October,2009.

Executive summary-

Industry Analysis-

Name- Aditya Kakatkar

Student Id- 2705942

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Executive Summary-

The global ship building industry has changed from last two decades, the demand and supply of

goods international has led many industries to enter into the market of shipbuilding. Transporting

commodities in bulk can only be transported big commercial cargo ships by ships, Shipbuilding

industry is a huge industry which requires lot of skilled and cheep labor. Shipbuilding requires

massive capital investment. In the 1960s EU were dominant in this industry, Globalizations and

free trade have opened the opportunities for new shipbuilders. Developing nations have

comparative advantage over the developed nation in shipbuilding, because of the cheep and

skilled labor. Shipbuilding demand have raised since 2003 because of developing nations like

South Korea, Japan, China and other developing nations. The Hyundai Heavy Industries was

established by Chung Ju Yung in 1947. The company over came the challenges in the field of

shipbuilding and today is one of the world’s top shipbuilding companies. Today worlds top 10

shipbuilding companies, 7 companies are from South Korea. In the global shipbuilding sector

South Korea dominates the industry followed by the China and then Japan. Due to globalization

and free trade demand for ships is increasing, by which many new developing countries are

entering into the market of shipbuilding. India and Pakistan are the new players, these countries

have comparative advantage over the rest of the global shipbuilding companies because of cheep

and skilled labor. The global shipbuilding demand feel the bang of the US recession, the fears in

the international economy and effect of September 11, In the year 2000 the order intake had

slowed down. This change mainly affected the European shipbuilding industry. The first half of

2002 of new orders was around 60percent below the year 2000. Ships which affected the most by

market conditions were the container ships and commercial cargo ships. The major shipbuilding

companies in the world compete with one another. The global coordination of shipbuilding firms

activities is best characterized by an upper right hand position in porter’s matrix, major

shipbuilders operate yards in only one country because of economics of scale in fabrication

facilities, infrastructure, inbound logistics and procurement. Product needs are quite standardize

for a given vessel type worldwide, and transport cost for completed vessels are low.

In this industry we analysed the industry from Michael E Porter’s five force theory and related

this theory to the shipbuilding industry. The analysis includes the Internal rivalry, barriers to

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entry, substitutes and complements, supplier power and buyer power. From the industry analysis

made for global shipbuilding industry, we here by conclude that global shipbuilding industry is

growing rapidly, with open market and demand for new commodities demanded for massive

production of large vessels, cargo carriers and commercial ships. The present market is

dominated by South Korea, but if we see from order book Japan is leading. Japan presently is

having more orders. The research and the analysis of shipbuilding industry states that this era

will be dominated by the developing Asian countries. Today due to the massive size of the

market and growth within the developing countries shipbuilding is one of the expensive industry

The porters Five Force theory really helps out to give out an global overview of the industry it

not only gives out the financial overview but the current market value of the industry

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ContentsIntroduction.................................................................................................................................................4

Global Shipbuilding Industry..................................................................................................................4

Global market industry analysis..................................................................................................................5

Major Industry developments..................................................................................................................5

Global Leaders in shipbuilding Industries.-.............................................................................................6

Hyundai Heavy Industries- South Korea.........................................................................................6

Daewoo Shipping building and Marine Engineering- South Korea.................................................6

Samsung Heavy Industry- South Korea...........................................................................................6

Responses to market developments.........................................................................................................7

Europe.........................................................................................................................................7

South Korea.................................................................................................................................8

Japan....................................................................................................................................................8

China...................................................................................................................................................9

Issues affecting the Shipbuilding market.-...................................................................................................9

Porter’s Five Force theory in the Global Shipbuilding Industry................................................................10

Industry Competitors.............................................................................................................................11

Internal Rivalry......................................................................................................................................12

Potential Entrants...................................................................................................................................13

Ship buyers............................................................................................................................................13

Conclusion.................................................................................................................................................15

Recommendation-.....................................................................................................................................16

References-................................................................................................................................................16

Introduction-

Global Shipbuilding Industry- From the analysis made. This report focuses on the global

shipbuilding Industry, the global opportunities for this industry is being analysed focusing on the

