Looming threat of Chinese shipyards to Ulsan

“That’s the way the industry moves: from Europe to Japan, Japan to Korea, and now from Korea to China,” Tsao says. “It’s got to happen.”

China Shipbuilding `Juggernaut’ Gains on Leaders Japan, Korea

March 22 (Bloomberg) — Five years ago, He Baoxin was putting the finishing touches on a ship small enough to fit through the Panama Canal. Now his company is making a vessel five times that size to service offshore oil and gas rigs.

“We’re building ships now that we could only dream of five years ago,” says He, 48, who runs Shanghai-based Shanghai Waigaoqiao Shipbuilding Co., China’s largest shipyard.

With leading yards worldwide at full capacity until 2008, China’s rise in market share has come at the expense of such publicly traded shipbuilders as South Korea’s Hyundai Heavy Industries Co. and Japan’s Mitsui Engineering & Shipbuilding Co. China, the world’s No. 3 shipbuilder, raised its share of new orders by 2 percent to 17 percent last year and won its first contract to build liquefied gas tankers.

“In volume, China can overtake the Koreans by 2015,” says Aled Smith, 36, who helps manage $300 million at M&G Ltd. in London, including shares of Hyundai Heavy. “They are building very aggressively.”

China’s 600 shipyards, mostly state-owned, charge about 10 percent less than competitors and are more flexible in building to specifications, according to Clarkson Plc, the world’s largest shipbroker. The government’s call for China to be the No. 1 shipbuilding power in a decade may wrest business from Korea and Japan in the same way those countries’ growth in shipbuilding took business from European yards two decades ago.

Korea’s Hyundai Heavy, the world’s largest shipbuilder, heard warning bells in August when Shanghai’s Hudong-Zhonghua Shipbuilding Group Co. landed China’s first order for gas tankers.

Moller-Maersk, Iran

“If you had asked me five years ago, I wouldn’t have thought it possible,” says Lee Kwang-ho, a general manager at Ulsan-based Hyundai Heavy, of China’s progress. “Quite simply, South Korea is going to have to work on getting more share in the market for high value-added ships like gas carriers.”

Chinese yards won 17 percent of all new orders by deadweight tonnage last year, according to London-based Clarkson. Korea won 34 percent and Japan 35 percent. Croatia was fourth with a 1.5 percent share. Five years ago, Korea had a 49 percent share, compared with 33 percent for Japan and 6 percent for China.

“China is one big juggernaut that’s really rolling,” says Tim Huxley, 44, Clarkson’s managing director in Hong Kong. “It’s going to be very difficult to stop it.”

Copenhagen-based A.P. Moller-Maersk A/S, the world’s largest shipping company by revenue, Tokyo-based Nippon Yusen K.K., the world’s No. 2, and state-owned National Iranian Tanker Co. of Tehran were among customers of Chinese yards in 2004.

Record Orders

The nation’s expanding economy is helping drive the need for more ships. Shipping lines worldwide ordered a record 2,077 vessels worth $77.2 billion in 2004 as traffic to and from China soared, according to Clarkson.

Global demand for ships spurred shares of Hyundai Heavy, Daewoo Shipbuilding & Marine Engineering Co. and Samsung Heavy Industries Co., the world’s three largest builders by market value. They all have soared more than 65 percent in the past 12 months. The shares of Hyundai Heavy, for instance, rose 83 percent to 57,900 won.

Net income at the three Korean companies fell as much as 68 percent last year because the ships they delivered had been ordered before steel prices rose and the U.S. dollar fell. Contract prices in Japan and Korea are negotiated in U.S. dollars.

Shares in Mitsui Engineering, the world’s No. 2 shipbuilder by sales, gained 5 percent in the past year to 201 yen. The Tokyo- based company last month cut its net income forecast by 16 percent to $48 million for the year ending March 31, blaming the rising costs of raw materials and a strengthening yen.

`Rosy Outlook’

Steel prices probably will decline in the second half of this year, says Wim-hein Pals, 38, who helps manage $3 billion at Robeco Group in Rotterdam, including shares of Seoul-based Samsung Heavy.

“We are quite optimistic about the shipbuilding sector in general,” Pals says. “There’s a rosy outlook for new orders.”

On the banks of the Yangtze River, northeast of Shanghai’s city center, about 4,500 employees of Shanghai Waigaoqiao are working in seven-day-a-week shifts on 15 vessels. In 1999, Waigaoqiao was marshland.

More than 90 percent of Shanghai Waigaoqiao’s ships are being made for owners in the U.S., Turkey, Greece and Japan, says He, the supervisor. The 300,000-deadweight-ton vessel for oil and gas rigs — a $200 million order by Houston-based ConocoPhillips, the largest U.S. oil refiner, and CNOOC Ltd., the Hong Kong-listed subsidiary of China’s largest offshore oil and gas producer — is the biggest of its type to be built in China, he says.

World’s Largest Shipyard

China State Shipbuilding Corp., the nation’s No. 1 commercial builder, is spending $3.62 billion to create the world’s largest shipyard on an island at the mouth of the Yangtze in Shanghai. Due to be completed in 2015, the yard will have an annual capacity of 8 million deadweight tons — 14 percent more than Hyundai Heavy’s.

