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Shipbuilding: The Market China Hasn't Cracked

For a decade China has aggressively expanded its presence in shipbuilding in hopes of using its low wages to capture yet another bastion of manufacturing. All isn’t going according to plan. South Korean shipbuilders’ focus on the most complicated and expensive vessels has allowed them to double their share of global orders this year as China’s low-end strategy fails to pay off.

Hyundai Heavy Industries, Daewoo Shipbuilding & Marine Engineering, and Samsung Heavy Industries, the world’s three largest shipyards, have won 40 percent of orders so far in 2011 as higher oil prices spur demand for liquefied-natural gas tankers and oil drilling ships. Chinese yards’ 2011 contract tally is valued at only about a quarter of Korea’s, based on data from Clarkson Research Services, because of a glut of lower-margin commodity transport ships that comprise the bulk of China’s production. “It’s been a good year for Korean shipyards, and it’s going to get even better next year,” says E*Trade Securities (ETFC) analyst Park Moo Hyun.

A 19 percent slump in global ship orders this year has mostly hit Chinese yards, with six of the 10 biggest failing to win any orders since June. Korean shipbuilders avoided the slowdown because they have largely ceded the market for small container ships and those that carry dry-bulk cargo to low-wage yards in China. “It’s now become a race for survival for shipyards in China,” says Cho In Karp, head of research at Heungkuk Securities in Seoul. “If they don’t have a source of income other than traditional shipbuilding, it’s going to be very difficult to remain in business.”

Korea’s Hyundai Heavy Industries has already exceeded its $12.3 billion sales target for this year, helped by $5.5 billion in orders for special ships used by oil companies to drill test wells in deep waters. Samsung Heavy has won $14.8 billion of orders so far this year, while Daewoo Shipbuilding has logged $10 billion. Fueling that strong performance: The two Seoul-based shipyards have received contracts for pricey semi-submersible drilling rigs, floating oil storage and production units, LNG carriers, and drilling ships. “In an uncertain market, you want to spend on something you know will earn you money, and energy is just that,” says Richard Park, an analyst at Korea Investment & Securities. “Korean shipyards are the ones that will benefit the most from this.”

The bottom line: Korea is besting China’s low-cost shipbuilders. In 2011, Korean makers have logged $37.8 billion in orders, vs. $10.3 billion for China.

Park is a reporter for Bloomberg News in Singapore.

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