The Impact of Economies of Scale in the Shipping Industry

1. How does shipping accommodate economies of scale?

2. What are the advantages of a globalised market for shipping?

Container shipping has developed significantly since the 1950s, particularly in terms of vessel size. However, the question of economies of scale may have a direct impact on the worldwide shipping industry. Issues like poor financing, strong competition, the decline of conferences, and a less regulated shipping industry are exerting pressure on many carriers to minimise their expenses and develop innovative ideas. The advantage of economies of scale in shipping is strong involvement of government that would help to maintain higher capacity in producing larger ship sizes and environment solutions by increasing cost savings. Further, advantages of global maritime markets could lead to rapid ship speed, intensive-oil power systems, opening shipping routes, and specialisation of maritime solutions. However, the shipping industry has been facing fierce competition that is creating issues for the newcomers to enter the market. Based on these concepts, this report would highlight the shipping industry economies of scales specially focusing on the Japanese and Korean shipping industry and would also discuss the advantages of globalised market for the shipping industry.

1. How does shipping accommodate economies of scale?

Like other different transportations, the shipping industries also have profited from economies of scale in inland transportation, transhipment and maritime shipping. For maritime container shipping, the capacity of the ships increases with low- cost per TEU. Thus, in this context, it can be said that there is a possibility to increase the size of the ships. Therefore, dry cargo vessels have steadily increased in size, and have closed the gap with oil tankers on average. In1995, they were, on average half the size and by 2005, they were excelled two third of the average tank size. Container vessels have also beyond their average size, enlarging dramatically from 1995 to 2007. In TEU terms, the average size of a 1995 containership was 1,431. By 2006, it had improved to 2,316 with an increase of 56% over the original value (ICS, 2013, Pp86). A ship’s deadweight that is its cargo-capacity in tonnes is the principal measure size for cargo ships.

Japan and South Korea have recently overwhelmed the shipbuilding industry, producing over two-thirds of the world ships, with China coming up very fast and trembling its between 2005, aiming to be the largest ship builder (Stopford, 2009, Pp614). Initially, the western nations used to dominate the shipping industry. But presently, Korea has been leading the market, followed by China and Japan (shown below in the graph) (Sung et al., 2010).

Figure 1: Global Shipbuilding Industry Market Shares

Source: (Sung et al., 2010)

Although South Korea is leading global shipping industry market share, Japanese government involvement in shipping industry would considerably influence on maritime economy. The government of Japan gave information on seven organizations that are recorded in either the Osaka or Tokyo stock exchanges – five are recorded as shipbuilding organisations while the other two are recorded as enhanced hardware companies. Each of the organisations is a vast industry in shipbuilding, and each is held by different groups of shareholders (Council Working party on Ship Building, 2013).

Japanese and Korean Shipbuilding Industries

Source: Council working party in shipbuilding, 2013, Pp14

Also, the graphical representation shows the stability of Japanese ship building capacity:

Figure 2: Stability of Japanese ship building capacity

Source: (Korea Shipbuilders’ Association, 2009, pp11)

In contrast, there have been controversial arguments in South Korea shipping firms owing to a lack of government involvement. Korea Business (2013) states financial burdens of South Korean shipping firms are demanding practical support countermeasures from the Korean government and financial institutes. 4C Offshore (2015) also claims a rise in government exposure to the industry via ownership, credit export policies and the increase in the risk of government finances could deteriorate the Korean shipbuilding industry. To consider of the problem of Korean shipbuilding industry is the government is only proving ship acquisition fund to small and medium-sized ships firms. Furthermore, financial support from a financial institution is state-backed, which means it requires more than 4 billion of $US. These funds would avoid cancelling more than 100 new shipbuilding orders. This effect would lead South Korean shipbuilding debts (Oblakova, n.d). Ship-owners’ Association held in a conference in Seoul’s Yeouido Maritime building on 12 September. They agreed that the threat of financial debts is facing in the Korean Shipping industries. This requires an urgent need of government support.

