Surviving Against Tide
Anand V Sharma, Director, Mantrana Maritime, Advisory Pvt Ltd.,

Indian shipbuilding is in turbulent waters after due to decline in its orderbook after witnessing a boom time in 2008. Many Indian shipyards having customized commercial shipbuilding infrastructure have to switch over to naval shipbuilding for survival due to overall global nature of shipbuilding industry. In this article, the author details the difficulties and risks involved for shipyards in shifting their focus from commercial shipbuilding to naval shipbuilding.

Shipbuilding, globally, is passing through a difficult time, and India is no exception. The industry, which was at peak of its cycle in early 2008 with mostly commercial orders, has witnessed a fall in newbuilding orders. There are several reasons such as oversupplied shipping market, all-time-low utilisation level of ships, poor outlook for growth in trade, etc.

Present Outlook
As the outlook of the industry is not buoyant, and owners do not see much appreciation in charter rates in the next 2 to 3 years, there is no incentive for ship owners to explore newbuilding activities on a large scale. The newbuilding orders placed on shipyards, globally, have fallen to less than 20 per cent by value vis-à-vis the share in 2007 and early 2008. This scenario is likely to stay for another 3 to 4 years. Due to global nature of shipbuilding industry, Indian shipyards are also affected by it on a very large scale. Uncertainty of new orders and growth perspectives along with financial uncertainty has made things worse for the shipbuilding industry in India. In order to offset fall in business from commercial shipping, Indian yards have diverted their focus in building ships for the defence industry, which increases their overall risk exposure in the industry.

Changing Business Focus
Revival of a struggling company is more probable if it is in a good industry with better economic outlook. However, when industry itself is in a downward spiral, even a good company finds it difficult to survive. Compared to 2007, now, majority of the newbuilding orders placed on Indian shipyards are from the government. This constitutes newbuilding orders by the naval forces and other PSUs. The four prominent sources of newbuilding orders since 2009 for Indian shipyards have been Indian Navy, Indian Coast Guard, Shipping Corporation of India, and ONGC. All these four entities constituted more than 80 per cent of the orders placed on commercial shipyards in India in last 4 years. This is in contrast to the 2008 scenario when more than 90 per cent of the orders came from private sector mostly commercial ships including offshore and substantial newbuilding orders from international clients.

Business Comparison – Commercial Vs Naval Shipbuilding
All the private commercial shipyards in India had undertaken extensive expansion between 2004 and 2007. Expansion of these shipyards was focused on augmenting their capability to build large and more sophisticated commercial ships both in cargo and offshore segment. However, in current times, though the infrastructure expansion is complete, due to bad market, shipyards are now focusing more on newbuilding orders for smaller-size ships, mainly in offshore and defence segments.

The dynamics of shipbuilding in both the segments are totally different. Due to different technical and commercial aspects associated with defence shipbuilding, the risk associated with growth and revival of shipyards is far higher.

The size of ships for Navy or Coast Guard is far smaller as compared to the infrastructure available at private commercial shipyards, which leads to large-scale underutilisation. Some of the over designed infrastructures at these shipyards are large-scale steel fabrication plant, material handling equipment, workshops associated with steel fabrication, etc. Unlike commercial shipbuilding, where a 100,000 DWT ship, costing USD 60 million, would consume more than 16,000 to 18,000 tons of steel, a defence ship, with similar value, would not require steel processing of more than 3,000 tons. Hence, there’s an infrastructure mismatch, considering cost breakup, when a shipyard designed for building large commercial ships instead undertakes defence shipbuilding.

Commercial shipbuilding is steel dominated. Steel constitutes majority of the cost associated as material processing of steel by way of cutting, bending and assembling, etc. In defence shipbuilding, outfitting and armaments dominate the overall cost of ship fabrication. A commercial shipyard, which has customized its infrastructure, manpower, and technical expertise as per commercial shipbuilding, would face large-scale underutilization of the same while building defence ships. It would also face difficulty in executing defence orders. Some of the infrastructure and expertise required in executing a defence order was not required in commercial shipbuilding, and which, therefore, commercial shipyards lack. Hence, post order procurement, these shipyards would be required to develop them.

