SHIPBUILDING INDUSTRY IN INDIA – AN OVERVEIW

- by Charanya Krishnan

Background:
Shipbuilding (encompassing shipyards, the marine equipment manufacturers and a large number of service and knowledge providers) is an important and
strategic industry in a number of countries around the world. This importance stems from the fact a nation's need to manufacture and repair its own Navy and
vessels that support its primary industries.
This paper presents a brief overview of the shipbuilding industry in India and the possible challenges and opportunities that Indian companies could enjoy in the
future.

The Uniqueness of Shipbuilding sector:

§ The shipbuilding industry has its own distinctive feature as compared to other industries in the country. It is unique in a way that it has to sell first and
construct later, unlike the auto industry or others, where one manufactures first and sells later.
§ Further shipyards get orders only if they are credible (deliver quality ships on time) and it can be credible only after successfully executing consistently under
international competition.
§ Further, subjoined, it has to be globally competitive against the best yards in the world. Unfortunately, the shipyards are faced with very stiff taxes, tariff,
duties, and financing charges as compared to foreign yards.
§ The deliverables of the sector involves long gestation periods and requires high cost finances over a long period.

Global Scenario:

Globally shipbuilding is a USD 20 billion industry. The global shipbuilidng order book recorded a 29% CAGR over the period of 2003 – 06. An upward trend has
been witnessed in the world order book as a percentage of worldfleet indicating a strong demand outlook.

Fortunes of shipping and shipbuilding industries seem to be linked to each other or at least move in tandem. For nearly three decades in the post World War II
era, both the industries were dominated by European nations and United States. Historically, shipbuilding industry suffered from the absence of global rules and a
tendency of over-investment due to the fact that shipyards offer a wide range of technologies, employ a significant number of workers and generate foreign
currency income (as the shipbuilding market is dollar-based and a global one).

However, high labour costs in the yards of Europe and USA, one of the major determinants in this cost competitive industry, has led to a gradual shift of the
center of shipbuilding to these Asian nations over the last two decades.

Today shipbuilding has become an attractive industry for developing nations. Japan used shipbuilding in the 1950s and 1960s to rebuild its industrial structure,
Korea made shipbuilding a strategic industry in the 1970s and China is now in the process to repeat these models with large state-supported investments in this
industry.

The tidal shift in shipbuilding activities, from Europe to Asia, has opened up huge opportunities for Indian yards, and both public and private ship-builders are
capitalizing on them

Indian Scenario:
With global shipping industry pitching for an unprecedented demand for new shipbuilding , a
window of opportunity which was not available earlier, has been created for the Indian shipbuilding industry.

The Indian shipbuilding industry had always been dogged by low capacity, poor productivity and lack of modernisation. Thanks to the gradual shift of shipbuilding
from Europe to Asia, today contrary to expectations the Indian Shipbuilidng order books stand at 1.3 million DWT. This has been possible on account of the
shipbuilding boom and both foreign/Indian Shipping Companies are coming forward to place new building orders on Indian Yards. This has enabled the industry’s
order books to grow from Rs 1500 crs in 2002 to Rs 14,000 crs (roughly 3060 m $) in 2006

The Indian shipbuilding industry is on a high growth trajectory and is expected to grow at a compounded growth of 30%. Though India has not yet become a
significant player in the global shipbuilding business, it has gained a strong foothold in the niche offshore segment.

India’s share in the world market has gone from an insignificant low of 0.1% in the beginning of 10th Plan to 1.3% in 2006. Hence from an an inward looking
industry dependent on government orders, the Indian shipbuilding industry is emerging as internationally competitive export led industry.

Nevertheless, the industry is still in its nascent stage and dependent on government support for subsidy. The industry is expected to become self sufficient in 10
years time and will no longer require subsidy thereafter. It is clear from the above that India can grow in the shipbuilding sector
in a healthy manner if shipbuilding is recognized as a strategic industry and if it can enjoy simple taxation policies with a fully empowered regulating body for
quick decision-making .

Tracking India’s performance:

India has 23 shipyards, of which 7 are under administrative control of the central government, 2 with state governments, and the rest in the private sector.

