The global shipbuilding Industry & Pakistan’s prospects

South Korea’s meteoric rise to the No 1 spot in the world shipbuilding industry has been awe-inspiring. Following Japan’s example, which had used the shipbuilding industry as a catalyst to rebuild it’s industrial structure in the post World War II era, it went on to outstrip Japan by 2003 in the three key categories of shipbuilding volume, order backlogs and new orders. By bagging new orders of up to $31.4b by mid-2011, it is way ahead of it’s nearest rival China with $8.8b. China, which had started replicating both the Japanese and the South Korean models with huge state – supported investments at the turn of the century, is however the market leader in terms of compensated gross tonnes.

National stakes

Shipbuilding, which is global in nature, is a multi-billion dollar industry. Many developing economies have over the years taken giant strides in this field by classifying it as a strategic industry, by virtue of which they have been able to inject generous doses of government subsidy to the tune of 20 to 30 per cent of the cost of the ship. The driving force behind this categorisation is the strongly-held belief that the retention of local skills and capabilities, particularly for the construction of warships, is essential for pursuing national objectives. While these state subsidies facilitated countries like China, South Korea, Japan and Taiwan in developing highly automated and competitive shipyards, their withdrawal caused an equivalent slump in the western shipbuilding industry, saddled as it was with high material and labour costs.
Most governments have traditionally been taking more than a passing interest in the shipbuilding industry because it employs a significant number of workers, utilizes a wide range of technologies, generates considerable income and encourages a large number of associated support industries. Despite the ever-increasing trend of automation, ship building remains a relatively high-skilled enterprise, with activities ranging from designing, fabrication and welding to management and commercial, all of which contribute significantly to national industrial capability.

Warship construction

Construction of warships is a much more complex affair. Apart from an intrinsic need for greater strength, greater power, greater stability, water-tightness and gas-tightness, there is the obvious added need for the installation of sensors and weapon systems. Owing to the specialist nature of each item, a significant part of the work has to be entrusted to a network of second and third level suppliers and subcontractors, and hence for the overall coordination and supervision of the project, the nomination of a lead architect becomes inescapable. The existence of an efficient and effective supply chain is also critical to the success of the enterprise, though reliance on the modular concept of construction certainly makes life easier.

Ship maintenance,
repairs and conversions

Ship maintenance, repairs and conversions provide a useful back-up earning option, particularly for those shipyards with insufficient shipbuilding orders. All ships in any case do need periodical maintenance to enable them to operate profitably and meet the minimum standards laid down by the IMO and classification societies. While warships follow their own stringent maintenance cycle, other vessels are required to undergo special surveys every five years in order to remain seaworthy. Ship repair requirements, on the other hand, can be periodic in nature and may include rectifying machinery defects, hull corrosion, tanks cleaning, overhauls, alterations and repainting. Routine or emergency repairs may require dry docking, though in most of the modern yards, even complex underwater work can often be undertaken alongside at berths. Ship conversions likewise are a lucrative activity from the shipyard’s as well as the ship owner’s perspective, as the latter struggles against high new-build prices and long delivery times.
Pakistani shipyards Karachi Shipyard and Engineering Works Ltd, the sole shipyard in Pakistan, was set up in 1957 under partial funding from the German government. It is capable of building and repairing medium-size ships up to 18000 tonnes and multi-purpose cargo vessels up to 26000 tonnes. It is self-sufficient in terms of associated support facilities like fabrication, foundry, machining etc and has constructed around 440 ships, repaired 5000 vessels and fabricated over 2000 heavy engineering units so far. The two-decade period from the early seventies was a profitable one from KSEWs perspective as it bagged orders for 19 support vessels from Iran, a cargo vessel and two tugboats from Abu Dhabi, two tugboats from Saudi Arabia and a cargo vessel plus two bulk carriers from China.
From the mid-90s onwards, foreign export orders having dried up, KSEW Ltd was primarily sustained by government subsidies and orders from the Pakistan Navy. A missile craft PNS SHUJAAT was first constructed there, followed by an order for the fabrication of a sub-section of the third Agosta 90B submarine. Three Fast Attack Craft (Missile) of German design were subsequently constructed under contract from a Thai yard. Two small KSEW-built tankers-cum-utility ships have recently been inducted in the Pakistan Naval Fleet. The order for the construction of the 4th F22P Chinese frigate has proved to be a boon for KSEW as it has resulted in up-gradation of the yard and training of their personnel in China. KSEW is now collaborating with China Shipbuilding and Offshore International Corporation for the in-country construction of two 500 ton FAC(M) for the Pakistan Navy.
KSEW has also been meeting orders for the fabrication of general items like flood light towers, dumping grate stokers, clinker cooler trolleys, fuel storage tanks, wind turbine towers, fire tube and water tube boilers, heat exchangers, gates for dams, barrages and headworks, conveyors, elevators, sugar mill machinery, cranes, steel structures, towers, caravans, overhead steel bridges, sewage treatment plants etc.
A ship lift and transfer system being procured from a German firm is under installation, which can be expected to significantly enhance KSEWs shipbuilding and ship repair capacity. Time will tell if this results in significantly changing KSEWs financial fortunes for the better.

