Shipbuilding – International Regulatory and Policy Environment

South Korea

South Korea has been a global leader in shipbuilding since 2003, when it outpaced Japan and European
countries who dominated the industry for centuries. Today, it is home to seven of the world's ten largest
shipbuilding companies. The shipbuilding industry remains as major contribution to the Korean export
sector. The growth of Korean shipbuilding can be attributed to the government strategies that included
capital funding, supportive policies and facilitation of joint ventures with international companies to
access latest technologies.

Governments in all major shipbuilding nations‟ play a vital role in development of the sector by
providing direct subsidies, easy financing, preferential orders, etc. The sector is dependent on the
government owing to requirements of huge capital investments, and sensitive nature because of national
security and large employment generation capacity. South Korea‟s shipbuilding industry has also grown
on the back of government support since inception. After gaining independence in 1948, the South
Korean government established the Korea Shipbuilding and Engineering Corporation (KESC). The
Government further acted to allocate capital, expand facilities and facilitate imports of ship components.

The Park Chung Hee regime (1961-1979) initiated the industrialization process of South Korea after the
military coup of May 1961. The Heavy and Chemical Industrialization (HCI) promotion policy was
adopted, which necessitated a huge amount of capital that was acquired via foreign loans, especially from
the U.S. and Japan. The shipbuilding sector was provided a thrust under the HCI policy. The HCI drive
provided shipbuilding and other preferred sectors with (i) capital incentives, (ii) complementary
investments, (iii) trade incentives, and (iv) tax holidays. The capital incentives included preferential rates
from state-owned banks with low nominal rates. A related method for securing access to capital was
government guarantees for foreign loans. (The Foreign Capital Inducement Law states that the South
Korean government would repay the loans to foreigners if the loans defaulted). The second category of
incentives was the government complementary investments which included large infrastructure
programmes for new facilities. The government invested in industrial complexes for shipbuilding at
Ulsan, Okp‟o and Chukdo. Also of great importance was the promotion of the steel industry through the
state-owned Pohang Iron and Steel Corporation (POSCO). The shipbuilding industry gave POSCO
increased economies of scale and POSCO gave the shipbuilding industry steel as a vital input at
comparatively low prices.

The South Korean shipbuilding grew exceptionally during 1970 to 1990, a period that was marked with
severe crisis in world shipping and shipbuilding, witnessing massive yard closures in Europe. By 1990,
the Western European merchant ship completions had been reduced from more than twelve million gross
register tons (grt) in 1975 to less than three million grt in 1990 (reduction of almost 75%). The South
Korean completions on the other hand multiplied by a factor of more than eight over the same period.

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Hyundai (HHI), a large business conglomerate, was instrumental in the rise of South Korea‟s
shipbuilding, which it achieved with the support of the government. The state supported HHI by (i)
giving access to domestic and foreign funds with preferential interest rates; (ii) helping in obtaining and
providing financial guarantees for the first order; (iii) making complementary investments in facilities
and complementary industries, such as steel through the Pohang Iron and Steel Company (POSCO); and
(iv) providing support for acquiring new technologies. HHI became the major shipbuilder in South Korea
in the 1970s and became the world’s leading shipbuilder in 1983, a position it still holds today. Similarly,
state support has helped in development of other shipbuilding players like Daewoo and Samsung.

By the mid-1980s, South Korea had become the most important competitor to the Japanese in the high-
volume shipbuilding market, which was in-part contributed by the appreciation of Japanese yen that
improved South Korea‟s competitiveness as against Japan.

The Shipbuilding sector held a priority status in the government‟s economic development agenda and
has been provided special thrust in various five year plans of the South Korean government. A summary
of government support to the sector during various plan periods is provided in the table below.

Plan period Key objectives/ measures

Third Five Year Development Plan  South Korea to be self-sufficient in vessels by
(1972-76) 1980.
 Shipbuilding exports to reach 1 billion USD by
1980 (3.2 million grt) and 2 billion USD (6.2
million grt) by 1985.
 Nine shipyards to be constructed by 1980 and a
further five by 1985.
Fourth Five Year Development  Commencement of the production of shipping
Plan (1977-81) components domestically
 Development of the Planned Shipbuilding
Program, which gave guidelines to the
shipbuilding sector. Much of the finance of the
shipbuilding sector to come from the National
Investment Fund and foreign loans.
 Government procurement to overcome depressed
international shipping markets.
 Increased focus on replacing the imports of ships
with South Korean-built ships

