The Shipbuilding Industry in the 1970s
The 1973-74 oil crisis precipitated a drastic worldwide drop in demand for ships in general and the collapse of the world tanker market. New building orders worldwide plummeted from 72.8 million gross tons in 1973 to 13.8 million gross tons in 1975, roughly 81 percent over this 2-year period.
To appreciate how severely the Japanese shipbuilding industry was affected by this drastic drop, it is useful to understand the nature of the world shipbuilding industry and Japan's position in that industry. The Japanese shipbuilding industry relies heavily on exports and is therefore particularly vulnerable to changes in the world demand for vessels. This world demand is derived from the shipping industry. In turn, the demand for shipping depends on the volume of trade and on the world gross national product. The size of, and changes inr the demand for shipbuilding were influenced by worldwide economic trends and growth.
Shipbuilding demand has certain characteristics that make it susceptible to fairly wide fluctuations. The annual requirement for new vessels is derived from the difference between the stock of ships the shipping industry holds and the necessary tonnages, which must be projected using the above economic factors. A period of 2 or 3 years is normally required from the time a shipbuilding order is received until construction is completed. Fluctuations in the factors that determine the demand for ships, the long service life of ships, and the long lead time between placing orders and taking delivery can produce large swings in the demand for new ships.
During the early 1970s, a great many speculators were ordering ships, including tankers, because they assumed the demand for oil and other commodities would increase. When the oil crisis hit, shipping companies found they had contracted for too many tankers, so they canceled some of their orders. Contracts on bulk carriers were also canceled due to the worldwide recession that followed the oil crisis. According to one Japanese shipbuilding industry representative we spoke with, Japanese shipbuilding companies lost a lot of money on these canceled contracts because they were forced to sell the vessels in a very soft market at much lower prices than those contracted for.
Because of the 2 to 3 year lag between the placement of orders and ship completions, the full impact of the oil crisis was not immediate; the shipbuilding industry actually "bottomed out" during 1978 and 1979. Japan launched nearly 18 million gross tons in 1975; by 1979, launchings had fallen to approximately 4.3 million gross tons, a drop of 76 percent. At the same time, Japan's share of new ship orders dropped from roughly 35 million gross tons in 1973 to 3.65 million gross tons in 1978, registering a decrease of almost 90 percent.
The 1973-74 oil crisis and the recession that followed severely affected the Japanese economy and caused structural recessions in several major industries, including shipbuilding. Government and industry worked together to develop and implement programs to help the shipbuilding industry restructure itself and adapt to the changed economic environment.
Although initial efforts were made to cope with the effects of the oil crisis-- shipbuilding capacity utilization was adjusted downward for fiscal years 1977 and 1978 --by 1978 it had become increasingly apparent that the industry was facing a structural depression and would require more drastic measures to recover. During this period, after the Standing Committee on Transportation solicited opinions from shipbuilding industry associations and other industry representatives, the Diet adopted a resolution recommending that the government: support measures for structural improvement to stabilize shipbuilding operations; develop measures to create demand for ships: and design measures to improve the employment situation.
In response to the Diet's recommendations, the Ministry of Transport asked the Shipping and Shipbuilding Rationalization Council, an advisory body, to make specific recommendations for rationalizing the industry. The Council, which consists of scholars, labor officials, and industry representatives, made its assessment and presented it in July 1978. The Council concluded that the volume of new construction of Japanese-built ocean-going vessels would never return to the high levels achieved before the oil crisis. It predicted that construction volumes would decrease until 1980, then begin a slight upturn, with the volume of new construction estimated to reach 6.4 million compensate gross registered tons (CGRT) in 1985. In contrast, the aggregated total building capacity of those facilities capable of building vessels 5,000 gross tons or above was 9.8 million CGRT, which would leave a surplus capacity of 3.4 million CGRT by 1985.
To alleviate this supply/demand imbalance, the Council recommended that this excess capacity be scrapped and that special financing measures be provided to small- and medium-sized enterprises to assist them in disposing of surplus building facilities. The Council also suggested that capacity reductions might not be sufficient to resolve the supply/demand imbalance, so demand creation and adjustments in operating levels might also be required.
In August 1978, one month after the Council issued its recommendations to the Ministry of Transport, shipbuilding was designated one of the structurally depressed industries to be covered in the Structurally Depressed Industries Law. The basic plan for the shipbuilding industry was to be the one recommended by the Shipping and Shipbuilding Rationalization Council--to scrap 3.4 million CGRT, or approximately 35 percent, of the production capacity of those shipbuilders equipped with building berths or docks for the construction of vessels of 5,000 gross tons or more.
