Shipbuilding Whitepaper

8/14/2019 Shipbuilding Whitepaper

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IndianShipbuildingIndustry:Poised

forTakeoff?

Global Conference and Exposition on Shipbuilding

KPMG IN INDIA


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Theglobalshipbuildingindustryisinthemidstofanunprecedentedboomat

present.Attheendof2007,theglobalorderbookhadswelledto457mnDWT

havingquadrupledinthelast5years.1 Thislargeincreaseindemandhasledto

theemergenceofnewshipbuildingdestinations.CountriessuchasChinaandto

someextentVietnam,PhilippinesandTaiwanhaveleveragedtheirinherent

advantageoflowcostmanufacturingtoenterintoshipbuilding.

Indianshipbuildingindustryhasalsowitnessedhealthygrowthintherecent

past.Theannualturnoveroftheindustryhasincreasedby259percentfrom

2002-2007.2 Spurredbythisrecentgrowthseveralcompaniesaresettingup

shipbuildingcapacity.Theexistingshipyardsareaggressivelyexpandingcapacity.

TheoverallannouncedinvestmentoftheupcomingprivateshipyardsexceedsINR200billion,allproposedtocomeonlinewithinthenext5-7years. 3

Giventheinherentlaborintensivenatureoftheshipbuildingindustry,Indiahasa

naturaladvantagebyvirtueofitslowercostoflaborandavailabilityofskills.

However,inordertoestablishIndiaasapreferredshipbuildingdestination

certainareashavetobeaddressed.Eliminationofregulatoryhurdlesand

continuanceofsupportinlinewiththatenjoyedbycompetingnationslikeChina

andVietnamarerequiredfortheindustrytodevelopscale.

DevelopmentofamaturelargescaleshipbuildingindustryinIndiaislikelyto

drivethedevelopmentoftheheavyengineeringindustryacriticalsupportfor

notjustshipbuildingbutotherkeyinfrastructuresectorslikePowerandAviation.

TheINR200bninvestmentinshipbuildinghasthepotentialtotriggeran

additionalinvestmentofINR2200bninrelatedsectorssuchasteeland

engineeringgoodsmanufacturing,IT/ITESandconsumables.4

Inaddition,laborintensityofshipbuildingandshiprepairalongwiththegrowth

inlinkedancillaryandsupportindustrieswouldleadtosignificantemployment

generation.Employmenttotheextentof0.4millionnewdirectjobsinthe

shipbuildingsectorandaround2.4millionnewjobsinrelatedsectorscouldbe

generatediftheaboveinvestmentcommitmentsarerealized.5

ThisKPMGwhitepaperprovidesanoverviewoftheglobalandIndian

shipbuildingindustryandelaboratestheopportunitiesandchallengesforIndiain

becomingapreferredshipbuildingdestination.Ihopeyoufindituseful.

Preface

1 Source: Clarksons Data, KPMG Analysis

2 Source: SAI, KPMG Analysis3 Source: SAI, KPMG Analysis

4 Source: SAI, KPMG Analysis

5 Source: SAI, KPMG Analysis

Arvind Mahajan,Executive Director, Advisory Services


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Shipbuildinghashistoricallywitnessedarobust

growthindemandfornewvessels.Thoughtheshorttermdemandhasseenpeaksandtroughs,overallthe

sectorhasshownahealthyrisingtrendindemand

(referFig1).TheoverallCAGRbetween1980and

2005isaround6percent,whichishigherthanmost

manufacturingindustries.

Atpresent,thesectorisamidstanunprecedented

boom,unseeninthelastthreedecades.Attheendof

2007,theglobalorderbookhadswelledto457mn

DWThavingquadrupledinthelast5years.Thekey

reasonistherapidincreaseinneworderswhichhas

outgrownintheincreaseinglobalshipyardcapacity.

Averagedeliveryinthelast5yearshasbeenaround

60mnDWTwhereasnewordersinthesameperiod

havebeenaround100mnDWTperannum.

Thisunparalleledgrowthhasbeenbecauseofa

uniquesituationwhereseveraldrivershavepushednewbuildingdemandatthesameperiod.Thekey

amongthesedriversareasfollows:

Commodity driven trade growth: Therehasbeenadiscontinuousgrowthincommoditytrade(referFig.2)

withtheriseofemergingeconomieslikeChinaand

Indiaandshiftingofproductionbases

Super-sizing: Inrecentyears,theaveragesizeofshipshasincreasedsubstantiallyduetofreightsaving

fromscale-economiesandiscreatingdemandfor

largersizevessels.Forinstance,theaverage

containershipsizehasmorethandoubledoverthe

past4years,increasingfrom1,967TEUin2003to

2,372TEUin20076

Replacement of aging fleet: Withanaveragelifespanof30years,asizeableproportionofthecurrent

fleetwhichcameinlifearound1975reachedthe

replacementagefromaround2005,spurringnew

buildingdemand

Conversion of single-hull tankers: Concernsaroundtheriskofenvironmentaldamagearisingfromsingle

hulltankershaveledtoregulationthatnecessitatesreplacementofsinglehullVeryLargeCrudeCarriers

(VLCC)bydoublehulltankersorVeryLargeOre

Carriers(VLOC),furtherboostingshipyardactivity.

