There is a huge need for ships and vessels in India with estimations that demand will only rise in the years ahead – but even then Indian shipbuilding industry only comprises an abysmal one per cent of global shipbuilding industry. Sandeep Menezes takes a look at the emerging demand for ships and vessels across India while analyzing the domestic shipbuilding capability nationwide.
Indian owned ships/vessels carried a meager 7.95 per cent of India’s overseas trade during 2010-11 and the share of Indian owned vessels in India’s overseas trade during 2011-12 is 10.9 per cent. India’s freight bill of two years ago was estimated at $18.6 billion with 90 per cent being garnered by foreign vessels. With the nation already facing a huge trade deficit thereby putting pressure on the Indian Rupee and the economy, this huge outgoing freight bill is outrageous.
The demand for ships, semi-submersibles and port auxiliary vessels is projected to grow in view of rising cargo traffic from/to India in coming years. These factors are likely to offer steady demand for new shipbuilding activities as well as growth in ship-repair volumes to sustain the fleet in a sea-worthy state.
According to a recent ASSOCHAM report, India has a total of 1,122 shipping vessels in its shipping fleet and 41 per cent of these i.e. about 466 vessels fall in the age group of 20 years and more. Considering that average life of a shipping vessel is about 26 years, most of the existing Indian vessels need to be replaced.
The need for shipbuilding cannot be more emphasized given the fact that around 90 per cent of India’s foreign trade is carried out by foreign flagged carriers and even the bulk of imported crude. Other than loss of precious foreign exchange on foreign freight bill – it also makes the nation vulnerable strategically.
Indian shipbuilding companies, at the end of 2012-13, had orders of 351 ships with DWT 3547.91 thousand tonnes. As on 31st March, 2013 the public sector shipyards had orders of 132 ships of 139.32 thousand DWT – out of these 4 ships of 12.40 thousand DWT were export orders and remaining were orders from domestic companies. While in the private sector category, the private shipyards had orders for 219 ships of total 3408.59 thousand DWT. Therefore in terms of number of ship built or even Dead Weight Tonnage (DWT), the Indian private sector shipyards remain way ahead of public sector shipyards.
Even then, India comprises of a paltry one per cent in overall global shipbuilding capacity. This abysmal figure can definitely be improved through joint initiatives of shipbuilding industry and governmental support.
Pravin Kirolikar, Country Head, Goltens India (P) Ltd felt that while looking at the share in global scenario – its worthwhile, to look at, which segment, India has been able to establish in the shipbuilding. The major contribution had been in OSV’s (and similar type of Offshore related ships – such as AHTS, PSV etc), port crafts and in defence sector. Defence sector playing major role in new shipbuildings in India. Limited capacities in leading shipbuilding countries in OSV’s segments, has led to spill over to India and thus momentum picking up during 1997-2002.
Challenges Facing Indian Shipbuilding Industry:
The shipbuilding industry has huge potential due to the need for ships to support India’s growing trade and also manufacturing costs advantages that we enjoy vis-à-vis other nations. But this huge growth potential cannot be achieved until the challenges facing the industry are addressed accordingly.
Pravin Kirolikar pointed towards the following challenges facing Indian shipbuilding industry:
1. Comparatively higher overall costs impact, resulting out of statutory levies applicable to shipyards, and certain costs elements, influencing working and finance costs.
2. Lack of a defined policy in support to yards in the area of R&D and production technology related improvement activities.
3. Lack of unified implementation in the infrastructure developments, such as Ports, Roads, Deep draft water space along the coast, Maritime Policy etc.
4. Government policy towards subsidy.
5. Lack of equipment manufacturers relevant to ships in India.
6. Most importantly, non availability of skilled manpower – to deal with possible enhancement of capabilities to build the specialized ships.
7. Lack of modern technology – implementation. It’s more to do with “intention” to use modern technology – which could be due to consideration on “financial implications”.
Some of the challenges facing the shipbuilding industry include inadequate fiscal incentives to develop strong research and development facilities, designing capabilities and or even the setting up of an auxiliary base to encourage growth of the sector.
Mr Sabyasachi Hajara, Chairman, Maritime Awareness Program Society (MAPS) & Former CMD, Shipping Corporation of India, felt that more incentives are needed to promote shipbuilding in India because the countries which have come up in shipbuilding like Japan, South Korea and China all have initially given lots of incentives to their shipyards.
There may be talks about free economy but that does not really happen. China is giving tremendous support to its shipbuilding industry. Even nations such as Brazil and Vietnam are giving various incentives to its shipbuilding industry – that’s the reason they are coming up. India should also give incentives to its shipbuilding industry because this is a tremendous employment generating industry. India has all the requisite engineering skills, human resources, special types of required steels and technology but is unable to compete with other nations because of the incentives not being there, Sabyasachi Hajara rued.
