© YONHAP News

Korea’s shipbuilding industry has been struggling for years due to restructuring and the lack of global demand. But there are signs of turnaround on the horizon. To capitalize on this, the government announced a set of measures on November 22 that it hopes will coincide with a reemergence of the shipbuilding sector. Here is Lee In-chul(이인철), director of the Real Good Economic Institute, to examine the current situation of the local shipbuilding industry and the government’s support measures.

One of the factors behind the sluggish Korean economy is a decline in traditional manufacturing industries like automobiles and shipbuilding. In a welcome turnaround, however, the number of orders won by Korean shipyards in the first ten months of this year rose 71 percent year-on-year, making it possible the country reclaims the top spot in the global market with a 44 percent share.

During a Cabinet meeting last week, President Moon Jae-in mentioned the recent improvement in the business and used the expression, “Pull on the oars when the tide is rising.”

Clearly, the president is urging the government to lose no time in giving full support to local shipbuilders to capitalize on the positive momentum in the industry.

Noting signs of growth in the auto and shipbuilding sectors during a Cabinet meeting on November 20th, President Moon instructed his officials to craft support measures for those industries, including capital and R&D assistance. Korean shipbuilders, in particular, seem to be experiencing a reversal of fortunes after years of high deficits and low demand.

According to the U.K-based shipbuilding market research institute Clarkson Research, Korean shipbuilders accounted for nearly 45 percent of total global orders. That’s 23 million compensated gross tons or CGTs through October this year. It is the first time since 2015 that local shipyards earned annual orders exceeding 10 million CGTs. Thanks to the impressive performance, they are expected to clinch the number one position in new orders worldwide this year for the first time in seven years, outpacing their Chinese rivals who have dominated the global market since 2012.

In line with the ongoing recovery in the global shipbuilding industry, which bottomed out in 2016, orders secured by Korean shipbuilders this year have nearly doubled from a year earlier.

Korea has been trailing China in the global shipbuilding market for over half a decade. But this year, orders for Korean-built ships are expected to rise to the highest level since 2014, and may possible exceed Chinese orders. Mr. Lee explains what’s driving this increase.

Stricter emissions regulations bring renewed attention to Korean shipbuilders’ high level of technology. 

The International Maritime Organization or IMO plans to enforce tighter marine environmental regulations starting in 2020, prompting a transition to more environmentally-friendly ships. It comes as no surprise that proficiency in complex clean vessel technology is becoming increasingly important.

Moreover, many suspect that China’s low price strategy has reached its limit. Clarkson Research says that about 75 percent of Chinese shipyards failed to win any single order from January to September this year. In contrast, there is a growing preference for Korean shipbuilders that have a technological edge, compared to those in China and Japan. For these reasons along with a steadily recovering global shipbuilding industry, Korean shipyards have been able to win more orders than their foreign rivals this year.

Large shipbuilders in Korea are making the most of the uptick in global demand. During the January to October period this year, Hyundai Heavy Industries won orders to build 135 ships, and Samsung Heavy Industries inked orders for 41 ships. Daewoo Shipbuilding and Marine Engineering also secured 38 new orders. The rise in new orders raises hopes that the local shipbuilding industry will be able to claw itself out of a recessionary lull starting from next year.

The IMO’s strengthened regulations on sulfur content are also welcome news for Korean shipbuilders. From 2020, the amount of sulfur oxide applied to offshore fuel oil will be drastically reduced to 0.5 percent from the current 3.5 percent. Violators will be subject to fines of up to 57-thousand-500 US dollars and could even be detained at or barred from entering ports. Thus shipping companies are increasingly turning to cleaner fuel alternatives like liquefied natural gas or LNG, as using LNG to power ships can reduce polluting emissions of sulfur oxides by up to 95 percent.

Korea has already benefited from these regulations. Hyundai Heavy Industries has won 18 orders for LNG-powered vessels, the greatest number in the world, while Samsung Heavy Industries has signed contracts to build 10 such ships. The problem is that only the largest shipbuilders in the industry are reaping the benefits of greater demand.

The long-stagnant shipbuilding industry has rebound at last, but its performance still falls far short of its all-time best year in 2007. The number of orders at present is less than 20 percent of that posted 11 years ago.

Also on a negative note, orders are confined to large shipbuilders. Small- and mid-sized shipyards are still struggling with a severe drought in orders, stoking fears of collapse. STX Offshore & Shipbuilding, for example, has won only six orders this year. Smaller shipbuilders have a hard time securing funds because their comparatively low credit ratings fail to secure them the loans needed from banks during the prolonged industry slump.

As Mr. Lee explained, smaller players in the local shipbuilding industry are still in a crisis. In order to assist them, the government unveiled a series of measures on November 22. The central government will provide cash-strapped shipbuilders with 700 billion won or 630 million US dollars in new financial aid and extend the maturity date on loans worth 1 trillion won or 800 million dollars. In addition, orders for 140 LNG-fueled vessels will be given to small and midsize local shipbuilders.

The increase in orders and infusion of capital are helpful measures, but it is necessary to come up with a more comprehensive plan to assist ailing ship builders.

I think technology and market confidence are the major elements that determine the competitiveness of the manufacturing industry. Korea should also heed a lesson from China, where rising wages are hurting price competitiveness.

Korean shipbuilders will have to continue to merge existing production facilities as part of restructuring efforts to address oversupply.

They should shift their focus to high value-added vessels like LNG ships, super-large containers and eco-friendly ships, and develop a smart ship system that incorporates information technology into the shipbuilding business. They cannot regain their past glory without an overhaul of the basic industrial structure. They need to widen the technology gap with their rivals and increase labor productivity as well.

Korea’s shipbuilding industry once dominated the world market on the back of overwhelming technological prowess. The industry experienced a crisis due to dwindling orders triggered by the global economic slowdown and a prolonged trend of low oil prices. But it turns out that the same technological competence that elevated Korea to the forefront of the industry is propelling industrial revival this year.

Riding this positive momentum, Korean shipbuilders should continue to enhance their technological development to ensure a full escape from the doldrums of recession.