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leading global players in the ship building industry. In today’s fast moving world of airplanes,

travelling by sea is very slow, but when the question of transporting heavy and mass delivery

ofgoods, ships are the only option considered. The marine and the sea trade has always been

given the first preference all over the world. This is the main reason why seaborne industry is

considered the largest transportation industry. Shipbuilding industry involves huge workforce,

heavy capital investment and modern technology. This industry requires all the above three

factors for smooth running. Shipbuilding process is very time consuming, many other small

industries are connected with shipbuilding, these small scale industry manufacture integrated

parts for shipbuilding. As we know import and exports contribute to the nations national income

where major imports and exports are done through the sea. The main driving factor of this

industry is the GDP growth. Over the past years the shipbuilding industry has shifted its

primarily base from the dominating nation which is Europe to now Asia. Even inside Asia there

has been struggle to receive the top position in shipbuilding where South Korea dominates the

industry by leaving China and Japan behind. China has also left behind Japan and became the

second player in this industry. The positions these nations have gained are just not within Asia

but are on International global platform. The order books of these global shipyards show the size

of their shipping industry. Currently these shipyards are having huge order books that need to be

delivered through the coming years. Due to globalization this industry is in a boom and the

demand for shipbuilding will never go down. The demand for new cargo ships, commercial

ships can be calculated on the basis of volume of trade, volume of marine freight, global

economic growth and demand of steel. This industry mainly focuses on the country factors and

firm characteristics that determine leadership in international industry, as well as the strategic

alternatives faced by firms competing in such an environment. In the end of the year of 2005, the

global shipbuilding order book halted for 227 million dead weight from which 208 million tons

was on order in shipyard of Asia. This states the growth and development of Asia.

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Global market industry analysis

Major Industry developmentsThe global shipbuilding market is receiving the impact of the recession in the US, the doubts in

the world economy and effect of 9/11/. In 2002 the order intake had slowed down and remained

constant for a while see (see graph). This transformation mainly affected the European

shipbuilding industry. Before the 2002 of new orders was around 60Ercent below the year 2000.

Ships which affected the most by market conditions were the container ships and cruse ships.

Quarterly rate of generation of new shipbuilding orders

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0

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1995 1996 1997 1998 1999 2000 2001 2002

Year

Mil

lion

CG

T


Index prise for ship new buildings (1987 = 100)

80

100

120

140

160

180

200

19881989 19901991 19921993 19941995 19961997 19981999 20002001 2002

Global Leaders in shipbuilding Industries.-

Hyundai Heavy Industries- South Korea

Daewoo Shipping building and Marine Engineering- South Korea

Samsung Heavy Industry- South Korea

Bohai Shipbuilding Heavy Industry Co., Ltd. – China

Bolunbao Shipyard – China

Alcock Ashdown, Bhavnagar - India

Cochin Shipyard Limited - India

Hakodate Dock (Hakodate) – Japan

Imabari S.B. (Marugame) - Japan

Imabari S.B. (Saijo) -Japan

Imabari S.B. (Imabari) -Japan

Ishikawajima-Harima Heavy Industries (Kure) -Japan

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http://en.wikipedia.org/wiki/Ishikawajima-Harima_Heavy_Industries

http://en.wikipedia.org/wiki/Cochin_Shipyard

http://www.alcockshipyard.com/

http://en.wikipedia.org/w/index.php?title=Bolunbao_Shipyard&action=edit&redlink=1

http://en.wikipedia.org/w/index.php?title=Bohai_Shipbuilding_Heavy_Industry&action=edit&redlink=1


Responses to market developments

The market of ship building is increased tremendously, within the past few decades.

Europe

European shipyards have already been affected for a longer period of time to focus mainly on

target market segment with a high value extra, where Asian shipbuilding industries have been

behind in the commercial ships and commercial cargos are mainly ordered, as they cannot match

the lower price of Korean Shipbuilding industries. European shipyards receive very problem in

the passenger ship market. The shipbuilding has significantly slowed down and an alternative

market segment of similar importance is not in sight. A number of European shipyards in

Germany, Italy, the Netherlands, Sweden, Norway and Poland went bust or had to lay off

workers in Denmark, Germany, Finland, the Netherlands, the United Kingdom and Poland since

the date of the Commission’s last report. Very few yards have order book stretching beyond

2003-2004. European shipping yards are undergoing various measures to improve their

competitiveness and existences in the shipbuilding industry increased. the R&D, technology

department, is significantly changing in the European market.

South Korea

Korea geographically enjoys a lot of advantages over the rest of the shipping yards in the world.