Shipbuilding has witnessed robust demand growth

6Source: Nomura Research

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Inthelongterm,shipbuildingdemandgrowthislikelytodemonstrate

continuedhealthygrowth.Thebasicdriverofshipbuildingisglobalseabornetradewhichisgrowingatahealthyrateof4percentinthelast

25yearsandislikelytocontinuedoingso.

Latesttrendsindicatethattheshipbuildingdemandisreachingashort-

termpeak7 anditisestimatedthatthatby2012,theshipbuildingmarket

wouldstabilize.Thereafter,thedemandwouldreturntoitsseculargrowth

rateoverthelongterm.

Deliverieswouldincreaseaswellastheorderbook,andtheratio

betweenthemwouldremainathistoricallevels(referFig.3).

Healthy demand growth is likely to continue inthe long term

7 New orders in 2008 have declined by over 30 percent compared to last year.

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Shipbuildingisatrulyglobalindustryastradingofshipsisnotprotected

byanytariffbarriers.Thiscanbeascertainedbythefactthatmorethan90percentofKoreas(theworldleader)currentorderbookisfor

exports8.

Theindustryhaschangedsupplybasestolowcostdestinationsinthe

lastcentury.Newcountrieshavegainedprominence,especiallyduring

boomperiods.EnglandandUSweretheworldleaderstill1950(referFig.

4).JapanandKoreaemergedasprominentshipbuildingnationsduring

the1950sand1970s.ThecurrentboomhasbroughtChinatothefore

(referinsetonChina).Korea,JapanandChinaaccountformorethan85

percentofworlddeliveriesatpresent.

Vesselswithlessercomplexityaremovingtonewerdestinationsgiven

therelativeeaseintheirmanufactureandrelativelylowerlevelsof

customerloyaltyintheirpurchase.ThecurrentorderbookofKoreaand

Europeistiltedtowardscomplexvesselssuchascontainershipsand

cruises,whilethatofemergingnationsandChinaisdominatedbybulk

vessels(referFig.5).Emergingnationshavethereforestartedwithbulk

ordersandmightgraduallymoveupthevaluechainwithexperience.

Supply bases have shifted to new destinationsdriven by supply constraints and cost advantages

8 Source: Clarksons data, KPMG Analysis

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Thedriversforsuchshiftinshipbuildingbasesarecapacityconstraintsin

leadingcountriesandlowershipbuildingcostsintheemergingnations.

Thelowercostcomesfrominherenteconomicadvantages(e.g.cheap

labor)andenablingGovernmentsupportwhichcouldresultinareduction

ofshipbuilderscost(e.g.direct/indirectsubsidy)ortheshipbuyerscost

(e.g.exportbuyerscredit).CountriessuchasVietnamandIndia,with

inherenteconomicadvantages,arewellplacedtoemergeasnewplayers

andgrabafairshareoftheshipbuildingpie.

Case Study: Emergence of China

Chinasriseasashipbuildingpowerisaweinspiring.Withinaspanof

fiveyearsChinahasrisentobecomethethirdlargestshipbuilding

nationafterSouthKoreaandJapanintermsofdeliveries.Intermsof

orderbooksizeithassurpassedJapanaswell,indicatingthatitmight

soonbeedgingJapanoutofitslongheldsecondspot.

Chinaaimstobecometheworldsleadingshipbuildingnationby2015.

TheChineseGovernment,throughitstwolargecompaniesCSSCand

CSICandhostofotherpublic/privateshipyardsisaddingmassive

capacities.WhathavebeenthedriversforChinagrowthstory?Chinese

Shipyardshavebeenpropelledbyacombinationoffavorable

Governmentpolicyandeconomicfactors.

Chinaiscurrentlyintoits11thfive-yearplan,whichhasastrong

emphasisonshipbuildinglikethepreviousplan.TheGovernmentfavors

domesticshippinglinessuchasCOSCOpurchasingshipsfromChinese

yardsandprovidesthemwithdiscountsandeconomicalcreditforthe

purpose.Forexports,theGovernmenthasotherbenefitssuchasVAT

refundonexportandprovidingsovereignguaranteeandlowmargin

credittoshipbuyers.

Chinasbiggesteconomicadvantageislowlaborcost.Evenafter

incorporatingproductivitydifferences,Chineselaborcostisaround50percentofKoreanandJapaneselabor.ThatChinaisthecheapeststeel

manufacturerintheworldalsohelpsitsyardstoreducecostandlower

theirshipbuildingpricesintheglobalmarket.

