Widening gap between Japanese and South Korean shipbuilders
■Visit to South Korean heavy machinery makers: We visited South Korea’s heavy machinery makers (Hyundai Heavy Industries, Samsung Heavy Industry and Doosan Heavy Industries & Construction) to research their business strategies, recent earnings conditions and shipyards. We believe South Korean shipbuilders are sailing ahead of their Japanese counterparts, buoyed by brisk earnings.
■Variance in order price: Japanese shipbuilders will likely struggle to take on short-term deliveries, given that their order books are generally full through to 2010-11. In contrast, South Korean shipbuilders still have room to respond to 2009 deliveries, and therefore have potential to reap lucrative orders. South Korean shipbuilders are generally said to refuse orders unless they yield an OP margin of at least 10-15%.
■Technological gap: South Korean shipbuilders hold a near-monopoly over construction of high-value added super-large LNG vessels (266,000 cubic meters). They have also introduced new technologies enabling construction of ships offshore using super-large cranes of 3,000 tons-plus (Goliath cranes normally used at shipyards are 300-1,000 tons). Also, the South Korean shipbuilding industry pays some of the highest wages in the country, enabling it to attract high caliber personnel.
■Two business models for the shipbuilding industry: The two types of business model evident in South Korea are the vertical-integration model (Hyundai Heavy Industries) and horizontal division-of-labor type (Samsung Heavy Industries). Hyundai Heavy Industries holds the world’s top share for ship engines, and produces key engine components such as crankshafts in-house. In contrast, Samsung Heavy Industries procures engines and main ship equipment from outside. However, orders for large LNG tankers and large-scale marine production facilities such as floating production, storage and offloading vessels (FPSO) are highly lucrative owing to its cutting-edge design.
■Implications for shipbuilding-related firms: Prices for ship equipment look set to significantly improve. Hyundai Heavy Industries commented that it has raised prices for ship engines by around 60% over the past three years. Hence, shipbuilding order prices are improving while price hikes for ship equipment are also being tolerated. Earnings are likely to be boosted by increased volumes and higher prices for ship engines and equipment such as valves. Companies handling ship equipment are Mitsui Engineering and Shipbuilding, Sasebo Heavy Industries, Daihatsu Diesel Mfg, Kobe Diesel, Akasaka Diesels and Nakakita Seisakusho.