Its geographic location makes the buyer attracted, offshore structures gas tankers and cruise

ships, on the other hand they try to activate more demand in their traditional market segments

tankers and container ships. All these are done through by reducing the offer prices koted, inspite

of constant cost increases in Korean production over the past 12 months. Wages in Korean yards

have increased by 6 percent. Raw Material costs have increased by ca. 5 percent , Steel is

10percent and inflation is 8 percent and the WON has appreciated by 8 percent with reference to

the USD. Skilled and semi skilled Labour and material costs relation for 90 percent of total gross

production costs in shipbuilding industry and the associated cost increases are consequently

important

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Japan

The Japanese shipbuilding industry is at present is passing through massive reformation,

bringing collectively a number of shipyards under one roof of a few large groups. The resultant

synergies have helped Japanese yards to stay and comitete with the rest of the global players in

exacting regarding the series production of bulk carriers, although this is significantly assisted by

the fact that. 50 percent of the order comes from the domestic demand, mainly for cargos and

bulk carriers. Japanese technology and highly motivated and skilled workers make them

competitive in the global market, Japan is currently is leading in the market if we see by the

order book. Booking of freights and huge carriers are still waiting.

China

Chinese shipyards have lower labour, cost when compared to rest of the shipyards in the world ,

China enjoys this benefit because of its cheep labour and large population. Government plays a

vital role in development of shipbuilding companies. China after entering into the WTO in 2002

gained more global attention, with Chinas economy growing faster and faster year by year, China

needs to stand out in the market of shipbuilding. However china is having manpower, capital and

government support, china will be the next leading shipbuilding industry .global demand for

commodities will never stop. With a booming GDP. And substantial commitment China will

come out through in this industry easily.

Issues affecting the Shipbuilding market.-Issues-

Economic- Global economic development, changes in economic growth patterns, and

expectation of increasing economic growth in the future.

Government policies- No co-operation and support from the government. Government

intervention may affect directly to the shipbuilding industry.

Structural – changes in the structure of shipbuilding.

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Market development- The changing market, new demands from customers, competition in

price affect the industry

Regulatory- Changes in environmental, safety and regulatory regimes.

Technology- Changes in ships design, new modern technology

Support measures- Actions taken by government in support of the shipbuilding industry

which could affect the normal operation of competitive conditions in the industry

New players- the impact of new players entering into the shipbuilding market.

Porter’s Five Force theory in the Global Shipbuilding Industry

The research and the analysis is to confined the industries like Hyundai Heavy Industries that

build major cargo ships like bulk carriers and (VLCC) Very Large Crude Carriers.

The introduction of porter’s Five Force theory was first acknowledged by Michael E. Porter in

the 1980’s when he was starting up the competitive strategy. The five forces theory introduced

by Michael E.Porter. Basically he focused on the global market and designed a common format

which can be analysed on a common platform of the global industry. The combination of the

five forces namely categorized as Internal rivalry, Barrier to entry, substitutes and complements,

supplier power and buyer power are the key elements that needs to be analysed in any global

industry. These five forces just don’t tell about the industries strength but also determines the

profitability of the Industry

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Bargaining power of suppliers Threats of new entrants

Threat of Substitutes

The structure of shipbuilding industry

The state of competition in the shipbuilding industry is a function of five basic competitive

forces as shown in the above fig. In shipbuilding, buyers and rivalry (Ship-owners) affect the

competitive position of participants more strongly. Government affects a number of forces in one

way or another.

The Structural Analysis of Industries

The first fundamental determinant of a firm's profitability is industry attractiveness. Competitive

strategy must grow out of a sophisticated understanding of the rules of competition that

determine an industry's attractiveness. The ultimate aim of competitive strategy is to cope with

and, ideally, to change those rules in the firm's favor. In any industry, whether it is domestic or

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Potential new Entrants

Industry Competitors

(Rivalry among existing shipbuilders)

Substitutes

Ship-ownersSuppliers


international or produces a product or a service, the rules of competition are embodied in five

competitive forces: the entry of new competitors, the threat of substitutes, the bargaining power

of buyers, the bargaining power of suppliers, and the rivalry among the existing competitors.

