iMarine

Samsung Heavy Industries Expands Production Capacity with China Subcontracting Model

Samsung Heavy Industries has decided to entrust the construction of four Suezmax tankers (crude oil tankers), for which it has recently received orders, to Chinese shipyards. Due to a three-year order backlog and a shortage of shipyards, Samsung Heavy Industries has developed a strategy to utilize Chinese shipyards. The company plans to gradually expand this form of production and construction to other ship types such as container ships in the future.

Samsung Heavy Industries is in the process of signing a subcontract with Chinese shipyard PaxOcean Engineering Zhoushan Co.Ltd (POEZ) to build the Suezmax tankers it secured in November this year. The vessels are expected to be delivered by December 2027 to the shipowner. Samsung Heavy Industries said it is considering negotiating with other Chinese shipyards for subcontracting as the number of tankers in the order is as many as four.

The vessels will essentially be constructed using the docks and labor force of Chinese shipyards, while Samsung Heavy Industries will be responsible for vessel design and procurement of major equipment. Samsung Heavy Industries plans to send about 20 production management professionals to the site to supervise production when actual construction begins.

A Suezmax tanker is the largest-sized vessel capable of passing through the Suez Canal, which connects the Mediterranean Sea to the Red Sea, with a tonnage of about 150,000 tons. Despite being an ultra-large ship, China has mastered the design and construction of large tankers and bulk carriers, so there is no need to worry about technology leakage.

Samsung Heavy Industries sees its China subcontracting strategy as advantageous in terms of price competitiveness. Since it can reduce the cost of raw materials and labor, even if the order price is lower than before, it will not affect the profit.

As a matter of fact, Samsung Heavy Industries got the order for four tankers for $334 million this time, which is about $83.5 million per tanker, lower than the original price of $90 million. Shipowners also see no excuse for the subcontracting approach. Because the overall construction responsibility is assumed by the Korean shipyard, even if the price is lower can get quality assurance. A South Korean industry insider said, “If the South Korean order-taking-China subcontracting strategy can be successfully implemented, it will benefit South Korean shipyards, Chinese shipyards and shipowners.”

Previously, South Korean shipyards had entrusted the construction of ship sections to Chinese shipyards due to labor shortages. Many skilled workers left the shipbuilding industry during the prolonged recession that began in 2016. As a result, the labor supply could not keep up with the number of orders when the post-Singkwan epidemic shipbuilding boom arrived, and South Korean shipyards had to entrust the production of ship sections to China to meet delivery deadlines.

However, it is the first time to subcontract the construction of a whole ship to a Chinese shipyard. It is estimated that this may become a new shipbuilding strategy in the context of the continuous backlog of orders of the three major Korean shipbuilding giants (HD Hyundai, Hanwha Marine and Samsung Heavy Industries).

Currently, the three major Korean shipbuilding companies are implementing various measures to ensure stable production at their production bases. HD Hyundai’s strategy is to actively utilize its shipyards in Southeast Asia. HD Hyundai Mipo plans to expand the annual construction capacity of its shipyard in Khanh Hoa Province, central Vietnam, from 15 ships per year to 23 ships by 2030. HD Korea Shipbuilding & Offshore Engineering (KSOE) produces ship sections and offshore wind power substructures by leasing the Subic Shipyard, 110 kilometers northwest of Manila, the capital of the Philippines. Hanwha Ocean acquired Dyna-mac, a Singaporean company specializing in offshore facility superstructures, earlier this month to strengthen its offshore facility production capabilities. Unlike HD Hyundai and Hanwha Ocean, Samsung Heavy Industries chose to subcontract rather than directly build overseas production bases.

This strategy may bring the advantage of expanding the types of orders. Considering limited dock resources, Korean shipyards have previously been selective in taking orders for high value-added ships such as LNG carriers.

With the increase in the number of docks, they can expand their orders to tankers, bulk carriers and container ships. The company is considering producing high-value-added vessels in South Korea and subcontracting the production of low-priced vessels overseas, such as in China. Samsung Heavy Industries said, “In the future, we will expand the form of subcontract production and construction to container ships and other fields. We will cooperate not only with Chinese shipyards but also with shipyards in Southeast Asia if conditions permit.”

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