Shipbuilders Face Ongoing Realignment

Tokyo, Aug. 26 (Jiji Press)--The Japanese shipbuilding industry is likely to experience a shakeout, even after an abortive merger deal between Kawasaki Heavy Industries Ltd. <7012> and Mitsui Engineering & Shipbuilding Co. <7003> in mid-June. The deal between the second- and fifth-largest companies in the shipbuilding and heavy machinery industry in Japan would have created a firm with sales of 2 trillion yen, trailing only industry leader Mitsubishi Heavy Industries Ltd. <7011>, which has sales of 3 trillion yen. The merger talks started amid a strong sense of crisis at both Kawasaki Heavy and Mitsui Engineering in the face of plunging ship prices and rapid earnings deterioration as a result of huge capacity increases by Chinese and South Korean shipbuilders. Other serious blows to Japanese shipbuilders have included the Lehman shock of 2008 and the record-breaking appreciation of the yen. Despite the recent fall of the yen, shipbuilders still face a gap between supply and demand. The scuttling of the merger deal in a surprise coup by a majority of board members at Kawasaki Heavy, "will not dampen moves toward realignment in the industry," says Kazuo Tsukuda, chairman of the Shipbuilders' Association of Japan. In January, IHI Corp. <7013> and JFE Holdings Inc. <5411> unified their shipbuilding subsidiaries to established Japan Marine United Corp. JMU President Shinjiro Mishima says the company will "vie with Chinese and South Korean shipbuilders by combining the (founders') design and development teams and producing more kinds of ships." Meanwhile, Mitsubishi Heavy has discontinued the building of container ships and other commercial vessels at its mainline dockyard in Kobe, Hyogo Prefecture. Production will be farmed out to Imabari Shipbuilding Co. and a comprehensive heavy machinery maker in India to take advantage of the alliance partners' cost competitiveness. The tie-up deals represent a departure from Mitsubishi Heavy's shipbuilding policy of doing everything itself, from design to production. Marine resources are seen as key to the recent shakeout. With oil and gas field development off Brazil, Africa and Southeast Asia gathering pace amid growing global energy demand stimulated by the rising presence of China and other emerging economies, Japanese shipbuilders are eager to build oil and natural gas production equipment. In addition, sea areas around Japan are said to be rich in methane hydrates, touted as a new source of energy, and rare earths. The Kawasaki Heavy and Mitsui Engineering executives who planned the two companies' marriage envisioned the merged firm entering the field of production equipment for marine resources. "Although we can't undertake marine projects at present, we won't leave them only to Chinese and South Korean companies," a Mitsui Engineering executive says. END