Shipbuilding Industry in India

SHIPBUILDING INDUSTRY IN INDIA – ANConducing Studies 190 NA 190
OVERVEIWTotal 20,608 23,520 44,128
- by Charanya KrishnanPrivate Players:
Background:Indian corporates and shipyards plan to invest
Shipbuilding (encompassing shipyards, the marineover 170 billion INR over the next 5-7 years that
equipment manufacturers and a large number ofhas the potential to take india’s share to over
service and knowledge providers) is an important3% to 5% of global shipbuilding.
and strategic industry in a number of countriesIndian business is convinced that India has a major
around the world. This importance stems fromcomparative advantage in ship-building that has
the fact a nation's need to manufacture andbeen masked all these years by an inefficient
repair its own Navy and vessels that support itspublic sector notorious for high costs and time
primary industries.overruns. The labour cost per worker in India is
This paper presents a brief overview of theestimated at $1,192 per year, against $10,743 and
shipbuilding industry in India and the possible$21,317 per worker in leading shipbuilding countries
challenges and opportunities that Indian companieslike South Korea and Singapore. Apart from skilled
could enjoy in the future.welders and fitters, India has world-class naval
The Uniqueness of Shipbuilding sector:engineers and architects. These, along with
§ The shipbuilding industry has its own distinctivetop-class management,can make India a global
feature as compared to other industries in thepower.
country. It is unique in a way that it has to sellWatching the Indian Shipbuilding Market:
first and construct later, unlike the auto industryKey players:
or others, where one manufactures first and sellsKey issues and challenges:
later.The Indian Government has been trying various
§ Further shipyards get orders only if they arepromotional and subsidy measures since the
credible (deliver quality ships on time) and it can70’s which managed to keep the industry
be credible only after successfully executingalive at a time when the global industry was
consistently under international competition.passing through a deep recession after the boom
§ Further, subjoined, it has to be globallyof the 70’s which, the country missed due to
competitive against the best yards in the world.lack of industrial growth.
Unfortunately, the shipyards are faced with veryThe shipbuilding industry is now witnessing a
stiff taxes, tariff, duties, and financing charges asgrowth phase after a gap of almost 25 years.
compared to foreign yards.This is an opportunity for India to revive its
§ The deliverables of the sector involves longshipping industry and bring it at par with the rest
gestation periods and requires high cost financesof the world.
over a long period.It is essential for India to put together strategies,
Global Scenario:which could lead to optimal and effective
Globally shipbuilding is a USD 20 billion industry. Thecontribution towards the global shipbuilding industry.
global shipbuilidng order book recorded a 29%Infact the time is just ripe for India to carve a
CAGR over the period of 2003 – 06. Anniche in this sector. However in order to achieve
upward trend has been witnessed in the worldthis objective, it would be imperative to address
order book as a percentage of worldfleetconcern areas which could be detrimental to the
indicating a strong demand outlook.future progress of the sector:
Fortunes of shipping and shipbuilding industriesProcedure governing subsidy support: with Indian
seem to be linked to each other or at least moveshipyards suffering systemic and scale
in tandem. For nearly three decades in the postdisadvantages, the policy of GOI to extend
World War II era, both the industries weresubsidy support to Indian shipbuilders enabled
dominated by European nations and United States.them to effectively compete in the global market.
Historically, shipbuilding industry suffered from theHowever, after expiry of the subsidy scheme,
absence of global rules and a tendency ofeven as its renewal is under construction, there is
over-investment due to the fact that shipyardsa need to ensure that that prescriptive
offer a wide range of technologies, employ aprocedures governing eligibility to receive subsidy
significant number of workers and generateare removed. These include necessity to win an
foreign currency income (as the shipbuildingorder through international bidding or certification
market is dollar-based and a global one).from the ship owner that the bid process had
However, high labour costs in the yards of Europebeen followed before selecting the Indian shipyard,
and USA, one of the major determinants in thiswhich effectively ensure that the benefits of the
cost competitive industry, has led to a gradualsubsidy scheme are not realized by the private
shift of the center of shipbuilding to these Asianship-owners as most of their ship building orders
nations over the last two decades.are through negotiations
Today shipbuilding has become an attractiveDeficient infrastructure: Indian yards lack the
industry for developing nations. Japan usedcapability to build large and modern ships.
shipbuilding in the 1950s and 1960s to rebuild itsPresently, the Cochin shipyard is the only one that
industrial structure, Korea made shipbuilding ahas the capability to build large and modern ships.
