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Kawasaki-Mitsui merger aims to keep shipbuilders afloat

Publication Date : 24-04-2013


With the "2014 problem" drawing ever closer, Kawasaki Heavy Industries Ltd. and Mitsui Engineering & Shipbuilding Co. had to take drastic action to ensure their survival.

The move by the two major shipbuilding and heavy machinery makers to enter merger talks reflected their sense of urgency toward overhauling their shipbuilding business, as Japanese firms are expected to complete the construction of ships for which they currently have orders in 2014.

Meanwhile, rivals in China and South Korea have gained an edge on Japan with their low-priced products and have come close to Japanese firms in terms of technological prowess.

Kawasaki Heavy and Mitsui Engineering & Shipbuilding aim to achieve the survival of their shipbuilding business by cutting costs with the merger. They also plan to boost their strength in such growth sectors as ocean development, the extraction of deep-sea resources.

According to the Shipbuilders' Association of Japan, outstanding orders received by Japanese shipbuilders totaled 25.82 million tons in 2012, just 40 per cent of the total posted in the peak period in 2007. After the Lehman shock of 2008, Japanese firm's market share shrank steadily.

Most observers do not expect to see a sudden rebound in orders. This is of heightened concern to many in the industry in Japan in light of the 2014 problem that will leave most of the nation's shipbuilding facilities idle with no orders to work on in 2014.

Mitsui Engineering & Shipbuilding, the fourth-largest shipbuilder in the country, lacks a clearly defining specialty, producing mainly midsize commercial ships.

Meanwhile, Kawasaki Heavy Industries, ranked eighth as a shipbuilder, faces a particularly harsh business environment. According to sources close to the matter, Kawasaki Heavy's Kobe shipyard is expected to have no outstanding orders in the first half of 2014, while Mitsui Engineering & Shipbuilding's shipyard in Chiba Prefecture may possibly face a similar situation within the same year.

Japanese shipbuilders, including Kawasaki Heavy and Mitsui Engineering & Shipbuilding, are lagging behind their Chinese and South Korean rivals, which have gained the upper hand with lower-priced products by cutting costs and improving their technologies. China and South Korea promoted the industry as a national project. Firms in the two countries built large dockyards in multiple locations since around 2003.

A dockyard constructed near Shanghai by China State Shipbuilding Corp. (CSSC), the world's largest shipbuilder, builds more than 20 ships a year, at least double the output of Japan's largest shipyard, owned by Imabari Shipbuilding Co.

South Korea's Hyundai Heavy Industries Co., the world's second-largest shipbuilder, has received a large number of orders to build fuel-efficient ships.

Japan's shipbuilders held an 18 per cent share in the global market in 2012, down by nearly half from the level in 2004, when Japan was nearly tied with South Korea. China's share increased to 41 per cent in 2012, while South Korea's share held nearly steady at 33 per cent in the same year, leaving Japan far behind.

Merger may run up against wall

The two Japanese firms' move toward a merger aims to cut costs in their slumping shipbuilding business to get a competitive edge against their rivals in China and South Korea and to boost their strength in the growing ocean development sector.

Kawasaki Heavy has domestic dockyards in Kobe and Sakaide, Kagawa Prefecture, while Mitsui Engineering & Shipbuilding has dockyards in Chiba and Tamano, Okayama Prefecture. The firms hope that the business integration through the merger will bring an increase in orders.

However, the merger talks may run into rough waters regarding the restructuring of dockyards. Some observers say the merger will bring no benefits unless some shipyards are shut down.

Meanwhile, both firms are paying close attention to the growth sector of offshore development. Mitsui Engineering & Shipbuilding, through its consolidated subsidiary Mitsui Ocean Development & Engineering Co., produces platforms developed for offshore oil fields. Kawasaki Heavy, although shipbuilding accounts for only 9 per cent of its sales, aims to receive orders for an offshore oil field off Brazil through a Brazilian shipbuilder in which it acquired a 30 per cent stake in 2012.

The worldwide ocean development business was seen to be worth about 6 trillion yen in 2011--almost the same as the shipbuilding business. Support ships to transport on-the-ocean facilities and construction materials need advanced technology, which could boost the market size to 11 trillion yen in 2020, according to some estimates.


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