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【Ocean Newsletter】Back issues

No.40 April 5, 2002

Shipbuilding - Where to Now?

By the mid-1950s Japan took the lead in the world shipbuilding league for 35 years. However, at present there is more intense competition among the burgeoning shipbuilding countries that use cheap labour as leverage. Everyone should think more carefully about the effects for the ship operator from the cost down process during construction. In the future, Japan should take the lead in the world again on the basis of better quality and high reliability.

To look ahead is always a daunting task and, where shipbuilding is concerned it can be very difficult sometimes. Forecasts of future market requirements for new ships have been known to be disastrously wrong at times.
However, anyone trying to look ahead, in the world of shipbuilding, before the terrible events of September 11th, last year, might have seen a particular picture beginning to form. It could be seen that demand for some ship types, such as bulk carriers and VLCCs, had flattened out somewhat, as the "bulge" of the replacement programmes for those ships was over. The flow of orders for such newbuildings had slowed to a more healthy and sustainable rate.
On the other hand, there was a considerable demand for large container ships which many thought was getting out of hand. Never the less, there was active talk, and some discussions going on, about even larger container ships with capacities of up to 10 000, or even 12 000TEU.
Perhaps a similar situation had been reached in the more specialised but lucrative, market sector of large passenger cruise liner newbuildings.
Difficult though it may be to accept, perhaps the drastic events in September, last, did the shipbuilding market favour, in that over tonnaging was stopped in its tracks or, at least stopped before it got out of control. Of course, everyone asks -- but what now?
To answer that question is difficult to say the least but, as the world adjusts to new circumstances, which are perhaps not yet settled, world trade will pick up again and, hopefully new shipbuilding orders will follow since world trade levels are the biggest controller on shipping and the requirement for new ships. If we are lucky, we may just see some market sectors begin to rise as soon as the spring of 2002 or just after that. However, it will be a slow rise and it may take some time for other market sectors to pick up.
However, before looking ahead too far, we would do well to see what has been happening in recent years. It is after all, on lessons learned from history that we can build a better future but only if we are strong enough to learn and take on board those lessons, and accept their meanings.
Competition between shipbuilding countries has always been there, since the industrial revolution and the coming of steel-hulled ships. The European countries led the way in the beginning and today it is hard to believe that the UK once built 80 per cent of the world's new merchant ship tonnage. By the mid 1950's Japan, through the strenuous efforts of its shipbuilders and their dedicated work forces, took the lead in the world shipbuilding league and remained the leader for some 35 years. Then came Korea, with huge new shipyards, cheaper, and it seemed unlimited labour, to challenge the Japanese position. Today we can see China beginning to go down that same road as a challenge to Korea, as that huge country's industrialisation begins to gather pace.
In all of this, perhaps the biggest change of all has been the collapse in prices of newbuildings over the last decade, or so. As an example, if we look at a new VLCC building in the early 1990's, an owner would have to pay around $95 million for such a ship but, in 2001, the same ship could be purchased for a little over $70 million. Surely, there can few industries in the world which have seen such dramatic price reductions for large capital projects.
Those reductions have come about, partially by intense competition, with it seems, Korea leading the way and China having an underlying effect. At the same time, currency exchange rates have had a considerable effect. After the Asian crisis in 1997, the Korean Won devalued hugely and so the Korean yards were able to take in more domestic revenue from say, a newbuilding VLCC, costing around $70 million, than they had previously received from the same type of ship order with a price tag as high as $85 million. In the same time period, Japan's exchange rate did not move in such a dramatic way and so price pressures built up.
Present order books, in major shipbuilding countries, are full enough to keep the yards busy throughout 2002 and into the early part of 2003 but, what then? Hopefully, before the end of this year, we will see world trade pick up, at least slowly and, with that, an increase in the trickle of orders presently going to the yards. However, there will be intense competition for new orders and we could expect to see prices go down further, with subsequent losses to the shipyards, engine builders, and equipment suppliers.
Before we look further into that scenario, we should look a little more closely at what has been happening, from the ship operators' point of view. Such gentlemen are, after all, the end users of the products coming from the shipyards and machinery works.
From the author's own 10-year experience of sailing on board ships as an engineer, in fast cargo liners operating between Europe and the East Asian area, it is clear that all ships spend some 80 to 85% of their time at sea, working in a rolling or pitching (or a combination of both motions). In such conditions, stresses are placed on the ship's hull, and equally importantly on the machinery and especially the main engine. Such stresses on main engines cannot be simulated ashore or even in the design stage of the engine, unlike the hull which can be modeled and tank tested in various sea conditions to confirm design calculations.
