shipbuilding whitepaper
TRANSCRIPT
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IndianShipbuildingIndustry:Poised
forTakeoff?
Global Conference and Exposition on Shipbuilding
KPMG IN INDIA
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Theglobalshipbuildingindustryisinthemidstofanunprecedentedboomat
present.Attheendof2007,theglobalorderbookhadswelledto457mnDWT
havingquadrupledinthelast5years.1 Thislargeincreaseindemandhasledto
theemergenceofnewshipbuildingdestinations.CountriessuchasChinaandto
someextentVietnam,PhilippinesandTaiwanhaveleveragedtheirinherent
advantageoflowcostmanufacturingtoenterintoshipbuilding.
Indianshipbuildingindustryhasalsowitnessedhealthygrowthintherecent
past.Theannualturnoveroftheindustryhasincreasedby259percentfrom
2002-2007.2 Spurredbythisrecentgrowthseveralcompaniesaresettingup
shipbuildingcapacity.Theexistingshipyardsareaggressivelyexpandingcapacity.
TheoverallannouncedinvestmentoftheupcomingprivateshipyardsexceedsINR200billion,allproposedtocomeonlinewithinthenext5-7years. 3
Giventheinherentlaborintensivenatureoftheshipbuildingindustry,Indiahasa
naturaladvantagebyvirtueofitslowercostoflaborandavailabilityofskills.
However,inordertoestablishIndiaasapreferredshipbuildingdestination
certainareashavetobeaddressed.Eliminationofregulatoryhurdlesand
continuanceofsupportinlinewiththatenjoyedbycompetingnationslikeChina
andVietnamarerequiredfortheindustrytodevelopscale.
DevelopmentofamaturelargescaleshipbuildingindustryinIndiaislikelyto
drivethedevelopmentoftheheavyengineeringindustryacriticalsupportfor
notjustshipbuildingbutotherkeyinfrastructuresectorslikePowerandAviation.
TheINR200bninvestmentinshipbuildinghasthepotentialtotriggeran
additionalinvestmentofINR2200bninrelatedsectorssuchasteeland
engineeringgoodsmanufacturing,IT/ITESandconsumables.4
Inaddition,laborintensityofshipbuildingandshiprepairalongwiththegrowth
inlinkedancillaryandsupportindustrieswouldleadtosignificantemployment
generation.Employmenttotheextentof0.4millionnewdirectjobsinthe
shipbuildingsectorandaround2.4millionnewjobsinrelatedsectorscouldbe
generatediftheaboveinvestmentcommitmentsarerealized.5
ThisKPMGwhitepaperprovidesanoverviewoftheglobalandIndian
shipbuildingindustryandelaboratestheopportunitiesandchallengesforIndiain
becomingapreferredshipbuildingdestination.Ihopeyoufindituseful.
Preface
1 Source: Clarksons Data, KPMG Analysis
2 Source: SAI, KPMG Analysis3 Source: SAI, KPMG Analysis
4 Source: SAI, KPMG Analysis
5 Source: SAI, KPMG Analysis
Arvind Mahajan,Executive Director, Advisory Services
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Shipbuildinghashistoricallywitnessedarobust
growthindemandfornewvessels.Thoughtheshorttermdemandhasseenpeaksandtroughs,overallthe
sectorhasshownahealthyrisingtrendindemand
(referFig1).TheoverallCAGRbetween1980and
2005isaround6percent,whichishigherthanmost
manufacturingindustries.
Atpresent,thesectorisamidstanunprecedented
boom,unseeninthelastthreedecades.Attheendof
2007,theglobalorderbookhadswelledto457mn
DWThavingquadrupledinthelast5years.Thekey
reasonistherapidincreaseinneworderswhichhas
outgrownintheincreaseinglobalshipyardcapacity.
Averagedeliveryinthelast5yearshasbeenaround
60mnDWTwhereasnewordersinthesameperiod
havebeenaround100mnDWTperannum.
Thisunparalleledgrowthhasbeenbecauseofa
uniquesituationwhereseveraldrivershavepushednewbuildingdemandatthesameperiod.Thekey
amongthesedriversareasfollows:
Commodity driven trade growth: Therehasbeenadiscontinuousgrowthincommoditytrade(referFig.2)
withtheriseofemergingeconomieslikeChinaand
Indiaandshiftingofproductionbases
Super-sizing: Inrecentyears,theaveragesizeofshipshasincreasedsubstantiallyduetofreightsaving
fromscale-economiesandiscreatingdemandfor
largersizevessels.Forinstance,theaverage
containershipsizehasmorethandoubledoverthe
past4years,increasingfrom1,967TEUin2003to
2,372TEUin20076
Replacement of aging fleet: Withanaveragelifespanof30years,asizeableproportionofthecurrent
fleetwhichcameinlifearound1975reachedthe
replacementagefromaround2005,spurringnew
buildingdemand
Conversion of single-hull tankers: Concernsaroundtheriskofenvironmentaldamagearisingfromsingle
hulltankershaveledtoregulationthatnecessitatesreplacementofsinglehullVeryLargeCrudeCarriers
(VLCC)bydoublehulltankersorVeryLargeOre
Carriers(VLOC),furtherboostingshipyardactivity.
