In 1975, South Korea ship production volume was just a sixth that of West Germany's.
15 years later in 1990, South Korea put down more ships than all of Europe combined.
Today Korea is one of the three countries dominating the
world shipbuilding industry. The other two being Japan and China.
Ships are quite literally one of Korea’s biggest
export sectors. Right up there with cars and semiconductors.
In this video, we are going to look at the rapid rise of South Korea’s shipbuilding industry.
## History of the Shipbuilding Industry
At the start of the 1800s, the United States was the world's shipbuilding leader.
This was because the world mostly sailed wooden ships and America has a lot of good wood.
Starting in the 1850s, this leadership position passed to the United Kingdom.
Motivated by naval contests with Holland plus timber shortages
after losing access to America's forests, the British drifted towards metal ships.
For about a century up to World War II, the UK made the best and most
steel steam-powered ships. In 1882, the UK had 80% of the world shipbuilding market.
The RMS Titanic, my fourth favorite metal ship with the letter "i" in its name,
was built in the United Kingdom - Belfast Harbor in Northern Ireland.
During World War II, leadership passed to the Americans, which
utilized new welding technologies to build faster than ever before.
From 1940 to 1945, America produced 90% of the world's ships.
After the war’s end however, leadership passed to the Japanese. Many of their
ships were destroyed during the fighting. With the country so dependent on overseas trade,
the Japanese government explicitly focused on replenishing their stock.
Their efforts were encouraged by American economic recovery funds
and the Korean War. Japan eventually took over as the world's leading shipbuilding
country by tonnage - taking market share from the western countries.
In 1974, Japanese shipbuilders took 40% share of the 28,370 ship orders
placed that year. And here is where the Koreans come into the picture.
## Korean Beginnings
The Korean people have built ships throughout their long history.
They kinda had to. The country is surrounded by three seas on
three sides and a big river on the fourth.
Furthermore, the country regularly grappled with the Chinese and Japanese for naval power,
developing sophisticated fighting ships for the purpose. Throughout the Choson period,
Korea maintained a credible standing naval force for 500 years - a remarkable feat.
The famous Battle of Myeongnyang in 1597 saw a
small Korean floating force defeat a much larger invading Japanese navy.
The victory - immortalized in Korea's highest grossing movie, "the Admiral:
Roaring Currents" - could never have happened without competently built ships.
Ships like the famous "turtle ship", known for its heavy armor and uniquely traditional design.
Non-combat ships included transport ships and carriers. They can get up
to 19 meters long and carry 75 tons of cargo.
## Post War
In 1895, the naval force was disbanded, ending most large ship construction.
And during the Japanese colonial period, Japanese shipmaking companies monopolized the industry.
The Japanese mostly built small to medium sized ships in Korea during the occupation era.
After World War II, the Korean government took over their
leftover facilities and equipment and started a company with them.
The Korea Shipbuilding and Engineering Corporation or KSEC was based in Busan and
had been originally started by the Mitsubishi Group in 1937 as part of the wartime effort.
For many years, KSEC was Korea's biggest and most advanced shipbuilder. But that
was not saying much. The company's major achievement during the 1960s
was converting production from wooden to steel ships.
They chugged along. In 1960, Korea floated 4,224 tons of ship capacity. Five years later,
that tonnage grew to 13,788 tons. By 1970, that was 39,100 tons. Impressive growth.
In 1967, they completed their largest ship yet - a 6,000 ton steel ship. In 1969, they
exported 20 tuna fishing ships to Taiwan. KSEC wasn't terrible, but they weren't great either.
KSEC later went bankrupt. It was then taken over by the Hanjin chaebol, owner of the flagship
airliner Korean Air. And Hanjin ... well, I have a video about what happened after that.
## Building Big Ships
We should take some time to discuss the global
shipbuilding industry and the big ship value chain.
It begins with design. The assembler works with the customer to decide on what to build
as well as production and engineering schedules.
Behind the scenes, the assembler communicates with its suppliers on critical items with
long lead times like the engine, steel plating, and power generation/propulsion.
Thousands of steel plates are cut, bent and prepared for assembly. We take them
to the shipyard, where we put them together on building blocks to slowly create the hull.
After that, we then have to outfit that hull with the thousands of pipes,
electrical cables, furnishings and machinery needed for that ship to
function. This all has to be well-planned because rework here is very difficult.
When that is done, we align and weld together the various pre-fabricated
parts including the piping. We used to paint the whole thing during the final stages.
But when that became a production bottleneck,
we now do coating and painting throughout the entire cycle.
Finally, we flood the quay and see if the ship floats. If it does, we go into commissioning
where we fire up the various systems and check whether they work as per spec.
## The Shipyard Industry
Shipbuilding is an assembly industry.