However,thereareafewconcerns.Chinastillhastodependonimports

for60percentofrawmaterials.Governmenthassetatargetof

reducingthisto30percentbytheendofthe11thfive-yearplan.Lackof

technologyisanotherobstaclethatChineseyardshavetoovercometo

getordersforcomplexvessels.Toaddressit,Chineseyardsaretyingup

withKoreanandJapaneseyardsfortechnologyandfocussingon

smallerandlesscomplexvessels(referFig.6).

9 Source: Clarksons Data, KPMG Research, Deutsche Bank

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Theyear2002servedasawater-shedforIndianshipbuildingindustry.In

thatyear,theGovernmentofIndiaintroducedasubsidyschemeforbothpublicandprivatesectorshipyards.Thesubsidywastargetedat

addressingthedistortionsofthedomesticeconomicenvironmentwhich

impactdomesticshipbuildersadverselyaswellasaddressingtheimpact

ofdirectandindirectsupportprovidedtotheshipyardsinothercountries.

Withglobalshipbuildingwitnessinganupwardtrend,theIndian

shipbuildingindustryhasbeenabletotakeadvantageofthis

Governmentsupporttoestablishitspresenceinglobalshipbuilding.The

followingtablesummarizesthegrowthexperiencedbyIndian

shipbuilders.

Havinggainedexperienceandsomecredibilitywithinternationalbuyers,

IndianyardsarenowgraduatingfromsmallervesselssuchasOSV/PSV

tolargervesselssuchasbulkcarriers.Recently,theRatnagiri-basedRajapuryardhaswontheordertobuild300,000DWTVLCC,thefirst

orderofthissizebyanIndianyard. 10

Indian shipbuilding industry has demonstratedstrong growth

Period Order Book Turn Over Investment

1997-2002 8,160 10,170 430

Between2002-2007 148,770 36,570 8,430

Percentagedifference 1,723% 259% 1,860%

Table1.PerformanceofIndianYards(INRmn)

10 Source: Clarksons Database, KPMG research

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Spurredbythisrecentgrowth,severalcompaniesaresettingup

shipbuildingcapacities.Mostexistingyards,suchasABGandBharatiare

expandingcapacityandundertakinggreen-fieldexpansion.Port

companies,notablyAdaniandSKILareindifferentstagesofdeveloping

shipyards.Shippinglinesareeyeingshipyardsaslateralexpansion.

ApeejayShipping,MercatorLinesandGarwareOffshorehaveentered

theshipbuildingmarketinalliancewithleadingplayers.Finally,related

heavyindustryplayersarealsoplanningtograbashareofthismarket.

ThissegmentincludesengineeringgiantL&T,andsteelmakersTataand

JSW.Theoverallannouncedinvestmentoftheupcomingprivate

shipyardsexceedsINR200billion,allcomingonlinewithinthenext5-7

years.

Healthy growth has attracted new players intoshipbuilding11

11 Source: SAI, KPMG Research

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India enjoys competitive advantages

Indiaalsoenjoysseveraloftheadvantageswhichhavepropelled

emergingcountriessuchasChinaandVietnamintotheforefrontofglobalshipbuilding.Someofthekeyadvantagesthatcanbeleveragedby

shipbuildersinIndiaare:

Low Labor Cost: Lowlaborcostisakeydrivingfactorinshipbuilding

nations,asitaccountsformorethan10percentofthetotalcost(refer

Fig.7a).Indianlaborcostsareonthelowersideascomparedtothoseof

theleadingshipbuildingnations(referFig.7b).Evenafterfactoringin

impactofproductivity,IndianlaborissubstantiallycheaperthanKorean

andChineselabor.Moreimportantly,Indianlaborcostisgrowingathalf

therateinChina,whichimpliesthatIndiamightcontinuetohavean

edgeoverChinainthefuture.

Strong Domestic Demand: Indianshippingtradeisboomingonthe

backofeconomicgrowthattherateofapproximately8percent.

Domesticshippinglinesareexpandingtheirfleetsandhaveplaced

orderswithglobalyards.Thereisalsoastrongthrustinbasicsectors

suchaspowerandsteelandcompaniesarelookingtoacquireshipsto

controltransportfrominternationalmines.

12 Source: Guangzhou is a leading yard in China owned by CSSC. Others includes SG&A cost

and financing expenses.

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TheGovernmentsnewinitiativesinCoastalShippingandIWT,islikelyto

furtherboostdemandfornewships.NewportsandIWTlaneswould

requiredredgingandotherport-relatedvesselsupport.Finally,the

ongoingoffshoreexplorationsareexpectedtocreatedemandforrigs,

OSVandPSV.Thus,eveninapossibleshort-termlowdemandscenario,

thereisenoughdomesticdemand,whichIndianshipbuilderscan

capitalizeupon.

