Japanese shipyards facing up to the reality of a changing world

Mergers, cuts and a renewed focus on China as shipbuilding giants fight for survival

K awasaki Heavy Industries' decision to switch some of its focus from its home base in Japan and more towards China is another signal that the shipbuilding crisis is forcing companies to make radical changes.

A simultaneous move by rival Mitsubishi Heavy Industries to cement a domestic alliance with Imabari Shipbuilding and Namura Shipbuilding tells the same story.

Like a cartoon character that has sprinted off the edge of a cliff and is still treading air, Japanese shipyards have run out of road.

This is a repeat of the way the national steel industry was forced to consolidate in the past, while the big liner companies have also started to consolidate to survive.

Japanese yards won their lowest level of foreign orders for nearly a quarter of a century in 2016. The country that once built more than half of the world’s ships has seen its share slump to less than 20%.

Japan has struggled to compete with lower-cost competition and has had to deal with the impact of a rising yen against the dollar.

And yet Japan recently overtook South Korea in the number of orders it has taken for the first time since 1999, latest figures from Clarksons show.

South Korean and Chinese builders have themselves run up big financial losses and been forced to shut facilities too.

DSME is looking at cutting 1,000 more jobs and reducing wages by a quarter to try to put the shipyard business on an even keel.

A $6bn proposed rescue offer for DSME from the government-backed Korea Development Bank in recent weeks has led to criticism in Japan about unfair subsidies.

Certainly there is still too much capacity and there are too few orders worldwide. Government help can just perpetuate a problem.

Kawasaki, under the new leadership of Yoshinori Kanehana, has to some extent been living on borrowed time since it failed to tie up its own consolidation deal — a merger with Mitsui Shipbuilding & Engineering and IHI Corp.

Kawasaki has been struggling to bring in dry bulk orders to its Kobe yard, against competition with much cheaper Chinese facilities.

The Sakaide shipyard, which specialises in higher-tech vessels such as LNG carriers, has been doing relatively well but the Kawasaki group has also suffered from its offshore yard connections, with a Brazilian market devastated by low oil prices and the Car Wash bribery scandal.

There had been speculation that Kawasaki, a huge conglomerate that is also active in the aerospace, defence and motorcycle sectors, might abandon shipbuilding completely. The other alternative was to have another go at merging. But it has shied away from both options.

Instead, Kanehana, who took over as president from Shigeru Murayama last summer, has decided to downsize Kawasaki by 30%, partly by shutting one of its two docks at Sakaide before the end of this decade. Hundreds of workers will go, although the company is hoping that most job losses will be through retirement and voluntary redundancy.

Kawasaki has also decided that if it cannot beat China, it must join it. The Japanese firm is to concentrate more in future on its existing joint ventures there, Nantong Cosco KHI Engineering Co (Nacks) and Dalian Cosco KHI Shipbuilding Co (Dacks). In the past, these two businesses have been run at arm's length but in future, Kawasaki will be much more hands-on, helping to procure parts and, more controversially, push into higher-value vessels such as LNG carriers.

Meanwhile, Mitsubishi will hope it can find a better equilibrium by sharing components, ship designs, innovative technology and workforces with Imabari and Namura. The two smaller firms are already more competitive than Mitsubishi.

There are still hopes that Oshima Shipbuilding will join forces with the new Mitsubishi alliance. Meanwhile, some observers will ask whether the Kawasaki strategy will save itself but at the expense of boosting China, which already boasts the world’s largest orders backlog.