Why not focus on ship repair before shipbuilding?

According to Shipbuilding Industry Development Policy 2021 (SBIDP 2021), Bangladesh aims to earn USD 4 billion and create employment for one lakh people by 2026 from an export-oriented shipbuilding industry.

According to UNCTAD, Bangladesh barely contributed 0.08% of the global shipbuilding gross tonnage in 2022, down from 0.15% in 2020. From 2008 till now, Bangladesh has exported 31 small ships (8,000 dwt in maximum) to countries in Asia, Africa and Europe.

Can Bangladesh achieve this export target as specified in this policy document? What are the impediments to attaining this vision? And why does Bangladesh’s approach to achieving the SBIDP 2021 target need a modified strategy?

The policy recognises that shipbuilding requires more investment, advanced technology and a lengthy period, and it acknowledges that Bangladesh needs to catch up with leading countries in terms of financial investment, resource allocation and other facilities.

A diagnostic trade integration study conducted by the World Bank has also reported that Bangladesh needs to fulfil the necessary criteria for new shipbuilding, such as ship design quality, technical capabilities, processes, overall cost, people and the business environment of shipbuilding, compared to South Korea, China and Vietnam.

Based on a report by UNCTAD (Review of Maritime Transport 2023), China, the Republic of Korea and Japan collectively account for 93% of the global shipbuilding market. These countries have established themselves as the primary maritime ship suppliers in the global market for several years, but their success took time to take off.

As mentioned in the book “Korean Shipbuilding Industry: Growth and Mission,” the evolution of the shipbuilding industry in these countries has followed a common stage of development.

First, these nations relied on merchant ships from other countries when trade was insignificant. Second, countries purchased new or used ships from developing shipping nations due to the need for increased trade. Third, shipyards for repairing ships were constructed as seaborne trade and foreign and domestic ships increased. Fourth, new shipyards were built as technologies for repairing ships were acquired and the demand for domestic ships grew.

Generally, the cost of constructing new ships includes 60% of materials, 20% of labour, and 20% of overhead. Due to Bangladesh’s weak local supply chain, the local value addition apart from labour is negligible. Hence, the progress of new shipbuilding in the last decade has been far from encouraging.

As such, reevaluating the current strategy with a fresh perspective is necessary. While reevaluating how to achieve the policy objectives, exploring the appropriate sectors with more opportunities for the shipbuilding market is necessary.

The ship repair market is often considered part of the broader shipbuilding industry, encompassing new ship construction, ship conversion and ship recycling. Bangladesh has a comparative advantage in labour-intensive work, which has already been demonstrated in the ship recycling industry, and that may be exploited in other service sectors like ship repair and maintenance (R&M), where the demand is more stable compared to the newbuilding export market.

Each year, more than 4,000 ocean-going merchant vessels visit our seaports and the number of Bangladesh flag vessels is also increasing (currently 97 in number, DG Shipping). This is an untapped business potential for Bangladesh.

Ship repair tasks typically involve docking, cleaning, greasing and scrubbing. It can usually be completed within days or weeks, unlike the years it takes to construct a new vessel.

The repair industry is labour-intensive and automation plays a relatively minor role (OECD, 2008). Typically, 70% of repair work is done when a vessel is in a berth, while the remaining 30% requires docking facilities such as dry docks or floating docks (OECD, 2008).

An ideal modern repair yard would have slipways, jetties, berthing facilities, dry docks, floating docks, several workshops, experts and skilled workers. Unlike shipbuilding, a product-oriented business, ship repair is a service-oriented venture. Developing economies with a plentiful labour supply will have an advantage in the ship-repair business (OECD, 2008). Hence, major ship repair yards are now located in Asia.

According to the World Bank’s diagnostic study, the shipbuilding industry in Bangladesh has considerable experience, so workers have the ability and necessary skills to run a repair yard. The study further suggested that since larger vessels ply Bangladesh waters, there is a general opportunity to benefit from this traffic and expand maintenance and repair facilities for larger ships.

It would require establishing appropriate sites or dry docks beyond the existing dry dock in Chittagong. Most ships visiting Bangladesh seaports are comparatively aged bulk vessels and stay longer, making a new repair yard an excellent place for repair work when needed.

Ship repair is a lucrative industry for many countries worldwide, driven by various factors such as pre-planned maintenance, unscheduled repairs, port state control regulations, second-hand ship sales and the re-activation of laid-up vessels.

Dry docking is integral to ship repair and maintenance, typically occurring every 30 months to comply with flag legislation and classification society rules. The cost is a significant component of the ship’s operating expenses, often amounting to six or seven figures in US dollars.

Despite the challenges posed by the Covid-19 pandemic, the repair industry has remained relatively stable, with over 11,000 vessels repaired in 2020. China emerged as the global leader in ship repair, accounting for 49% of all ship repairs worldwide in 2020, up from 45% in 2019.

The international ship R&M services market was valued at USD 39.83 billion in 2022 and is projected to grow from USD 41.47 billion in 2023 to USD 57.36 billion by 2030, exhibiting a CAGR of 4.7% during the forecast period (Fortune Business Insights).

Shipbuilding countries like China are converting new building yards into repair yards. India has also aimed to capture 10% of the global ship repair industry in its 12th five-year plan. The European shipbuilding industry has also been advised to focus on its ship repair potential to remain competitive.

Furthermore, installing new treatment systems following the International Convention for the Control and Management of Ship’s Ballast Water and Sediments represents a significant opportunity for the ship repair industry, valued at approximately USD 100 billion (UNCTAD). So, the market for R&M has vast potential to generate growth and the prospects for the ship repair business are bright.

However, Bangladesh needs a suitable modern ship repair yard as the local small shipyards primarily repair small domestic ships due to their limited capacity. Chittagong Dry Dock Limited (CDDL) is a state-owned enterprise that offers only limited dry-docking facilities for seagoing merchant vessels in the country. It can dock ships of up to 22,000 DWT with a length of 175 metres and a breadth of 24 metres, which is insufficient for modern seagoing merchant vessels.

As a result, Bangladesh-flagged merchant vessels, including the six newly procured vessels of the Bangladesh Shipping Corporation (BSC), are sent abroad for docking. The CEO of a leading private ship management company in Bangladesh has pointed out that their vessels are sent abroad regularly to avail the service and spend approximately USD 8,00,000 over five years, including two routine dockings and other expenses.

A modern ship repair yard in Bangladesh can turn this problem into a business opportunity that will save and potentially earn huge foreign currency and generate significant employment.

Given these circumstances, the ship R&M business shows considerable opportunity where the demand is more stable than in the new building market and has tremendous potential to succeed. In terms of cost structure, which includes 60% labour, 20% material, and 20% overhead costs, Bangladesh has an absolute comparative advantage over the competitors and local value addition will be higher.

Despite having a rich history in shipbuilding, the industry has struggled to adapt to new technological changes and adopt the best international shipbuilding practices. Additionally, the new building of ships needs a more robust supply chain which is now dependent on the global market.

A study reveals that the big players in shipbuilding became giants following common stages of development, which suggests that at this stage, the policy may take a modified strategy to promote the ship repair industry and gradually become a new builder of ships. This is also important in the port marketing sense (UNCTAD 1991) to ensure the safety of foreign ships in our future deep seaports.
Source: The Business Standard