Supporting industry infrastructure for some components: Indiahas

domesticindustrieswhichcanproducesomeoftherawmaterials

requiredinshipbuilding.Specifically,Indiahascompetitivesteel

manufacturing,lightengineeringandIT/ITESindustrieswhichcanoffer

therequiredproductsateconomicalcosts.Theseindustriesarecurrently

notproducinggoodsfortheshipbuildingsector,mainlyduetolackof

sufficientscaleofshipbuildinginthecountry.

Long Coastline: Indiaenjoysalongcoastlineofmorethan7,500kmlong

withseveraldeepwaterportsservingasgoodlocationsforsettingup

shipyards.

OtherdriversforshipbuildingindustryinIndiaincludethelimitedsurpluscapacityavailablewiththeglobalshipbuildingyardsandabooming

capitalmarketwhichcouldprovideeasyfinancingforcapitaland

operationalexpensesoftheseyards.Indiahasproveditscapabilityin

shipbuildingintheareaofsmallervessels(referFig.8)bygettinga

sizeablemarketshare.However,therearespecificareaswhichhaveto

beaddressedifIndiahastoachievethesameinlargervessels.

However, these advantages are negated by regulatoryhurdles

Indianyardsfacesystemicdisadvantagesinseveralareaswhichnegate

theirnaturalcompetitivenessandadverselyimpacttheirchancesof

succeedinginaglobalizedshipbuildingindustry.Indianshipbuildersface

acostdisadvantageof30-40percentofthecostofmanufacturingaship

onaccountofthesefactors 13.Thekeydisadvantagesareasfollows:

StatutoryBurdenShipbuildingattractsacomplexsetofleviesandduties.Thedifferential

rateofdutiesandtaxesbetweenIndiaandothernationsleadsto

additionalcostburdenforIndianshipyards.

13 All figures taken from Shipbuilding Economic Benefits and Benchmarking Government Support

across Countries prepared by KPMG

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Levies

Octroi,CST,VATandexcisearesomeoftheleviesapplicableto

shipyards.Severalshipbuildingnationshaverelaxedtheseleviesto

encourageshipyards.Forinstance,ChinarefundsVATcompletelyon

domesticsaleofshipswhereasinIndiaVATisrefundedonlyoninputs.

Thelackofsuchspecialincentivesfortheshipbuildingsectorleadstoan

additionalburdenof8percentfordomesticsalesandaround3percent

forexportsales.

Indirect TaxesServiceTax@12.36percentisapplicableonalldesignandengineering

servicesprocuredbytheshipyardsduringthecourseofship

construction.Itisestimatedthattheextentofservicecontributioninthe

contractpriceofashipisaround12percent.IncountriessuchasChina,

alumpsumVATisapplicable,whichislaterrefunded.

CorporatetaxalsoimpactsIndianshipbuildersadverselyascomparedto

competitorsinChinaandVietnam.Thegovernmentsinthesecountries

offeraslewofincentivestotheshipbuildingsector.Manysegmentsof

shipbuildinginChinahavebeennotifiedasEncouragedsectorwhich

enablecompaniestooffsetapartofinvestmentagainsttaxationwithin

fiveyearsofcommencement.Suchconcessionshelpyardstoreducecostduringtheinitialyearswhentheyarecompetingtoestablish

themselves.However,therecentinitiativesofIndianshipyardsto

structurethemselvesasSEZenablesthemtooffsetthisdisadvantage

significantly.

FinancingCostsFinancingcostsassumegreatersignificanceinshipbuildingduetoits

specialrequirements.Majorshipbuildingcountrieshavecreated

supportivemechanismstoeasetheburdenofthesecosts.Indian

shipyards,withnosuchdirectsupport,faceadditionalcostsonaccount

offinancing.

Bank Guarantees

Shipyardsarerequiredtoprovidebankguaranteestoprotecttheship

buyer.Theseguaranteescompriseperformanceguarantee(fortimely

delivery),refundguarantee(forstagepayments)andpost-construction

guarantee(towardsdefects).

InChina,thegovernmentprovidessovereignrefundguaranteesfor

certainclassofvessels,thusremovinganyrelatedburdenonthe

shipyard.InKorea,shipyardfinancinghasmaturedandtheevolved

mechanismsdrivethecostlower.However,inIndia,financialinstitutions

donothaveafocusontheshipbuildingsectorandthereisnosupport

fromtheGovernmenttoreducethechargesasinthecaseofKorea.Asa

result,thecostofbankguaranteesinIndiaishigherthancompeting

countries.