Those model tests are more concerned with hull performance in rough sea conditions. They are not so concerned with the endurance of the hull in long periods of rough weather. Of course basic hull strength, and hence design and construction rules, are laid down by appropriate Government bodies as well as the Classification Societies and, the ship designers must follow those rules.
Where the main machinery is concerned, engines are so large that it is not possible to test them under simulated rough sea conditions and there is no computer program which can do the simulation mathematically, either. The result is that the engine designer or builder does not know the total forces being placed on his engine when it is operating in a ship in rough weather.
In recent years, ship operators have seen hull designs become minimised but of course still within the rules, as the commercial forces of stiffer competition lead to the so-called "cost down" effect. The result for the ship operators is that little or no reserve is left in the ship design for the extra wear and tear which comes with rough weather operations. That equally applies, if not more so in some detail areas, with the main machinery.
While mentioning the weather effects, it should be born in mind what the human race is doing to the earth's environment in creating the "greenhouse effect". Signs of this are already with us, and the effects will become greater, including changes in weather patterns, where greater and more ferocious storms can be expected. Thus, more and greater stresses will placed on ships' hulls and machinery.
To the seafarer, the sea is a great friend who he lives with for many weeks of the year but, it can be his terrible enemy, also, so any weakness in hull or machinery will put the seafarer's life in unnecessary danger at times, as well as bringing the cargo carried into a poor condition sometimes.
When "cost down" methods are used in design and construction of the ship they also affect the machinery and from the operator's point of view, that brings the main engine into strong focus. Engine designers try to produce a design which will ensure an efficient and reliable engine but the majority of large 2-stroke engines today are built by licensees located far away from the designer's base. Thus, the actual engine builders, under pressure from their shipbuilder customers, for lower prices, make what might be seen as minor modifications to the original design to suit their own cost structures. Such modifications in one part of an engine can make differences in other parts of the engine, which are not investigated. So, reliability is reduced. Add to that, the use of cheaper, and hence sometimes lower quality parts, and reliability is reduced further.
It is quite clear today that such practices lead to engine failure, which is a costly business at the best of times, with losses on charter rates on top of what should be unnecessary repair bills for the operator. In some cases, within the past 5 years, the use of cheaper parts of dubious quality or, the lack of good quality control, has led to engine failures which have involved engine room staff being seriously injured. It is quietly feared among operators that if the "cost down" process is continued, that the death of an engineer working in the engine room, cannot be far away.
Who then will be the guilty party? The engine builder will blame the shipbuilder for pushing him further into the "cost down" process but the shipbuilder will blame the shipowner for pressing him down on price.
Who is the shipowner today can be quite a question. The number of real shipowners today can probably counted on one hand, as many ships are initially owned, on behalf of original shipowners, by banks, finance houses, perhaps trading houses, or even the shipbuilders themselves in some cases. Such organisations are not so interested in the technical aspects of the ship. Their business is money and how to make more of it. So it is natural that they want the cheapest possible price for the maximum cargo carrying possibilities and, hence the fastest return on their investment in the ship.
Any ship operator today (very often a previous shipowner) can appreciate that fact but, he has the responsibility of operating the ship, sometimes on a slender budget awarded by the "owner". The ship operator is looking for reliability and safety above all else but, he sees that those qualities may have been sacrificed to some degree in the "cost down" process during design and building. Thus, the repair and down-time costs go up and the long term investment begins to look poor.
Today, many ship operators feel strongly that the time has come to stop this pressure on the shipbuilders and engine builders, before there is a fatal accident. They feel that it would be much better if so-called "owners" were to look at the long term returns on the considerable investment a ship represents, rather than a short term quick profit view. However, long term benefits of lower repair and down time bills only come through higher quality, which in turn, means an initial higher price. It also means that the shipowner gets a better and safer ship with less risk to him, his ship operator, and to the ship's crew.
So, the ship operators -- the users of the end product, the ship -- ask that everyone think more carefully about ship prices and costs in the future and, where might we be going with the "cost down" process. If an increase in quality means a higher price, so be it. Many major ship operators today would be prepared to pay another 10 per cent on the cost price if it assured them that they were getting better quality and hence increased reliability and safety.
However, market competitiveness is important so we might ask where is Japan's place in all of this and particularly in the future?
