Lynn Kan
The Business Times
Wednesday, Apr 17, 2013
SINGAPORE - First Dalian Shipbuilding, now China Rongsheng Heavy Industries.
This year could be remembered as when Chinese shipbuilders-turned-offshore builders sealed more jack-up rig deals than Singapore's Keppel Corporation and Sembcorp Marine, the de facto hegemons in jack-up rigs that had a hand in building 70 per cent of the existing global fleet.
A report by Religare Capital showed that Chinese yards have won US$2.73 billion in jack-up rigs, while the Singapore duo hauled in only US$1.97 billion to-date.
"There's a substantial glut in shipbuilding capacity in China and the yards aren't getting orders so they're making a push into offshore," said Religare Capital analyst Vincent Fernando.
"Since 2006, Chinese shipyards have started to grow their market share, moving up the learning curve and delivering on new projects," said Barclays Research analysts Scott Darling and Clement Chen in a recent report.
Chinese yards are not the only ones that covet pole position. Other shipbuilder-turned-rig builders in Korea like Hyundai Heavy Industries, Samsung Heavy Industries and Daewoo Shipbuilding & Marine Engineering have been busy too, securing orders for drillships that operate in ultradeepwater.
The stand-off between the Singapore rigbuilders and others from China and Korea has been brewing for some years, since shipping entered a slump.
But the moment for capturing more market share is now.
The aged global rig fleet is in need of replacement as consumption for energy increases in emerging economies. Of the world's 500 jack-up rigs, about 300 are over 30 years old.
A new jack-up rig could set back a drilling operator or national oil company by about US$200 million at current prices. And now, their choices are not confined to the top five yards in Singapore or Korea any longer: China yards like Cosco, CIMC Raffles, and Dalian Shipbuilding have entered the picture.
Barclays estimates that, In the past decade, Chinese yards have grown their market share of rigs from 5 per cent to about 30 per cent currently.
And it could increase further. Religare Capital surmised that Chinese yards will be capable of rivalling Singapore yards in terms of rig production capacity by 2015.
The Barclays projections corroborate that: China yards may capture 10 percentage points more of market share in the next two years.
While the perception is that Chinese yards stick to less complex and commoditised jack-up rigs, and are not competing head-on with the likes of Keppel and Sembmarine, that has proven to be increasingly untrue.
"CIMC Raffles in early January won orders for two high spec deepwater semisubmersibles from (Cyprus-based) Frigstad Offshore. These rigs are more advanced than most being built in Singapore right now," said Mr Fernando.
The dealbreaker was more attractive contract terms offered by Chinese yards, he added.
State backing has meant Chinese yards often offer discounts between 10-20 per cent off contract prices and extremely attractive payment terms of a one cent downpayment upfront and 99 per cent of the contract value upon delivery.
In contrast, Singapore yards have a milestone payment system or a 20 per cent-80 per cent payment structure.
But CIMB stands by their belief that the Chinese financier-builder model will not deprive Singapore yards of their fair share of order wins.
"Traditional drillers with stronger cash flows should still find comfort in Singapore and Korean yards, unwilling to take on risks in quality and delivery," said CIMB.
Yet, the aggression shown by Chinese yards has led to a drop-off in operating margins of rig projects, reported Keppel Corp and Sembmarine last year.
Gone were the boom eras of margins that could go as high as 20 per cent. Instead, going forward, management for both companies are keeping to more modest ranges of between 10 and 13 per cent.
"For yards in general - whether in Singapore or China - they will see a weakening in pricing power because they're competing against each other for business," said Mr Fernando.
For now, Singapore yards have articulated clearly that their competitiveness hinges on a mixture of productivity gains and innovation.
"We recognise that there is increased competition in the rigbuilding sphere but we are confident that Keppel Offshore & Marine is able to distance itself through innovation, technology and experience," COO of Keppel Offshore and Marine, Chow Yew Yuen told BT.
Keppel has pursued a strategy of "Near Market, Near Customer", setting up overseas yards in markets like the US, Brazil and China to tap on interest from oil and gas regions around the world and to meet local content demands, said Mr Chow.
And Sembmarine will be shifting from its Jurong premises to a new Tuas Integrated Yard later this year. The new space is configured to minimise the movement of manpower and materials.
This year, Yangzijiang chairman Ren Yuanlin told BT that one way for Singapore yards to keep their edge over Chinese yards is to partner with them.
Know-how is Singapore's strong suit while China has labour, a resource Singapore has sore demand for.
Yangzijiang itself pursued this strategy in 2010 when it bought over Baker Technology's 15 per cent stake in Sembmarine rigbuilding subsidiary PPL Shipyard, sharing board seats with Sembmarine.
However, the investment turned into a litigious affair, that is now before the Court of Appeal, belying Singapore yards' discomfort to relinquish its intellectual property and knowhow easily to overseas competitors.
Setting aside the issue of PPL Shipyard, Mr Ren said collaboration still makes sense to Singapore yards. "The problem is whether there is mindset and willingness to do it. But if Singapore yards want to keep their number one spot, they have to consider ways of collaboration with Chinese yards," said Mr Ren.
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