After witnessing a brief recovery in the shipbuilding industry, South Korean shipyards are now bracing for hard times again. An initial burst of energy and optimism quickly slipped back into gloom in 2011 following continued concerns over the euro zone debt crisis as well as the slowing economic growth of the United States.

Though the current outlook of the global economy is uncertain, global industrial giant Hyundai Heavy Industries (HHI) seems to be relatively well positioned to overcome a prolonged downturn and maintain its No. 1 position in the shipbuilding sector. A high level of automation and cutting – edge production technologies help HHI deliver various types of ships with superb quality on time.

HHI’s latest push to diversify its vessel portfolio by building more sophisticated and environmentally friendly vessels is also paying off. Executives at the world’s biggest shipyard say the key is to maintain a superior technological edge over rivals and a strong will to change things at a time of fierce competition amid economic uncertainties. They say failure to innovate will cost even the world’s most efficient and successful shipyard.

“We must forget all the company has achieved in the past 30 years and try to build a new 30-year period,” said Kim Oi-hyun, HHI’s co-CEO and senior executive vice president in charge of the Shipbuilding Division. “What I am repeatedly saying to myself is that we should not become complacent. It is possible that we can fall from the top any time unless we change ourselves,” said Kim, a 36-year industrial veteran who has witnessed the ups and downs of the world’s shipbuilding industry.

“Forget the number one position in the industry. We should build our capability to better adapt ourselves to the rapidly changing business environment.”

Analysts say high steel prices, strong local currency, and the struggling shipping industry are major threats to South Korean shipbuilders even though they have seized nearly three-quarters of the world’s ship orders in the first half of this year.

South Korea, which had no shipbuilding industry until the early 1970s, is now home to seven of the world’s ten largest shipbuilding companies. They are vying with each other and with competitors in China and elsewhere.

It was in 2000 that South Korea definitely wrested from Japan the title of ‘world’s largest shipbuilding nation’. But a burgeoning China has embarked on a path to surpass South Korea. Focusing on relatively low-tech containerships and bulk carriers, China replaced South Korea at the top of the table for new shipbuilding orders in 2010.

But in 2011, South Korea regained the top spot as shipowners ordered more drillships, liquefied natural gas (LNG) carriers, mega containerships and other complex vessels in which South Korean companies specialize in.

The industry has turned away from bulk carriers and tankers due to an oversupply of vessels that have depressed freight markets and bankrupted many shipping firms . These segments are dominated by Chinese shipbuilders but are at the lower end of the value scale.

The Baltic Exchange’s benchmark dry freight index measuring freight rates has plummeted, forcing shipowners to delay or cancel orders for dry bulk carriers and focus more on niche markets, such as drillships and LNG carriers. Analysts expect the downturn in global orders for capesize bulk carriers to continue through to 2012, which may intensify the race for survival for shipyards in China.

Propelled by the Chinese government’s desire to dominate the global shipbuilding industry by 2015, China-based suppliers have aggressively pushed to modernize their drydocks and close the technological gap with South Korean competitors in recent years. But HHI executives and analysts say it will take a long time for China to catch up or even surpass South Korea in production technologies of high-end vessels.

In the aftermath of the 2008 collapse of Lehman Brothers, HHI and other South Korean shipbuilders acutely felt the pain of a sharp decline in new orders as the global economy fell into a recession. In 2009, not a single order was placed with HHI. The Company had enjoyed an unprecedented shipbuilding boom in 2007 and 2008, with its sales and profits jumping to unprecedented levels. New orders began arriving at HHI from 2010 as the world economy took the path of recovery, but now that recovery appears to be struggling and 2012 will be another challenging year.

“Earlier this year the global shipbuilding industry seemed likely to recover at a rapid pace, but now it suddenly fell into difficulties. It’s really hard to predict how the next year will be,” said Kim Hyun-chul, chief business planning officer of the Shipbuilding Division. “Because of uncertainties in the world economy, shipowners are currently taking a wait-and-see attitude,” he added.

Drillship Success

In the first nine months of 2011, Hyundai Heavy Industries won USD 10.03 billon in new shipbuilding orders, already surpassing its annual order target of USD 7.47 billion. In 2010, the Company won USD 4 billion in new orders. This is largely due to surging orders for drillships and other specialty vessels, and HHI is keen to further boost its competitiveness in those highvalue vessels in the coming years.

So far this year , HHI has been awarded orders for 10 drillships worth USD 5.5 billion, the largest number of deals for such ships the Company has won in a single year. A drillship is a maritime vessel that has been modified to drill oil and gas wells in deep water or for scientific drilling.

“The drillship sector was the savior of the shipbuilding division this year, ”said Kim Oi -hyun . HHI has turned its eyes to the drillship market in recent years and its first drillship was delivered only late last year, but it has quickly established itself as a new power, competing head-on with long-time rival Samsung Heavy Industries. SHI won its first drillship order in 1996 and has since clinched more than half of the contracts since 2005.

“Many people initially questioned whether we would be successful in the drillship sector because it was totally new to us, but we surprised the market by delivering a high-quality ship on time,” said Kim.

Analysts say in view of a large number of drillship contracts signed already this year, the market may see a slowdown in new orders for the time being.

Tougher Environmental Standards

Kim said HHI will continue to develop more environmentally friendly ships and engines, including those using LNG as a fuel. Shipowners are demanding not only more complex vessels but more fuel efficient and less polluting ships due to volatile oil prices and tougher environmental standards.

This year the UN’s International Maritime Organization agreed on energy efficiency design standards to substantially cut greenhouse emissions in new ships from 2013. With the environmental regulations set to become tougher, only companies with higher technological standards will be able to properly meet market needs, Kim said.

Kim attributes HHI’s success to a talented workforce committed to delivering high-quality ships in time and the Company’s close relationship with thousands of reliable parts suppliers and subcontractors in Ulsan. “We have a cluster of great suppliers around us and this is a huge advantage for us,” said Kim.

Kim said the Company has no plan to expand its shipyards to meet rising orders for drillships and other special purpose vessels. HHI currently has order backlogs which would keep the shipyard busy for at least until the end of 2013.