Bargaining Power of Suppliers Steel:

Shipbuilding sector is a capital intensive industry, with the price of steel and other raw materials comprising a major part of the shipbuilding cost. Among the raw materials, steel is the major one. Asia is the worlds largest producer of crude steel and finished products with a share of around 60%. The global steel production has increased at a compounded growth rate of 6.8% in the period of 2000-07. China currently accounts for around 40% of the global steel production. The customers of the steel industry are majorly automobile and shipbuilding. In countries like Japan, Korea and China, shipbuilding accounts for around 20-30 % of the total steel production. Steel for shipbuilding is very general in nature mainly because shipbuilding requires steel as plates with different thicknesses and different grades. The products are not unique and can be procured from a varying number of companies. The only requirement is the quality of the grade of steel to be used. Also, the designs of ships are made in such a way that only that steel is used that is readily available. The steel industry for shipbuilding has become global. The shipbuilders do not hesitate to import steel from faraway places for construction. The shipyards are typically made on the coast, and hence they can procure steel very easily through ships. And the volumes ordered by the major shipyards in Korea, Japan and China make them very costly to lose as customers. The return on equity of the Steel industry is more than that of the shipbuilding industry, and the skills required for these two industries are different. These reasons also avoid steel suppliers to move into shipbuilding. Because of the above mentioned reasons, steel makers cannot exercise bargaining power on the major shipbuilding companies.

Marine Equipments:
The marine equipments sector is an extremely important sector in the marine industry. Typically marine equipments comprise of around 20 % of the shipbuilding cost for standard bulk carriers to about 65% for specialized vessels. Hence, the supply of marine equipments is a major point while doing the Porters five forces analysis. The equipments sector is heterogeneous with a large number of companies (around5000 9000) throughout the world. The sector has different kinds of products; the most important types are listed below (XXXX 20XX): Categories Propulsion/ Power System Marine Equipments Systems 1. Propulsion, Power generating systems 2. Auxiliary Power generating systems 3. Auxiliary Systems 4. Electrical Systems, plants and cables 5. Instrumentation, control and navigation systems 6. Communications and Entertainment Systems 7. Lighting Systems 8. Steering Systems 9. Special Ship Operation Systems 10. Mooring, Deck Machinery Systems 11. Cargo Systems 12. General Outfitting Components 13. Heat, Ventilation, Air Conditioning Systems 14. Accommodation Systems 15. Safety and Life Saving Systems, Environmental Protection Systems 16. Other Systems 17. Materials

Navigation/ communication/ control (electrics & electronics) equipment Cargo related equipment Hotel and related equipment

Other miscellaneous

The sector caters to the automobile and aviation industry also other than the shipbuilding industry. The total market of the marine equipments sector was estimated in 2005 at about 57 billion Euros. Out of this, 21 billion Euros is for commercial shipbuilding, and 36 billion Euros is for naval shipbuilding. When oil & gas sector is also added to shipbuilding, the amount reaches to 109 billion Euros. The marine equipment market is dominated by Asia followed by Western Europe and then by North America. The % division in these three regions is given below:

