Setting sail for lucrative shores

The conventional wisdom is that the shipbuilding industry is vital for the health of the economy because of its ripple effect ― the business boosts trade and other ancillary services in a big way.

In the sense, Korean shipyards with global brand recognition seem to have played a major role in the country’s fast economic recovery over the past few years through and in the aftermath of the global financial crisis.
Korea, home to the world’s three biggest shipyards of Hyundai Heavy Industries, Samsung Heavy Industries and Daewoo Shipbuilding & Marine Engineering (DSME), underpinned its bottom line based on the shipbuilders’ quantum leaps in high-end vessels.
Included in examples are the liquefied natural gas (LNG) carriers, super container ships and large-scale tankers. Korean shipyards swept over 60 percent of the global demand for LNG carriers and containers, according to market research firms.
As for the lucrative offshore production units, Asia’s fourth-biggest economy is also a foremost player with a 63 percent global market share as of the end of last year.
Industry watchers point out that domestic shipyards’ achievements have something to do with their efforts to expand their business horizons to high value-added products.
``South Korean shipbuilders have so far managed to stay ahead of its bigger Japanese and Chinese rivals by enhancing their productivity by utilizing such techniques as assembling critical parts of vessels into modular blocks. They are diversifying their business portfolios as well,’’ said Park Kyu-won, chairman of the Korea Shipbuilders’ Association (KOSHIPA).
According to stock analysts, however, the local shipbuilders’ operating profit rates are relatively low at about 10 percent when considering their brand names.
``We’ve acknowledged this. In order to raise profitability, Hyundai put forth efforts to gain more market shares in high value-added vessels. At the same time, we are placing priorities on diversifying business portfolios,” Hyundai Heavy spokesman Kim Kwang-kook said.
Financial markets seemingly do not question the future profitability of Hyundai Heavy with observers giving more credit to the company's commitment to diversify and cut down exposure to undesirable business cycles.
``Of interest is the fact that each of Hyundai Heavy’s six businesses ― shipbuilding, offshore equipment, engines, electronic information system, construction equipment and industrial plants ― carves out over 10 percent of the firm’s annual revenues,’’ said Ahn Ji-hyun, an analyst at HMC Investment, adding that Hyundai Heavy’s diversified business portfolios are making it more attractive.
``In addition, Hyundai Heavy is securing new growth engines that would replace its conventional cash cows because it has been spending more of its resources to strengthen non-shipbuilding sectors.’’
The outlook for backlog orders, or the key barometer to gauge the profitability of shipbuilders, also looks quite good.
Another local brokerage Daishin Securities expects Hyundai Heavy to win $31 billion worth of such orders by the end of this year.
``That’s an increase of 16.5 percent from our previous estimate. We raised the expectation because of the rising demand for plants and heavy equipment,’’ said Chun Jae-cheon, an analyst at Daishin.
Buoyant sales of its excavators in China is also spurring on Hyundai Heavy, which sold a quarterly record of 82.8 million excavators in China and the consensus is that the strong sales will continue in the second quarter.
``Its plant businesses are expected to rack up better performances in the latter half because the firm is likely to win some big projects such as those for steam turbine generators in the Middle East,’’ Dongbu Securities researcher Kim Hong-kyun said.
In its traditional shipbuilding businesses, Hyundai Heavy has struck $9.6 billion worth of orders both at home and abroad as of the end of April this year, data from KB Investment showed.
``Hyundai Heavy has won more drillship orders compared to its rivals and the rising values of its investments are more than enough to cushion falling profits in the shipbuilding industry,’’ the securities firm said in a recent report.
Amid rising oil prices and hopeful signs of global economic recovery, renewable energy has emerged as the next-generation growth engine for almost all shipbuilders which Hyundai is jumping in head on.
The outfit has already set up Hyundai Energy & Resources, which mainly handles renewable energy. Hyundai spokesman Kim said that his company will spend around 1 trillion won over the next three years on renewable energy.
``The increased investment is necessary because Hyundai heavy, which also churns out marine engines and energy equipment, aims to create more future profit from non-ship divisions,’’ the company spokesman said.DSME, Samsung following
The situation is not much different at Daewoo Shipbuilding and Marine Engineering (DSME) and Samsung Heavy Industries ― the world’s second and third biggest shipyards, respectively.
With a substantial competitive edge in shipbuilding, the two are scrambling to enter lucrative markets using a strategy to lower their dependence on traditional shipbuilding.
Renewable energy and wind power are the markets that DSME and Samsung Heavy are eyeing, while they are cashing in to produce more value-added ships and to win more overseas projects in oil-rich and emerging countries.
DSME said its first quarter net profit more than doubled on firm orders for more pricey ships. ``Higher-charged container ships and drillships helped raise the profit in the latest quarter,’’ a DSME spokesman said.
Its affiliate, Daewoo E&R, has been leading the way. The unit has won local government approval in Papua New Guinea for a large-scale LNG-FPSO project.
The new project is expected to bring greater momentum to Daewoo’s offshore plant business and the spokesman said DSME has a plan to build ships for transporting LNG, fuel and other resources.
Deep sea projects in Nigeria, Kazakhstan and a mining project in Indonesia are other businesses that DSME is involved in.
``Amid the rising raw materials costs, DSME is banking on several other sectors such as wind power as its next revenue stream, which makes sense considering its strengthening financial structure,’’ Woori Investment analyst Song Jae-hak said.
As of the end of April this year, DSME won orders for 13 ships valued at $3.4 billion. It aims to strike $11 billion worth of new orders by the end of this year.
Samsung Heavy has identified sea-related projects as its next revenue sources and fortunately the strategies have already begun yielding profit.
Samsung recently received an order worth $640 million to construct an FPSO (floating production storage and offloading) facility for a Norway-based unit of Teekay.
Meanwhile, Norwegian oil and gas major Statoil named Samsung as its partner for a $412 million contract to build topsides at the Valemon platform in the North Sea.
``Samsung has the advantage in large-sized container ships. Also, it is better than Hyundai Heavy and DSME in drillships and FPSO projects in some cases. Samsung will be one of the top winners if the shipbuilding industry shows a sign of turnaround,’’ Woori said in a latest note to clients.
``It’s been confirmed that Samsung Heavy has keen interests in the global wind power market and renewable energy. We will take action when the time is right,’’ a Samsung spokesman said.
But here’s one challenge: Chinese shipbuilders are flexing their muscle for container, LNG and car-delivering carriers and that mean more competition for Koreans.
``Still, China manufactures low-cost vessels. In contrast, Koreans have already been moving up the value chain and becoming dominant in specialized ships,’’ Woori said.
``Koreans shipbuilders have strong track records of being on time or even being ahead of schedule, resulting in some shipowners having to pay higher premium as the Koreans have credibility.’’