Shipbuilders in China, Japan and South Korea are locked in a struggle for survival amid a global supply glut and shrinking market, as each government digs in its heels to protect these major employers.
The world’s shipbuilding companies are concentrated in the three East Asian countries, which together control 90% of global market share. Advanced and affordable Japanese shipbuilders beat out European rivals in the 1950s to lead the world for roughly 40 years. But competitors arose in South Korea in the 1990s and in China the next decade. Companies from either country have held the top spot since 2010.
Overcapacity has plagued the industry worldwide. Shipbuilding volume soared after 2003 as the Chinese economy expanded, but plummeted following the 2008 financial crisis to 18.84 million gross tons in 2016 from 131.88 million gross tons in 2006.
Order backlogs also continue to thin. Japanese shipyards handled just 2.4 years worth of construction in March compared to 4.2 years in 2015. South Korean companies also dropped to 1.7 years from 2.7 years, while Chinese shipbuilders slipped to 2.8 years from 3.5 years.
This shrinking market has also exacerbated price competition. Companies with larger facilities like Hyundai Heavy Industries have lowered unit prices for big vessels by packaging several orders together into lots.
The South Korean company’s’ shipyard in Ulsan is the largest in the world, with nine docks capable of producing 10 300,000-ton supersize tankers in just six months. Park Mu-sung, a managing director, said Hyundai Heavy has gained customers as a result of its flexible delivery periods, something Japanese shipbuilders cannot emulate.
South Korean shipbuilders were thus able to capture 43% of the market last year, while Japanese companies fell to a record low 7%.
Daewoo Shipbuilding & Marine Engineering also returned to the black after a bailout from the state-owned Korea Development Bank last year. Although the company has said KDB was only trying to avoid a loss as the top shareholder, Seoul was likely thinking about protecting employment as well. Japanese shipbuilders, however, have argued that the bailout runs against fair competition and that Tokyo should file a complaint against Seoul at the World Trade Organization, which Japan is currently considering.
Despite their confrontational stances, Japan and South Korea also face a common threat: the birth of China’s state-owned shipbuilding behemoth.
Chinese companies were equally vulnerable to overcapacity despite winning 35% of the world’s orders last year. Dalian Shipbuilding Industry’s six-dock yard only completed 12 ships in 2017, for example. Beijing therefore decided to merge the country’s top two shipbuilders, China State Shipbuilding and China Shipbuilding Industry, which are both state-owned enterprises with numerous yards.
The new company will own three of the world’s biggest shipbuilders, which built a combined 6.38 million gross tons last year, dwarfing Hyundai Heavy Industries. Beijing’s strategy of joining state-owned enterprises to improve international competitiveness can also be seen in steel and rail cars.
The three nations have tried to discuss a solution to this excessive competition. Japanese Prime Minister Shinzo Abe called for debate on market-distorting government aid as recently as May when he met with Chinese Premier Li Keqiang and South Korean President Moon Jae-in. But no side has been willing to greatly reduce capacity, since the industry is a major employer in each country.
Japanese companies are trying to launch a counterattack by moving production to Asian neighbors. Kawasaki Heavy Industries has tried to cope by closing one of its two docks at a facility in Kagawa Prefecture and building a new one at a Chinese joint venture. Mitsui E & S Shipbuilding, meanwhile, is partnering with Tsuneishi Shipbuilding, which has a shipyard in the Philippines.