A Wide Disparity! Inspiration from South Korean Ship Enterprises' Package of VLCC Orders

 VLCC has been the largest vessel type in the international shipping market since 2017. Chinese shipping companies, however, only received a very small amount. From January to April in 2018, of the global order of 22 VLCCs, Korean shipyards got 20 ships (a share of nearly 91%). During the same period, Chinese and Japanese shipping companies only offered 2 ships. In 2017, among the 48 VLCC orders worldwide, 35 ships are from the three largest shipping companies in South Korea (nearly accounting for 73% of the total). Except for five ships ordered by Hyundai Merchant Marine, the others were all foreign ship owners, while 7 and 6 ships separately from Chinese and Japanese ship enterprises were all made by their own shipyards. In the field of VLCC, South Korea's strong market position is inseparable from its marketing strategy, product competitiveness and cost control capability of shipbuilding enterprises.

(I) Marketing Strategy

One is to reduce gross profit for low-cost orders. Since 2017, the three largest shipping companies in South Korea have reduced their gross profit in order to solve the problem of insufficient orders and inadequate production tasks. The value of VLCC undertaken by Korea in 2017 was basically around 80 million U.S. dollars, the lowest level since 2004, and the price that can be accepted by Chinese shipping companies is also at this level, a still gap compared with the $300-500 million price difference expected by the former shipowner leading to the flow of a large number of orders to Korea. The second is to strengthen the marketing sales to old customers. The three major shipping companies in South Korea actively consolidated their long-term relationships with shipowners. Their CEO personally visited shipowners and promoted the development concept of "coexistence". Among the orders for VLCC recently, most of them came from customers with more than 10 years' cooperation.

(II) Product Competitiveness

The first is to lower operating costs. The weight of VLCC empty ships built by the three major shipbuilding companies in South Korea is usually around 42,500 tons, while the weight of VLCC empty ships built by domestic shipping companies is generally over 46,000 tons. The lighter weight of the hull reduced the oil consumption significantly. For example, the 320 thousand tons of VLCC building 2014 by COSCO DAEWOO Corporation has a consumption of 97 tons per day at a speed of 16.2 knots, while the same domestic design has an average daily consumption of 107 tons at the speed of 15.8 knots, a difference of 10%. The second is better matching quality. Due to the well-developed domestic shipbuilding facilities in Korea, there are over 90% of the VLCC's self-supporting rate. Local suppliers are recognized worldwide as well-known brands. It has a more complete after-sale system and not only enjoys a high degree of recognition by the shipowners, but also has a unique advantage in the supply chain compared with the Chinese shipyards' import of high-quality facilities. The third is the better asset inflation-hedging ability. Because of its obvious advantages in operating economy, quality and after-sales service, the VLCC built by the Korean shipyard showed a better liquidity and asset inflation-hedging ability. Taking the example of second-hand ships that were delivered in 2011 and traded in 2014, the price of VLCCs of South Korean shipping companies are generally 10-20 million U.S. dollars higher than that of the VLCCs built by Chinese shipyards.

(Ⅲ) The Cost Control of Enterprises

One is the capacity of mass design and construction. Nearly half of the VLCCs operating in the world are built by the three largest shipping companies in Korea. By virtue of its rich construction experience, it has formed the capacity of mass design and construction of VLCC at low cost. In 2018, the order of VLCC undertaken by POSCO DAEWOO Corporation was of the same design and specification, which greatly reduced the cost in the context of low ship prices. The second is a shorter construction cycle. The Korean shipyard needs only 600 thousand working hours to build a VLCC, while the Chinese shipyard needs generally around 2 million working hours, and the efficiency is 1/3 less than that of the Korean shipyard. Taking the VLCC series ordered by Genre8 Maritime as an example, which were built at Modern Three Lakesand Waigaoqiao, the construction period of the modern three lakes is 243-325 days,while the domestic efficient Waigaoqiao Shipbuilding will take 365-442 days. The faster construction cycle, on the one hand, ensures shipowners to put into use as soon as possible and make profits as early as possible. On the other hand, it also significantly reduces its own construction costs.

Conclusion: Under the background of relatively unsatisfied demand for marine products and high value-added marine products, the three major shipbuilding companies in South Korea have returned to the VLCC and other advantageous sectors, and have used a low ship price to create a new world. China's shipping companies will obtain a share in the current market environment by making a main ship type into a fine type and drawing on its price advantage.

Source: China Shipbuilding Industry Research Center