Indian Shipbuilding Industry : A view

Indian Shipbuilding Industry : In Full Sail

Thanks to the boom witnessed in the global maritime trade and shipbuilding activities in recent times, the Indian shipbuilding industry, with its competitive advantages of low-cost labor and know-how, is all set to conquer newer territories in this decade.
It was in 1955, a trapezoid reservoir measuring about 214 x 36 meters, belonging to the Harappan Civilization of 3rd millennium BC and identified as the first tidal dock of the world for berthing and servicing ships, was excavated at Lothal, Gujarat. The finding, along with the terracotta models of boats found at Lothal and the engravings of sailing crafts on Indus valley seals and panels, besides the numerous references in classical literature to maritime activities and boatbuilding technology in the various regions of India, stands as a testimony to the earliest origins of the shipbuilding industry in India. Despite boasting of such a hoary history, the shipbuilding industry in India accounts for just about 1% of the global market share. While it does reflect the missed chances, it also reveals the profusion of opportunities for India in an industry that has hitherto been dominated by South Korea, Japan, and China, which together hold 75% of the overall global market share.

Of calm waters and favorable winds
In fact, there is a growing demand for shipbuilding, including manufacturing marine equipment and providing related services, across the world. The triggers behind this demand include: the scrapping of old vessels, International Maritime Organization’ s (IMO) guidelines to scrap all single hull tankers by 2010, a marked increase in oil and gas exploration activities, and a rise in seaborne trade. According to a report by Angel Broking, about 90% of the goods by volume and 70% by value are transported by sea route. While the world seaborne trade increased from 16,777 billion ton-miles in 1980 to 30,687 billion ton-miles in 2006, growing at a CAGR of 2.4%, the fleet of available vessels capacity increased at a CAGR of 1.6% during the same period. Further, the rise in the oil Exploration and Production (E&P) activities is also contributing to the growing demand for ships, support vehicles, offshore rigs, and other related equipment. In other words, the gap between demand and supply has been growing over the years, creating opportunities for countries like India to tap.
While countries like South Korea and Japan enjoy a higher global market share, they do not have enough berths in their shipyards and have reached their full capacities. Also, the labor costs in these countries are quite high, pushing business to low-cost destinations like India and China (see Chart). India, with its 5,500-km mainland coastline, enjoys certain advantages over other nations. The labor costs in India are far less than in other Asian countries like Japan and South Korea. India has an emerging shipping ancillary industry that produces engines, pumps, valves, and generators. The new capacities that are coming up in Indian shipyards can provide earlier time slots. Indian shipyards are also into manufacturing of rigs. Add to this, the availability of a skilled labor pool and expertise in building offshore support vessels and platform support vessels, and India has what it takes to be a big player in the global shipping sweepstakes. What’s more, waking up to the competitive potential of the Indian shipping industry, the Indian Government has set an ambitious target of gaining 8% of the world share in shipbuilding by 2017. Some estimates have even projected the industry to grow at a compounded growth rate of 30%, culminating in a market size of $20 bn, from the current $5 bn, i.e., 15% of the global market share, by 2020.
However, the industry in India, as of today, is at a nascent stage and needs the support of the government to come into its own. Though shipbuilding has been recognized as one of the strategic industries by the government that meets the country’s defense requirements and shipping tonnage under the national merchant fleet, the industry has a long way to go in terms of shipping fleet ownership as well as infrastructure. For example, about 90% of India-owned ships are foreign built and Indian shipyards rely mostly on imported equipment. Besides, over 40% of the Indian shipping fleet is more than two decades old and needs to be replaced in the next few years. Which only goes to show that the sector has great scope for companies to invest and prosper.