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Working Capital

Typically,ashipyardrequiresaworkingcapitalofaround25-35percentof

thecostoftheshipduringtheentireconstructionperiod.Theinterest

ratesonworkingcapitalinIndiaaverage10.5percent.Incontrast,the

interestratespresentlyofferedtoshipbuildingyardsoverseasare

significantlylowerataround5-6percentinKoreaandaround4-8percent

lowerinChina.Inaddition,exportcreditinthesecountriesisofferedat

muchlowerinterestrates.

OthercostsIndianshipbuildingindustryisatanearlystagebuthastocompete

againstestablishedyardsinKoreaandChinatograbashareofthe

market.Itslowerscaleleadstoseveraldisadvantagesindesignand

manpowercosts.Leadingshipbuildingcountriessupporttheindustryby

creatingenablingpoliciesfordevelopmentoftechnicalandmanpower

capabilities.

Forinstance,Chinaprovidesscientificresearchsubsidytomaritime

universities,andprovidesR&Dandlivingallowancetopostgraduate

students,toensureavailabilityofatalentpoolforshipyards.Korea

establishedashiplaboratoryentirelythroughGovernmentfundingin1976tointroduceadvancedforeigntechniquesanddevelopsuch

techniquesindigenously.

ThereisanincreasedfocusbyIndianshipbuildersondevelopingdesign

capabilitieseitherin-houseorthroughestablishedbodieslikeNational

ShipDesignResearchCentre(NSDRC).However,itmaystilltakesome

timeforIndiatomitigatethiscostdisadvantagewhichclearlydepends

ontheirabilitytoattractordersandoffsetashareofprofitintheseareas.

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Government support is critical to mitigateregulatory disadvantagesIncontextofsales,theshipbuildingindustryisatypicalglobal

manufacturingindustry,however,whenitcomestoproduction,itishighlyconcentrated,duetotherelativelyhighlevelsofstateintervention.

Mostcountries,throughaseriesofmeasures,helptheshipyardsin

reducingcostsandattractingglobalbusiness.Thesupportprovidedby

Chinaishighlightedinthefollowinginset.

Case Study: Chinas support to shipbuilding

Chinahasfollowedtherouteofplanneddevelopmentalratherthan

market-rationaldevelopmentfortheshipbuildingsector.Overthelast

decade,Chinahasundertakenaseriesofinitiativestopromoteand

supportthegrowthofshipbuildingindustry.Thesemeasures,introduced

atbothcentralandprovinciallevel,havecontributedsignificantlytogrowthofshipbuildingsectorinChina.Thefollowingfiguredepictsthe

timingofthesemeasuresvis--visthegrowthtrendwitnessedinthe

shipbuildingsectorandclearlyindicatesthattherewasleadtimeinthe

realizationofbenefits.

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1.LossreimbursementtodomesticshipbuilderssuchasDalian

Shipyard

2.Scrappingaidonallshipsproducedduring1972-2001

3.SupportinAcquiringland.Preferentialratesonacquisition.CapitalTax

subsidiesprovided.VATrefundispresentupto17percent

4.ExchangeRateControl

5.Incentivestoencourageshipbuildingindustrydevelopmentat

LiaoningShipbuildingZone

6.Circularonacceleratingshipbuildingindustrydevelopmentin

Zhejiangprovince

7. Tenthfive-yeardevelopmentplanforshipbuildingindustry.Interim

ProvisionsonPromotingIndustrialStructureAdjustment.

Thereasonforthissupportisnothardtoguess,viz.-onaccountofthe

largecontributionoftheindustrytothecountryseconomy.Interestingly,

countrieshavenotonlysupportedtheindustryduringitsinitialgrowth

phase,butcontinuedtoextendbenefitsevenwhentheindustry

matured.Thesupportcontinuedevenduringglobaldownturn,underlining

thesignificantcorrelationbetweenshipbuildingandthenational

economy.

InIndia,theGovernmenthastraditionallybeenprovidingsupporttothe

Indianshipbuildingindustrythroughvariousmeasures.Whilemostof

thesemeasureswereaimedatprotectingthepublicsectorshipyards,

theGovernmentintroducedsupportivemeasuresfortheprivatesectorin

2002.TheconsequentstronggrowthinshipbuildingsectorinIndiabears

testimonytothecriticalityofGovernmentsupportasshowninTable1.