Shipbuilding has witnessed robust demand growth
6Source: Nomura Research
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Inthelongterm,shipbuildingdemandgrowthislikelytodemonstrate
continuedhealthygrowth.Thebasicdriverofshipbuildingisglobalseabornetradewhichisgrowingatahealthyrateof4percentinthelast
25yearsandislikelytocontinuedoingso.
Latesttrendsindicatethattheshipbuildingdemandisreachingashort-
termpeak7 anditisestimatedthatthatby2012,theshipbuildingmarket
wouldstabilize.Thereafter,thedemandwouldreturntoitsseculargrowth
rateoverthelongterm.
Deliverieswouldincreaseaswellastheorderbook,andtheratio
betweenthemwouldremainathistoricallevels(referFig.3).
Healthy demand growth is likely to continue inthe long term
7 New orders in 2008 have declined by over 30 percent compared to last year.
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Shipbuildingisatrulyglobalindustryastradingofshipsisnotprotected
byanytariffbarriers.Thiscanbeascertainedbythefactthatmorethan90percentofKoreas(theworldleader)currentorderbookisfor
exports8.
Theindustryhaschangedsupplybasestolowcostdestinationsinthe
lastcentury.Newcountrieshavegainedprominence,especiallyduring
boomperiods.EnglandandUSweretheworldleaderstill1950(referFig.
4).JapanandKoreaemergedasprominentshipbuildingnationsduring
the1950sand1970s.ThecurrentboomhasbroughtChinatothefore
(referinsetonChina).Korea,JapanandChinaaccountformorethan85
percentofworlddeliveriesatpresent.
Vesselswithlessercomplexityaremovingtonewerdestinationsgiven
therelativeeaseintheirmanufactureandrelativelylowerlevelsof
customerloyaltyintheirpurchase.ThecurrentorderbookofKoreaand
Europeistiltedtowardscomplexvesselssuchascontainershipsand
cruises,whilethatofemergingnationsandChinaisdominatedbybulk
vessels(referFig.5).Emergingnationshavethereforestartedwithbulk
ordersandmightgraduallymoveupthevaluechainwithexperience.
Supply bases have shifted to new destinationsdriven by supply constraints and cost advantages
8 Source: Clarksons data, KPMG Analysis
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Thedriversforsuchshiftinshipbuildingbasesarecapacityconstraintsin
leadingcountriesandlowershipbuildingcostsintheemergingnations.
Thelowercostcomesfrominherenteconomicadvantages(e.g.cheap
labor)andenablingGovernmentsupportwhichcouldresultinareduction
ofshipbuilderscost(e.g.direct/indirectsubsidy)ortheshipbuyerscost
(e.g.exportbuyerscredit).CountriessuchasVietnamandIndia,with
inherenteconomicadvantages,arewellplacedtoemergeasnewplayers
andgrabafairshareoftheshipbuildingpie.
Case Study: Emergence of China
Chinasriseasashipbuildingpowerisaweinspiring.Withinaspanof
fiveyearsChinahasrisentobecomethethirdlargestshipbuilding
nationafterSouthKoreaandJapanintermsofdeliveries.Intermsof
orderbooksizeithassurpassedJapanaswell,indicatingthatitmight
soonbeedgingJapanoutofitslongheldsecondspot.
Chinaaimstobecometheworldsleadingshipbuildingnationby2015.
TheChineseGovernment,throughitstwolargecompaniesCSSCand
CSICandhostofotherpublic/privateshipyardsisaddingmassive
capacities.WhathavebeenthedriversforChinagrowthstory?Chinese
Shipyardshavebeenpropelledbyacombinationoffavorable
Governmentpolicyandeconomicfactors.
Chinaiscurrentlyintoits11thfive-yearplan,whichhasastrong
emphasisonshipbuildinglikethepreviousplan.TheGovernmentfavors
domesticshippinglinessuchasCOSCOpurchasingshipsfromChinese
yardsandprovidesthemwithdiscountsandeconomicalcreditforthe
purpose.Forexports,theGovernmenthasotherbenefitssuchasVAT
refundonexportandprovidingsovereignguaranteeandlowmargin
credittoshipbuyers.
