Indian Shipbuilding Industry : A critique on KPMG Whitepaper

The other day I was going through a report prepared by KPMG for FICCI “Indian Shipbuilding Industry: Poised for take off”, wherein they had mentioned India could be the next powerhouse in shipbuilding. You can read the report here.

The report seems to have been prepared by people whose understanding of the Shipbuilding Industry is naïve to put it politely. Not only have they got their facts wrong (by a huge margin!!!), but their conclusions seemed to be flawed.

Their report claims that the Indian Shipbuilding industry is poised to take off and India could emerge a worthy competitor to Japan, Korea and China. Their conclusions are based on the fact that Indian Shipbuilding industry would see an influx of Rs 200 Billion ($5 Billion) in the next 5-10 years. Moreover India with its cheap labor would be an attractive destination for competitive pricing of shipbuilding.

Global Shipbuilding has shown a CAGR of around 6 % from 1980-2007. This fact is nothing earthshaking, given the fact that during this period the Global GDP has also risen 6% annually. What this means is that on an average, every industrial activity has risen on an average of 6 % annually. Shipbuilding is no exception.

Because of the phase-out of Single Hull Tankers, the global shipbuilding orders have quadrupled in the last 5 years. This is as of 2007. I am sure 40 % of the orders would have got cancelled because of the ongoing recession due to the US sub-prime Mortgage crisis. Moreover with more emphasis on renewable energy sources, than the traditional petroleum products and with countries promising to cut their carbon emissions by atleast 20 % in the next five years, the scope for trading in Oil products is getting smaller and smaller.

Labor Cost : The report states that shipbuilding is a labor intensive activity (Wrong!!!) and labor accounts for 10 % of the total shipbuilding cost (Correct!!).

As rightly brought out in the report, labor accounts for 10 % of shipbuilding cost and hence is NOT a labor intensive activity. 90 % of the cost is associated with material costs, overheads and technological set up. To break it up further, 20 % of the total cost would be Steel, approximately 47 % is the cost of Finished Manufactured goods, 13 % costs are the overheads and the rest 10 % are the misc expenses. Thus even if we stick to the Report’s contention that Indian Labor is competitive compared to World’s markets, India is still competitive in only 10 % of the total costs.

Now let me come to the next assumption in the Report that ‘India’s labor cost is cheap’. As per Fig 7b ‘Cost of Labor in 2008’, the chart shows that India’s labor cost is 1.5 USD per day (i.e Rs 60/- INR). I am not aware where the Management Consultancy Firm KPMG got this absolutely crap figures from. Or is it, that they are fabricating the facts to support their contention. Most states in India, have Minimum basic Wages of 4 USD (Rs 200/- day). It is a known fact that the Minimum basic wages in the shipbuilding industry could touch somewhere between Rs 250- Rs 300 (5-7 USD). Taking this into account India’s labor cost is two and a half times China’s costs. So as far as the labor cost is concerned, India does not have edge over China.

Till now I have not taken into account, the labor productivity where India lags behind all the other shipbuilding nations. The labor productivity in terms of tons/mandays is 1/10 of Japan and ½ of China. Thus the contention that India is labor competitive compared to other nations is a myth.

Indian Shipyards have bagged huge quantum of International Shipbuilding orders: The report states that the Indian Shipyards, notably ABG Shipping and Bharti Shipping have bagged international orders in the last 2-3 years and their order books are already full till 2012. This could be true, but that does not mean that the shipyards which have bagged these orders have got it because of their competitive pricing. It is a known fact that the order books of Japanese, Korean and Chinese Shipyards are already full till 2015 with orders of Container Vessels, Super tankers and PANAMAX vessels and they have no further capacity to take any further shipbuilding orders, until and unless they upgrade or increase their shipyard facilities. Thus the ship owners were reluctantly forced to go to third world countries like India, Sri Lanka and Vietnam to augment their fleet size as none of the developed shipbuilding nations were willing to take up their orders.

Other problems with Indian Shipbuilding Industry

Lack of Creativity and Innovation : It is a known fact Indians are hardly known for their creative ideas/ innovation. The last great creative work done by Indians was the creation of Zero and that was way back in 1000 BC. This is not to say that, India has not progressed in the last three thousand years. They have progressed, but on the shoulders of other nations, not in their own capacity. Indians are good at solving equations once an equation is given to them, but poor at formulating equations or finding a practical use out of the equations. This is clearly seen in one of the achievements of Independent India, their so called Software Industry. The Indian Software Giants INFOSYS, Wipro and TCS are globally very competitive, but are not house hold names compared to Microsoft, Adobe, Macromedia, etc. Till date, these firms have yet to come up with an innovative product catering to the masses. These so called Software Giants are good at ‘one of a kind products’, not because they are competitive in that field, but because the actual Software Giants like Microsoft, Adobe , etc will not want to get into such ‘menial’ tasks or as Caste Indians term them ‘Shudra jobs’.

The same lack of creativity find a place in the shipbuilding industry. They cannot conceive of a new kind of vessel (For Eg, the Container Vessel). Their lack of creativity is amply shown in their lack of Design capabilities. The Indian Shipyards totally survive on Technology Transfers from Foreign Shipyards. Research & Development is an anathema to the Indian Shipbuilders.

Conclusion

Contrary to what the KPMG report claims, Indian Shipbuilding is nowhere near the class of Japanese, Korean or Chinese Shipbuilders. The Indian Cheap Labor cost is nothing but a myth. Their shipyards are what the US shipyards were a hundred years back. Most of the Indian Shipyards lack a CNC cutting machine, forget about robotic welders. Moreover India’s archaic labor laws would prevent the introduction of any labor saving technology. Lack of creativity is a bane of Indians and their creative spirit has not been shown in the past three thousand years.

But is all lost? Is India’s Shipbuilding Industry doomed for eternity in the backwaters of technological and creative primitivity. Need Not Be. As Ayn Rand rightly brought out in one of her novels “All it takes is for a few good men to take up the cudgels”. But will Indian Shipbuilding Industry find its Few Good Men???