Currently,Indiahasemergedasoneofthepotentialleadersintheglobal

shipbuildingmarket.However,theIndianyardsareyettoachievethe

criticalscaletoovercomethedisadvantagescomparedtoother

competingnations.Hence,GovernmentsupportisessentialforIndiatorealizeitsshipbuildingpotentialandenjoytheconsequentbenefitstothe

economy,atleasttillthetimethecriticalhurdleiscrossed.Certainstates

arealreadytakingthelead.Gujarat,thecurrentfavoreddestinationfor

Indianshipbuilders,iscomingupwithashipbuildingpolicy,tofurther

promotethesector.14

14 Source: Marinelink

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ThefollowingaresomeoftheoptionsthattheCentralandState

Governmentscanuseassupportingmeasures:

Directsubsidyagainstcontractprices

Provisionofrefundguarantees

State-fundedorsubsidizedinnovation,R&Dtodevelopshipdesign,

shipbuildingtechnology,orshipyardproductionexpertise

Project/workingcapitalfinanceonsubsidizedinterestorinterest-free

loans,underwritingdebttoreducethecommercialrisk

Preferentialtaxschemesforshipownersorforshipyards

Exchangeratecontrolforshipyards-thisreducesoneofthekeyrisk

factors

Incentivestoancillariese.g.steelproducers,mainenginebuildersor

equipmentsuppliers.

GovernmentsupportiscriticaltilltheIndianshipbuildingindustrygains

criticalvolumestoremoveitsscalerelateddisadvantagesandremoveits

dependenceonimportsforprocuringraw-materials.

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Development of an ancillary setup

Ancillaryindustriesusuallylagthedevelopmentofshipbuildingindustry

inanycountry.ItrequirestheshipyardstoachieveacriticalmassbeforegloballyrenownedancillarycompaniessuchasMan,Wartsila,Caterpillar

andRollsRoyceestablishasizeablepresencethere.Thisisevidencedby

theevolutionofshipbuildinginputindustryinChinaasdepictedinFig.9.

MostgloballyreputedcompaniesstartedestablishinginChinaafter2002

whenitcrossedacapacityof5mnDWT 15.Eventhenmostofthesearejointventureswithleadinglocalshipyardstomitigateriskandtie-in

customers.Incontrast,Indiascurrentcapacityaswellasitsexpected

capacityin2011ismuchlowerthantheChinesethresholdcapacity.This

mightimplythatIndianshipyardswouldcontinuetheirdependenceon

importsforsourcingtheirinputs.

15The capacity is not defined as a threshold volume but is shown as an indicator of scale

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However,Indiasstrengthsinthemanufacturingsectormightadvance

theprocesshere.Indiaisrecognizedasaglobalplayerinlight

engineeringandamajorbaseforautoancillaries.Thishascreatedawell-

establishedpoolofengineeringgraduatesandsuppliercompaniesto

suchindustries.Indiacanbeusedbyancillarycompaniesasaglobal

productionbasecateringtolocalshipbuildersaswellastheglobal

market.

Somesignsofthisoccurrencearealreadyvisible.ManDieselhassetup

anengineplantatAurangabadandWartsilaisinnegotiationswithseveraldomesticshipyardstosetupasimilarunitinthecountry.RollsRoyceis

settingupanelectronicsandcommunicationplantinNaviMumbai. 16

However,forIndiatohaveasizeablecomponentsetup,domestic

demandhastoreachacriticalmasstosustainglobalinterest.Also,the

shipbuildingindustryneedstobeproactive.AscanbeseenfromFig.9,

CSSCandCSICaswellasotherlocalplayerspartneredwith

manufacturingcompaniestostartlocalproductionofthesecomponents.

Indianplayersneedtoreplicatethemodel.

16 Source: KPMG Research

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The multiple benefits of shipbuilding justify thesupportShipbuildingisaunusualindustryas65percentofvalueadditionduring

buildingofshipscomesfromotherindustries.Also,shipbuildingisalaborintensiveindustry.Asanestimate,about750workersworkingfora

yeararerequiredtobuilda30,000DWTvesselinIndia.

Thegrowthofthedomesticshipbuildingsector,whichtodayimports

about45percentofitsinputrequirements,canprovideamajortrigger

forlarge-scaleindigenizationofheavyengineeringproductsand

ancillaries.Heavyengineeringindustryisintegratedwithvariouscore

sectorsforitsdemand.Thedemandisderivedprimarilyfromcapacity

creationsinsectorslikeinfrastructureandgeneralmanufacturing

includingprocessindustries.Beinganintermediateindustry,itsdemand

dependsonend-userindustries.However,astheenduserindustrymix

isfairlydiverse,itisnecessarytogeneratelong-termsustainablegrowth

driversforheavyengineeringsegment,inordertoexpandthe

manufacturingbaseandenhanceoverallmanufacturingcompetitiveness.

Shipbuildingindustrycanplaytheroleofmotherindustrytoheavy

engineering,similartothecriticalroleessayedbyautomanufacturingin

caseoflightengineering.Thegrowthprojectionsformanufacturingin

Indiawouldbemuchhigheriftheshipbuildingindustrytakesoffinthe

nextfewyears.