Chinasbiggesteconomicadvantageislowlaborcost.Evenafter
incorporatingproductivitydifferences,Chineselaborcostisaround50percentofKoreanandJapaneselabor.ThatChinaisthecheapeststeel
manufacturerintheworldalsohelpsitsyardstoreducecostandlower
theirshipbuildingpricesintheglobalmarket.
However,thereareafewconcerns.Chinastillhastodependonimports
for60percentofrawmaterials.Governmenthassetatargetof
reducingthisto30percentbytheendofthe11thfive-yearplan.Lackof
technologyisanotherobstaclethatChineseyardshavetoovercometo
getordersforcomplexvessels.Toaddressit,Chineseyardsaretyingup
withKoreanandJapaneseyardsfortechnologyandfocussingon
smallerandlesscomplexvessels(referFig.6).
9 Source: Clarksons Data, KPMG Research, Deutsche Bank
9
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Theyear2002servedasawater-shedforIndianshipbuildingindustry.In
thatyear,theGovernmentofIndiaintroducedasubsidyschemeforbothpublicandprivatesectorshipyards.Thesubsidywastargetedat
addressingthedistortionsofthedomesticeconomicenvironmentwhich
impactdomesticshipbuildersadverselyaswellasaddressingtheimpact
ofdirectandindirectsupportprovidedtotheshipyardsinothercountries.
Withglobalshipbuildingwitnessinganupwardtrend,theIndian
shipbuildingindustryhasbeenabletotakeadvantageofthis
Governmentsupporttoestablishitspresenceinglobalshipbuilding.The
followingtablesummarizesthegrowthexperiencedbyIndian
shipbuilders.
Havinggainedexperienceandsomecredibilitywithinternationalbuyers,
IndianyardsarenowgraduatingfromsmallervesselssuchasOSV/PSV
tolargervesselssuchasbulkcarriers.Recently,theRatnagiri-basedRajapuryardhaswontheordertobuild300,000DWTVLCC,thefirst
orderofthissizebyanIndianyard. 10
Indian shipbuilding industry has demonstratedstrong growth
Period Order Book Turn Over Investment
1997-2002 8,160 10,170 430
Between2002-2007 148,770 36,570 8,430
Percentagedifference 1,723% 259% 1,860%
Table1.PerformanceofIndianYards(INRmn)
10 Source: Clarksons Database, KPMG research
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Spurredbythisrecentgrowth,severalcompaniesaresettingup
shipbuildingcapacities.Mostexistingyards,suchasABGandBharatiare
expandingcapacityandundertakinggreen-fieldexpansion.Port
companies,notablyAdaniandSKILareindifferentstagesofdeveloping
shipyards.Shippinglinesareeyeingshipyardsaslateralexpansion.
ApeejayShipping,MercatorLinesandGarwareOffshorehaveentered
theshipbuildingmarketinalliancewithleadingplayers.Finally,related
heavyindustryplayersarealsoplanningtograbashareofthismarket.
ThissegmentincludesengineeringgiantL&T,andsteelmakersTataand
JSW.Theoverallannouncedinvestmentoftheupcomingprivate
shipyardsexceedsINR200billion,allcomingonlinewithinthenext5-7
years.
Healthy growth has attracted new players intoshipbuilding11
11 Source: SAI, KPMG Research
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India enjoys competitive advantages
Indiaalsoenjoysseveraloftheadvantageswhichhavepropelled
emergingcountriessuchasChinaandVietnamintotheforefrontofglobalshipbuilding.Someofthekeyadvantagesthatcanbeleveragedby
shipbuildersinIndiaare:
Low Labor Cost: Lowlaborcostisakeydrivingfactorinshipbuilding
nations,asitaccountsformorethan10percentofthetotalcost(refer
Fig.7a).Indianlaborcostsareonthelowersideascomparedtothoseof
theleadingshipbuildingnations(referFig.7b).Evenafterfactoringin
impactofproductivity,IndianlaborissubstantiallycheaperthanKorean
andChineselabor.Moreimportantly,Indianlaborcostisgrowingathalf
therateinChina,whichimpliesthatIndiamightcontinuetohavean
edgeoverChinainthefuture.
Strong Domestic Demand: Indianshippingtradeisboomingonthe
backofeconomicgrowthattherateofapproximately8percent.