The marine equipment sector consists of different companies producing and servicing different kinds of products and industries. Hence when we consider the industry, it is better not to try to find the top companies in it. However the concentration of companies can be found in some specific equipments industry (example the main engine). The two most popular names in the marine main engine sector are Wartsila (Finland) and MAN B&W (Germany). However if we see the actual manufacturers of the engines they are made in different parts of the world under the license of these companies. It has created a win-win situation for both: - The biggest shipbuilders in the world are so huge that it is economic for them to manufacture the engines for the ships they build at their yards. Although the ship-owners insist on having their ships fitted with Wartsila or MAN engines, these big shipbuilders may have very easily come up to the quality and have convinced the owners to use their engine. - On the other hand, Wartsila and MAN B&W have got all the necessary skills as well as economics to make engines, but they dont want to lose the biggest shipbuilders as customers. - Hence, the two industries have come to a solution. The shipbuilders now have the permission to build engines under the license of Wartsila and MAN B&W. The same principle of building under the license of reputed European equipment manufacturers have been used for other marine equipments as well. Hence, although the equipments have European brands, they are majorly made in S. Korea, Japan and China. Hence, although there were only 2 major marine engine manufacturers, the shipbuilding industry has been able to break their bargaining power up to a large extent by having partnership with the European engine manufacturers. Korean Marine Equipment: The Korean marine equipments industry has grown because of the growth in domestic demand of equipments due to the exceptional boom in the Korean shipbuilding industry. The total imports as a percentage of the total shipbuilding market have reduced drastically from about 62% in 1980 to 21 % in 2003. Japan constitutes the major share of imports followed by Germany, Norway and USA. Chinese Marine Equipments: The Chinese marine equipments industry has earlier been import driven with the major imports coming from S. Korea and Japan. But in the last decade, China is proceeding towards becoming the biggest shipbuilding nation in the worl owing to its low labour costs. The Chinese have also understood the requirement of license agreements with major equipments companies. For example more and more shipyards are getting in agreements with companies like Wartsila and Yanmar. Big Chinese shipbuilders like Hudong are having equipment manufacturers as a part of their yard. Japanese Marine Equipment: Japan is one of the biggest players in the Asian marine equipments industry with its share being around 9.8 billion Euros in 2006. The imports are relatively lower in Japan standing at about 3%

of the total marine equipments required. The country depends on domestic production for the same. However Japan is also an exporter of marine equipments (majorly outboard motors) with a share of around 25% of the domestic production. However the exports are mainly to Europe and America, and hence they do not have power over the countries like China and Korea.

Labour
Labour constitutes of a large part of the cost of shipbuilding construction. The cost of labour is the product of the number of man-hours of labour and the wage rate. For a shipbuilder, to be competitive, reduction of labour costs is of utmost importance. The number of man-hours used by the shipbuilding industry in different companies is different. This depends on two main things amount of mechanization of the factory and the skilllevel of employees. The skill level of labour is different in different countries. For example the breakup of the entire labour of Korean shipbuilding is 5% Management & administration 10% 27% Technical and skilled workers 57% Workers at subcontracted companies

Korean shipbuilding manpower division (Not to scale) On the other hand, Chinese shipbuilding companies have a majority of workers doesnt have advanced education as that in Korea and Japan. The other important criterion for determining profitability is the wage rate. Among the 3 countries (Japan, Korea and China), China has the lowest wage rate (US $2/day), whereas the wage rate of Japan (US $25/day) and Korea (US $19/day) are comparable. The lower wage rate has made Chinese ships cheaper. On the other hand Korea and Japan are trying to reduce their labour costs by increasing their skill level and increase of mechanization of their shipyards. These nations are achieving this by improving the shipyard facilities, and workers productivity. The labour cost % is around 25% in Japan/Korea and 12-14 % in China. If we consider the upcoming shipbuilding nations such as India, the labour costs are even lower at 8-10% of the total shipbuilding cost.

Bargaining power of Buyers

The major buyers of ships are Shipping Companies, and companies that require vessels to operate offshore vessels. The ship-owners give their requirements in the new building market. Normally the countries like Japan, Korea and China build ships in a period of 1 year. The ships may take longer times to complete depending upon the complexity of the ships made. But getting a ship in the fleet of the ship-owner at their planned times is extremely important for the profitability of the ship-owner company. The total shipping market actually pushes the shipbuilding industry. More the global tonnage and more the freight rates, there is more and more shipbuilding orders. If the overall expectation of the shipping market is good, ship-owners may buy second hand ships, and very soon the positive sentiment is passed to the ship-building market. Sometimes, a huge amount of ships are ordered at a particular time, and by the time the ships are delivered, there are a huge number of ships in the market and there is over-supply. Hence, ship-owners may not hesitate to pay a premium to get their ship delivered in the time they want.

