Japanese Shipbuilding Still Going Strong

UNCLAS TOKYO 002363 SIPDIS SIPDIS SENSITIVE E.O. 12958: N/A TAGS: ECON EIND JA SUBJECT: Japanese Shipbuilding Still Going Strong Sensitive but unclassified. Please protect accordingly. ¶1. (SBU) Summary. Despite being a high-wage country, Japan's shipbuilders are still going strong, capturing 17.7 percent of new ship orders by tonnage world-wide in 2005, according to a new report by the Japan Ship Exporters' Association. Japanese shipping companies are expanding their fleets to meet worldwide shipping demand, and the largest container ship built in Japan, a 9,040 TEU (twenty-foot equivalent units) container vessel was recently delivered. There are some headwinds, however. Japanese shipbuilders face competition from China and Korea and are concerned about their aging workforce. Small and medium shipbuilders are doing less well than the larger yards, but the GOJ is seeking to give them some support and at the same time is seeking to reduce over capacity in the industry. End Summary. The State of Japanese Shipbuilding is Good -------------- ¶2. (U) The Japan Ship Exporters' Association issued the 2007 edition of Shipbuilding and Marine Engineering in Japan (SMEJ 2007) in April. This survey of Japanese shipbuilding shows the Japanese industry to be quite healthy with a high level of backorders: 493 ships of 18,546,000 gross tons total as of June 2006. Copies of the 2007 report in English can be ordered from The Japan Ship Exporters' Association. ¶3. (U) Japanese shipyards continue to invest and innovate, achieving a milestone last October when Ishikawajima-Harima Industries (IHI) Marine United deliveQ a 9,040 TEU container ship, the Humber Bridge, at its Kure shipyard. The Humber Bridge is the largest container ship built in Japan and is the first of eight ships being built for Kawasaki Kisen Kaisha shipping company for the Asia/North Europe trade. Japanese Ship Operators are Expanding their Fleets -------------- --- ¶4. (SBU) To maintain their market position and meet strong demand, the three largest Japanese marine transport firms - Mitsui O.S.K., Nippon Yusen Kabushiki Kaisha (NYK) and Kawasaki Kisen Kaisha -- are expanding their fleets, with their combined number of vessels anticipated to increase by 30 percent to some 2,500 over the next three years or so according to the press. In recent meetings with representatives from Mitsui, which is the largest procurer and ship operator, they told us that Mitsui has 278 vessels on order which are expected to enter their fleet by 2011-2012, distributed as follows: Bulk carriers - 142 - 50 percent Crude Tankers - 32 - 12 percent Container Vessels - 28 - 10 percent LNG Carriers - 25 - 9 percent Product Tankers - 24 -- 9 percent Chemical Tankers - 11 - 4 percent Reefers - 10 - 4 percent Open Hatch Bulkers - 3 - 1 percent LPG carriers - 1 percent Pure Car Carriers - 1 - 0.4 percent Head Winds: Korean and Chinese Competition, Increased Costs, and Aging Workforce -------------- ¶5. (U) SMEJ 2007 notes, however, that the shipbuilding industry is facing some challenges. The backorders declined 18.8 percent from the year before. Moreover, in terms of world market share, China is emerging as the major new competitor. In 2005, Japan had a 17.7 percent share of new ship orders by tonnage, a 43.9 percent decrease from the prior year. Korea had a 43.8 percent share, a decline of 3.9 percent. China accounted for 18.3 percent of orders, an increase of 47.8 percent from the year before. China's "aggressive investments in facilities," the report said, means Japan shipbuilders need to work hard to keep their competitive edge. Other recent problems are the high costs of steel, materials, and equipment which are squeezing shipbuilders' profits. In addition, the engineers and technicians who have helped keep Japan competitive are aging. According to the SMEJ, about half of the skilled workers in the shipbuilding sector are 50 years or older -- up from 40 years or older five years ago. ¶6. (SBU) In separate conversation, the Mitsui rQresentatives and a Morgan Stanley analyst who covers transportation issues remarked to us that shipbuilding is moving to Korea and particularly China. The Morgan Stanley analyst said this is following the historical trend favoring new entrants as shipbuilding has gravitated from Europe to Japan, then Korea and now China. ¶7. (U) Further illustrating this shift is that Japanese shipping companies themselves are making use of China's shipyards. NYK line recently took delivery of a 175,000 deadweight ton bulk carrier from Shanghai Waigaoquai Yard, the first time NYK had ever purchased a ship from a Chinese yard, and has ordered three more of the same, plus two 300,000 deadweight ton bulk carriers and two very large crude carriers (VLCC) from Nantong Cosco KHI. Small and Medium Shipbuilders Navigating the Shoals with Difficulty -------------- ¶8. (U) Small and medium shipbuilders that build coastal or short range vessels are facing difficulties due to over-capacity and a poor business environment, said the SMEJ 2007 report. (Note: the SMEJ 2003 edition evidenced a similar concern). The Japanese government is trying to support the smaller shipbuilders through the Laws for Promotion of Business Activities by Medium and Small Enterprises, which involve help with insurance, lower interest rates and preferential tax treatment. Reducing Overcapacity in the Shipbuilding Industry -------------- --- ¶9. (SBU) MLIT officials told us that a mechanism to reduce competition and over-capacity in the shipbuilding industry for many years has been for a quasi-governmental agency organized by MLIT to buy the facilities and land of small and medium sized shipbuilders. Facilities and land bought by the organization are sold to any parties interested in purchasing them. The same agency then assesses a fee to the remaining shipbuilders to cover the difference of the cost of the buy out and selling, making the whole process cost free to the government. ¶10. (SBU) MLIT officials added, however, that this is an old-style approach that MLIT no longer wishes to pursue. The third phase of this program has been going on for about 10 years. MLIT's Maritime Subcommittee is examining ways to increase the rate charged to the remaining producers to encourage the termination of the program on time in 2010. To cover the difference between the buyout fee and revenue received from the sale of the facilities and land, the remaining shipbuilders were charged at the rate of 0.15 percent of their sales contracts for new ships for the year. The proposed plan by MLIT to end the program by the scheduled time is to increase the current rate 0.15 percent to 0.25 percent.