Domesticshippinglinesareexpandingtheirfleetsandhaveplaced
orderswithglobalyards.Thereisalsoastrongthrustinbasicsectors
suchaspowerandsteelandcompaniesarelookingtoacquireshipsto
controltransportfrominternationalmines.
12 Source: Guangzhou is a leading yard in China owned by CSSC. Others includes SG&A cost
and financing expenses.
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TheGovernmentsnewinitiativesinCoastalShippingandIWT,islikelyto
furtherboostdemandfornewships.NewportsandIWTlaneswould
requiredredgingandotherport-relatedvesselsupport.Finally,the
ongoingoffshoreexplorationsareexpectedtocreatedemandforrigs,
OSVandPSV.Thus,eveninapossibleshort-termlowdemandscenario,
thereisenoughdomesticdemand,whichIndianshipbuilderscan
capitalizeupon.
Supporting industry infrastructure for some components: Indiahas
domesticindustrieswhichcanproducesomeoftherawmaterials
requiredinshipbuilding.Specifically,Indiahascompetitivesteel
manufacturing,lightengineeringandIT/ITESindustrieswhichcanoffer
therequiredproductsateconomicalcosts.Theseindustriesarecurrently
notproducinggoodsfortheshipbuildingsector,mainlyduetolackof
sufficientscaleofshipbuildinginthecountry.
Long Coastline: Indiaenjoysalongcoastlineofmorethan7,500kmlong
withseveraldeepwaterportsservingasgoodlocationsforsettingup
shipyards.
OtherdriversforshipbuildingindustryinIndiaincludethelimitedsurpluscapacityavailablewiththeglobalshipbuildingyardsandabooming
capitalmarketwhichcouldprovideeasyfinancingforcapitaland
operationalexpensesoftheseyards.Indiahasproveditscapabilityin
shipbuildingintheareaofsmallervessels(referFig.8)bygettinga
sizeablemarketshare.However,therearespecificareaswhichhaveto
beaddressedifIndiahastoachievethesameinlargervessels.
However, these advantages are negated by regulatoryhurdles
Indianyardsfacesystemicdisadvantagesinseveralareaswhichnegate
theirnaturalcompetitivenessandadverselyimpacttheirchancesof
succeedinginaglobalizedshipbuildingindustry.Indianshipbuildersface
acostdisadvantageof30-40percentofthecostofmanufacturingaship
onaccountofthesefactors 13.Thekeydisadvantagesareasfollows:
StatutoryBurdenShipbuildingattractsacomplexsetofleviesandduties.Thedifferential
rateofdutiesandtaxesbetweenIndiaandothernationsleadsto
additionalcostburdenforIndianshipyards.
13 All figures taken from Shipbuilding Economic Benefits and Benchmarking Government Support
across Countries prepared by KPMG
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Levies
Octroi,CST,VATandexcisearesomeoftheleviesapplicableto
shipyards.Severalshipbuildingnationshaverelaxedtheseleviesto
encourageshipyards.Forinstance,ChinarefundsVATcompletelyon
domesticsaleofshipswhereasinIndiaVATisrefundedonlyoninputs.
Thelackofsuchspecialincentivesfortheshipbuildingsectorleadstoan
additionalburdenof8percentfordomesticsalesandaround3percent
forexportsales.
Indirect TaxesServiceTax@12.36percentisapplicableonalldesignandengineering
servicesprocuredbytheshipyardsduringthecourseofship
construction.Itisestimatedthattheextentofservicecontributioninthe
contractpriceofashipisaround12percent.IncountriessuchasChina,
alumpsumVATisapplicable,whichislaterrefunded.
CorporatetaxalsoimpactsIndianshipbuildersadverselyascomparedto
competitorsinChinaandVietnam.Thegovernmentsinthesecountries
offeraslewofincentivestotheshipbuildingsector.Manysegmentsof
shipbuildinginChinahavebeennotifiedasEncouragedsectorwhich
enablecompaniestooffsetapartofinvestmentagainsttaxationwithin
fiveyearsofcommencement.Suchconcessionshelpyardstoreducecostduringtheinitialyearswhentheyarecompetingtoestablish
themselves.However,therecentinitiativesofIndianshipyardsto
structurethemselvesasSEZenablesthemtooffsetthisdisadvantage
significantly.
FinancingCostsFinancingcostsassumegreatersignificanceinshipbuildingduetoits
specialrequirements.Majorshipbuildingcountrieshavecreated
supportivemechanismstoeasetheburdenofthesecosts.Indian
shipyards,withnosuchdirectsupport,faceadditionalcostsonaccount
offinancing.