Global Prospects

At the moment, shipbuilding is an expanding market. In 2009, orders were placed for 169 ships, while the very next year, the order book increased by more than three times to 525 ships. This however presents a deceptive picture as to the health of the shipyards. The fact is that among the total of 198 yards globally, orders were only placed to 50 yards in 2009. In 2010, likewise, opportunities for construction of the afore-mentioned 525 ships were only given to 75 of the yards. A yard thus has to be competitive, either in terms of production costs or in terms of technological sophistication.
European yards have thus been forced to focus on niche markets like yachts, cruise ships, small container ships and specialised vessels such as ice breakers, chemical tankers, Offshore Support Vessels, research ships and warships. US effort is currently being devoted towards the construction of warships and vessels being used for domestic purposes, where a lack of competition has resulted in inefficiencies and consequently higher contract prices. South Korea is primarily investing in high-end and high-priced vessels such as LNG carriers and offshore facilities. China is also now a major player in the shipbuilding industry, particularly in bulk carrier and container vessel categories. As far as warship construction is concerned, those countries that have the wherewithal prefer to construct them in their own yards.
The trend to invest in countries with cheap labour and land costs is also picking up as it makes strong economic sense, the strategy being to produce simpler vessels there at nominal rates. Yards in Philippines, Thailand, Vietnam, Malaysia and India are accordingly making their presence felt. Indian shipbuilding, which was initially catering to it’s own need, became export-oriented in the late nineties and is currently thriving through huge foreign investments and joint ventures. Indian state-owned shipyards are however comparatively stagnant, with orders being only placed either by the Indian Navy or by the Shipping Corporation of India. Indian shipyards have also forayed into the manufacture of rigs, which is relatively sophisticated in nature with comparatively higher profit margins.

Pakistan’s Prospects

Pakistan’s prospects can be gauged by first looking at KSEWs example. This state-owned shipyard had been buoyed up for a considerable period of time through injection of generous government subsidies, but for the past few years has come out of the red through generous orders from the Pakistan Navy. So prior to considering the establishment of new shipyards in Pakistan, it may be worthwhile to review as to why KSEW should not be privatised first. This would lead to a significant technological upgradation, incorporation of a modern design department capable of meeting customised requirements and the formulation of an effective marketing strategy to attract buyers.
The only reason such a move has been resisted thus far is because of the yard’s supposed strategic importance. This facet has been blown out of proportion as KSEW can certainly not construct warships, or other simpler ships for that matter, through purely indigenous means. Such constructions rely massively on foreign suppliers for almost all the equipment, weapons, sensors, machinery, electronics and even shipbuilding designs and materials. So the claim of having achieved self-sufficiency in warship construction appears meaningless when seen in this context.
Having said that, there is no harm in inviting proposals for setting up of new shipyards at designated places along our coast. Alternately, the choice of specific spaces can be left to the discretion of would-be investors. If sufficient interest is visible, it can be taken as a sign of the viability of the enterprise. The Govt of Pakistan should preferably insulate itself against possible risks owing to fluctuating market conditions by restricting its contribution to the land, utilities and infrastructure (buildings) only. The foreign investor chosen can thus be expected to try his best to make the endeavour a success, since he would be the major beneficiary in case of profits and major affectee in case of losses.
It would however definitely be in the country’s interest too to ensure that the project is a success, since that would in itself attract further investment. From Pakistan’s point of view, it should be ensured that the foreign investor selected has the necessary technological and financial background for setting up and running a premier shipbuilding and repair yard. Such an investment would also result in the creation of an highly-skilled local workforce possessing wide-ranging high-order skills like ship designing, management, welding and fabrication.

Conclusion

Those governments possessing ample resources can only afford to pump in generous subsidies to keep state-owned shipbuilding yards going. These subsidies concurrently make them dependant and relatively inefficient. Resource-constrained countries like Pakistan can barely manage to inject enough to keep their head above water, without any meaningful upgrade in their capacity, infrastructure or technological prowess. It is a capital-intensive field where one has to constantly stay ahead of the competition in terms of production costs, quality, logistical planning, marketing skills and above all, in meeting deadlines. Once a shipbuilding enterprise takes off, the benefits are enormous.
Joint ventures with investors possessing ample finances and experience can help revive the flagging fortunes of the Pakistani shipbuilding industry. Apart from land and basic infrastructure, Pakistan would need to offer various other incentives to entice the best bids, the least of which is good law and order situation and a conducive working environment. The country possesses two of the key drivers for investment, namely low production costs and good access to important markets, and needs to exploit these well, not only to encourage joint enterprises but also to turn them into commercially vibrant ones.

The writer is the Director General at the National Centre for Maritime Policy and Research, Bahria University, Karachi.