Rising to the offshore challenge

CHINA is slowly losing its competitiveness as a low-cost shipbuilding destination for the offshore and marine industry.

Moreover, with serious shipowners opting for quality over price, Chinese shipyards are likely to up their game as they can no longer compete on price alone.

"The Chinese yuan continues to strengthen against the US dollar and Chinese labour costs continue to rise faster than in many South-east Asian countries. The Chinese yards are thus trying to move up the value chain as the Korean and the Japanese yards did a generation ago," George Horsington, president of business development at Jaya Holdings, told The Business Times.

Despite credit tightening in China, yards there are still able to offer attractive financing terms to shipowners for new builds.

"Chinese yards do have access to state bank financing unlike yards in Singapore and the Batam cluster. We have seen payment terms offered between the conventional 20:80 payment schedule as low as 5:95, which is unsustainable and exposes owners to issues with delays and corner-cutting," Mr Horsington adds.

Such compromises on quality and delivery schedules force many shipowners to look away. Mr Horsington explains that "state bank financing is likely to be more attractive to smaller, less established players, and is only part of the reason owners choose a yard".

Larger offshore and marine companies take a different view on contracting Chinese yards to build their vessels.

Mr Horsington observed: "A lot of the top-tier owners in the offshore sector have very strong balance sheets and are more concerned about timeliness of delivery and quality of build rather than cheap credit. Some players have large contingent liabilities from the payment terms offered in China by yards which ought to be factored into their balance sheets when assessing credit quality." In Singapore, the decision among shipowners to continue building with Chinese yards seems to be split along the lines of quality versus price.

Technical support

"Each owner (in Singapore) has their own strategy. I think some owners have been burnt in China and would be reluctant to return. Others place cheap build cost above all else, especially if they are not long-term owners and operators of the vessels," said Mr Horsington.

Regardless, industry players here still play an important role in the life cycle of a vessel built in China. According to Mr Horsington, most new builds from China come to Singapore for post-delivery work because the technical support available for offshore vessels in Singapore is much better than in China. This is because Singapore is positioned as the predominant Asia-Pacific hub for equipment manufacturers across the board.

The decline in appeal of Chinese yards is also due to another factor which affects demand for cheaper vessels. Since about 2009, a glut in the traditional shipping industry has seen more shipowners and shipbuilders make a transition to the more profitable and dynamic offshore and marine vessels segment. Even so, this trend has declined as a result of several push and pull factors.

"I think the recent recovery in bulk and tanker rates is reducing this trend as traditional blue water cargo vessel orders have recovered," suggested Mr Horsington.

Furthermore, challenges existed for those shipbuilders who made the switch, and this eventually turned them away.

"A lot of yards in China have tried moving into offshore and suddenly realised that it was much harder than they expected. Offshore vessels are small, complicated and very, very, specialised compared to tankers, bulkers and container vessels. The skills required to build the two categories of vessels are very different - cargo ships are about fabricating steel at the lowest cost per tonne; offshore vessels are about the value-add from special equipment such as cranes, dive systems, anchor handling winches and multiple cargo capacities. There is much more emphasis on electrical systems and automation in offshore vessels than in conventional, and more stringent requirements for fit out," he explained.

Even though some of the Chinese yards may have made incremental improvements in quality, they still lag behind their competition in the region in this aspect. "I think Singapore and Batam cluster yards still offer excellent quality, after-sales service and on-time delivery, which can offset improvements in China," Mr Horsington noted.

Indonesian yards, in particular, have risen in quality, said Mr Horsington, whose company Jaya Holdings itself has built its vessels in its Batam yard.

The Batam cluster has demonstrated its excellent commitment to quality, but most Batam-built offshore support vessels (OSVs) work outside Indonesia. We have vessels we have built in our Batam yard on hire to major international oil companies such as Statoil and Anadarko, which demonstrate that Batam yards can produce to the highest standards."

Indonesian industry players, though, admit that the shipbuilders in their country cannot compete with China on pricing.

"Indonesian shipyards for new building have never been price-competitive compared to China because of the taxes that apply to the shipbuilding industry (in Indonesia), even though we still have an advantage of a relatively low-cost labour. The only shipyards in (Indonesia that) have tax-free advantage is Batam as they are part of the free trade zone in Indonesia," Nova Mugijanto, CEO of the Pan Maritime Group, told BT.

This was reiterated by Djoni Sutji, president of PT Indonesia Bulk Carrier. "Indonesian shipyards are not as competitive to build a new ship compared to China or other countries that have incentives from the government. With the (raw) material almost all imported, and with no tax incentives, it is not really competitive yet to build a ship in Indonesia."

Even then, Mr Mugijanto, who is also the offshore marine division head at the Indonesian National Shipowners Association, added that shipowners looking to build small to medium-sized vessels with relatively not so high technology, may yet achieve cost advantages building in Indonesia.

Mr Sutji agreed that the Indonesian yards were more cost-effective for Singapore shipowners in building smaller and simpler vessels.

"It is dependent on the shipowner's requirement, but some still prefer to build in Indonesia for not too high-tech ships or smaller ships," he said.

He explained that this was because it was more convenient and cheaper for Singapore-based shipowners to monitor the progress of their vessel in construction and for smaller vessels, this factor weighed in favourably in its cost-benefit analysis. For bigger or high-tech vessels, such as large bulk carriers and LNG ships, Mr Sutji admitted that shipbuilders, including from Singapore, prefer building in more experienced and sophisticated yards in Japan, China, Korea and Singapore.

Cabotage law

However, industry players in Indonesia are optimistic that more shipowners from Singapore will increase their shipbuilding in Indonesia due to a new local content rule that the Indonesian government is implementing, in addition to a cabotage law that has already somewhat benefited the industry.

For starters, the cabotage law allowing only Indonesian-flagged vessels in the country, has helped improve the quality of shipbuilding in the yards there, revealed Mr Mugijanto.

"Because of the Indonesian cabotage policy since 2005, there are an additional 7,200 Indonesian-flagged vessels. Currently the total number of Indonesian-flagged vessels has already reached 13,224 units. Even though the majority are second-hand vessels, with the repair activities being done in Indonesia. So the ship repair business is booming. Because of that, the shipyard has the ability to improve their quality both for repair and new building."

He believes these standards in Indonesia will increase as more ship orders come in from Singapore due to the new local content rule. "Currently, the Indonesian government is trying to increase and boost 'Local Content'. Upcoming new build vessels, which are purchased using government funds, must be built in Indonesian shipyards. These include tankers for PT Pertamina, RORO Vessels for the Sea and Communication Department, Patrol Boats for the Customs, small and medium-sized OSVs for Indonesian oil and gas companies."

These rapid developments, including the trends of shipowners picking quality over price and traditional shipbuilders leaving the offshore and marine sector, will cause structural changes in the segment going forward, Mr Horsington pointed out.

"The offshore segment has always been very competitive and both in terms of shipowners and shipyards building in the sector, the market is very fragmented. We would expect to see more consolidation on both the yard front and the owner/operator front."

Another trend the industry veteran, who had spent 15 years with Swire Offshore Pacific before joining Jaya Holdings in 2012, pointed out was a potential change in the type of fuel and vessels the sector is likely to see going forward.

"The most likely trend in the OSV sector is going to be a move towards dual-fuel, LNG-powered hybrid vessels. LNG is going to take off as a source of fuel (in the sector). As a result, vessels will get larger to accommodate the extra tanks required. Diesel will not disappear but charterers will want to have the LNG option."