strategic industry in the 1970s and China is now inWhile the government has provided subsidies to
the process to repeat these models with largeshipyards but it has to ensure that the benefits
state-supported investments in this industry.reach the private players as well
The tidal shift in shipbuilding activities, from EuropeDisadvantages accruing from small scale of
to Asia, has opened up huge opportunities foroperations: the shipbuilding sector in China and
Indian yards, and both public and privateSouth Korea have received government fiscal and
ship-builders are capitalizing on thempolicy support, enabling them to develop scale as
Indian Scenario:well as a cluster of ancillaries. These advantages
With global shipping industry pitching for anof scale are not available to Indian shipbuilding
unprecedented demand for new shipbuilding ,industry, which imports most of its input materials
awindow of opportunity which was not availableand is therefore unable to leverage advantages
earlier, has been created for the Indian shipbuildingoffered by bulk purchases and Just in Time
industry.supplies. As a result there is significant cost
The Indian shipbuilding industry had always beendisadvantages on account of import dependence
dogged by low capacity, poor productivity andwhich eat into low labor cost advantages of Indian
lack of modernisation. Thanks to the gradual shiftshipbuilders.
of shipbuilding from Europe to Asia, todayLack of ship design and limited investment in R&D:
contrary to expectations the Indian ShipbuilidngIndian players need to work hard to meet the
order books stand at 1.3 million DWT. This hasinternational players in ship automation and
been possible on account of the shipbuilding boomtechnology
and both foreign/Indian Shipping Companies areBenchmarking it to international standards: The
coming forward to place new building orders onIndian shipbuilders must focus on benchmarking
Indian Yards. This has enabled the industry’stheir own processes to international standards to
order books to grow from Rs 1500 crs in 2002improve the efficiency, delivery time, price and
to Rs 14,000 crs (roughly 3060 m $) in 2006quality, which will in turn, will enhance the
The Indian shipbuilding industry is on a high growthcompetitiveness of the shipbuilding sector.
trajectory and is expected to grow at aMeasures such as performance incentives, PPP
compounded growth of 30%. Though India hasmodels, etc could be introduced to improve
not yet become a significant player in the globalefficiency.
shipbuilding business, it has gained a strongSupporting the growth of ancillary industries:
foothold in the niche offshore segment.Ancillaries need to develop along with the
India’s share in the world market has goneshipbuilding industry as they are the key
from an insignificant low of 0.1% in the beginningcompetitive differentiator for establishing
of 10th Plan to 1.3% in 2006. Hence from an anrelocating shipbuilding and shiprepair facilities. A
inward looking industry dependent on governmentcluster development approach for building ancillary
orders, the Indian shipbuilding industry is emergingcapacity could be adopted.
as internationally competitive export led industry.Training and human skills issues: Development of
Nevertheless, the industry is still in its nascenttraining programs in various academies to produce
stage and dependent on government support forhigh quality talent should be prime focus
subsidy. The industry is expected to become selfNo tariff protection from imports
sufficient in 10 years time and will no longerMultiple clearances: As the industry Is dynamic and
require subsidy thereafter. It is clear from thecyclical in nature these clearances result in
above that India can grow in the shipbuildingprocedural delays and hampers augmentation of
sectorin a healthy manner if shipbuilding iscapacity
recognized as a strategic industry and if it can(a) Presently there is no supervisory Authority
enjoy simple taxation policies with a fullyApex body
empowered regulating body for quick(b) High customs and excise Duty on capital
decision-making .investment: The government levies 35% duty on
Tracking India’s performance:all capital equipments such as cranes, plasma
India has 23 shipyards, of which 7 are undercutting machines, and other material handling
administrative control of the central government,equipment purchased for running a shipyard
2 with state governments, and the rest in the(c) Duty on sale of ships to Indian Shipping
private sector.Companies: The materials and parts imported for
The current shipbuilding capacity of India is onlybuilding ships are exempted from payment of
2,81,000 DWT, which is quite undersized accordingcustom duties but these ships once built are
to global shipbuilding standards, and inadequatetreated as imported ships and a custom duty of
given the country's requirements. A comparison5.0% is levied on them
of productivity shows that while China may be(d) Onerous Tax Structure: Indian shipyards are
well ahead of India in total ship building, it’ssubject to 19 different taxes/ duties. These
productivity is almost the same as India and thistaxes cumulatively put Indian shipyards at a
is one area that India can take a lead on thedisadvantage and diminish their cost competitive
strength of its IT industry and setting up newas compared to the international players
modern shipyards.Growth Enablers:
Country Completions M DWT EmployeesThe growth in overall trade, increase in offshore
Productivity DWT Persondrilling activity, and demand from the naval force
Japan (2004) 23.2 80,000 290and coastal guards are the key growth drivers
Korea (2004) 23 71,800 320for the Indian shipbuilding industry.
