South Korea’s shipbuilding industry has been overtaken by latecomers, including China, in the liquefied natural gas (LNG) carrier, very large crude carrier (VLCC) and offshore plant sectors that the industry has had the most competitive edge in the world. Even Singapore, which has been “immaterial” in the industry, is taking away orders from South Korean shipbuilders.
Worsening Cost Competitiveness
At the meeting marking the Shipbuilding & Marine Day, which was held for the first time in two years, at EL Tower in Yangjae-dong, Seoul, on December 1, Park Dae-young, president and CEO of Samsung Heavy Industries Co., said, “It is a great shock that Singapore has won offshore plant orders which South Korean companies were expected to receive.” He also expressed concerns that Singapore is rapidly securing the competitiveness in the offshore plant sector by merging with an engineering company and building a new offshore dock. There have been a huge uproar in the industry as global leading Samsung Heavy Industries and Daewoo Shipbuilding & Marine Engineering (DSME) lost all the orders to Sembcorp Marine, Singapore’s second largest offshore plant company that has no experience in large-scale projects.
The domestic industry said the gap in labor costs is the main cause of the defeat. The bidding prices submitted by Chinese and Singaporean shipbuilders were much lower than those of Korean shipyards. An official from the shipbuilding industry said, “The wage cost of Sembcorp Marine was US$25 (27,175 won) while that of South Korean shipbuilders was US$65 (70,661 won). Singapore’s per capita income is US$53,000 (57.43 million won), which is about two times higher than that of South Korea with US$28,000 (30.34 million won). However, the country now has a better cost competitiveness than South Korea as it has attracted cheap Southeast Asia labors.
China is also using its low labor costs to compete in the high value added ship sector. A shipyard from China State Shipbuilding Corporation (CSSC) won the US$1.44 billion (1.56 trillion won) orders to build nine 22,000-TEU container ships, which are the largest in the world, from Frace’s CMA CGM, the third largest shipping company in the world, in August, beating Hyundai Heavy Industries.
Slow Pace of Restructuring Hurts Competitiveness
Wage costs account for 30 percent of the total shipbuilding production costs. Since there is no big gap between countries in the cost of materials, such as rear plates and equipment, labor productivity acts as a decisive variable in obtaining orders. South Korean shipbuilders have pushed ahead with a large-scale restructuring since 2015 but this have made little progress due to their labor unions’ strong opposition. Samsung Heavy Industries, which shut down two out of eight docks because of the lack of work, planned to dismiss 1,500 employees this year for the second consecutive year but it only received a voluntary retirement from 600 to 700 employees owing to the internal opposition.
Hyundai Heavy Industries also has 1,500 idle workers as there is no more offshore plant orders to build. However, the company cannot respond to it as the union expresses the strong opposition. Yang Jong-seo, senior research analyst at the Export-Import Bank of Korea, said, “Labor costs in the South Korean shipbuilding industry are twice as high as that in China and are on a par with that in Japan but the nation’s productivity fall behind the two countries. It will be painful but the industry needs to make continuous efforts to get rid of inefficiency on a production site.”
Need to Change High Value Added Ship Only Strategy
Some market experts point out that the South Korean shipbuilding industry needs to change its strategy targeting only the high value added market. Under given conditions, shipping companies cannot afford to buy expensive South Korean ships and offshore plants, though the quality is good. In particular, they are under great financial pressure with the introduction of global environmental regulations, including mandatory ballast water treatment system and stronger control over sulfur oxide emissions. Accordingly, they are expected to place orders based on prices rather than technology by 2020. There is also a growing consensus that the industry needs to continuously seek to cut the cost, though it is a painful process.
Others also say that China and Singapore are raising their competitiveness in the high value added ship sector so the domestic shipbuilding industry should target the low value added ship market, like bulk carriers and tankers, again. Seong Hong-geun, research director of the Korea Research Institute of Ships & Ocean Engineering (KRISO), said, “With the advent of smart ships and eco-friendly technologies, the boundary between high value and low value added ships is disappearing. South Korean shipbuilders should compete with China in all sectors regardless of the type of ships.” South Korea will not be able to maintain the shipbuilding industry when it insists on only some types of ships.