Pointing to the past, Hajara explained that Indian shipyards were doing reasonably well and had come up from 0.2 per cent of world shipbuilding tonnage to more than one per cent. This was because of the subsidy being given to the shipyards. But from 2007 that subsidy was withdrawn despite demands from shipbuilding industry over the years. Even now there are talks of incentives but nothing has been done. Without subsidy in today’s world for Indian shipbuilding to go forward is very difficult.
On being asked about government support to the Indian shipbuilding industry, Deepak Shetty, Joint Director General of Shipping, Government of India, stated that there are incentives being worked out. Until sometime ago there was a shipbuilding subsidy. Also fiscal incentives are being looked at to try and scale up the contribution of Indian shipbuilding yards to around five per cent. That is part of the national maritime agenda. Shipbuilding has to be a collective work by private and PSU shipyards. But at the end of the day this is an enterprise stemming primarily from the private sector.
Need of the Hour
High input costs and rising costs of raw material, freight together with miscellaneous duties and taxes being imposed amounts to a huge price differential of about 50 per cent in building a ship in India and other countries. Therefore other than governmental incentives, the entire industry and its auxiliary sectors need to be reassessed while also looking into potential for increased FDI. The steel industry, auxiliary components, logistics, ports, designing and technology segments need to be analyzed for reducing costs and improving technologically.
Pravin Kirolikar felt that it is imperative that an overall approach is required, to be put in motion, both from Government (Central and State) and also the yards, such that it addresses not only shipbuilding but also simultaneous synchronized implementation of overall Maritime Policy of India. From shipbuilding perspective, following key steps may address the challenges to a large extent:
1. Streamlining and optimization of Government (Central & State) statutory levies/duties, subsidy so as to reduce finance cost / working costs, in a selective manner and thus makes the yards competitive in the global market.
2. Encouragement, through incentives to yard’s for their R&D, Productivity and Quality Improvement plans. Such arrangements can also be passed on to shipbuilding equipment manufacturers.
Syed Abdi, Managing Director, ABG Shipyard Ltd, felt the following initiatives need to be pursued:
-Shipyards face over 20 per cent cost disadvantages with respect to foreign yards, of which up to 11 per cent can be attributed to unabsorbed taxes and duties (in case of domestic sale of vessels). Government bodies are following up on this with a range of incentives at various forums.
-Reinstatement of shipbuilding subsidy needs to be pursued.
-Bank guarantee requirements needs to be reviewed and other operation issues such as custom bond period extension from 1 year to 5 years etc.
-Considering the capital intensive nature of shipbuilding, lower cost of financing needs to be pursued.
Given a proper growth environment and supportive policies, there are various advantages that Indian shipbuilding industry have such as lower costs of labour, availability of skilled workforce together with robust demand in the domestic market and a growing steel industry are certain factors that build up a strong case for shipbuilding sector in India.
Kirolikar felt that low labour cost, strong domestic demand, ancillaries catering to components to some extent, long coast line, proven capabilities in smaller/mid size vessels sizes, capabilities and capacities to develop technologies – both from R&D and production perspective, are some of the advantages India can build upon at this juncture.
The vast majority of Indian ships are less competitive as mostly younger vessels that are less than 15 years old are preferred in international trade. Assuming that out of the 41 per cent vessels, about seven per cent (approximate rate at which India’s vessel strength has grown between 2000 and 2011) of them get replaced then this would translate into 33 ships.
An average cost of constructing a large vessel is roughly about $100 million, therefore the size of such an opportunity would amount to $3.3 billion.
According to Syed Abdi, the forecast of growth of Indian shipbuilding in view of various industries and also replacement of old tonnage, going forward is projected as follows for the next ten years:
-Rigs for domestic market: 15 to 20. This projection is based on the increased area of Exploration and Production in the country.
-Offshore support vessels: in view of the Middle East and South East Asia markets, this number is projected at approximately 200. These projections are based on a moderate six per cent growth year on year in the number of rigs in these regions and the vessels to rig deployment.
-Replacement of bulk carrier numbers is projected to be around 60.
-Indian shipyards to build Liquefied Natural Gas vessels for GAIL project.
-In addition to above there are the other types of vessels such as shuttle tankers, etc. which are also required.
-To summarize, the demand is positively there.
Despite total volume of cargo moving in India’s trade expanding progressively, the share of Indian ships in carriage of country’s overseas trade declined from about 36 per cent in 1990-91 to just over eight per cent in 2009-10. Therefore the need for more ships is guaranteed since share of Indian ships is abysmal but domestic shipbuilders need to pull up their socks and invest in capacity enhancement and better technologies in order to take advantage of this opportunity or else shipbuilders from other countries will cash in on this opportunity.
Pravin Kirolikar concluded by pointing out that the shipbuilding is typically regarded as global industry, while its competitive success depends upon the local environment.