This means that most of the final ship's value
comes not from the shipyard but rather the suppliers.
With the exception of the United States, just 20-30% of the ship's final value comes
at the shipyard level. And that percentage has generally decreased in recent years.
Yet that is not to say that a shipyard has it easy. These huge ships have so
many parts. A complex research vessel can have 550,000 parts. A cruise ship, 900,000 parts.
Shipyards have to develop considerable coordination and management systems
so that everything goes where it should and nothing gets lost. Far easier said than done.
## New Policies
In the 1960s, the Park Chung-hee government sought to promote growth
in various industries with the Heavy and Chemical Industrialization promotion policy.
Shipbuilding was one such industry. The government gave subsidies to
shipbuilders and exempted importation taxes for shipbuilding equipment.
Then in 1968, the government - armed with the expertise of retired Nippon Steel executives
and capital from Japanese reparations - established Pohang Iron and Steel or POSCO.
Today POSCO is one of the world's biggest
steelmakers. The sixth largest if you are going by 2021 production.
A domestic shipbuilding industry cannot flower without a powerful domestic steel
industry. POSCO's expanding steel capacity drove South Korea's rise in the automobile,
railroad, container, and construction industries.
In 1971, KSEC received an order for six oil carriers in the range of 20,000-30,000 tons.
The Korean government noticed an opportunity in larger vessels like oil carriers and LNG ships.
In 1973, they set a public goal to have three shipyards capable of producing a
million tons of gross tonnage by 1976. And by 1980, Korea would satisfy their
own domestic demand and export 3.2 million tons of ship volume capacity.
Considering the then-mediocre state of the Korean shipbuilding industry, doing such a
thing in just 3 years seemed irrational. But the chaebol stepped up. First amongst them, Hyundai.
## Hyundai
Hyundai Heavy Industries is a subsidiary of the Hyundai Group.
Hyundai's chairman Chung Ju-yung (정주영) was an aggressive businessman. At the time,
they were Korea's largest chaebol with a presence in automobiles, engineering, and construction.
They originally planned to build three medium-sized shipyards - ranging at
about 150,000 to 200,000 tons. But upon revision,
they decided to build one super-large shipyard with a million ton capacity.
They chose to locate the shipyard in Ulsan's Mipo
Bay because of its easy access to various raw materials including steel from POSCO.
Then in 1972, Hyundai Heavy won their first ship order - two Very Large Crude Carriers
each with 260,000 tons of capacity from the Greek shipping tycoon George Livanos.
Great news. But there were two snags. The first was that he wanted the ships to be
exactly the same as a recent ship produced by the Scottish shipbuilding firm Scott Lithgow.
The second problem was that Hyundai Construction had not yet finished the shipyard. So in order
to save time, Hyundai Heavy decided to build both the ships AND the yard at the same time.
## Getting Help
To learn how to do this, Hyundai looked abroad for someone to teach them.
In the late 1960s, Chung discussed joint ventures with Japanese and
Norwegian companies but none of those worked out. And the Japanese forbade the
transfer of their advanced shipbuilding and welding techniques to South Korea.
Chung also discussed a more restrictive licensing agreement
with A.G. Weser of West Germany, but that fell through because of cost.
Finally, they came across the United Kingdom. In 1971, Chung met Charles Brook Longbottom,
a former member of Parliament who chaired the Scottish naval architecture firm
A&P Appledore - today A&P Group, the UK's largest ship repair and conversion company.
Appledore offered to train Hyundai in how to design and develop a shipyard as well as how to
staff and run it. Appledore would do the first yard layout themselves and hand over drawings.
But for the two 260,000 ton crude carriers,
that was a bit more challenging. Appledore reached out to Scott Lithgow themselves - one
of the only three yards in the United Kingdom capable of building such ships.
In late March 1972, Hyundai broke ground on their massive Ulsan shipyard. A few weeks later,
the first cohort of 70 engineers - middle managers and foremen with training from
elite Korean universities - went to Scotland for training.
Each day, they were sending back reports and information to help
craft the massive Ulsan shipyard as it was being built. As one of the Koreans said,
"We are trying to do in a few years what Western countries took many years to do".
In order to replicate those ships Hyundai used Scott Lithgow's own drawings,
used the same European suppliers, and many of the same raw materials.
Scott Lithgow reviewed the size and thickness of each plate.
Scott Lithgow's engineers knew that they were training a competitor. One director said,
"If we did not train them, then someone else
would. We were ... contributing to our own eventual downfall".
The Scottish relationship also brought the Japanese over. The latter realizing that there
no longer was any point in giving the Koreans the cold shoulder. Now they were missing out on
business. Kawasaki Shipbuilding contributed some of their work procedures to the build.