The Korean economy was affected by the financial crisis of 1997 that was triggered by the poor
performance and high debt ratios of some large conglomerates. The crisis led to a fall in real GDP, high
inflation, three times rise in unemployment and depreciation in Korea‟s currency (won). Thus, the
government initiated market based reforms aimed at the financial, corporate and public sectors. In
December 1997, Korea shifted from a managed to a free floating exchange rate system and since then has
pursued exchange rate stabilization. Disbursements from multilateral institutions and foreign investment
inflows enabled Korea to rebuild quickly its international reserves, which had been depleted by the crisis,
thus helping to restore confidence in the economy. The investment regime was also liberalized by
removing nearly all barriers to incoming FDI. Liberalization of the investment regime together with

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regulatory and other market-based reforms has contributed to a considerable expansion in foreign
investment.

Additionally, the Korean government has taken active measuressuch ascutting corporate taxes and
reducing the trademark evaluation period, to stimulate FDI through deregulation and by enhancing
vehicles for investment promotion. Furthermore, the government has made considerable efforts to solicit
foreign investors‟ opinions and incorporate their suggestions into its policies. The Invest Korea Plaza and
the G4F website (www.g4f.go.kr) which were set up in 2006 are good examples of the government‟s
efforts to provide one-stop administrative services to foreign investors.

There are multiple industry associations to facilitate growth and development of the shipbuilding sector.
KOSHIPA is the leading shipbuilding association, enhancing cooperation amongst members and
promoting their common interests, with membership covering all the major shipbuilders. Other key
shipbuilding industry associations include Korea Marine Equipment Association (KOMEA) and the
Korea Shipbuilding Industry Cooperative (KOSIC). A host of specialized institutions such as the Korea
Marine Equipment Research Institute (KOMERI) and the Society of Naval Architects of Korea (SNAK) are
more focused on R&D activities and production innovation. The Government‟s strong push to promote
University-Industry R&D activities in the 80s resulted in many collaborative initiatives. More recently the
Ministry of Knowledge Economy, has been pushing for the convergence of shipbuilding and IT sectors to
support the “Smart Ships” agenda.

The trade regime of Korea is also liberal. Tariff protection for ships ranges from zero to 8%. The shipping
industry has also benefited from government subsidy (Local Tax Reduction for Building and Acquisition
of International Line Vessels and Deep Sea Fishing Vessels) that promoting the shipping industry by
relieving the tax burden on international line vessels, deep-sea fishing vessels and coastal line vessels.

Korea's industrial vision for 2010 is to become one of the world's top four "industrial superpowers", based
on strengthening its global position in the traditional basic industries of semi-conductors, cars,
petrochemicals, steel, machinery, and shipbuilding. The government policies are thus directed at
improving competitiveness and developing high-value-added advanced technology products based on
innovative strategies.

Japan

Japan has held a leading position in the global shipbuilding industry since 1970s and has thus played a
major role in shaping the worldwide development of the industry. Being an island nation, shipping is an
essential activity for both domestic and international trade, and a strong shipbuilding industry provides a
solid foundation not just for the shipping industry but also for the economy as a whole. Japanese
shipbuilding industry‟s core products include oil tankers, bulk carriers and container ships; which
comprise majority of world‟s fleet today.

The history of the Japanese shipbuilding industry and the government‟s role in the development of this
industry can be traced to the Meiji period (1868 to 1912), when the government gave orders for ships and
large military carriers to compete with European and American maritime carriers. In 1896, the Navigation

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Promotion Law and the Shipbuilding Promotion Law were created that provided strong incentives to
build and operate faster and larger ships. Japanese maritime carriers and shipbuilders depended heavily
on subsidies provided by these laws.

Post the Meiji restoration period, Japan‟s modern shipbuilding started with private sector being given a
greater role. However, during World War II, the industry was brought under government control and
ships were built largely for military use. The war defeat had left the Japanese shipbuilding industry also
weak. To aid recovery, Japan began deregulation of industry by returning to private administration and
adopted a liberal monetary policy; the interest rates were deliberately kept very low and stable and Banks
were lenient in the disbursements of loan, generally providing „overloan‟ and allowed deferment of loan.
These measures helped in meeting the businesses‟ need for capital investment, especially the heavy
industrial sectors like shipbuilding that have huge capital needs. Other forms of special supports for the
shipbuilding industry included various tax benefits, and financing through the Ex-IM Bank and the JDB.
Thus, 1950s & 60s witnessed a rapid growth in Japanese commercial shipbuilding industry. These
government subsidies were continued for most of the 1960s, and by 1970 shipbuilding in Japan became
highly competitive in world markets.

