When state-run Cochin Shipyard Ltd delivered the sixth and last of a series of bulk carriers built for Denmark’s Clipper Group on 30 November 2007, it achieved a first for the Indian shipbuilding industry. The ship was handed over to the owner 105 days before the scheduled date of delivery.
The building of six bulk carriers, each having a capacity to carry 20,000 tonnes of dry bulk cargo, for the Clipper Group signifies India’s transition from a shipbuilding country that is notorious for missing delivery deadlines to one that meets globally acceptable standards on delivery time and quality of ships.
The delivery sequence of the Clipper ships has scripted this transition. The delivery of the first ship was 45 days behind schedule and the second was delayed by 15 days. The third ship was delivered on time, the fourth five days ahead of time and the fifth 45 days ahead of schedule.
“That story (delays) is old now. It is no longer there,” said an excited M. Jitendran, chairman and managing director, Cochin Shipyard.
Delayed delivery means a yard has to spend more on labour costs, which erodes the firm’s margins. Besides, the firm will have to pay liquidated damages to the shipowner to compensate for loss on freight for each day of delay.
Growing confidence: ABG Shipyard Ltd’s facility in Surat, Gujarat. India has 23 shipyards—seven are owned by the Centre, two by state governments and the rest are with private sector firms such as ABG Shipyard. (Ashesh Shah / Mint)
“Cochin Shipyard delivering ships for Clipper ahead of schedule is good for the Indian shipbuilding industry. We need a couple of more examples to boost the confidence of global shipowners to build their ships in India,” said Ray Stewart, chief executive officer, Pipavav Shipyard Ltd, India’s newest private sector shipbuilder.
“This is already starting to happen,” said John Stansfeld, president of ship classification society Lloyds Register Asia. Classification societies set technical rules on safety and protection of ships, confirm that designs and calculations meet these rules, survey ships and structures during the process of construction and commissioning, and periodically survey vessels to ensure they continue to meet the rules.
“In 2002, 40% of India’s production was built for foreign owners. This now stands at more than 65%, a sign of greater market confidence, but also of the global scarcity of shipbuilding slots,” Stansfeld had said during a recent visit to Mumbai.
“If you go to Japanese or Korean shipyards, you will have to wait for five years to get a ship because they are fully booked till 2011. In India, you can get a ship in two to two-and-a-half years,” said Ajit Tewari, chairman and managing director of state-run Hindustan Shipyard Ltd.
India has 23 shipyards, seven of which are owned by the Centre, two by state governments and the rest are in the private sector including Pipavav Shipyard, ABG Shipyard Ltd, Bharati Shipyard Ltd and Larsen and Toubro Ltd.
The shipbuilding capacity of these yards including cargo carrying capacity is 2.8 million tonnes (mt) a year. Local yards are currently building about 245 ships with a capacity of 2.5mt valued at more than Rs20,000 crore. But India’s share of the global shipbuilding market is just 0.4%. That could change.
“India has all the ingredients for successful shipbuilding,” said Coert Kleijwegt, managing director of Hong Kong-based new shipbuilding brokerage Orient Dutch Shipbroking Ltd.
According to an audit and consultancy firm, KPMG India Pvt. Ltd, India’s shipbuilding capacity is projected to double to 4mt by 2012 and rise further to 19mt by 2017. At this stage, India is expected to hold 7.5% share of the world shipbuilding market.
However, Japan, South Korea and China will continue to dominate the industry and are expected to offer 80% of available capacity by 2015. China’s capacity is expected to increase by about 55% by 2015. China has some 326 yards with a capacity to build ships to carry 12.2mt of cargo a year.
The capacity of South Korea and Japan, in contrast, is expected to decline by 5% and 18%, respectively.
Even at a capacity level of 4mt in 2012, India will compete with Vietnam for the fourth or fifth slot on the global stage. “The competition for market share will be intense and fierce,” said Tewari of Hindustan Shipyard.
Banmali Agrawala, managing director, Wartsila India Ltd, the Indian unit of Finnish equipment maker Wartsila Corp., felt the same way.
“We are not alone in the boom, there are other countries in the race,” he said. “India cannot be competitive in shipbuilding if our policies are vastly different from other countries. We need to get our act together to capture the opportunity.”
“A key to India’s success will be a good understanding of the target markets,” said Stansfeld of Lloyds Register Asia. “But clearly, whether the primary target is domestic or foreign owners, delivering a quality product on time will not be negotiable,” he noted.
South Korea has relied heavily on foreign buyers to expand its industry while Japan has largely been dependent on domestic shipowners and China is reaping the benefits of both.
Indian shipping firms need to invest $20 billion (Rs80,200 crore) over the next five years to buy new ships to replace old ones and expand their fleet to meet the growing demand for carrying cargo. India currently owns 1.5% of the global shipping fleet and is ranked 17th in the world.
Yet, Indian owners are placing orders for new ships at global yards. “That’s because Indian yards never invested to expand capabilities to build bigger ships. So, if you want to build bigger ships, where will you go?” asked Pipavav’s Stewart. Pipavav Shipyard can build ships with a cargo carrying capacity of 400,000 tonnes.
There is also the price factor. “It costs 51% to 56% more to build a ship in India compared to China and Korea. This is mainly due to a number of duties, taxes, higher raw material costs and freight,” said Tewari.
“There is a huge price differential. That’s why we want the government to continue with the subsidy,” Tewari said. A shipbuilding subsidy given to Indian yards for building ships ended on 14 August 2007 after a five-year run.
Local shipbuilders say that the government has a role to play in a highly capital-intensive industry. “There is no way China would have achieved the kind of commercial success in shipbuilding without support from its government,” said Stewart.
The biggest challenge before Indian yards, according to Stansfeld, is developing indigenous design capabilities. “India needs to improve its efficiency and productivity. Now, the market is on a high and shipowners are willing to pay the price. But when the market goes down, China can reduce its price and still make profits because it is highly efficient. Can India afford to reduce its price without hurting its margins and profits? I doubt it,” said Orient Dutch’s Kleijwegt, who has brokered many shipbuilding deals in India.
Production engineering, Stansfeld said, will be the great differentiator. “The Koreans have really been able to cut production times and find ways to build ships more effectively. Investing in this will bring benefits to India in quality, delivery times and cost control,” he said.