A Steady Hum at South Korea's Shipyards

The good times are likely to continue for shipbuilders Hyundai, Samsung, and Daewoo well into the next decade, though Chinese rivals loom

by Moon Ihlwan

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Don't try to tell South Korea's ultra-prosperous shipbuilders their days are numbered as competition intensifies with China. Executives at the country's major shipping yards see their order books for mega-ships bulging well into next decade.

"Sure the Chinese will challenge our leadership in the future," says General Manager Kim Boo Kyung at Samsung Heavy Industries, the world's second largest builder of ships. "But that won't happen until 2020 or beyond."

While plenty of South Korean industries have a bad case of China jitters, it isn't so when it comes to the sprawling cargo ships that carry around the world's major tradable goods. The Koreans rule: They built 41% of all ships delivered last year, and the country is home to 6 of the world's top 10 shipyards.

In the most sophisticated freighter category—liquefied natural gas carriers—four out of five are built by Korean companies. Korea is also home to the three biggest industry players: market leader Hyundai Heavy Industries (HYHZF), followed by Samsung Heavy (SMSHF), and Daewoo Shipbuilding & Marine Engineering.

Reason for Concern

To pull away from shipyards in China, which aims to eclipse Korea as the largest shipbuilding country by 2015, Korean companies are focusing on such high-value-added vessels as LNG carriers, ultra-large ships, and oil-exploring drill ships. The Koreans are also seeking more innovative ship-manufacturing processes to boost productivity (see BusinessWeek.com, 5/12/06, "Korea's Shipbuilding Industry Sails Ahead").

There is some reason for concern, however. By one key metric, the Chinese have overtaken the Koreans this year. British Clarkson Research Service, which closely tracks the industry, said in a recent report that Chinese yards signed 56.6% of the total number of new contracts in the first quarter of 2007, with the Koreans accounting for just 26.1%. Korean newspapers called it an early warning signal that the country's shipyards will face a fate similar to that of domestic textile manufacturers and assembly-heavy electronics makers that have either relocated to China or closed shops.

Managers at Korean yards brush aside the argument. The demand for new orders this year has been largely focused on bulk carriers for delivery by 2009, and the Korean shipbuilders are fully booked with work until the first half of 2010. "The bulk carrier market is certainly hot, but we don't have the room to accommodate the needs," says Kim.

Cyclical Industry

The plentiful backlog of orders underlines an extraordinary stretch of shipping demand since the last industry slump back in 2002. At the end of March, Korean shipbuilders were sitting on orders for 1,186 vessels totaling 75.8 million gross tons and worth more than $100 billion, according to the Korean Shipbuilders' Assn.

That will keep the major players in high-speed mode for about 3 1/2 years. "We are in a cyclical industry, and this boom can't last forever," points out Kwon Oh Yoon, a senior manager at the association. "But there's no sign in the horizon the buoyant mood will sour any time soon."

Not surprisingly, Korean shipyards are raking in some serious profits. Until late last year, they had suffered from lackluster profitability because of the combination of a sharp rise in steel sheet prices in recent years and the low contract prices they accepted until the latter half of 2004. Given a three-year lag time between when contracts are signed and when earnings are booked with the delivery of ships, the yards are beginning to reap rewards in earnest from lucrative contracts dating from late 2004.

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The biggest beneficiary will be Hyundai Heavy, the undisputed global leader.