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SHIPBUILDING INDUSTRY IN INDIA

AN OVEVIEW

Background: Shipbuilding (encompassing shipyards, the marine equipment manufacturers and a l arge number of service and knowledge providers) is an important and strategic in dustry in a number of countries around the world. This importance stems from the fact a nation's need to manufacture and repair its own Navy and vessels that su pport its primary industries. This paper presents a brief overview of the shipbuilding industry in India and t he possible challenges and opportunities that Indian companies could enjoy in th e future. The Uniqueness of Shipbuilding sector: § The shipbuilding industry has its own distinctive feature as compared to other i ndustries in the country. It is unique in a way that it has to sell first and co nstruct later, unlike the auto industry or others, where one manufactures first and sells later. § Further shipyards get orders only if they are credible (deliver quality ships on time) and it can be credible only after successfully executing consistently und er international competition. § Further, subjoined, it has to be globally competitive against the best yards in the world. Unfortunately, the shipyards are faced with very stiff taxes, tariff, duties, and financing charges as compared to foreign yards. § The deliverables of the sector involves long gestation periods and requires high cost finances over a long period. Global Scenario: Globally shipbuilding is a USD 20 billion industry. The global shipbuilidng orde r book recorded a 29% CAGR over the period of 2003 06. An upward trend has been witnessed in the world order book as a percentage of worldfleet indicating a str ong demand outlook. Fortunes of shipping and shipbuilding industries seem to be linked to each other or at least move in tandem. For nearly three decades in the post World War II e ra, both the industries were dominated by European nations and United States. Hi storically, shipbuilding industry suffered from the absence of global rules and a tendency of over-investment due to the fact that shipyards offer a wide range of technologies, employ a significant number of workers and generate foreign cur rency income (as the shipbuilding market is dollar-based and a global one). However, high labour costs in the yards of Europe and USA, one of the major dete rminants in this cost competitive industry, has led to a gradual shift of the ce nter of shipbuilding to these Asian nations over the last two decades. Today shipbuilding has become an attractive industry for developing nations. Jap

000 crs (roughly 3060 m $) in 200 6 The Indian shipbuilding industry is on a high growth trajectory and is expected to grow at a compounded growth of 30%. The industry is expected to become self sufficient in 10 years time and will no longer require subsidy thereafter. it has gained a strong foothold in the niche offshore segment.800 China (2004) 8. and the rest in the private sector.2 80. Nevertheless.000 Employees 290 320 56 Productivity DWT Person .3% in 2006. which is quite undersized according to global shipbuilding standards. It is clear from th e above that India can grow in the shipbuilding sector in a healthy manner if shipbuilding is recognized as a strategic industry and if it can enjoy simple taxation policies with a fully empowered regulating body fo r quick decision-making . This has been possible on account of the shi pbuilding boom and both foreign/Indian Shipping Companies are coming forward to place new building orders on Indian Yards. a window of opportunity which was not available earlier. the industry is still in its nascent stage and dependent on govern ment support for subsidy. India s share in the world market has gone from an insignificant low of 0. and inadequate given the country's requirements.000 DWT. has been created for the Indian shipbuilding industry. The tidal shift in shipbuilding activities. The current shipbuilding capacity of India is only 2. Though India has not yet become a signifi cant player in the global shipbuilding business. and both public and private ship-builders ar e capitalizing on them Indian Scenario: With global shipping industry pitching for an unprecedented demand for new shipb uilding . 2 with state governments. the Indian shipbuilding industry is emerging as internationally competitive export led industry. This has enabled the industry s order b ooks to grow from Rs 1500 crs in 2002 to Rs 14. today contrary to expectations the Indian Shipbuilidng or der books stand at 1. it s productivity is almost the sam e as India and this is one area that India can take a lead on the strength of it s IT industry and setting up new modern shipyards. of which 7 are under administrative control of the centr al government. A comparison of productivity shows that while China may be well ahead of India in total ship building. Korea made shipbuilding a strategic industry in the 1970s and China is now in t he process to repeat these models with large state-supported investments in this industry. Tracking India s performance: India has 23 shipyards. from Europe to Asia.3 million DWT. The Indian shipbuilding industry had always been dogged by low capacity. Thanks to the gradual shift of shipbuildin g from Europe to Asia. Country Completions M DWT Japan (2004) 23.8 158. has opened up h uge opportunities for Indian yards.000 Korea (2004) 23 71. Hence from an an inward looking indust ry dependent on government orders.81.an used shipbuilding in the 1950s and 1960s to rebuild its industrial structure.1% in th e beginning of 10th Plan to 1. poor pr oductivity and lack of modernisation.

