SHIPBUILDING LENDS TO ‘RISE OF ASIA’: CAN INDIA CONTRIBUTE?

- Akshita Mathur

The global shipbuilding industry is currently dominated by Asia. In contrast, during the
1960’s, Europe accounted for almost 70 percent of the world's shipbuilding capacity. Over the
last 40 years, there has been a progressive shift in geographic locus of global shipbuilding from
the West to the East, in tandem with the ‘rise’ of Asia. Japan became the world’s leading
shipbuilder in the 1960s, followed by South Korea in the 1980s, and China since the 1990s. At
present, shipyards from these three countries are the largest players in each of the four major
market segments of tankers, bulk carriers, container ships and offshore vessels. Together, in
2013, the three Asian countries accounted for 90 per cent of global shipbuilding. This paper
examines the key factors, which enabled these countries to succeed, and aims to draw lessons for
India.

Key Drivers

The fundamental building blocks for success for all three countries – China, Japan and
South Korea – are similar. The key enablers of shipbuilding industry are the availability of raw
material, human resource and technology, and government policy.

The key ingredient for building ships is steel. The maturing of steel-production in Asia
helped the shipbuilding industry grow. The second is skilled labour. Although initially, low-cost
and abundant labour precipitated the industry's shift to Asia, development of skills among the
labour helped shipyards deliver quality and gain competitiveness. A third determinant is
shipbuilding technology. Japan and South Korea have traditionally possessed a stronger
scientific base than China. However, following technology infusion and best-practices, China
now produces better ships in more complex segments such as Ultra Large Container ships, and is
also making inroads into the fast-growing LNG (Liquefied Natural Gas) segment. The opening
up of the Arctic Northern Sea Route has led to a growing demand for specialized ice-class
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vessels, the hulls of which are built in either South Korea or China. A fourth driver is
government policy. Many governments support respective shipbuilding industries because it
creates skilled labour force, stimulates ancillary industrial activity, spurs employment, and bears
potential strategic applications. While political support is important, fiscal support and incentives
from the government matter more.

Asian Giants in Shipbuilding

South Korea

South Korea supplies almost half of the world’s ship requirements and has been a global
leader in shipbuilding since 2003, when it outpaced Japan and Europe, who had dominated the
industry for decades. Its government designated shipbuilding as a strategic industry. In 2012, it
was home to seven of the world's ten largest shipbuilding companies. This could also be
attributed to government strategies that included capital funding, supportive policies and
facilitation of joint ventures with international companies, which enabled access to latest
technologies. The government also adopted pro-active policies such as relaxing tax regimes for
private sector to stimulate Foreign Direct Investment (FDI) through deregulation.

Japan

Japan’s trademark being quality and timely delivery, its shipyards were long preferred for
placing shipbuilding orders. Its core products include oil tankers, bulk carriers and container
ships, which comprise a major portion of the world’s shipping fleet today. In the 1950s, it began
deregulating its shipping industry by adopting private administration and a liberal monetary
policy. The interest rates were deliberately kept low and stable, and banks were lenient in the
disbursement of loans, while also providing for over-loans and loan deferment options. These
measures helped to meet the business need for capital investment, especially the capital-intensive
heavy industrial sectors like shipbuilding. Other forms of support to the shipbuilding industry
included tax benefits and financing through the EX-IM (Export-Import) banks.
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China
The development of China’s shipbuilding industry is often compared to that of South
Korea, but the conditions of the two were fundamentally different. South Korean shipbuilding
industry was essentially export-oriented. In contrast, China’s strategy was to develop shipyard
capacity to sustain domestic economic development and to become self-sufficient in maritime
transportation. Over the last decade, the Chinese government has taken several measures to
provide impetus to the industry. These include incentives and support in the form of direct aid,
loss reimbursements, tax subsidies, etc. Chinese shipbuilders also entered into a number of
technical cooperation agreements and joint ventures with Japanese and South Korean
shipbuilding firms, which provided access to advanced ship-designs and shipbuilding
technologies.

Relevance for India

India ranks amongst the major global exporter of ships, clearly showcasing its potential.
However, despite being at an advantage in terms of the key drivers of shipbuilding such a low
labour cost and abundant availability of raw material, Indian shipbuilding industry is beset by a
lack of structured policy framework and governmental support, and an inefficient public sector
industry characterized by high time and cost overruns. Nonetheless, Indian shipbuilding is doing
remarkably well in the warship sector, where the Indian Navy provides the design expertise. A
propitious development for India is the recent emergence of private shipyards across the country.
These private players contribute significantly to India’s GDP; and looking from a larger
perspective, can also contribute to the larger ambit of national security. The government needs to
formulate a plan to support commercial shipbuilding, alike the defense shipbuilders. The
government could also set up a marine fund to support the domestic shipbuilding similar to the
merchant marine fund of Brazil. India can draw lessons from China in terms of collaborating in
joint ventures with other countries, especially in terms of technology-sharing. A strong public-
private partnership could also revitalize the shipbuilding industry.

The recent initiative by the Indian government of the ‘make in India’ concept could be
capitalized to make a paradigm shift from being a buyer to a seller. The analysis of the various
facets of the global shipbuilding industry clearly shows that India needs to look at multiple
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innovations including in the areas of regulatory framework, investment policies, trade policies,
fiscal policies, infrastructure, research and development, skill, financing process, collaboration
and technology. Shipbuilding being a capital-intensive industry requires all the above facets to be
addressed concurrently, and not on piece-meal basis. The emergence of private shipyards and the
change in policies towards FDI may be an opportune moment for India to showcase its prowess
to the world, and contribute to the ‘rise’ of Asia.