Bank Guarantees
Shipyardsarerequiredtoprovidebankguaranteestoprotecttheship
buyer.Theseguaranteescompriseperformanceguarantee(fortimely
delivery),refundguarantee(forstagepayments)andpost-construction
guarantee(towardsdefects).
InChina,thegovernmentprovidessovereignrefundguaranteesfor
certainclassofvessels,thusremovinganyrelatedburdenonthe
shipyard.InKorea,shipyardfinancinghasmaturedandtheevolved
mechanismsdrivethecostlower.However,inIndia,financialinstitutions
donothaveafocusontheshipbuildingsectorandthereisnosupport
fromtheGovernmenttoreducethechargesasinthecaseofKorea.Asa
result,thecostofbankguaranteesinIndiaishigherthancompeting
countries.
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Working Capital
Typically,ashipyardrequiresaworkingcapitalofaround25-35percentof
thecostoftheshipduringtheentireconstructionperiod.Theinterest
ratesonworkingcapitalinIndiaaverage10.5percent.Incontrast,the
interestratespresentlyofferedtoshipbuildingyardsoverseasare
significantlylowerataround5-6percentinKoreaandaround4-8percent
lowerinChina.Inaddition,exportcreditinthesecountriesisofferedat
muchlowerinterestrates.
OthercostsIndianshipbuildingindustryisatanearlystagebuthastocompete
againstestablishedyardsinKoreaandChinatograbashareofthe
market.Itslowerscaleleadstoseveraldisadvantagesindesignand
manpowercosts.Leadingshipbuildingcountriessupporttheindustryby
creatingenablingpoliciesfordevelopmentoftechnicalandmanpower
capabilities.
Forinstance,Chinaprovidesscientificresearchsubsidytomaritime
universities,andprovidesR&Dandlivingallowancetopostgraduate
students,toensureavailabilityofatalentpoolforshipyards.Korea
establishedashiplaboratoryentirelythroughGovernmentfundingin1976tointroduceadvancedforeigntechniquesanddevelopsuch
techniquesindigenously.
ThereisanincreasedfocusbyIndianshipbuildersondevelopingdesign
capabilitieseitherin-houseorthroughestablishedbodieslikeNational
ShipDesignResearchCentre(NSDRC).However,itmaystilltakesome
timeforIndiatomitigatethiscostdisadvantagewhichclearlydepends
ontheirabilitytoattractordersandoffsetashareofprofitintheseareas.
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Government support is critical to mitigateregulatory disadvantagesIncontextofsales,theshipbuildingindustryisatypicalglobal
manufacturingindustry,however,whenitcomestoproduction,itishighlyconcentrated,duetotherelativelyhighlevelsofstateintervention.
Mostcountries,throughaseriesofmeasures,helptheshipyardsin
reducingcostsandattractingglobalbusiness.Thesupportprovidedby
Chinaishighlightedinthefollowinginset.
Case Study: Chinas support to shipbuilding
Chinahasfollowedtherouteofplanneddevelopmentalratherthan
market-rationaldevelopmentfortheshipbuildingsector.Overthelast
decade,Chinahasundertakenaseriesofinitiativestopromoteand
supportthegrowthofshipbuildingindustry.Thesemeasures,introduced
atbothcentralandprovinciallevel,havecontributedsignificantlytogrowthofshipbuildingsectorinChina.Thefollowingfiguredepictsthe
timingofthesemeasuresvis--visthegrowthtrendwitnessedinthe
shipbuildingsectorandclearlyindicatesthattherewasleadtimeinthe
realizationofbenefits.
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1.LossreimbursementtodomesticshipbuilderssuchasDalian
Shipyard
2.Scrappingaidonallshipsproducedduring1972-2001
3.SupportinAcquiringland.Preferentialratesonacquisition.CapitalTax
subsidiesprovided.VATrefundispresentupto17percent
4.ExchangeRateControl
5.Incentivestoencourageshipbuildingindustrydevelopmentat
LiaoningShipbuildingZone
6.Circularonacceleratingshipbuildingindustrydevelopmentin
Zhejiangprovince
7. Tenthfive-yeardevelopmentplanforshipbuildingindustry.Interim
ProvisionsonPromotingIndustrialStructureAdjustment.
Thereasonforthissupportisnothardtoguess,viz.-onaccountofthe
largecontributionoftheindustrytothecountryseconomy.Interestingly,
countrieshavenotonlysupportedtheindustryduringitsinitialgrowth
phase,butcontinuedtoextendbenefitsevenwhentheindustry
matured.Thesupportcontinuedevenduringglobaldownturn,underlining
thesignificantcorrelationbetweenshipbuildingandthenational
economy.