Cost of ship is the one major cost for the ship-owners. These are capital investments the ship-owners make in a view of typically around 25 years (lifetime of a ship) so that they can benefit from the ship over the entire period of 25 years. The income from the ship is offset by the debt repayments the ship-owners pay. Hence ship-owners give extreme importance to parameters like cost and quality. The shipbuilding industry is dominated by a few

engineers

large shipyards. The largest 4 shipyards of the world (all in Korea) account for 25% of the world production; and the largest 18 shipyards (in Japan, Korea and China) account for 50% of the world production.

On the other hand, the number of ship-owners throughout the world is also similar in number to the number of shipbuilders in the world. So, logically there should not be much bargaining power with respect to the shipowners or shipbuilders. However, the reality is different. Ship-owners throughout the world have similar attitude, and most of these major ship-owners throughout the world ply in the global shipping industry. Most of the ship-owners have one main objective Get the ship at the lowest cost, with the best quality at the least possible time. On the other hand, with the current global problems of over-capacity the shipbuilders from countries other than Japan, Korea and China, force other countries like India, Vietnam and Brazil, although quote lesser costs than that of Korea, Japan & China, try to extend the period of construction sometimes by even 200 percent. Hence this particular parameter does not provide bargaining power to the buyers of ships produced in China, Japan and Korea. The shipbuilding industry in Japan, South Korea and China have become more-or-less standardized. The designs of the vessels are common, and are derived majorly from previously built ships with minor changes. Hence, most of the shipyards are expert in building all kinds of ships. The ship-owners have a number of choices in this respect. But on the other hand, shipbuilding is a relatively longer term contract and there is a substantial amount of time and money spent on selecting the shipbuilder who can build vessel for the ship-owner. Also, when the shipbuilding starts, the owner pays the shipbuilder money at different phases of the project. Hence, although different clauses are present in the contract agreement regarding recovery of money; if the shipbuilder defaults in the timeliness of different phases of project, the switching costs are too high for a ship-owner to change the builder. The ship-owners can very well do shipbuilding operations provided the financials permit so. But not all shipowners can afford to invest in shipbuilding. However it has been seen that large ship-owners like Maersk have already developed shipyards as part of JVs. But owners can integrate backwards only when their self demands (of ships) are so large that investing in shipbuilding is cheaper.

The ship-owners purchase ships on debt. Ship costs are a major part of the capital expenditure of the shipping company. Hence reduction in the costs of shipbuilding heavily reduces the expenses in terms of debt repayment.

Rivalry among Competitors

Country Order book (million CGT) 2008 Japan South Korea China Rest of the World Orderbook of Top 3 Korean Shipbuilders in 2008 Hyundai Samsung Daewoo Rest of Korea C3 19.53 10.83 11.35 27.99 60% 31.4 69.7 62.3 32.5 Orderbook of Top 3 Chinese Shipbuilders in 2008 Dalian Jiangnan New Century Rest of China C3 3.78 3.65 2.9 51.97 16.60%

Orderbook of Top 3 Japanese Shipbuilders in 2008 Imabari Tsuneishi Universal S.B. Rest of Japan C3 4.99 4.09 3.12 19.2 38.90%