## Success and Hardship
Even with foreign help, Hyundai could not replicate the ship 100%. You build a Very
Large Crude-oil Carrier in two separate halves and then mash them together.
For the first Livanos ship - named the Atlantic Baron - when they tried
to put the two halves together, they did not fit. Whomp whomp.
Hyundai set up a new design office to monitor construction but issues continued.
Despite everyone working overtime from 6 AM to 3 AM, the first ship's delivery date had
to be pushed back from October 1973 to February 1974. The second ship also had to be delayed.
Then came the Oil Crises of 1973, which wiped out demand for such large floating oil carriers.
Shipbuilding activities in France, Norway, Sweden,
and other European countries would eventually fall by 90% from their peaks in the mid-1970s.
Livanos refused delivery. Two other customers in Hong Kong and Japan also refused delivery.
This is not uncommon in times of oversupply, but it left Hyundai in a bit of a tight spot.
## Chaebol Advantages
Here is when it is good to be a chaebol.
Hyundai started their own shipping company, Hyundai Merchant Marine, which serviced their
general trading company. Hyundai Merchant Marine capably absorbed these new ships.
The South Korean government helped too by passing a law requiring that
all crude oil deliveries to Korea had to be carried on Korean-owned vessels.
Today HMM - as it is now known - is one of the world's biggest
transportation and shipping companies.
And Hyundai Heavy benefitted from the talents working in the Hyundai Group.
Hyundai Construction provided front-line supervisors and reviewed feasibility
studies. And Hyundai Motors dispatched engineers to reduce throughput time.
Hyundai Heavy continued working on expanding their skills. They hired ex-employees from
Appledore to train technicians in skills like gas cutting, piping, sheet metal,
and drawing. They struck more transfer agreements with companies in Europe.
Gradually they acquired the ability to do their own design modifications,
produce their own engines, and improve their cost structures. And over time,
they cut their throughput times to make delivery deadlines.
In 1973, Hyundai's pass rate in ship inspection was 38.1%. By 1976,
that rate rapidly improved to 84.1% - on par with shipyards in developed countries.
## The Others Join In
Two other chaebol soon followed Hyundai into the business.
In December 1978, Daewoo took over a partially completed shipyard at Okpo
originally owned by KSEC. Aided by a little state support, they finished it in 1981.
In September 1979, Samsung acquired Koryo Shipbuilding and began building up there too.
The two chaebol followed the same path as Hyundai, absorbing foreign technology from European
countries to kickstart their production systems. Daewoo also worked with Scotland's Appledore.
While Samsung worked with the Danish firm Burmeister & Wain.
From 1976 to 1985, the Korean shipbuilding industry grew by 30% each year. This is
despite multiple oil shocks. In fact, the shocks might have helped the Koreans gain
share. The terrible shipping conditions wiped out international competition.
The 1985 Plaza Accord revalued the Japanese Yen,
giving Korean ships a cost advantage on currency values alone.
However, the Japanese remained a formidable competitor. Japan had a larger merchant
fleet. Their labor productivity rates were 60% higher than the Koreans.
Their integrated steel mills were just as efficient as POSCO
throughout the late 1970s and into the 1980s.
And the Japanese government's wide-ranging
domestic procurement systems kept local demand quite stable.
So Japan remained in the game despite Japanese labor costing 2.5 times more than Korean labor.
## The 1990s
In 1989, the Korean government realized that
shipbuilding capacity was getting a bit overheated.
Korean shipyard profits had never been high - margins were estimated
to be just 2.8% in the early 1980s - but now they edged towards over-supply.
So the government streamlined the industry,
prohibiting any more new shipyard builds until 1993. They also pushed several companies to
improve their cost structures - starting a wave of consolidation.
And then came the Asian Financial Crisis in 1997. Several chaebol like
Hyundai and Daewoo broke apart due to debt issues, but on the whole the
Korean shipbuilding industry gained share against its world competitors like Japan.
That is because Korean-built ships got even cheaper when the
Korean won crashed. Combined with the strong worldwide shipbuilding market,
annual ship orders soared from 22 million to 37 million gross tonnage.
In 2000, South Korean shipbuilders finally
surpassed the Japanese in terms of orders received. Hyundai, Daewoo,
and Samsung have retained their dominance over the next two decades.
## Conclusion
In 2020, some 4% of South Korea's exports are ships. Korea’s LNG and
crude carriers are some of the best in the world.
But the shipbuilding industry is intensely competitive. China has
followed similar paths to become the world's second largest ship exporter.
A country's shipbuilding industry declines as its labor gets more expensive. If the country
cannot accordingly improve its labor productivity then it eventually loses
competitiveness - staying afloat only with government subsidies.
China's labor costs and industrial policies are heavily backing their shipbuilders. The Korean
government and the chaebol they work with need to do as such to retain their leading position.