TheIndianShipbuildingIndustryhasdemonstratedaspirationstoacquire

a7.5percentshareinglobalshipbuildingby2017,whichisexpectedto

haveasizeofabove500mnDWT.AnalysissuggestthatthiswouldrequireIndianshipbuilderstoinvestclosetoINR200Bninnewyard

capacity,whichinterestingly,isthecurrentlevelofcumulativeinvestment

declaredbyvariousentrantsinthissector.

ThisINR200bninvestmentinshipbuildingcantriggeradditional

investmentofINR2200bninrelatedsectorssuchassteeland

engineeringgoodsmanufacturing(referFig.10a),IT/ITESand

consumables.Likewise,shipbuildingislikelytogeneratearevenueof

INR800bnandanoverallrevenueofINR3300bnincludingassociated

sectors.ThisrevenuecouldprovidearoundINR250bnintaxesforthe

Government.

17

17 Source: All figures taken from Shipbuilding Economic Benefits and Benchmarking Government

Support across Countries prepared by KPMG

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Suchascaleofinvestmentcanalsoleadtosignificantmultiplierbenefits

intermsofemploymentgenerationandinvestmentinother

manufacturingsectors.Employmenttotheextentof0.4millionnew

directjobsinshipbuildingsectorandaround2.4millionnewjobs(refer

Fig.10b)inrelatedsectorscanbegeneratediftheaboveinvestment

commitmentsarerealized18

.Furthermore,thejobcreationpotentialofshipbuildingismorethanothercomparablesectorsascanbeseenin

Table2.

Inaddition,ahealthyshipbuildingindustryisalsolikelytoattractship-

repairbusiness.Shiprepairisevenmorelaborintensivethan

shipbuilding.India,withitslaboradvantageanditsidealpositionon

internationaltraderoute,iswellplacedtowrestthisbusinessfrom

competitors,oncetheshipbuildingindustryisdeveloped.Thiscancreate

additionalrevenueandemploymentopportunitieswithmarginalincrease

ininvestment.

Finally,aboomingdomesticshipbuildingindustrywouldalsoprovidethe

muchneededdomesticcapabilitywhichcanbeaccessedforfuture

needsoftheNavyandCoastGuardandhelprealizethegoalof

indigenizationindefenceproduction.

Labor employed / Turnover (INRmn) for various industries

Shipbuilding 97

Auto-CommercialVehicles 12

HeavyEngineering 33

Construction-Civil 18

Source:KPMGAnalysis

Table2

18 Source: Shipyards Association of India

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Conclusion

Thedevelopmentoftheshipbuildingsectorhasthepotentialtopositively

impacttheeconomyincludingservicesectors.Torealizeitsgrowth

potential,thesectorneedstoestablishandachieveacriticalmass.The

windowofopportunitypresentedbytheongoingboomphaseneedsto

becapitalizedtofirmlygroundtheindustryalongwithitsancillaries.

IndianshipbuildinghassubstantialplansforinvestmentofaroundINR

200bnoverthenext5-10years,incapacityexpansionandupgradation

oftheexistingyards.However,thisinvestmentandconsequentbenefits

canmaterializeonlyifsupportivemeasuresarecontinuedbythe

Governmenttoaddressthesystemicdisadvantagesaffectingthe

competitivenessofIndianshipbuildingindustry.Inaddition,proactive

actionbyshipyardstopromoteancillarybuildupiscritical.Addressingthesedisadvantagesarelikelytonotonlymakethecommercial

shipbuildingindustrycompetitive,butalsocreatestrategicallybeneficial

optionsformeetingIndiasdefenserequirements.

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Glossary

CAGR CompoundedAnnualGrowthRate

CIF CostInsuranceFreight

COSCO ChinaOceanShippingCompany

CSIC ChinaShipbuildingIndustryCorporation

CSSC ChinaStateShipbuildingCorporation

CST CentralSalesTax

DWT DeadWeightTonnage

EIU EconomicIntelligenceUnit

GT GrossTonnage

INR IndianRupee

IT InformationTechnology

ITES InformationTechnologyEnabledServices

IWT InlandWaterTransport

JSW JindalSouthWest

KOSHIPA KoreanShipbuildingAssociation

L&T LarsenandToubro

LNG LiquifiedNaturalGas

MN Million

OSV OffshoreSupplyVessel

PSV PlatformSupplyVessel

R&D ResearchandDevelopment

SAI SihpyardsAssociation of India

SG&A SellingGeneralandAdministration

SKIL SeaKingInfrastructureLimited

TEU Twenty feet Equivalent Unit

VAT ValueAddedTax

VLCC Ver yLarge Crude Carrier

VLOC VeryLargeOreCarrier

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About FICCI

FICCIistherallyingpointforfreeenterprisesinIndia.Ithasempowered

Indianbusinesses,inthechangingtimes,toshoreuptheir

competitivenessandenhancetheirglobalreach.