We can see from the above mentioned tables that the % market share of the top 3 companies in Korea is 60% and the same percentage for Japan and China are 39% and 17% respectively. The high Korean concentration ratio indicates that a high concentration of market share is held by the largest firms - the industry is concentrated. With only a few firms holding a large market share, the competitive landscape is less competitive (closer to a monopoly). A low concentration ratio like that of China indicates that the industry is characterized by many rivals, none of which has a significant market share. These fragmented markets are said to be competitive. The concentration ratio is not the only available measure; the trend is to define industries in terms that convey more information than distribution of market share. If rivalry among firms in an industry is low, the industry is considered to be disciplined. This discipline may result from the industry's history of competition, the role of a leading firm, or informal compliance with a generally understood code of conduct Although shipbuilding is a cyclic industry, till the last 2-3 years, shipbuilding was growing at a good pace. The shipyards invested heavily on their capacities. There was less competition for new-building orders. However very recently the demand is on a slump and there has been a fight for new building. The rivalry is intense currently. Shipbuilding has traditionally been a very high fixed cost industry, with shipyards like Hyundai spending heavily on massive docks and cranes. Hence, at this current slow growth of the industry there is competition. In Korea, the competition is on who will become the leader in the Korean Shipbuilding industry. On the other hand, Japan and China have a number of relatively similar sized competitors more inclined towards a perfect competition industry. However, it must be noted that the value addition in China is higher (in percentage terms) than that of Korea. But Japan, although in absolute terms the value added is small, but in percentage terms the value added is near to China. This is because, these three countries has different competitive scenarios. China has very low labour costs relative to Japan and Korea. Hence, although Chinas concentration ratio is small, they generate profits because of this very less labour costs. On the other hand Japan believes in heavy investments in increasing efficiency. Hence their value added is also good. However in Korea, the labour costs are high. So Korea focuses on reducing the number of man-hours in a direction of reducing labour costs. The heavy competition among shipbuilders in these countries is the reason for declining or very slow-growing price levels. In order to reduce this competitive rivalry, different companies in different countries have different strategies. Competitive Strategies of Japan Japanese shipyards are known for their medium to lower end shipbuilding. For example, the biggest Japanese shipyard Imabari is known for their bulk carriers. Japanese wage rates are very high, and hence to be competitive, Japan has traditionally focussed on low cost strategies. And even then Japanese shipyards invest

even more for increasing productivity. Some major investments for improving productivity have been undertaken by Tsuneishi shipyard in both inside and outside Japan. Some Japanese shipyards, in order to further reduce costs, have started opening facilities in lower cost countries. Tuneishi opened a shipyard in Philipines in 1997. But due to unknown reasons, this trend has reduced. After the economic downturn, seaborne trade reduced, and hence shipbuilding demands also reduced. In order to counter the downturn effect Japan has started building specialized vessels like LNG carriers. Also they have started focussing on the offshore segment.

Competitive Strategies of South Korea Unlike Japan (who focuses on productivity and efficiency), South Korea follows a two-way strategy to counter competitive forces. They try to become efficient shipbuilders on one hand, and on the other hand there have been investments for diversifying their core product portfolio and innovation. The big shipbuilders of S. Korea are conglomerates who have businesses other than the shipbuilding industry. Due to diversified revenue streams, risk is lesser for the South Korean companies. An example of this is that Samsung Heavy Industries (worlds second largest shipyard) is planning to enter the wind-turbine industry. Another differentiating factor of the S. Korean shipyards is they have more equity and hence they can easily move into different market segments. South Korea has also been moving towards the higher segment of the market. The biggest shipyards of S. Korea have an offshore unit each. As a response to the high labour costs in S. Korea, the shipbuilding companies have been acquiring/building shipyards in low cost countries. For example Hyundai Heavy Industries is having 3 JVs with Chinese companies, whereas DMSE has built its 2 nd biggest shipyard in China. Competitive Strategies of China The Chinese also follow the diversification strategy as that of the South Korean firms. For example some shipbuilders are part of conglomerates which have businesses in Universities and R&D institutes. China also focus on middle to low end ships. They are trying hard to move into the higher segment of the market (like S. Korean shipbuilders) but due to the lack of skills of Chinese workers, China seems to be a long way from high end ships. However the strategy to reduce shipbuilding costs is different than that of S. Korea and Japan. This is because labour costs are low. The government owned shipbuilding companies are trying to reduce costs by integration of supply chain of shipbuilders, thus achieving economies of scale.