The current shipbuilding capacity of India is only 2,81,000 DWT, which is quite undersized according to global shipbuilding standards, and inadequate given the
country's requirements. A comparison of productivity shows that while China may be well ahead of India in total ship building, it’s productivity is almost the same
as India and this is one area that India can take a lead on the strength of its IT industry and setting up new modern shipyards.

Country Completions M DWT Employees Productivity DWT Person

Japan (2004) 23.2 80,000 290
Korea (2004) 23 71,800 320
China (2004) 8.8 158,000 56
India (2006) 0.6 12,000 50

Comparing India and China:

A comparison of productivity between India and china shows that while China may be well ahead of India in total ship building, it’s productivity is almost the
same as India and this is one area that India can take a lead on the strength of its IT industry and setting up new modern shipyards.

China India
Shipbuilding & Repair Yards 492 28
Manufacture of Equipment 148 Not Known
No of Employees 2,87,702 (total industry) 12,000
Orderbook 40 m DWT 1.3m DWT
Global share 19 - 20% 1%

China has been gaining almost 2% of the world’s share every year. India has a lot of catching up to do.

The growth of Chinese shipbuilding industry is now becoming a threat to almost all major shipbuilding nations as China is planning to become the leading
shipbuilding nation with an aim to corner more than 30% global share by 2015. India is probably the only country that will be able to match the Chinese prices
with its relatively low labour costs and industrial base for manufacture of equipment.

The fact however remains that India’s contribution is tending towards being a significant component in the global shipbuilding industry and that we need to get
our act together to use this very promising window of opportunity. With the exponential growth in the number of ships calling on Indian ports, providing ship-
repair facilities is becoming an increasingly attractive opportunity. Not only does ship-repair and building activity help generate substantial local jobs, it also
builds the capacity of local industry.

Stakeholders in Indian Shipbuilding sector:

Government:
§ FDI: the government has permitted 100% FDI in shipbuilding and ship repair activity
§ Investments: the government has proposed to invest INR 71.95 billion in the shipbuilding industry, towards the modernization of infrastructure and
development of a research design base
§ XI plan outlay:
Name of shipyards/schemes Government Budgetary Support (INR million) Internal and External Budgetary Support Total
Cochin Shipyards 400 5,500 5900
Setting up of two International size Shipyards 15,000 15,000 30,000
R&D schemes in Shipbuilding 2,018 NA 2,018
Conducing Studies 190 NA 190
Total 20,608 23,520 44,128
Private Players:
Indian corporates and shipyards plan to invest over 170 billion INR over the next 5-7 years that has the potential to take india’s share to over 3% to 5% of global
shipbuilding.
Indian business is convinced that India has a major comparative advantage in ship-building that has been masked all these years by an inefficient public sector
notorious for high costs and time overruns. The labour cost per worker in India is estimated at $1,192 per year, against $10,743 and $21,317 per worker in
leading shipbuilding countries like South Korea and Singapore. Apart from skilled welders and fitters, India has world-class naval engineers and architects. These,
along with top-class management,
can make India a global power.

Watching the Indian Shipbuilding Market:

Key players:

Key issues and challenges:

The Indian Government has been trying various promotional and subsidy measures since the 70’s which managed to keep the industry alive at a time when the
global industry was passing through a deep recession after the boom of the 70’s which, the country missed due to lack of industrial growth.
The shipbuilding industry is now witnessing a growth phase after a gap of almost 25 years. This is an opportunity for India to revive its shipping industry and
bring it at par with the rest of the world.
It is essential for India to put together strategies, which could lead to optimal and effective contribution towards the global shipbuilding industry. Infact the time
is just ripe for India to carve a niche in this sector. However in order to achieve this objective, it would be imperative to address concern areas which could be
detrimental to the future progress of the sector:

Procedure governing subsidy support: with Indian shipyards suffering systemic and scale disadvantages, the policy of GOI to extend subsidy support to Indian
shipbuilders enabled them to effectively compete in the global market. However, after expiry of the subsidy scheme, even as its renewal is under construction,
there is a need to ensure that that prescriptive procedures governing eligibility to receive subsidy are removed. These include necessity to win an order through
international bidding or certification from the ship owner that the bid process had been followed before selecting the Indian shipyard, which effectively ensure
that the benefits of the subsidy scheme are not realized by the private ship-owners as most of their ship building orders are through negotiations