The five forces determine industry profitability because they influence the prices, costs, and

required investment of firms in an industry -- the elements of return on investment. Buyer power

influences the prices that firms can charge, for example, as does the threat of substitution. The

power of buyers can also influence cost and investment, because powerful buyers demand costly

service. The bargaining power of suppliers determines the costs of raw materials and other

inputs. The intensity of rivalry influences prices as well as the costs of competing in areas such

as plant, product development, advertising, and sales force. The threat of entry places a limit on

prices, and shapes the investment required to deter entrants.

Industry Competitors-

Competition in shipbuilding can be segmented by nation or by firm. In shipbuilding, the

competitive advantage of a participant in the sector tends be more location specific than sector

specific. Shipbuilding involves high labor intensive, depending mostly on skilled and semi

skilled labor. The domestic raw material availability of ship components and steel industry

influence the competitive of the shipbuilding companies in that nation. A shipbuilding contract

involves huge amount of financing to a ship buyer. A well set local financial market (mostly

influenced by government) is a main key competitive position of shipbuilding companies.

Currently, shipbuilding industries are present in thirty countries. From a international

perspective, the relevant players are categorized into three major groups, Western European

countries including the United Kingdom, Japan and developing countries including Korea. There

other free world nations including United States. The market share of these three major groups

have changed drastically during the past decade. In the 1984 the Japanese held 57.6 % of the

global market. Western Europe 13.2% , and the developing countries 26.5%. All these groups

have different sources of competitive advantage in terms of financing, cost structure technology

level of shipbuilding, quality standards and meeting the deadline.

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Internal Rivalry-In the case of shipbuilding companies. Internal rivalry exists more between

nations than Industries. As we know that shipbuilding does not caters to the domestic customers

but it is a International industry. Import and export plays a vital role in a countries national

income. After the developing nations signed the WTO and free trade it opened up whole new

opportunities for exports and imports. Where there are opportunities there is competition and

rivalry. Many new developing nations like India and Pakistan entered the market of ship building

because of their skilled and cheep labor. The large number of oceangoing vessels being delivered

worldwide is growing by 6% per year, and touched the heights of 1000 mark in 2006 for the first

time. Global shipyards have wide spread orders for new vessels and cargo carriers. The price has

increased rapidly over the past few years, with the demand of LNG- Liquid Natural Gas carriers

and LPG- Liquid Petroleum Gas carriers, South Korea tops with 76.7 % and 71.3 %. Other

nations like China, Japan are having less market shares which makes South Korea the leader in

production of LNG and LPG carriers, with regards to cargo and bulk carriers China and Japan

dominates the sector with 47.7% and 40.5% of global market share. Although countries like UK

and USA contribute towards the shipbuilding industry their contribution is much more lesser

than Korea, China and Japan. Rivalry between shipbuilding companies is high, mainly in the

form of price competition the following factors has led to competition in price.

Excess capacity and high fixed cost- High fixed cost of commodities leads to rapid rise of

price cutting whenever excess capacity is present.

Diverse competitors- Diverse strategies, nations of origin, and management styles among

different shipbuilding industries increase the instability of rivalry. Eg shipbuilders of

different communist countries are satisfied with a rate of return which is no acceptable to the

leading shipbuilders of the world.

High exit barriers- shipbuilding process involves high investment, in most countries the

industry is strongly influenced by government for employment reasons, economic

development, and national protection. These barriers lead to unsuccessful shipbuilders to

continue operating often with government subsides, and to determinedly wage price wars at

the expense of industry profitability.

Potential Entrants – During the past century, potential new entrants to shipbuilding have

always been present. Korea and Japan rose to importance. A number of developing nations, such

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as Taiwan, Brazil also entered on a significant scale in the 1970 but did not succeed. Despite of

continuous high entry barriers to the industry. Such as need to accumulate substantial experience

and extensive capital requirement governments have constantly helped finance entry. China, with

its huge intensive labor, is expected by many to emerge as the newly successful entrant. CSSC

China’s government controlled shipbuilding and shipping corporation, was formed in May 1982

as a vehicle for cording 25 ship yards and 88 new building blocks and 24 repair docks.

Ship buyers – The outlook of the shipbuilding industry are majorly influenced by those of the

business cycles of two industries which are closely correlated. The buyer’s position in bargaining

in shipbuilding is generally strong for a number of reasons. First there tend to be a number of

potential suppliers of ships of a given technology and quality, though industry participants vary

differently in technological ability. Second, the shipping industry itself is highly competitive

making buyers very sensitive to the price of ships. Third, major ship buyers purchases new ships

in large volumes. This creates influence over builders because their fixed costs raise the intensive

to utilize capacity. Buyers are also knowledgeable and expend substantial resources in ship

purchasing because the cost of ships is by far their largest investment.

