Keeping Korea?s top spot in shipbuilding

Shipbuilding is an important industry in Korea that significantly contributes to the nation’s economic performance. The country has recently taken a firm position as a global leader. At $43.1 billion (10.2 percent of the nation’s total exports) in 2008, the industry ranked first among Korean exports for the first time in history, outpacing automobiles and semiconductors. Shipbuilding is expected to maintain its No. 1 status throughout 2009.
Since 2003, Korea has been a global front-runner in terms of new orders received, tonnage of ships built and order backlog. The country has seven of the world’s top 10 shipyards.
However, the global shipbuilding industry, which enjoyed a boom during between 2003 and 2007, abruptly entered a downward phase in 2008. New orders received plunged by more than 40 percent due to the global economic correction and the end to most replacement orders in 2007.
In contrast, during the boom, countries such as Korea and China saw an upsurge in the construction of shipbuilding facilities. As a result, an oversupply is expected until 2011 and the price of new ships will continue to drop for a while.
In the aftermath of the industry lull, major shipbuilders around the world are faced with a series of unfavorable conditions (i.e. fewer new orders and cancellations of existing ones). Fortunately, however, Korean shipbuilders have suffered less damage than their counterparts in countries such as China and Japan. Although local shipbuilders saw new orders fall 20 percent in the first half of 2008, their market share actually rose by more than 11.7 percentage points from the previous year.
Sources of Korea’s competitiveness in shipbuilding can be divided into six attributes. Firstly, Korea has more than 110,000 skilled shipbuilding workers, and about four times more ship designers alone than Japan. Second, Korea matches or surpasses Japan in terms of overall shipbuilding capability, ranging from design, production and management. Third, Korea has an upper hand in economy of scale. As of 2007, the average shipbuilding capacity of Korea’s shipyards was two and seven times higher than Japan and China, respectively. Fourthly, due to continuous process improvement and the application and development of innovative production methods, Korea’s productivity is high, evidenced by its unit process time being similar to that of Japan and only half that of China. Fifth, Korea has a stable production portfolio with more than 60 percent of docks in local shipyards filled with high value-added container ships and tankers. Sixth, in Korea, the shipbuilding cluster that stretches from Busan and South Gyeongsang along the south coast, supports the nation’s shipbuilding industry.
Although Korea is now an international shipbuilding leader, whether or not it can maintain its position for the next five to 10 years is uncertain. China, in particular, is a potential threat. Recently, overall competitiveness of the Chinese shipbuilding industry has neared 90 percent of Korea’s current level. Such performance is driven by low wages (only a sixth of Korea’s), strong government measures to nurture the industry and technological transfer from Japan that seeks to make a comeback as the world leader by aggressively cooperating with China.
But Korea has a new advantage - the fact that Chinese shipbuilders have been more severely affected than their Korean peers by this recession. This suggests that Korea has won some time to broaden the gap with China.
To maintain their leadership, Korean shipbuilders must complete some key tasks. First, they should proactively develop high-end ships equipped with more sophisticated technologies. Second, they need to diversify their business models by changing their way of thinking. For example, by expanding the concept of shipbuilding from “carrier builder” to “ocean developer,” they could dramatically change their business approach (i.e. to marine plant construction, marine development and ship finance). Finally, the Korean government, for its part, should promote ship finance, which has remained weak, and build up a human resources development system that fits the global shipbuilding industry’s changing business paradigm.