China (2004) 8.8 158,000 56Leveraging labor cost advantage: In India, labor
India (2006) 0.6 12,000 50cost per worker per year of USD 1,192 is very
Comparing India and China:low, when compared with USD 10,743 and USD
A comparison of productivity between India and21,317 in South Korea and Singapore respectively
china shows that while China may be well aheadOffshore segment: As the proven oil and gas
of India in total ship building, it’s productivity isreserves are likely to meet the global energy
almost the same as India and this is one area thatrequirements only till 2030, there is increased
India can take a lead on the strength of its ITexploration and production (E&P) activity,
industry and setting up new modern shipyards.particularly in the offshore segment. This is
China Indiaexpected to drive the demand for OSVs.
Shipbuilding & Repair Yards 492 28Indian shipyards have carved a niche in the
Manufacture of Equipment 148 Not Knownconstruction of OSVs. Approximately 70.0 % of
No of Employees 2,87,702 (total industry) 12,000Bharti’s and ABG’s order book is directed
Orderbook 40 m DWT 1.3m DWTtowards the oil and gas sector. Globally India has
Global share 19 - 20% 1%one of the largest OSV order books. Industry
China has been gaining almost 2% of theleaders, Korea and Japan have limited OSV
world’s share every year. India has a lot ofcapacity, resulting in a shift towards India
catching up to do.Replacement Demand:
The growth of Chinese shipbuilding industry is now40% of the Indian owned fleet is more than 20
becoming a threat to almost all major shipbuildingyears old and Indian owners will need to spend
nations as China is planning to become the leadingabout $ 4 billion to replace these in the next 5
shipbuilding nation with an aim to corner moreyears.
than 30% global share by 2015. India is probablyThe International Maritime Organization (IMO) has
the only country that will be able to match themandated the phasing out of all single hull vessels
Chinese prices with its relatively low labour costsby 2010. Single hull tankers constitute 15.8% of
and industrial base for manufacture of equipment.the total vessels
The fact however remains that India’sSWOT Analysis:
contribution is tending towards being a significantRecommendations:
component in the global shipbuilding industry and§ Dedicated SEZ for integrated and clustered
that we need to get our act together to use thisdevelopment of Shipbuilding sector in India.
very promising window of opportunity. With the§ Encourage Design capability and R&D through
exponential growth in the number of ships callingfiscal benefits as given to R&D investment in
on Indian ports, providing ship-repair facilities ispharmaceutical sector.
becoming an increasingly attractive opportunity.§ Exemption of Service Tax on Shipbuilding and
Not only does ship-repair and building activity helpShip Repair.
generate substantial local jobs, it also builds the§ Constitution of an apex body to regulate the
capacity of local industry.working of the sector.
Stakeholders in Indian Shipbuilding sector:Conclusion:
Government:Worldwide the shipyards are full and the world is
§ FDI: the government has permitted 100% FDIturning to India to meet its requirements. After all,
in shipbuilding and ship repair activityChina and India have the skills and cheap steel to
§ Investments: the government has proposedmake the best and cheapest ships.
to invest INR 71.95 billion in the shipbuildingThe successful shipbuilding industrial development
industry, towards the modernization ofof Japan, Korea and China has not happened by
infrastructure and development of a researchchance but by a carefully crafted policy where
design basethe government has provided the core
§ XI plan outlay:administrative guidance and support. Such an
Name of shipyards/schemes Governmentintegrated policy initiative would be required for
Budgetary Support (INR million) Internal andthe revitalisation of the Indian ship repair industry
External Budgetary Support Totalas well so that conditions are created for the
Cochin Shipyards 400 5,500 5900Indian firms to become technological leaders
Setting up of two International size Shipyardsinstead of followers, through promoting
15,000 15,000 30,000competition, cooperation and even acquisition and
R&D schemes in Shipbuilding 2,018 NA 2,018Joint Ventures with leading foreign yards.