InIndia,theGovernmenthastraditionallybeenprovidingsupporttothe
Indianshipbuildingindustrythroughvariousmeasures.Whilemostof
thesemeasureswereaimedatprotectingthepublicsectorshipyards,
theGovernmentintroducedsupportivemeasuresfortheprivatesectorin
2002.TheconsequentstronggrowthinshipbuildingsectorinIndiabears
testimonytothecriticalityofGovernmentsupportasshowninTable1.
Currently,Indiahasemergedasoneofthepotentialleadersintheglobal
shipbuildingmarket.However,theIndianyardsareyettoachievethe
criticalscaletoovercomethedisadvantagescomparedtoother
competingnations.Hence,GovernmentsupportisessentialforIndiatorealizeitsshipbuildingpotentialandenjoytheconsequentbenefitstothe
economy,atleasttillthetimethecriticalhurdleiscrossed.Certainstates
arealreadytakingthelead.Gujarat,thecurrentfavoreddestinationfor
Indianshipbuilders,iscomingupwithashipbuildingpolicy,tofurther
promotethesector.14
14 Source: Marinelink
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ThefollowingaresomeoftheoptionsthattheCentralandState
Governmentscanuseassupportingmeasures:
Directsubsidyagainstcontractprices
Provisionofrefundguarantees
State-fundedorsubsidizedinnovation,R&Dtodevelopshipdesign,
shipbuildingtechnology,orshipyardproductionexpertise
Project/workingcapitalfinanceonsubsidizedinterestorinterest-free
loans,underwritingdebttoreducethecommercialrisk
Preferentialtaxschemesforshipownersorforshipyards
Exchangeratecontrolforshipyards-thisreducesoneofthekeyrisk
factors
Incentivestoancillariese.g.steelproducers,mainenginebuildersor
equipmentsuppliers.
GovernmentsupportiscriticaltilltheIndianshipbuildingindustrygains
criticalvolumestoremoveitsscalerelateddisadvantagesandremoveits
dependenceonimportsforprocuringraw-materials.
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Development of an ancillary setup
Ancillaryindustriesusuallylagthedevelopmentofshipbuildingindustry
inanycountry.ItrequirestheshipyardstoachieveacriticalmassbeforegloballyrenownedancillarycompaniessuchasMan,Wartsila,Caterpillar
andRollsRoyceestablishasizeablepresencethere.Thisisevidencedby
theevolutionofshipbuildinginputindustryinChinaasdepictedinFig.9.
MostgloballyreputedcompaniesstartedestablishinginChinaafter2002
whenitcrossedacapacityof5mnDWT 15.Eventhenmostofthesearejointventureswithleadinglocalshipyardstomitigateriskandtie-in
customers.Incontrast,Indiascurrentcapacityaswellasitsexpected
capacityin2011ismuchlowerthantheChinesethresholdcapacity.This
mightimplythatIndianshipyardswouldcontinuetheirdependenceon
importsforsourcingtheirinputs.
15The capacity is not defined as a threshold volume but is shown as an indicator of scale
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However,Indiasstrengthsinthemanufacturingsectormightadvance
theprocesshere.Indiaisrecognizedasaglobalplayerinlight
engineeringandamajorbaseforautoancillaries.Thishascreatedawell-
establishedpoolofengineeringgraduatesandsuppliercompaniesto
suchindustries.Indiacanbeusedbyancillarycompaniesasaglobal
productionbasecateringtolocalshipbuildersaswellastheglobal
market.
Somesignsofthisoccurrencearealreadyvisible.ManDieselhassetup
anengineplantatAurangabadandWartsilaisinnegotiationswithseveraldomesticshipyardstosetupasimilarunitinthecountry.RollsRoyceis
settingupanelectronicsandcommunicationplantinNaviMumbai. 16
However,forIndiatohaveasizeablecomponentsetup,domestic
demandhastoreachacriticalmasstosustainglobalinterest.Also,the
shipbuildingindustryneedstobeproactive.AscanbeseenfromFig.9,
CSSCandCSICaswellasotherlocalplayerspartneredwith
manufacturingcompaniestostartlocalproductionofthesecomponents.
Indianplayersneedtoreplicatethemodel.
16 Source: KPMG Research
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The multiple benefits of shipbuilding justify thesupportShipbuildingisaunusualindustryas65percentofvalueadditionduring
buildingofshipscomesfromotherindustries.Also,shipbuildingisalaborintensiveindustry.Asanestimate,about750workersworkingfora
yeararerequiredtobuilda30,000DWTvesselinIndia.