Japan has a good reputation for high productivity and, on-time delivery from its shipbuilders. Their productivity levels have been the envy of the world's shipbuilders. Quality was also a feature but, in the face of intense competition, especially from Korea, and to some degree to China breaking into the market, it has regretfully diminished. So which way should Japan's shipbuilders take now?
From the ship operator's view point, the way forward would be an increase in quality, even it means an increase in ship prices. Orders might well be lost for a while to the major competitors of Korea and even China but, Japan could lead the way back to better quality and higher reliability in ships. Others then must follow or, lose market share in the new quality ship league.
Some idea of what can be done can be seen in the European area yards. They gave up trying to compete against the East Asian yards for many ship types, quite some years ago, to concentrate on the higher quality styles of ships and the more specialised types of ships. The results can be seen today in the number of passenger cruise ships built in the European yards, for example -- more than 90 per cent of the world's requirements. Likewise, the bulk of the many specialised vessels which are required for the offshore oil and gas business today come from European yards. All of those ships require and get good quality built into them.
There is a wealth of talent in Japan and, while ship quality is increased, it should be possible to refine efficiency and hence take productivity to even higher levels in the yards. Grouping up of some of the various shipbuilding divisions of the major industrial groups has been promoted but, so far has made little progress for a number of very different reasons. Perhaps a different look at the possibilities regrouping should be made. The idea of much larger shipbuilding affiliations through various combinations should provide some savings on costs but it is hoped not at the sacrifice of flexibility of operations.
If Japan were to go for higher quality ships, it could of course mean some reduction in shipbuilding capacity and consequent loss of employment for some people. The author is well aware of what that means to the individual person, having been through the same process himself. If that were the case, the Government would have to look at alternative employment schemes but also should be able to encourage out of work operatives to use their hard won skills to their own benefits through self-employment schemes.
If we could set aside the events of September 11th, last, just for a moment, and consider where the world's shipbuilding industry might have been if those events had never occurred. We can see, as previously mentioned, that the demand for bulk carriers and VLCC's had flattened out while the demand for container ships, especially of the larger sizes, was almost rampant. However, a diet of large container ships with small side dishes of some bulk carriers and tankers is not good for the appetite of shipbuilders as it can lead to some indigestion in the form of over tonnaging in the container trades. Therefore, a reduction in the world capacity for newbuildings is inevitable at least in the medium term. Thus, some shipbuilding berths will have to closed down and used for other purposes.
If we now bring the effects of the September 2001 terrorism back into the equation, we can immediately see that in the container ship sector of the shipbuilding market, the possibility of ower/opertors ordering new ships in the 10 000 to 12 000 TEU size range are very remote. If such huge ships were to come back into vogue, perhaps only 30 to 40 of them would ever be built, for the trans Pacific and, the Europe/East Asia routes only. Basic design work for such ships has been completed by a number of shipyards, in anticipation of what might have been required. However, the main propulsion ideas for these ships have never been fully settled and the huge costs associated with the full development of engine powerful enough to for single screw 12 000 TEU vessels will never be repaid by the relatively few orders which would be available to any single engine designer.
Looking right across the world's new ship requirements under the present circumstances, it is not possible to see any clear picture but it is certain that that there will be no great surge of orders once the market restarts. At best it can be hoped that a slow but steady increase in market requirements will occur, and we can be sure that some cut throat, and loss making, pricing tactics will be used by certain shipbuilders. There is, however, a limit to how much loss any sensible company can take, and prices will inevitably rise but that could take some time to accomplish.
If such price competition will inevitably lead to more "cost down" process, it will be the ship operator who will suffer at the end of that line once again. Better quality with less sophistication on board should be the way forward. It is sometimes thought that there is too much in the way of so-called clever design in some ship types today when crews don't fully understand all the devices and electronic systems on board. A more sturdy and simpler design is the order of the day particularly where the simple bulk carrier is concerned, for example. Better quality with less "frills" is what is really required in such ships and a good shipbuilder will recognize that.
It will not be easy to produce, and sell, better quality ships at a higher price against the general flow of cheaper prices on "cost down" vessels but, that is what is wanted by the ship operators. Those who finance newbuildings would be wise to not look for short term gains but to think longer term. After all, a ship has a 20-year lifetime on average. That is not a short life for a major investment. Few aircraft, for example, reach that age and motor cars rarely do but, the relative investment initially, is high for a company or an individual, respectively, in those cases. Why shouldn't a ship with a lifetime of 20 years deserve a greater investment initially? If the shipbuilders are to go for better quality at slightly higher prices it might serve them well to remember an English motto -- "he who dares, wins".