VZCZCXYZ0004
RR RUEHWEB

DE RUEHKO #2363/01 1490049
ZNR UUUUU ZZH
R 290049Z MAY 07
FM AMEMBASSY TOKYO
TO SECSTATE WASHDC 3961

UNCLAS TOKYO 002363 
 
SIPDIS 
 
SIPDIS 
 
SENSITIVE 
 
E.O. 12958: N/A 
TAGS: ECON EIND JA
SUBJECT: Japanese Shipbuilding Still Going Strong 
 
 
Sensitive but unclassified.  Please protect accordingly. 
 
¶1.  (SBU) Summary.  Despite being a high-wage country, Japan's 
shipbuilders are still going strong, capturing 17.7 percent of new 
ship orders by tonnage world-wide in 2005, according to a new report 
by the Japan Ship Exporters' Association.  Japanese shipping 
companies are expanding their fleets to meet worldwide shipping 
demand, and the largest container ship built in Japan, a 9,040 TEU 
(twenty-foot equivalent units) container vessel was recently 
delivered.  There are some headwinds, however.  Japanese 
shipbuilders face competition from China and Korea and are concerned 
about their aging workforce.  Small and medium shipbuilders are 
doing less well than the larger yards, but the GOJ is seeking to 
give them some support and at the same time is seeking to reduce 
over capacity in the industry.  End Summary. 
 
The State of Japanese Shipbuilding is Good 
------------------------------------------ 
 
¶2. (U) The Japan Ship Exporters' Association issued the 2007 edition 
of Shipbuilding and Marine Engineering in Japan (SMEJ 2007) in 
April.  This survey of Japanese shipbuilding shows the Japanese 
industry to be quite healthy with a high level of backorders:  493 
ships of 18,546,000 gross tons total as of June 2006.  Copies of the 
2007 report in English can be ordered from The Japan Ship Exporters' 
Association. 
 
¶3.  (U) Japanese shipyards continue to invest and innovate, 
achieving a milestone last October when Ishikawajima-Harima 
Industries (IHI) Marine United deliveQ a 9,040 TEU container ship, 
the Humber Bridge, at its Kure shipyard.  The Humber Bridge is the 
largest container ship built in Japan and is the first of eight 
ships being built for Kawasaki Kisen Kaisha shipping company for the 
Asia/North Europe trade. 
 
Japanese Ship Operators are Expanding their Fleets 
--------------------------------------------- --- 
 
¶4. (SBU) To maintain their market position and meet strong demand, 
the three largest Japanese marine transport firms - Mitsui O.S.K., 
Nippon Yusen Kabushiki Kaisha (NYK) and Kawasaki Kisen Kaisha -- are 
expanding their fleets, with their combined number of vessels 
anticipated to increase by 30 percent to some 2,500 over the next 
three years or so according to the press.  In recent meetings with 
representatives from Mitsui, which is the largest procurer and ship 
operator, they told us that Mitsui has 278 vessels on order which 
are expected to enter their fleet by 2011-2012, distributed as 
follows: 
 
Bulk carriers - 142 - 50 percent 
Crude Tankers - 32 - 12 percent 
Container Vessels - 28 - 10 percent 
LNG Carriers - 25 - 9 percent 
Product Tankers - 24 -- 9 percent 
Chemical Tankers - 11 - 4 percent 
Reefers - 10 - 4 percent 
Open Hatch Bulkers - 3 - 1 percent 
LPG carriers - 1 percent 
Pure Car Carriers - 1 - 0.4 percent 
 
Head Winds:  Korean and Chinese Competition, Increased Costs, and 
Aging Workforce 
--------------- 
 
¶5. (U) SMEJ 2007 notes, however, that the shipbuilding industry is 
facing some challenges.  The backorders declined 18.8 percent from 
the year before.  Moreover, in terms of world market share, China is 
emerging as the major new competitor.  In 2005, Japan had a 17.7 
percent share of new ship orders by tonnage, a 43.9 percent decrease 
from the prior year.  Korea had a 43.8 percent share, a decline of 
3.9 percent.  China accounted for 18.3 percent of orders, an 
increase of 47.8 percent from the year before.  China's "aggressive 
investments in facilities," the report said, means Japan 
shipbuilders need to work hard to keep their competitive edge. 
Other recent problems are the high costs of steel, materials, and 
equipment which are squeezing shipbuilders' profits.  In addition, 
the engineers and technicians who have helped keep Japan competitive 
are aging.  According to the SMEJ, about half of the skilled workers 
in the shipbuilding sector are 50 years or older -- up from 40 years 
or older five years ago. 
 
¶6.  (SBU)  In separate conversation, the Mitsui rQresentatives and 
a Morgan Stanley analyst who covers transportation issues remarked 
to us that shipbuilding is moving to Korea and particularly China. 
The Morgan Stanley analyst said this is following the historical 
trend favoring new entrants as shipbuilding has gravitated from 
Europe to Japan, then Korea and now China. 
 
¶7.  (U) Further illustrating this shift is that Japanese shipping 
companies themselves are making use of China's shipyards.  NYK line 
recently took delivery of a 175,000 deadweight ton bulk carrier from 
Shanghai Waigaoquai Yard, the first time NYK had ever purchased a 
ship from a Chinese yard, and has ordered three more of the same, 
plus two 300,000 deadweight ton bulk carriers and two very large 
crude carriers (VLCC) from Nantong Cosco KHI. 
 
Small and Medium Shipbuilders Navigating the Shoals with Difficulty 
---------- 
 
¶8.  (U)  Small and medium shipbuilders that build coastal or short 
range vessels are facing difficulties due to over-capacity and a 
poor business environment, said the SMEJ 2007 report.  (Note:  the 
SMEJ 2003 edition evidenced a similar concern).  The Japanese 
government is trying to support the smaller shipbuilders through the 
Laws for Promotion of Business Activities by Medium and Small 
Enterprises, which involve help with insurance, lower interest rates 
and preferential tax treatment. 
 
Reducing Overcapacity in the Shipbuilding Industry 
--------------------------------------------- --- 
 
¶9. (SBU) MLIT officials told us that a mechanism to reduce 
competition and over-capacity in the shipbuilding industry for many 
years has been for a quasi-governmental agency organized by MLIT to 
buy the facilities and land of small and medium sized shipbuilders. 
Facilities and land bought by the organization are sold to any 
parties interested in purchasing them.  The same agency then 
assesses a fee to the remaining shipbuilders to cover the difference 
of the cost of the buy out and selling, making the whole process 
cost free to the government. 
 
¶10. (SBU) MLIT officials added, however, that this is an old-style 
approach that MLIT no longer wishes to pursue.  The third phase of 
this program has been going on for about 10 years.  MLIT's Maritime 
Subcommittee is examining ways to increase the rate charged to the 
remaining producers to encourage the termination of the program on 
time in 2010.  To cover the difference between the buyout fee and 
revenue received from the sale of the facilities and land, the 
remaining shipbuilders were charged at the rate of 0.15 percent of 
their sales contracts for new ships for the year.  The proposed plan 
by MLIT to end the program by the scheduled time is to increase the 
current rate 0.15 percent to 0.25 percent.