Chinese Premier Zhu Rongji in May 2002 asked shipyards to propel the country to world No. 1 status, according to Liu Xiao, a Shanghai-based policy researcher at Beijing-based China State Shipbuilding. The State Commission of Science, Technology and Industry for National Defense set 2015 as the goal.

Labor costs in China are about 15 percent lower than in Korea and Japan, according to Clarkson. That advantage is partly offset by the number of workers needed to perform tasks already automated in other countries, and the cost of importing steel and parts.

Late Delivery

China’s ability to divert enough steel and electricity to shipyards remains in question, says Yuji Isoda, the general manager of investor relations at Nippon Yusen.

The country also lacks a large marine components industry by comparison with competitors, Wang Rongshen, president of the China Association of the Shipbuilding Trade, said in the weekly Beijing Review magazine on March 10.

Those elements can compromise the quality of Chinese-built ships and cause delivery deadlines to be missed. Ship companies then have to send representatives to supervise building, raising costs, says Atle Jebsen, chairman of Jebsens Management AS, a Bergen, Norway-based ship management company.

Jebsens’ first Chinese order — three bulk carriers from Guangzhou Shipyard International Co. in southern Guangdong province in 1984 — was delivered more than a year late, Jebsen says. The company since has ordered 12 ships from other Chinese yards for delivery in coming years.

“As management competence improves, delivery on time will be more the order of the day,” Jebsen says. “It’s difficult to generalize because the differences between individual shipyards are so great.”

`Safe Hands’

BP Plc, the world’s second-largest publicly traded oil company, is sticking with Korean builders because they are more reliable, says Paul Oliver, BP’s North Asia shipping manager, based in Hong Kong.

While London-based BP is part of a Chinese- and Australian- led group that placed the $400 million order for two liquefied natural gas, or LNG, tankers, at Hudong-Zhonghua in August, BP ordered four of its own tankers last year from Hyundai Heavy.

“The Koreans are a very safe pair of hands,” Oliver says. “They are highly professional. They deliver on time.”

China’s ability to challenge Korean builders on technical expertise will be judged by the outcome of Hudong-Zhonghua’s LNG contract, says Clarkson’s Huxley. The tankers are due to be delivered in 2007.

“It’s going to be a factor of the quality of those ships,” he says. “Everybody’s going to be watching.”

Japan’s First Order

Nippon Yusen is betting China will succeed. The company last year placed the first Japanese order in China: two bulk carriers worth $70 million from Shanghai Waigaoqiao. It has also ordered two super-size crude oil carriers, the world’s biggest tankers, from Nantong Cosco KHI Ship Engineering Co., a Sino-Japanese joint venture in eastern Jiangsu province.

Previously, Nippon Yusen bought 85 percent of its ships from Japan and the rest from Korea, says Nippon Yusen’s Isoda.

“Although the shipbuilding industry in China is behind Japan and Korea in its productivity and quality of the product, we think they will catch up rapidly,” he says.

National Iranian Tanker is already boosting orders. It was the first overseas line to buy Chinese-made super-size crude oil carriers, says Mohammad Souri, the company chairman. Dalian New Shipbuilding Heavy Industries Co., which runs China’s No. 2 shipyard in north-eastern Liaoning province, delivered the ships on time in 2003, he says.

Europe Will Falter

“Price-wise and quality-wise, they are the best ships we’ve had,” Souri says. He may order as many as 50 vessels, including 10 super-size tankers, worth about $4.5 billion for delivery by 2010, he says.

European builders such as Madrid-based Izar Construcciones Navales SA and Paris-based Alstom SA’s Chantiers de l’Atlantique will falter under China’s onslaught, says Pals of Robeco Group.

“It will be the end of the story for big shipyards in Europe between now and 2015,” Pals says. “It will be a very small niche market on a national scale that will survive.”

Chantiers de l’Atlantique is already in China, working with Hudong-Zhonghua on the LNG tankers.

Japanese shipyards probably can sustain themselves with orders from domestic shipping lines, Huxley says.

Still, Kawasaki Heavy Industries Ltd., Japan’s second-largest heavy-machinery maker, in 1999 started the Nantong shipyard joint venture with China Ocean Shipping (Group) Co., China’s biggest shipping company, based in Beijing. In addition to Nippon Yusen, Tokyo-based Kawasaki Kisen Kaisha Ltd., the world’s No. 5 line by sales, is a customer.

`Business Chances’

“The advantages of building ships in China is that we don’t miss the business chances in China,” Yoshitaka Yashiro, a spokesman for Kobe-based Kawasaki Heavy, said in an e-mail. “Vigorous demand for new ships will accelerate Chinese shipbuilders’ investment.”

Frederick Tsao, 48, who runs a 60-strong fleet of bulk carriers as chairman of Singapore-based IMC Group, started ordering ships from China two decades ago because Japan was too expensive, he says. Now he’s scouting to buy his own Chinese shipyard.

“That’s the way the industry moves: from Europe to Japan, Japan to Korea, and now from Korea to China,” Tsao says. “It’s got to happen.”