However, in the 1970s and 1980s the shipbuilding industry suffered from two recessions, leading to lower
demand from domestic market and thereby created huge excess capacities with the private players in the
industry. Thus, the companies were compelled to look at export market and take orders from foreign
countries. The government assisted the industry by introducing export promotion policies, such as the
link system, by which the losses caused by unprofitable orders were made up by profits gained from the
import of raw sugar. The government had already adopted trade liberalization policy in the 1960s, with a
view to strengthen industry‟s international competitiveness. Accordingly, a long-term vision for
industrial structure was adopted wherein two criteria for an optimum industrial structure were
introduced: (1) "Income Elasticity Criteria" on the demand aspect; and (2) "Productivity Increase Rate
Criteria" focusing on the supply side. Applying these criteria, the path of heavy and chemical industries
was chosen as the most desirable.

The 1990s period has been fraught with heavy competition from the South Korean and Chinese
shipbuilding industries. As a result, Japan has continuously focused on innovation to create new
demand. The key R&D measures include creating replacement demand by developing environmentally
friendly and safer ships, and development of new demand for shipbuilding industry by research and
development of new technology, such as super large floating structures.

Japan’s innovative R&D programmes in Shipbuilding

The following R&D programs have been undertaken:

a) Super Eco-Shipis an innovative ship design with a gas turbine and a contra-rotating podded propulsor
driven by electric motors. Super Eco-Ship is environmentally friendly with CO2 emissions three quarters
of conventional coastal ships; NOx one tenth; and SOx two fifth. It also is economically improved with
20% more on-board cargo capacity and 10%greater overall efficiency. On-board working environment
will be improved with significant noise reduction and on-board maintenance-free engines. Vessel
manoeuvrability and controllability will be significantly improved. Its ability to move laterally makes

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approaching to, and moving away from, the pier easy. It is expected that the development and
commercialisation of Super Eco-Ship will revitalize the coastal shipping industry, help to accelerate a
modal shift to coastal shipping and contribute to a reduction of environmental load imposed by
transportation. Embarked on in 2001, the Super Eco-Ship R&D program has already resulted in new
technologies that prepare for the modal shift to support commercialization of Super Eco-Ship.
CurrentlyNMRI (National Maritime Research Institute) is developing an optimal hull form design
manual and on operation manual. Prototypes of Super Marine Gas Turbine and contra-rotating podded
propulsor were installed on a demonstration ship, which is now undergoing actual sea trials.
b) Mega-Float is a very large floating structure developed in Japan. It is earthquake resistant and
environmentally friendly. After evaluating a floating airport model of 1,000m in length, the feasibility of
constructing a floating airport using Mega-Float technology was demonstrated. Other uses for Mega-
Float technology have also been assessed. Mega-Float‟s feasibility as a reliable and inexpensive data
backup facility is also demonstrated in a joint demonstration project with the Ministry of Internal Affairs
and Communications and the Ministry of Economy, Trade and Industry. In addition to airports and
facilities for data backup, various applications such as port facilities, container terminals, energy facilities
and leisure facilities, are under consideration. We are actively promoting commercialization of Mega-
Float.

Source: OECD

Skill development
One of the competitive edges of Japanese shipbuilding industry lies in its excellent human resources.
Recognising the importance of skilled workforce in this industry, the government has taken efforts
towards skill development. In 2004, in partnership with shipbuilding related organizations, the
Shipbuilding Skill Development Center was founded within CAJS (The Cooperative Association of Japan
Shipbuilders). The centre commenced to develop training material and prepare necessary equipment to
support training efforts to be held at regional shipbuilding industry canters. Intensive training programs
were launched inInnoshima and Imabari in FY 2004, in Higashinippon and Oita in FY 2005. In addition, a
training program for trainers was started, and teaching materials for on the job training (OJT) has been
developed and noware supplied to shipyards.

Environmental protection
As one of the major shipbuilding countries, Japan actively participates in international discussions of
environmental issues and international regulations. Japan is an active participant in the discussion of
Ship Recycling in the IMO.Japan has been leading the international discussion for establishing a
framework to maintain recycling capacity in the world, and at the same time to foster an environmentally
friendly and safe ship recycling industry. To this end, the Ship Recycling Review Commission was
established by Ministry of Land, Infrastructure and Transport. It consists of experts on shipbuilding,
shipping and the environment and is conducting a comprehensive study on ship recycling, and
developing strategic approaches in international organizations to facilitate the establishment of a
globally-applicable instrument.

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