Public sector players: Running a tight ship
There are in all 27 shipyards in India, including eight state-owned. Though the industry witnessed the entry of private sector players following the changes in the industrial policy regime in 1991, the Indian shipping industry is dominated by public sector companies that cater to the commercial and defense users. Prominent among them is the Cochin Shipyard Ltd. (CSL). Incorporated in the year 1972 as a fully-owned Government of India company, CSL remains the torchbearer in the shipbuilding industry. Equipped to build and repair the largest vessels in India, CSL can build ships up to 1,10,000 DWT (Dead Weight Tonnage) and repair ships up to 1,25,000 DWT. Besides building two of India’s largest double hull Aframax tankers, each of 95,000 DWT, CSL is also building India’s first indigenous 37,500-ton air defense ship for the Indian Navy. The company specializes in Panamax type bulk carriers and oil tankers, and in constructing tugs, docking pontoons, and passenger vessels. The products offered by CSL also include tankers, product carriers, bulk carriers, high bollard pull tugs, and air defense ships. CSL can handle repairs of all types of ships such as upgrading of ships used for oil exploration and periodical lay-up repairs, and life extension of the ships of Navy, UTL, Coast Guard, Fisheries, Port Trust, SCI, and ONGC. The company has tie-ups with specialist firms in Asia, Europe, and the US for technology transfer and material packages for shipbuilding, ship repairs, platforms, rigs, and upgrading of yard facilities.
Despite the global economic slowdown, CSL managed to achieve a reasonable growth in the year 2008-09. The first eight months of the year 2008-09 saw CSL achieve shipbuilding production of Rs 648 cr, as against the full year achievement of Rs 582 cr in 2007-08. The ship-repair turnover during April-November 2008 stood at Rs 183 cr, compared to the full year achievement of Rs 252 cr in 2007-08. The gross income for the year was Rs 1,360 cr, as against Rs 966.91 cr the previous year, a growth of 41%. The profit before tax for the year stood at Rs 247.63 cr, as against Rs 149.40 cr the previous year, an improvement of 66%. The Net profit for the year saw a 70% increase at Rs 160 cr, compared to Rs 93.85 cr for the previous year.
As for other public sector companies, Hooghly Dock and Port Engineers Ltd. (HDPEL) has won orders worth Rs 99.61 cr and Rs 29 cr from the Indian Navy and the Inland Waterways Authority of India, respectively. Hindustan Shipyard Ltd. (HSL) has a shipbuilding order book worth Rs 1,864.81 cr, which includes Rs 629 cr for the medium repair-cum-moderniz ation of 877 EKM Submarine of Indian Navy. HSL’s overall income has increased to Rs 510.14 cr in 2007-08 from Rs 399.77 cr the previous year.

Private sector players: On board
While the public sector companies’ order book has an equal share of domestic and export orders, the private companies have got about 85% overseas orders—a sign of the growing demand for shipbuilding services in the overseas market. The orders, however, in terms of DWT are less than 0.5% owing to the fact that these companies handle smaller vessels, compared to established players in South Korea or Japan. This is expected to change in the coming years, as the Indian private players target the larger vessel segment. The fact that most of the private Indian shipbuilders’ current capacities have been fully booked up to year 2011 (see Table) and that listed players like ABG Shipyard (the largest private sector shipyard) and Bharati Shipyard are holding orders about 12 times their FY07 revenues, with repeat clientele (a sign that these companies are able to procure newer orders from existing clients), is sure to act as a morale booster for all private companies to expand capacities and facilities to capitalize on the orders rejected by companies in Japan, South Korea, and China due to tight capacities. For example, ABG has a strong book order of Rs 8,985 cr (94 vessels), with deliveries spread over the next five years, of which 44% are repeat orders.
The booming business, coupled with the Indian Government’s subsidy support earlier, has inevitably attracted a host of new companies to invest in shipbuilding ventures, including Larsen & Toubro, Mercator Lines and Mech Marine Engineering, Adani Group, and Pawan Kumar Ruia Group. Construction companies like Punj Lloyd, which has a significant stake in Pipavav Shipyard, stand to benefit from the booming business as well as from better utilization of fabrication facilities in the shipyard for their mainstream construction business. The established players are also mulling the IPO and private equity options to tap funds for expansion and addition.
All set to sail
The shipping market, however, is cyclical in nature and is dependent on the demand-supply situation. Freight rates are influenced by global trade patterns, and this naturally means fluctuations in demand for shipbuilding activities. Though the global shipbuilding order book registered a CAGR of 29% between 2003 and 2006, there was a fall in the demand for new ships in 2008, due largely to the global financial crisis. However, the fact that the total annual world seaborne trade stood at 8.2 billion tons in 2008 shows that there was a 5.2% increase in trade—a welcome news, given the fact that the fortunes of global shipbuilding industry are inextricably intertwined with the global shipping industry, which transports about 80% of international trade. With major economies having weathered the recessionary storm, the global shipbuilding industry is all set to resume its sail northwards. Interestingly, it was high labor costs which pushed business from the yards of Europe and the US to countries like Japan and South Korea a few decades back. And with costs escalating in these Asian countries as well, shipbuilding activities are in search of newer yards.
India, with its long coastline, several deepwater ports, low labor cost, supporting components industry, shipbuilders with requisite expertise, and skilled workforce, is in a great position to grab the opportunity. The shipbuilding activities got a major boost, a few years back, from the subsidy scheme offered by the Indian Government, which provided a 30% incentive for all vessels more than 80 meters in length built for the local market and for all ships for exports. The cash subsidy and the tax holiday given by the government enabled Indian shipbuilders to offer their products at a lower price and thus compete with international shipyards. With the subsidy scheme having expired in August 2007, the Shipyard Association of India has asked the government to revive the scheme and grant it a 10-year extension. The Ministry of Shipping has also proposed a 20% subsidy scheme. The proposals, if accepted by the government, will surely give a major boost to the shipping industry. In other words, what shipbuilding was to Japan in the 1950s and 1960s and to South Korea in the 1970s, could be to India in the 2010s—that is, a key to rebuilding its industrial structure and injecting fresh momentum to its economy.