Various sources indicate that industry and government had difficulty reaching an agreement on how the plan should be carried out. Large and small firms disagreed as to which should bear the burden of capacity reductions. The smaller firms claimed the larger firms could afford to bear a greater portion of the burden, while the larger firms felt all should suffer equally. The larger firms also disagreed among themselves as to the appropriate mix of capacity reductions. One industry representative we spoke with noted it was difficult to reach a consensus because the plan called for the seven major companies (Mitsubishi, IHI, Kawasaki, Hitachi, Mitsui, Sumitomo, and Nippon Kokan) to become guarantors of government loans to the industry and to help in the loan repayments, even though these seven would receive no government assistance.
Nevertheless, the proposed rationalization plan went into effect in 1979, with capacity cutbacks to be completed by March 1980. Capacity cutbacks were determined based on categories of shipbuilders; altogether, 61 firms participated. This scrapping program was developed within two industry associations--the Shipbuilders' Association of Japan and the Cooperative Association of Japan Shipbuilders. These associations represent all but the smallest ship and boat manufacturers, the rationalization plan. who were not included in plan.
To accomplish the objectives of the rationalization plan, the government assisted the smaller firms but not the seven major shipbuilders. The government felt that these companies would financially capable of handling the cutbacks themselves and of be shifting resources into other industrial activities within their own companies. For smaller firms that were to cut back, the Ministry of Transport set up the Designated Shipbuilding Enterprises Stabilization Association, which was administered by the two industry associations. The Stabilization Association purchased nine shipyards, with a total aggregate building capacity of 490,000 CGRT, at a cost of 36.8 billion yen. To finance these purchases, the Stabilization Association obtained loans from the Japan Development Bank and various commercial banks and raised 2 billion yen -- l billion from the government and 1 billion from private sources.
The restructuring plan developed by the Ministry of Transport called for increasing the demand for Japanese vessels as well as reducing existing production capacity. Consequently, the government established a goal of constructing 3 million gross tons of new commercial shipping under a 3-year shipbuilding program beginning in fiscal year 1979. To meet that goal, the government agreed to finance a portion of the construction cost of each new vessel with long-term loans at low interest rates. Moreover, for certain types of vessels, the government subsidized a portion of the interest payments on such loans. To further boost demand, the government accelerated the replacement schedule for governmentowned vessels. Shipbuilders also benefitted from the extension of Japan's territorial limits to 200 nautical miles, which increased government demand for patrol vessels. The value of ship orders placed by the Defense Agency and the Maritime Safety Agency totaled about 104 billion yen in fiscal year 1977, and reached roughly 137 billion yen in fiscal year 1978.
The government also introduced a program to encourage the scrapping of existing ships. The Ship Disposal and Scrapping Promotion Association was set up in December 1978 to provide subsidies for the disposal of ships at 2,500 gross tons or above; subsidies granted by the Association (for example, approximately 1,700 yen per gross ton for ocean-going vessels) are financed by the government and the private sector.
Shipbuilding industry employment declined rapidly in a relatively short timeframe. Total workers, including subcontractors and allied industry employees, declined from 361,000 workers in 1974 to 228,000 in 1979, a decrease of 36.8 percent over this 5-year period. This relatively rapid decrease was due at least in part to the flexibility of the workforce due to the widespread use of subcontractors; between 1974-79 this group experienced a 53 percent reduction compared with 35 percent for regular employees and 24 percent for workers in allied industries. The industry's labor mobility may also be explained by the fact that shipbuilding workers have been losing comparative advantage in wage rates relative to their counterparts in other industries. Both the private sector and government took action to ease the adjustment process. The firms made efforts to retrain and relocate workers; the government instituted employment adjustment programs to aid workers from depressed industries.
As of April 1, 1983, there was a total of 298 Japanese shipbuilding firms, 136 of which were certified by the Japanese Government. Until 1981, seven major Japanese shipbuilders accounted for 70 percent of Japan's shipbuilding market: Mitsubishi Heavy Industries, Ishikawajima-Harima Heavy Industries, Kawasaki Heavy Industries, Nippon Kokan, Mitsui Engineering and Shipbuilding, Hitachi Zosen Corp. and Sumitomo Heavy Industries. In March 1983, these seven major companies accounted for 50 percent of the market. Four other companies located on the Soto Inland Sea Coast were growing in importance- Koroshima Dockyard and Co.; Imabari Shipbuilding Co. (located in Ehime Prefecture); Tsuneishi Shipbuilding Co. and Koyo Dockyard Co. (based in Hiroshima Prefecture). The two leading shipbuilders controlled about one-third of total new construction in 1983 (in gross registered tonnage), and Imabari Shipbuilding had become the third largest shipbuilder, accounting for 8.3 percent of total new construction.
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