Thegrowthofthedomesticshipbuildingsector,whichtodayimports
about45percentofitsinputrequirements,canprovideamajortrigger
forlarge-scaleindigenizationofheavyengineeringproductsand
ancillaries.Heavyengineeringindustryisintegratedwithvariouscore
sectorsforitsdemand.Thedemandisderivedprimarilyfromcapacity
creationsinsectorslikeinfrastructureandgeneralmanufacturing
includingprocessindustries.Beinganintermediateindustry,itsdemand
dependsonend-userindustries.However,astheenduserindustrymix
isfairlydiverse,itisnecessarytogeneratelong-termsustainablegrowth
driversforheavyengineeringsegment,inordertoexpandthe
manufacturingbaseandenhanceoverallmanufacturingcompetitiveness.
Shipbuildingindustrycanplaytheroleofmotherindustrytoheavy
engineering,similartothecriticalroleessayedbyautomanufacturingin
caseoflightengineering.Thegrowthprojectionsformanufacturingin
Indiawouldbemuchhigheriftheshipbuildingindustrytakesoffinthe
nextfewyears.
TheIndianShipbuildingIndustryhasdemonstratedaspirationstoacquire
a7.5percentshareinglobalshipbuildingby2017,whichisexpectedto
haveasizeofabove500mnDWT.AnalysissuggestthatthiswouldrequireIndianshipbuilderstoinvestclosetoINR200Bninnewyard
capacity,whichinterestingly,isthecurrentlevelofcumulativeinvestment
declaredbyvariousentrantsinthissector.
ThisINR200bninvestmentinshipbuildingcantriggeradditional
investmentofINR2200bninrelatedsectorssuchassteeland
engineeringgoodsmanufacturing(referFig.10a),IT/ITESand
consumables.Likewise,shipbuildingislikelytogeneratearevenueof
INR800bnandanoverallrevenueofINR3300bnincludingassociated
sectors.ThisrevenuecouldprovidearoundINR250bnintaxesforthe
Government.
17
17 Source: All figures taken from Shipbuilding Economic Benefits and Benchmarking Government
Support across Countries prepared by KPMG
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Suchascaleofinvestmentcanalsoleadtosignificantmultiplierbenefits
intermsofemploymentgenerationandinvestmentinother
manufacturingsectors.Employmenttotheextentof0.4millionnew
directjobsinshipbuildingsectorandaround2.4millionnewjobs(refer
Fig.10b)inrelatedsectorscanbegeneratediftheaboveinvestment
commitmentsarerealized18
.Furthermore,thejobcreationpotentialofshipbuildingismorethanothercomparablesectorsascanbeseenin
Table2.
Inaddition,ahealthyshipbuildingindustryisalsolikelytoattractship-
repairbusiness.Shiprepairisevenmorelaborintensivethan
shipbuilding.India,withitslaboradvantageanditsidealpositionon
internationaltraderoute,iswellplacedtowrestthisbusinessfrom
competitors,oncetheshipbuildingindustryisdeveloped.Thiscancreate
additionalrevenueandemploymentopportunitieswithmarginalincrease
ininvestment.
Finally,aboomingdomesticshipbuildingindustrywouldalsoprovidethe
muchneededdomesticcapabilitywhichcanbeaccessedforfuture
needsoftheNavyandCoastGuardandhelprealizethegoalof
indigenizationindefenceproduction.
Labor employed / Turnover (INRmn) for various industries
Shipbuilding 97
Auto-CommercialVehicles 12
HeavyEngineering 33
Construction-Civil 18
Source:KPMGAnalysis
Table2
18 Source: Shipyards Association of India
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Conclusion
Thedevelopmentoftheshipbuildingsectorhasthepotentialtopositively
impacttheeconomyincludingservicesectors.Torealizeitsgrowth
potential,thesectorneedstoestablishandachieveacriticalmass.The
windowofopportunitypresentedbytheongoingboomphaseneedsto
becapitalizedtofirmlygroundtheindustryalongwithitsancillaries.
IndianshipbuildinghassubstantialplansforinvestmentofaroundINR
200bnoverthenext5-10years,incapacityexpansionandupgradation
oftheexistingyards.However,thisinvestmentandconsequentbenefits
canmaterializeonlyifsupportivemeasuresarecontinuedbythe
Governmenttoaddressthesystemicdisadvantagesaffectingthe
competitivenessofIndianshipbuildingindustry.Inaddition,proactive
actionbyshipyardstopromoteancillarybuildupiscritical.Addressingthesedisadvantagesarelikelytonotonlymakethecommercial
shipbuildingindustrycompetitive,butalsocreatestrategicallybeneficial
optionsformeetingIndiasdefenserequirements.