Deficient infrastructure: Indian yards lack the capability to build large and modern ships. Presently, the Cochin shipyard is the only one that has the capability to
build large and modern ships. While the government has provided subsidies to shipyards but it has to ensure that the benefits reach the private players as well

Disadvantages accruing from small scale of operations: the shipbuilding sector in China and South Korea have received government fiscal and policy support,
enabling them to develop scale as well as a cluster of ancillaries. These advantages of scale are not available to Indian shipbuilding industry, which imports most
of its input materials and is therefore unable to leverage advantages offered by bulk purchases and Just in Time supplies. As a result there is significant cost
disadvantages on account of import dependence which eat into low labor cost advantages of Indian shipbuilders.

Lack of ship design and limited investment in R&D: Indian players need to work hard to meet the international players in ship automation and technology

Benchmarking it to international standards: The Indian shipbuilders must focus on benchmarking their own processes to international standards to improve the
efficiency, delivery time, price and quality, which will in turn, will enhance the competitiveness of the shipbuilding sector. Measures such as performance
incentives, PPP models, etc could be introduced to improve efficiency.

Supporting the growth of ancillary industries: Ancillaries need to develop along with the shipbuilding industry as they are the key competitive differentiator for
establishing/relocating shipbuilding and shiprepair facilities. A cluster development approach for building ancillary capacity could be adopted.

Training and human skills issues: Development of training programs in various academies to produce high quality talent should be prime focus

No tariff protection from imports

Multiple clearances: As the industry Is dynamic and cyclical in nature these clearances result in procedural delays and hampers augmentation of capacity

(a) Presently there is no supervisory Authority/Apex body

(b) High customs and excise Duty on capital investment: The government levies 35% duty on all capital equipments such as cranes, plasma cutting machines,
and other material handling equipment purchased for running a shipyard

(c) Duty on sale of ships to Indian Shipping Companies: The materials and parts imported for building ships are exempted from payment of custom duties but
these ships once built are treated as imported ships and a custom duty of 5.0% is levied on them

(d) Onerous Tax Structure: Indian shipyards are subject to 19 different taxes/ duties. These taxes cumulatively put Indian shipyards at a disadvantage and
diminish their cost competitive as compared to the international players

Growth Enablers:

The growth in overall trade, increase in offshore drilling activity, and demand from the naval force and coastal guards are the key growth drivers for the Indian
shipbuilding industry.

Leveraging labor cost advantage: In India, labor cost per worker per year of USD 1,192 is very low, when compared with USD 10,743 and USD 21,317 in South
Korea and Singapore respectively

Offshore segment: As the proven oil and gas reserves are likely to meet the global energy requirements only till 2030, there is increased exploration and
production (E&P) activity, particularly in the offshore segment. This is expected to drive the demand for OSVs.

Indian shipyards have carved a niche in the construction of OSVs. Approximately 70.0 % of Bharti’s and ABG’s order book is directed towards the oil and gas
sector. Globally India has one of the largest OSV order books. Industry leaders, Korea and Japan have limited OSV capacity, resulting in a shift towards India

Replacement Demand:
40% of the Indian owned fleet is more than 20 years old and Indian owners will need to spend about $ 4 billion to replace these in the next 5 years.
The International Maritime Organization (IMO) has mandated the phasing out of all single hull vessels by 2010. Single hull tankers constitute 15.8% of the total
vessels

SWOT Analysis:

Recommendations:

§ Dedicated SEZ for integrated and clustered development of Shipbuilding sector in India.
§ Encourage Design capability and R&D through fiscal benefits as given to R&D investment in pharmaceutical sector.
§ Exemption of Service Tax on Shipbuilding and Ship Repair.
§ Constitution of an apex body to regulate the working of the sector.

Conclusion:

Worldwide the shipyards are full and the world is turning to India to meet its requirements. After all, China and India have the skills and cheap steel to make the
best and cheapest ships.

The successful shipbuilding industrial development of Japan, Korea and China has not happened by chance but by a carefully crafted policy where the government
has provided the core administrative guidance and support. Such an integrated policy initiative would be required for the revitalisation of the Indian ship repair
industry as well so that conditions are created for the Indian firms to become technological leaders instead of followers, through promoting competition,
cooperation and even acquisition and Joint Ventures with leading foreign yards.
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