Ship buyers consider various factors when selecting a builder. For any type of ship, the four

major considerations are delivery, price, government policy and quality. The relative weight

placed on each factor varies by type of vessel. As a general rule, price is more important when

buying less classy vessels. Such as bulk carriers, oil tankers, and general cargo ships. Quality is

more important when buying high technology vessels, such as LNG tankers, container ships and

commercial ships. Delivery date is moderately important for most vessels categories, but very

important for those vessels used by merchant shipping companies that want to reduce the risk

associated with changeable freight rates. Government policy exerts a considerable influence over

the building of some vessel

Barriers to Entry-

Shipbuilding industry involves huge workforce, heavy capital investment and modern

technology, the procedure of shipbuilding is time consuming and requires lot of man force and

massive investment, which makes entry to this industry difficult. Some of the major barriers to

entry are

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Equipment and Machinery- Shipbuilding is not a easy process it requires heavy machinery,

and technology, a strong managers are required for monitoring the daily force. Each new

order book has a specific deadline. The ship has to be ready at the given deadline

Raw materials- The main raw material involved in shipbuilding is the steel, and as we know

steel prices are never stable, so managing the time and required raw materials is necessary

Expertise- Good and experienced engineers and staff make the shipbuilding ready before the

deadline this requires years of experience and commitment to the company. Hyundai Heavy

industries entered into the shipbuilding industry with a very little experience, while General

Dynamics had been in the industry along with combat systems and aerospace. Another

barrier is where companies prefer to buy from company who has been in this field for long

time.

Shipyard- Every shipbuilding company requires a shipyard where the ship can be made, a

proper location is necessary, the area occupied by the shipbuilders is massive, finding and

developing such location is difficult for new players.

Government- government support is necessary, as the investment is huge support from

government is in terms of incentives, tax holidays, investment from government side is

important.

These were the main barriers.

Substitutes and complements – From the perspective of cargo ships, the reason for substitution

is the price; the price that occurs in building cargo ship is very high Eg- Tanker ships have a

capacity to carry cargo from 1000 dead tonnage to 549999 dead weight tonnage. Hence there are

very little option of transportation that can match the capacity to carry cargo. Therefore within

the shipbuilding industry there are substitute for ships.

Supplier Power- The whole ship is not manufactured by the company itself, the company

outsource some work to the subcontractors. Companies like STX and Hyundai Heavy Industries

get their raw materials suppliers. Components like navigation systems, ships engine are not

produced by companies itself. They are subcontracted,

Buyer Power- Describes the potential of buyer, the buyer mainly in the shipbuilding industry is

are the shipping industries. Shipbuilders and shipping companies go along together; government

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is also a very important buyer, the import export capacity and demand for commodities has

opened up a new market for shipbuilding industries.

Conclusion- From the industry analysis made for global shipbuilding industry, we here by

conclude that global shipbuilding industry is growing rapidly, with open market and demand for

new commodities demanded for massive production of large vessels, cargo carriers and

commercial ships. The present market is dominated by South Korea, but if we see from order

book Japan is leading. Japan presently is having more orders. Shipbuilding industry is a never

ending industry, but the fear is of mass production of ships, more order for ships and less ship

yards

Recommendation- From the industry analysis and from the conclusion we here by

recommend that the global shipbuilding industry needs to slow down with its production of

ships, or else if uncertainties occur there would be more of ships and less of shipyards.

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References-Brooks, Ian & weatherston, Jamie. The business environment; challenges and changes .

Northmpton; Prentic Hall Europe, 1997

Changing global Industry: Dong Sung Cho and Michael E. Porter.

http:// English.hhi.co.kr/business/shipbuilding.asp ( accessed October 1, 2009)

Besanko, David, David Dranove, Mark Shanley, and Scott Schaefer. Economics of statergy, John

Wiley& sons, 2007

“Global Shipbuilding Industry: Status and challenges.” The shipbuilders association of Japan,

2005.2.

Strategic Marine.http//www.strategicmarine.com/( accessed Oct 3,2009).

Worthington, Ian& Britton, Chris. The business Environment. Fourth editions.cEssex:FT

Prentice Hall,2003

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global shipbuilding industries

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