Withanationwidemembershipofover1500corporatesandover500

chambersofcommerceandbusinessassociations,FICCIespousesthe

sharedvisionofIndianbusinessesandspeaksdirectlyandindirectlyfor

over2,50,000businessunits.Ithasanexpandingdirectmembershipof

enterprisesdrawnfromlarge,medium,smallandtinysegmentsof

manufacturing,distributivetradeandservices.FICCImaintainsthelead

astheproactivebusinesssolutionproviderthroughresearch,interactions

atthehighestpoliticallevelandglobalnetworking.

Setupin1927,ontheadviceofMahatmaGandhi,FICCIisthe largest

andoldestapexbusinessorganizationofIndianbusiness.Itshistoryis

verycloselyinterwovenwiththefreedommovement.FICCIinspired

economicnationalismasapoliticaltooltofightagainstdiscriminatory

economicpolicies.Thatcommitment,driveandmissioncontinueinthe

ever-changingeconomiclandscapeofIndia,chasingalwaysnewer

agenda.

Intheknowledge-drivenglobalizedeconomy,FICCIstandsforquality,

competitiveness,transparency,accountabilityandbusiness-government-

civilsocietypartnershiptospreadethics-basedbusinesspracticesandto

enhancethequalityoflifeofthecommonpeople.

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KPMGistheglobalnetworkofprofessionalservicesfirmsofKPMG

International.Ourmemberfirmsprovideaudit,taxandadvisoryservices

throughindustryfocused,talentedprofessionalswhodelivervalueforthe

benefitoftheirclientsandcommunities.Withnearly123,000people

worldwide,KPMGmemberfirmsprovideservicesin145countries.

ThememberfirmsofKPMGInternationalinIndiawereestablishedin

September1993.Asmembersofacohesivebusinessunit,theyrespond

toaclientserviceenvironmentbyleveragingtheresourcesofaglobal

networkoffirms,providingdetailedknowledgeoflocallaws,regulations,

marketsandcompetition.Weprovideservicestoover5,000international

andnationalclients,inIndia.KPMGhasofficesinIndiainMumbai,Delhi,

Bangalore,Chennai,Hyderabad,KolkataandPune.ThefirmsinIndiahave

accesstomorethan3000Indianandexpatriateprofessionals,manyof

whomareinternationallytrained.Westrivetoproviderapid,performance-

based,industry-focusedandtechnology-enabledservices,whichreflecta

sharedknowledgeofglobalandlocalindustriesandourexperience

oftheIndianbusinessenvironment.

About KPMG in India

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in.kpmg.com

KPMGinIndia

Mumbai

KPMG House, Kamala Mills Compound

448, Senapati Bapat Marg,Lower Parel, Mumbai 400 013

Tel: +91 22 3989 6000

Fax: +91 22 3983 6000

Delhi

4B, DLF Corporate Park

DLF City, Phase III

Gurgaon 122 002

Tel: +91 124 3074000

Fax: +91 124 2549101

Pune

703, Godrej Castlemaine

Bund Garden

Pune - 411 001

Tel: +91 20 3058 5764/65

Fax: +91 20 3058 5775

Bangalore

Maruthi Info-Tech Centre

11-12/1, Inner Ring Road

Koramangala, Bangalore 560 071

Tel: +91 80 3980 6000

Fax: +91 80 3980 6999

Chennai

No.10 Mahatma Gandhi Road

Nungambakkam

Chennai 600 034

Tel: +91 44 3914 5000

Fax: +91 44 3914 5999

Hyderabad

8-2-618/2

Reliance Humsafar, 4th Floor

Road No.11, Banjara Hills

Hyderabad - 500 034Tel: +91 40 2335 0060

Fax: +91 40 2335 0070

Kolkata

Park Plaza, Block F, Floor 6

71 Park Street

Kolkata 700 016

Tel: +91 33 2217 2858

Fax: +91 33 2217 2868

2008KPMG,anIndianPartnershipandamemberfirm

oftheKPMGnetworkofindependentmemberfirms

affiliated with KPMG International a Swiss cooperative All

Theinformationcontainedhereinisofageneralnatureandisnotintendedtoaddressthecircumstancesofanyparticularindividual

or entity Although we endeavor to provide accurate and timely information there can be no guarantee that such information is

KPMGContacts

Arvind Mahajan

Executive Director

Advisory Servicese-Mail: [email protected]

Tel: +91 22 3989 6206

Manish Sharma

Director

Advisory Services

e-Mail: [email protected]

Tel: +91 124 3074836

FICCI

FICCI

Federation House,

Tansen Marg,New Delhi 110001

Tel.: +91 11 2373 8760-70

Fax: +91 11 2372 1504, 2332 0714

FICCIContact

Mahesh Y Reddy

Senior Director

e-Mail: [email protected]

Tel: +91 11 2373 8760

Documents

Shipbuilding Whitepaper