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Japanese shipbuilders to be tested/Long-awaited merger is hopeful news as China, South Korea close in

Saturday, 04 February 2012 | 00:00
JFE Holdings Inc. and IHI Corp. concluded four years of negotiations as they reached a basic agreement to merge their shipbuilding units in October. However, the business environment has become increasingly severe for shipbuilders due to the rapid expansion of production in South Korea and China. Japanese shipbuilders are now on the verge of discovering whether they can recover their international competitiveness.
Shinjiro Mishima, president of Universal Shipbuilding Corp., a subsidiary of JFE Holdings, said at a Monday press conference announcing the merger with IHI Marine United Inc., "At last, we are able to stand at the starting point."
In April 2008, JFE Holdings and IHI unveiled a plan to merge their shipbuilding units, but negotiations dragged as the shipbuilding market deteriorated following the collapse of Lehman Brothers Holdings Inc. that autumn.
According to Mishima, the situation required them to review business conditions. A three- to four-year backlog of orders is also thought to have delayed the decision on the merger.
While negotiations stalled, their South Korean and Chinese counterparts rapidly increased their shipbuilding capacity in an effort to tap into the growing global ocean shipping demand spurred by economic development in emerging countries.
South Korea began fostering its shipbuilding industry, and major shipbuilders made capital investments totaling 1 trillion yen. Chinese firms also improved their price competitiveness, helped by low labor costs.
As a result, Japanese shipbuilders' global market share dropped sharply to 21 percent in 2010 from nearly 30 percent in 2008, far behind China's 38 percent and South Korea's 33 percent. "They have a huge lead on us," Mishima said.
It is also believed that the volume of new orders received by Japanese shipbuilders, which are weaker in terms of price competitiveness, will largely dwindle by around 2015, when supply will greatly exceed demand in the global shipbuilding market because of the degree to which China and South Korea have boosted their production capacities.
Alarmed by the likelihood that the business environment will become even more severe, JFE Holdings and IHI had little leeway in concluding the merger agreement.
Through the merger, the firms will be able to eliminate redundant shipbuilding. They are also expected to strengthen development of "energy-saving ships," offsetting high production costs with improved technological capabilities.
IHIMU President Shigemi Kurahara said they also can expect to see benefits from the large increase in engineers capable of developing new fields.
On the domestic front, the new company created by the merger will be comparable to industry leader Imabari Shipbuilding Co., which has been expanding its business scale by buying small and midsize shipbuilding firms based in the area around the Seto Inland Sea.
In July, the Land, Infrastructure, Transport and Tourism Ministry said in a report that cooperation between or integration of shipbuilders is necessary.
The latest merger will be the first large-scale restructuring of the Japanese shipbuilding industry since October 2002, when Universal Shipbuilding was established as a joint venture between NKK Corp., JFE's predecessor, and Hitachi Zosen Corp.
The latest merger is likely to become the real test of whether Japanese shipbuilders can make a comeback in the market.
Source: Yomiuri
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