Process Comparison – Commercial Vs Naval Shipbuilding
Right from conceptualization to delivery stage, after trial run, perspective of a commercial shipyard differs in case of defence ships and commercial ships. Processes, duration of tasks at each stage, etc, vary in both the cases. Naval shipbuilding has primarily been controlled by government-owned defence shipyards. Most of these orders have been placed on cost-plus basis in the past. The present newbuilding concept for Navy and Coast Guard are on fixed-cost basis. However, the mindset of Navy and Coast Guard towards the new realities of shipbuilding in India has not changed. This increases the risks for commercial shipyard intending to get into defence shipbuilding to mitigate slowdown in the overall shipbuilding market. In commercial shipbuilding, an established commercial shipping company takes around 3 months, from conceptualization to placing order shipyard. When a shipping company floats an enquiry, the shipyard plans and prepares proposal, including costing, while working out the commercials for building a ship. The shipyard also collects commercials and delivery schedule of all the critical items. The equipment suppliers, at the time of providing their proposal, also give a timeframe for the validity of that proposal, which is never more than 6 to 9 months from the date they send the proposal. Here, time is of essence. If discussions and negotiations between a shipyard and a customer exceed these stipulated timeframes, then the proposals and delivery schedules of those critical equipment are no more valid. All the stakeholders in the commercial shipbuilding understand this and, therefore, the essence of time is sacrosanct at all stages of the project, right up to the moment of signing between the ship owner and the shipyard. This is not the case in defence shipyard and Indian Navy.

Here, as soon as the enquiry is floated, the shipyard submits its proposal following the same method it does in commercial shipbuilding. Now, the timeframe stipulated by Navy or Coast Guard in declaring the winner of the tender and also contract signing is indefinite. It takes months before shipyards are technically evaluated and moved to the next stage of price opening. Once the price is opened, as per guidelines, barring some exceptional cases, the order should be placed on the shipyard that quotes the lowest. However, at the time of price opening, prices of all the shipyards are declared along with the lowest one, but the contract is not signed at that stage. It takes few more months, even a year, when the shipyard is called for negotiation and is given the letter of intent. Hence, compared to commercial shipbuilding, where it takes around 3 to 4 months for contract signing from the enquiry date or conceptualization, defence shipbuilding could take more than one and a half year for the same. This, itself, disturbs shipyard’s whole project planning. At the time of building, there are several stages of approvals and discussions required, both for conceptual designing, engineering and construction of ships, which is not the case in commercial shipbuilding. In commercial shipbuilding, ships’ building methods and other processes are standardized. Interaction between the shipyard and the owner is non-existent, except for quality checks and timelines.

For defence shipbuilding, the owner, which is Indian Navy or Indian Coast Guard, perhaps, does not take into account the economics of time while conceptualizing or awarding the project. Therefore, the newbuilding process and delivery takes far longer compared to a commercial ship of the same value. This scenario is likely to adversely affect the commercial performance of any shipyard.

Growth Outlook Comparison
For a commercial shipyard, with limited infrastructure, the only growth option is to improve productivity and deliver more ships using the same infrastructure, where dry dock and slipway is the most critical of all. Hence, a commercial shipyard tries to optimize those resources and plans to deliver more ships from the same slipway or dry dock. This induces an upside growth for the shipyard. However, when a naval ship is being built, especially for Indian Navy, the timeframe for assembling and outfitting on the newbuilding berth and the outfitting jetty is far more compared to a commercial ship of same value. From a shipyard’s perspective, the infrastructure is blocked as any sophisticated naval ship takes at least 2.5 years on the building berth even at international shipyards. Sometimes, a shipyard feels it’s just in doing so as one naval ship is several times more expensive than a commercial ship. There is a fallacy in the whole concept. In case of a commercial ship, value addition by the shipyard, in proportion to the total value of ship, is far more compared to the naval ships. In case of naval ships, the bought-out item constitutes a disproportionately large share to the value of ship. Hence, the net earnings available from naval ship are far lower compared to commercial ship.

For a fixed-price contract, every delay at stages like technically evaluating the suitability of shipyard, the tendering stage, process approval at construction stage, or any other unforeseeable delay at shipyard at the execution stage leads to cost overruns. It is a misconception that commercial shipbuilders would have far better earnings by building naval ships instead. In case of India, private commercial yards were making more profits when they were focused only on commercial shipbuilding.

After shifting their focus to naval shipbuilding, their profit margins dropped, and there have been inordinate delays in building these ships, which could even lead to blacklisting or cancelation of defence license. This could create a negative perception about the shipyard in the national and international shipbuilding industry, and also affect the shipyard’s ability to win commercial shipbuilding orders in future. Hence, switching focus of private commercial shipyard, and building defense ships at these yards whose infrastructure is customized to commercial shipbuilding, could be a very risky proposition and its fallouts could be far dangerous.