000 R&D schemes in Shipbuilding 2. a long with top-class management.608 23.95 billion in the ship building industry.India (2006) 0.6 12. India has world-class naval engineers and architects. China India Shipbuilding & Repair Yards Manufacture of Equipment No of Employees 2.743 and $21. towards the modernization of infrastructure and development o f a research design base § XI plan outlay: Name of shipyards/schemes Government Budgetary Support (INR million) Internal and External Budgetary Support Total Cochin Shipyards 400 5.192 per year. The fact however remains that India s contribution is tending towards being a sign ificant component in the global shipbuilding industry and that we need to get ou r act together to use this very promising window of opportunity.520 44. against $10.000 50 Comparing India and China: A comparison of productivity between India and china shows that while China may be well ahead of India in total ship building. India has a lot of catching up to do.000 30. Indian business is convinced that India has a major comparative advantage in shi p-building that has been masked all these years by an inefficient public sector notorious for high costs and time overruns. With the expone ntial growth in the number of ships calling on Indian ports. providing ship-repa ir facilities is becoming an increasingly attractive opportunity.3m DWT 1% China has been gaining almost 2% of the world s share every year.702 (total Orderbook 40 m DWT Global share 19 .87.317 per worker in leadi ng shipbuilding countries like South Korea and Singapore. it s productivity is almost the sam e as India and this is one area that India can take a lead on the strength of it s IT industry and setting up new modern shipyards.500 5900 Setting up of two International size Shipyards 15. India is probably the only country that will be able to match the Chinese prices with its relatively low labour costs and industrial base for manufacture of equipment. . The growth of Chinese shipbuilding industry is now becoming a threat to almost a ll major shipbuilding nations as China is planning to become the leading shipbui lding nation with an aim to corner more than 30% global share by 2015. Stakeholders in Indian Shipbuilding sector: Government: § FDI: the government has permitted 100% FDI in shipbuilding and ship repair activ ity § Investments: the government has proposed to invest INR 71.018 NA 2. Not only does ship-repair and building activity help generate substantial local jobs.20% 492 28 148 Not Known industry) 12. it also builds the capacity of local industry.000 1. The labour cost per worker in India is estimated at $1.000 15.018 Conducing Studies 190 NA 190 Total 20. Apart from skilled wel ders and fitters.128 Private Players: Indian corporates and shipyards plan to invest over 170 billion INR over the nex t 5-7 years that has the potential to take india s share to over 3% to 5% of globa l shipbuilding. These.

These include necessity to win an order through in ternational bidding or certification from the ship owner that the bid process ha d been followed before selecting the Indian shipyard. delivery time. As a result there is significant cost disadvantages on account of import dependence which eat into low labor cost adv antages of Indian shipbuilders. price and quality. Watching the Indian Shipbuilding Market: Key players: Key issues and challenges: The Indian Government has been trying various promotional and subsidy measures s ince the 70 s which managed to keep the industry alive at a time when the global i ndustry was passing through a deep recession after the boom of the 70 s which. However. the policy of GOI to extend subsidy support to Indian shi pbuilders enabled them to effectively compete in the global market.can make India a global power. The shipbuilding industry is now witnessing a growth phase after a gap of almost 25 years. This is an opportunity for India to revive its shipping industry and bring it at par with the rest of the world. the Cochin shipyard is the only one that has the capabili ty to build large and modern ships. aft er expiry of the subsidy scheme. it would be imperative to address concern areas which could be detrimental to the future progress of the sector: Procedure governing subsidy support: with Indian shipyards suffering systemic an d scale disadvantages. which imports most of its input materials and is therefore unable to leverage advantages offered by bulk purchases and Just in Time supplies. These advantages of scale are not available to Indian shipbuilding industry. will enhance the competitiveness of the shipbuilding sector. etc could be introduced to improve efficiency. PPP models. Measures such as performance incenti ves. ther e is a need to ensure that that prescriptive procedures governing eligibility to receive subsidy are removed. even as its renewal is under construction. which could lead to optima l and effective contribution towards the global shipbuilding industry. which effectively ensure t hat the benefits of the subsidy scheme are not realized by the private ship-owne rs as most of their ship building orders are through negotiations Deficient infrastructure: Indian yards lack the capability to build large and mo dern ships. enab ling them to develop scale as well as a cluster of ancillaries. While the government has provided subsidies to shipyards but it has to ensure that the benefits reach the private players as well Disadvantages accruing from small scale of operations: the shipbuilding sector i n China and South Korea have received government fiscal and policy support. Lack of ship design and limited investment in R&D: Indian players need to work h ard to meet the international players in ship automation and technology Benchmarking it to international standards: The Indian shipbuilders must focus o n benchmarking their own processes to international standards to improve the eff iciency. the country missed due to lack of industrial growth. Supporting the growth of ancillary industries: Ancillaries need to develop along with the shipbuilding industry as they are the key competitive differentiator f or establishing/relocating shipbuilding and shiprepair facilities. A cluster dev . which will in turn. However in order to achieve this objective. Infact th e time is just ripe for India to carve a niche in this sector. It is essential for India to put together strategies. Presently.

