No end in sight for China, South Korea shipbuilders

The once formidable shipbuilding industries of China and South Korea now find themselves having to cope with a prolonged slump, with orders at dangerously low levels. Calls for consolidation in the overcrowded industry have yet to produce any meaningful reform.

The cluster of dockyards along the Yangtze River in Yangzhou in China’s Jiangsu Province is testament to the torrid situation. The area, said to be where the eighth-century monk Jianzhen started out on his way to taking Buddhism Japan, is now a key global shipbuilding center.

But the giant cranes reaching into the skyline above the docks belie the predicament of local shipbuilders.

At the point of Oct. 18, production has been suspended at five of the eight dockyards, while the other three have been operating at lowered capacity.

In 2003, local textile and garment company Jiangsu Sainty launched into shipbuilding in the belief it would grow into a significant earner, pumping in huge funds earned through real estate.

For a period it looked as though the investment would pay off. Vessels were in high demand amid rapid economic growth, and other companies followed suit. As a result, total new orders, which stood at 3 million gross tons in 2002, grew to 20 times that figure tons just five years later.

But when orders fell to one-third of the peak level in 2015, the industry was left overcrowded. Progress in realignment has been painfully slow, with 3,000 companies remaining and a half of production capacity estimated to be redundant.

Symbolically, Sainty Marine, the shipbuilding subsidiary of Jiangsu Sainty, went under in February. The company has sought buyers on three separate occasions without success. In the end, it announced plans to relaunch itself as a power company, which was widely interpreted as an intention to abandon shipbuilding.

Excess capacity is no longer something industry players can cope with. In October, Guo Dacheng, chairman of the China Association of the National Shipbuilding Industry, called for expediting the process of weeding out zombie companies, saying they are detrimental to the entire industry.

Nearly 30% of the 71 companies Beijing rated as superior are now facing difficulties, including bankruptcy and production suspension.

The situation is little better on the other side of the Yellow Sea. In September, South Korea’s shipbuilders managed to win orders for a total of just three vessels, or one-16th the figure a year ago, according to a U.K. research company.

The country’s big three — Hyundai Heavy Industries, Daewoo Shipbuilding & Marine Engineering and Samsung Heavy Industries — no longer receive orders from overseas for large ships such as liquefied natural gas tankers.

The South Korean government is pushing to downsize the industry. On Oct. 17, Yoo Il-ho, who leads the country’s economic policy as deputy prime minister and minister of strategy and finance, called on shipbuilders to expedite restructuring. He said structural adjustments must be sped up and be carried out ruthlessly.

By 2018, Samsung plans to cut its 14,000-strong payroll by 30% to 40%, while Daewoo aims to let 20% of its workers go by 2020. Overall, downsizing will reduce the total number of workers at the big-three to about 10,000.

In an interim report commissioned by the South Korean government, McKinsey & Co. called for consolidation of the big three into two, noting that Daewoo would not be able to survive on its own.
Source: Nikkei