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Glossary
CAGR CompoundedAnnualGrowthRate
CIF CostInsuranceFreight
COSCO ChinaOceanShippingCompany
CSIC ChinaShipbuildingIndustryCorporation
CSSC ChinaStateShipbuildingCorporation
CST CentralSalesTax
DWT DeadWeightTonnage
EIU EconomicIntelligenceUnit
GT GrossTonnage
INR IndianRupee
IT InformationTechnology
ITES InformationTechnologyEnabledServices
IWT InlandWaterTransport
JSW JindalSouthWest
KOSHIPA KoreanShipbuildingAssociation
L&T LarsenandToubro
LNG LiquifiedNaturalGas
MN Million
OSV OffshoreSupplyVessel
PSV PlatformSupplyVessel
R&D ResearchandDevelopment
SAI SihpyardsAssociation of India
SG&A SellingGeneralandAdministration
SKIL SeaKingInfrastructureLimited
TEU Twenty feet Equivalent Unit
VAT ValueAddedTax
VLCC Ver yLarge Crude Carrier
VLOC VeryLargeOreCarrier
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About FICCI
FICCIistherallyingpointforfreeenterprisesinIndia.Ithasempowered
Indianbusinesses,inthechangingtimes,toshoreuptheir
competitivenessandenhancetheirglobalreach.
Withanationwidemembershipofover1500corporatesandover500
chambersofcommerceandbusinessassociations,FICCIespousesthe
sharedvisionofIndianbusinessesandspeaksdirectlyandindirectlyfor
over2,50,000businessunits.Ithasanexpandingdirectmembershipof
enterprisesdrawnfromlarge,medium,smallandtinysegmentsof
manufacturing,distributivetradeandservices.FICCImaintainsthelead
astheproactivebusinesssolutionproviderthroughresearch,interactions
atthehighestpoliticallevelandglobalnetworking.
Setupin1927,ontheadviceofMahatmaGandhi,FICCIisthe largest
andoldestapexbusinessorganizationofIndianbusiness.Itshistoryis
verycloselyinterwovenwiththefreedommovement.FICCIinspired
economicnationalismasapoliticaltooltofightagainstdiscriminatory
economicpolicies.Thatcommitment,driveandmissioncontinueinthe
ever-changingeconomiclandscapeofIndia,chasingalwaysnewer
agenda.
Intheknowledge-drivenglobalizedeconomy,FICCIstandsforquality,
competitiveness,transparency,accountabilityandbusiness-government-
civilsocietypartnershiptospreadethics-basedbusinesspracticesandto
enhancethequalityoflifeofthecommonpeople.
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KPMGistheglobalnetworkofprofessionalservicesfirmsofKPMG
International.Ourmemberfirmsprovideaudit,taxandadvisoryservices
throughindustryfocused,talentedprofessionalswhodelivervalueforthe
benefitoftheirclientsandcommunities.Withnearly123,000people
worldwide,KPMGmemberfirmsprovideservicesin145countries.
ThememberfirmsofKPMGInternationalinIndiawereestablishedin
September1993.Asmembersofacohesivebusinessunit,theyrespond
toaclientserviceenvironmentbyleveragingtheresourcesofaglobal
networkoffirms,providingdetailedknowledgeoflocallaws,regulations,
marketsandcompetition.Weprovideservicestoover5,000international
andnationalclients,inIndia.KPMGhasofficesinIndiainMumbai,Delhi,
Bangalore,Chennai,Hyderabad,KolkataandPune.ThefirmsinIndiahave
accesstomorethan3000Indianandexpatriateprofessionals,manyof
whomareinternationallytrained.Westrivetoproviderapid,performance-
based,industry-focusedandtechnology-enabledservices,whichreflecta
sharedknowledgeofglobalandlocalindustriesandourexperience
oftheIndianbusinessenvironment.
About KPMG in India
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in.kpmg.com
KPMGinIndia
Mumbai
KPMG House, Kamala Mills Compound
448, Senapati Bapat Marg,Lower Parel, Mumbai 400 013
Tel: +91 22 3989 6000
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2008KPMG,anIndianPartnershipandamemberfirm
oftheKPMGnetworkofindependentmemberfirms
affiliated with KPMG International a Swiss cooperative All
Theinformationcontainedhereinisofageneralnatureandisnotintendedtoaddressthecircumstancesofanyparticularindividual
or entity Although we endeavor to provide accurate and timely information there can be no guarantee that such information is
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