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

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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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Contents
Introduction....................................................................................................................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
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

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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.

Global market industry analysis

Major Industry developments

The 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.

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6
Million CGT
5

0
1995 1996 1997 1998 1999 2000 2001 2002
Year

Quarterly rate of generation of new shipbuilding orders

Index prise for ship new buildings (1987 = 100)

200

180

160

140
120

100

80
198819891990199119921993199419951996199719981999200020012002

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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

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

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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

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

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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.
• 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

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

Potential new Entrants

Bargaining power of suppliers Threats of new entrants

Industry Competitors
Supplier (Rivalry among existing shipbuilders)
Ship-owners
s

Threat of Substitutes

Substitutes

The structure of shipbuilding industry

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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
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

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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.

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.

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• 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
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

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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

• 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

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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
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-

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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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