A red flag was raised for Korean shipyards such as Hyundai Heavy Industries, Daewoo Shipbuilding & Marine Engineering (DSME) and Samsung Heavy Industries which had dominated the offshore plant market. This is because they are losing orders to Singaporean shipyards which have not been even recognized as their competitor so far.
In particular, bidding prices submitted by Singaporean shipbuilders are much lower than those of Korean shipyards. Of course, it is still unclear whether or not the bidding prices suggested by Singaporean shipbuilders can give rise to profits. There is still a possibility that Singaporean shipbuilders are suggesting unreasonably low bidding prices to receive orders to build up their experience. One thing is clear. If this trend holds, it will become nearly impossible for Korean shipbuilders to receive orders for offshore plants.
According to the shipbuilding and offshore plant industry on November 13, as Sembcorp Marine of Singapore landed a contract to build an offshore plant, the Big 3 Korean shipbuilders have been feeling a bigger sense of crisis. Recently, oil major Statoil signed a letter of intent (LOI) with Sembcorp Marine in the bid for Part 1 (the hull and deck house) of Johan Castberg’s floating production storage and offloading (FPSO) unit. The contract amounted to about US$490 million, about US$100 million less than US$575 million that foreign news outlets analyzed that DSME submitted.
"It is said that Sembcorp Marine’s bidding price is US$100 million less than that of DSME which submitted the lowest bidding price among the three major Korean shipbuilders in the bid for Johan Castberg’s FPSO unit,” a Korean shipyard official said. “At that time, controversy was aroused over DSME’s low bidding price disclosed in foreign news reports but actually, Sembcorp Marine’s contract volume put everyone in the Korean shipbuilding industry at a loss.”
"The price difference of US$100 million cannot be overcome through simple cost cutting," he said. "If Sembcorp Marine steadily submits bidding prices at this level, Korean shipbuilders will lose all offshore plant orders to Sembcorp Marine."
The large gap is blamed on labor costs. "Although Singapore's consumer price level is high, Singaporean shipbuilders such as Sembcorp Marine and Keppel hire workers from Malaysia, India and Pakistan to build offshore plants," the official said. “It is true that Singaporean shipbuilders can crush Korean companies in terms of labor cost.”
If Singapore shipyards continue to win orders for the hulls of offshore plants only like the Johan Castberg case, it will deal a big blow to Korean shipyards. An offshore plant bid can be held for a full turn-key contract or separate contracts for the hull, the deck house, and production facility (the top side). Observing recent order trends, many cases have been separate contracts.
"Building an FPSO unit is like putting a crude oil production plant on a vessel," another official said. “The construction of the bottom of an FPSO vessel similar to a ship is capable of stably generating profits as it has a few variables compared to production facilities. “If Singaporean shipbuilders land all of hull construction orders, it will make Korean shipbuilders have no choice but to build high-risk production facilities only. Korean shipbuilders want to win orders for entire offshore plants, but lately, ship owners have preferred to place separate orders, giving more troubles to Korean shipbuilders."
For the present, Korean shipyards should prepare for the “second race” with Sembcorp Marine. Hyundai Heavy Industries, Samsung Heavy Industries and Sembcorp Marine are competing for the “Block B” gas project of Vietnamese oil company PHu Quoc Petroleum. Samsung Heavy Industries and Sembcorp Marine will also take part in the bid for the top side (part 2) of Johan Castberg. The three Korean shipbuilders and Sembcorp Marine will also vie in the bid for Chevron's Rosebank FPSO.
In the meantime, major Korean shipbuilders are already fiercely competing with Chinese counterparts in the merchant ship sector. Chinese shipyards are also making attempts to win orders for oil tankers and containerships which are Korean shipbuilders’ main areas based on low labor costs and financial support from the Chinese government. Recently, CMA CGM of France shocked the Korean shipbuilding industry by concluding a contract to build up to nine 22,000-TEU vessels with two Chinese shipyards -- Hudong-Zhonghua Shipyard and Shanghai Waigaoqiao Shipbuilding.