there is increased exploration and produc tion (E&P) activity.elopment approach for building ancillary capacity could be adopted.0 % of Bharti s and ABG s order book is directed towards the oil and gas sector. when compared with USD 10. Leveraging labor cost advantage: In India. plasma cutting machines. The International Maritime Organization (IMO) has mandated the phasing out of al l single hull vessels by 2010. Globally India has one of the largest OSV order books.8% of the total vessels SWOT Analysis: Recommendations: § India.192 is very low.743 and USD 21. This is expected to d rive the demand for OSVs. Industry leaders. Indian shipyards have carved a niche in the construction of OSVs. increase in offshore drilling activity. labor cost per worker per year of USD 1. an d other material handling equipment purchased for running a shipyard (c) Duty on sale of ships to Indian Shipping Companies: The materials and pa rts imported for building ships are exempted from payment of custom duties but t hese ships once built are treated as imported ships and a custom duty of 5. Korea a nd Japan have limited OSV capacity. and demand from the naval force and coastal guards are the key growth drivers for the India n shipbuilding industry. Single hull tankers constitute 15. Dedicated SEZ for integrated and clustered development of Shipbuilding sector in .0% is levied on them (d) Onerous Tax Structure: Indian shipyards are subject to 19 different taxe s/ duties. Training and human skills issues: Development of training programs in various ac ademies to produce high quality talent should be prime focus No tariff protection from imports Multiple clearances: As the industry Is dynamic and cyclical in nature these cle arances result in procedural delays and hampers augmentation of capacity (a) Presently there is no supervisory Authority/Apex body (b) High customs and excise Duty on capital investment: The government levie s 35% duty on all capital equipments such as cranes. Approximately 70. resulting in a shift towards India Replacement Demand: 40% of the Indian owned fleet is more than 20 years old and Indian owners will n eed to spend about $ 4 billion to replace these in the next 5 years. These taxes cumulatively put Indian shipyards at a disadvantage and d iminish their cost competitive as compared to the international players Growth Enablers: The growth in overall trade.317 in South Korea and Singapore respectively Offshore segment: As the proven oil and gas reserves are likely to meet the glob al energy requirements only till 2030. particularly in the offshore segment.

China and India have the skills and cheap steel to make the best and cheapest ships. through promoting competition. Such an integrated pol icy initiative would be required for the revitalisation of the Indian ship repai r industry as well so that conditions are created for the Indian firms to become technological leaders instead of followers. Constitution of an apex body to regulate the working of the sector. . Conclusion: Worldwide the shipyards are full and the world is turning to India to meet its r equirements. After all.§ stment § § Encourage Design capability and R&D through fiscal benefits as given to R&D inve in pharmaceutical sector. Exemption of Service Tax on Shipbuilding and Ship Repair. The successful shipbuilding industrial development of Japan. coop eration and even acquisition and Joint Ventures with leading foreign yards. Korea and China has not happened by chance but by a carefully crafted policy where the government h as provided the core administrative guidance and support.

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