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Can defence save Indian shipbuilding?

Discussion in 'Indian Defence Forum' started by arp2041, Aug 23, 2012.

  1. arp2041

    arp2041 BANNED

    Apr 4, 2012
    +5 / 27,152 / -14
    India’s leading shipbuilding company Cochin Shipyard started operations in 1972, the same year that Korea’s Hyundai Heavy Industries launched its shipbuilding venture. Forty years later, the Korean company claims a market share of 15 per cent in the global shipbuilding industry, having delivered more than 1,686 ships to 268 ship-owners in 48 countries ever since its inception. Cochin Shipyard’s total deliveries, on the other hand, are expected to be 107 by the end of 2012.

    The disparity in the performance of the two companies highlights the sad state of the shipbuilding industry in India which has seen commercial orders vanish over the past several years. Now, though, ship building is getting a new lease of life with the opening up of defence sector orders to private shipyards.

    Recently, when Goa-based Dempo shipbuilding picked up a 74-per-cent stake in Modest Infra, one of the driving factors was the latter’s defence orders. “Naval orders are big growth area for us,” said Srinivas Dempo, chairman, Dempo Group. Modest Infra has 7 fuel supply vessels at a total of 4,000 dead weight tonnage commissioned by the navy and to be delivered to them by 2013.

    Other deals abound. Cochin Shipyard’s order book for the next three years includes 29 ships, out of which 20 are coast guard vessels and aircraft carriers. Pipavav Shipyard has joined hands with Mazagaon Docks while Larsen & Toubro is set to partner with Hindustan shipyard. Mazagaon Docks, which has a naval order book of Rs 1 lakh crore, has been lagging behind in the delivery of the orders due to capacity constraints.

    L&T also recently tied up with Japanese heavy engineering major, Mitsubishi in order to leverage the Japanese company’s technical and design expertise. “While defence is a thrust area, we are expecting a lot of growth to come from the offshore industry,” said A Thapliyal, chief executive officer, L&T shipbuilding.

    Governmental neglect
    Whether India will be able to ape the success of countries like Korea, Japan or China on a global platform, however, is questionable. Countries where shipbuilding has emerged as a major business, experts say, have had a strong government backing complete with cheaper loans, indirect subsidies etc. “We have not reached a stage where we can enjoy economies of scale like Korea or China. In India we produce around 20 ships in a year while developed shipbuilding markets make from 70 to 100 ships in a year,” said D Datar, chief financial officer, ABG shipyard. Due to this, almost 90 per cent of equipment for manufacturing ships is sourced from overseas.

    Shipyards, meanwhile, blame the government for not helping to provide a level playing field with global competitors. The government had extended the shipbuilding subsidy scheme from 2002 to 2007. While the scheme and a temporary boom in the industry prevailed, the scheme was discontinued and along with a recession, sunk the industry. The figures speak for themselves: During 2002 and 2007, India’s order book increased fourfold, from 0.3 million DWT to nearly 1.3 million DW, and accompanied by an impressive increase in global market share. After 2007, the share in new orders has progressively declined from 0.67 per cent in 2007 to 0.02 per cent in 2009 and 0.13 per cent in 2010. This decline in share is not evident for yards in other countries like China and Korea as they continued to receive support, both direct and indirect even during the recession.

    Up to snuff?
    Now, however, it isn’t a subsidy, but defence orders that are trying to salvage Indian shipbuilding. What has made defence an attractive option for private players is that cost or time consideration, experts say, don’t matter as much. In commercial ship orders, these are two areas where shipyards have often slipped. However, the pressure to provide a ‘quality product’ is far higher in the defence sector, due to security and strategic implications.

    A senior executive of Great Eastern Shipping Company recalled an instance where the company had placed an order for a bulk carrier with one of the leading shipyards. The yard not only delivered the vessel four years past the delivery date, the imported steel on the hull had rusted during the long gestation period. “Defence is not a sustainable option for private sector companies although they will get first right of refusal, price preference and such benefits in getting a local contract. But will they be able to provide warships to the world?” the senior executive said. Technological constraints are also considered a big hurdle in the construction of various vessels, more so in defence where technological expertise is closely guarded.

    With no prior experience and expertise to make defence ships, industry experts therefore have ample reason to doubt why private sector firms may not yet be able to become world class shipbuilders. Yet, shipbuilders have no option but to forge ahead. “In the current market scenario, the opportunity cost for companies, if they do not go for naval orders, would be to manufacture nothing. In doing so the companies cannot recover the fixed cost. This is likely to give them subsistence income but not profits,” said Hemant Bhattbhatt, senior director, Deloitte India.

    This is hardly good news for an industry looking to make a comeback.

    Can defence save Indian shipbuilding? | idrw.org