However, things are not so honky dory even discounting the current slowdown. India is building ships of small to medium sizes only, with shipbuilding capacity limited to 110,000 deadweight tonnage (even though some shipyards have capacity to build very-large crude carriers). Mechanization at shipyards is non-existent and productivity level is quite low. What still makes shipping companies approach India is the non-availability of slots at the yards in Korea, Japan and China, and availability of relatively cheaper labor.
Tonnage tax had received good feedback initially, and private players were encouraged to step up investment in shipbuilding. Under tonnage tax system, income tax is levied on a predetermined fixed scale on the basis of presumptive income of the net tonnage of each ship. There are reports that this had reduced the incidence of tax to as low as 3%, and this spurred shipbuilding activities. Order books of Indian players grew from Rs816 crore to Rs21,800 crore by 2007 end. But benefits have been offset by the introduction of a number of service taxes and dividend tax. Effective service tax, according to tax experts, has jumped from 8% in 2004 to 12.6% by 2008. This has affected foreign direct investments (FDI) adversely, as is reflected in almost zero FDI in shipbuilding in the last two years, despite 100% being allowed.
| Labour costs in shipbuilding | |
| Country | Labour costs ($per annum) |
| China | 729 |
| Indonesia | 1008 |
| India | 1192 |
| Philippines | 2450 |
| Thailand | 2705 |
| Malaysia | 3429 |
| Korea | 10743 |
| Singapore | 21317 |
| Source: Ministry of Commerce & Industry | |
While China is trying to become the most preferred shipbuilding destination in the world by 2025, the Indian government, through its National Maritime Development Program, plans to turn India into one of the leading players. In pursuit of this the government has brought custom and excise tax for shipyards on par with export-oriented units, and has exempted capital goods meant for shipbuilding from customs duty.
Future
Shipping companies have started putting their expansion plans on hold, thanks to credit crisis and plunging sea rates. After all, ships purchased by them generally have an 80% debt component. Speaking at the India Shipping Summit in October last year, Tobias Konig, managing partner of Hamburg-based shipping investment firm Konig and Cie GmbH, had said there would be no new business in ship financing as European banks had ceased extending credit line to ship financing in 2008 itself. Slowdown in the shipping industry, though, will not have an immediate impact on shipbuilders as lead time from placing the order to the date of delivery of vessels varies between three to four years, and, most of the players have orders booked till 2012.
Adverse affects have, though, started surfacing. The Shipping Corporation of India has postponed its Rs500 billion fleet expansion plan, and Essar Shipping has canceled orders for three vessels. Private companies like ABG and Bharati are putting up a brave face. ABG Shipyard had made an impressive net profit of Rs1.6 billion in 2007-08 - a growth of 38% over last year - with a sale of Rs9.7 billion. Bharati, which had registered 47% jump in its profit in the same period, expects to continue growth of 30% to 40% in 2009, according to agency reports. However, going by the way their stock prices have plunged, it seems market is expecting a sorry year ahead. Shares of ABG Shipyard have fallen by over 50% since 2007, while that of Bharati by as much as 80% from the beginning of 2008. Their old orders, however, look quite impressive. Bharati, for instance, is working on an order book of Rs48 billion.
According to an analyst working with a shipbuilder, “The key to keep floating in these troubled times is to ensure that jobs already assigned on order books remain firm in place. It is difficult considering the largest global player Hyundai is also seeing orders getting canceled.”
Banks need to realize that financing ship acquisitions would remain a profitable portfolio for them in the long term. Asian banks need to step in for European banks, traditional finance providers for the industry. Perhaps it’s time shipbuilders should ponder newer ways, like offering deferred payment facility to shipping companies.
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