The Korean shipbuilding organisations also have been receiving a lot of public complaints due to odour (1.3%), particulate matter (32.1%) and mostly due to noise pollution (65%). However, it is found that most of the complaints received are the small- and medium-sized companies compared to large-scale shipyards. Conversely, Japanese shipbuilding has been working successfully. They have been mitigating such public complaint issues by utilising the lubrication system that takes some scavenging air from main engine’s turbocharger to the vessel’s bottom to reduce frictional resistance between the hull bottom and seawater, consequently curtailing CO2 emission. A system featuring this scavenging by air, by pass technology is expected to be effective in cutting down CO2 emissions from large ship having deep drafts (Japanese Ship Technology Research Association, 2014, Pp3). The expansion of Japanese vessels is not only more stable than their competitors, but also small and medium firms specialise in Japanese shipbuilding, thus domestic and international economic scales could significantly enhance.

2. What are the advantages of a globalised market for shipping?

Shipping has been an imperative human action all through history, especially where thriving depended principally on worldwide and interregional trade. Globalisation is persuaded by the recognition that goods and resources are not generally arranged with the populaces that craving them, thus worldwide services of transportation are required. Due to globalisation, there has been a rise in the use of containers since 1956. Therefore, high-limit boats have been fabricated; today more than 60 have a limit more than 5,000 20-foot identical units (TEUs). Studies conjecture 6% yearly growth in traffic of container through 2005, as a consequence of proceeds with extension of the utilisation of containers by the industry of shipping in developing nations; expanded trade made merchandise and products with a higher worth included; the pattern towards globalisation by multinational makers; and development of megaships shows a rise in feeder and ship activity.

Government Involvement in the Shipping Industry

Globalisation actually helps the shipping industry to minimise the expense of every unit of delivery, which were mostly utilized as transformation to fuel alternation in the 1900s instead of protecting energies. Oil-controlled business ships obliged fewer crews and appreciated different operations in fuelling. Oil controlled ships likewise quickened more rapidly than coal-fuelled frameworks, and could attain to higher velocities. Considering above components, global delivery have changed the whole armada from coal to oil more than five decades (Corbett &Winebrake, 2008, Pp10).

As it is indicated figure3, other than shipbuilding, there have been the progressions of different patterns in the advancement of the worldwide maritime area. The moving of energy creation to new ranges, especially the Arctic locale, and opening of new delivering courses, for example, the Northeast Passage, makes a developing interest for particular sea and seaward arrangements, and in addition new shipping services. Environmental-accommodating arrangements, for example, clean tech are developing the importance of consciousness of ecological preventions and the relocation of atmosphere changes could affect to worldwide sea commercial ventures (Smartcomp, 2013, Pp6).

Figure 3. Comparison of the world fleet and sea trade developments

Source: (Smartcomp, 2013, Pp6)

From figure 4, it appears that there are minor obstacles when directing the investigation for tanker boats. However, in this case, the fixation is significantly bigger, since South Korea had a 66% offer, and the three primary exporters were in charge of 94.7% of all tanker fares worldwide. While creation, which is gathered, is performed in numerous nations, exportation is considerably more focused since it is performed by just a little number of nations. These certainties indicate the strict choice of the purchaser advertise that is positively connected to the cost and nature of the conveyances, additionally to less target elements. This proof demonstrates the significance of a decent market passage procedure for organisations wishing to go into this business sector (Pinto & Colin, 2009, Pp144).

Figure 4: largest ship importers between 1990 and 2006

Source: Pinto & Colin, 2009, Pp144

Conclusion

In conclusion, it appears Japanese shipbuilding development, including vessel sizes and types are more stable and a strong government involvement may secure the expansion of shipbuilding businesses, as well as financial issues. On the other hand, South Korea seems to struggle with ship building investment due to a lack of government support. Moreover, with the development of globalised markets, there are various factors can improve; shipping speed, intensive oil-power system, maritime offshore and environmental-friendly solutions, and international routes. However, newcomers may be difficult to compete due to strict selection of buyer’s market and less objective factors and environment solutions are needed. It is predicted that the Japanese shipping industry would be leading other countries for some centuries. Furthermore, Japanese ship building firms are dominating the market in Asia as well as worldwide, if there were more effective international collaborations, there would be less financial issues, economies of scale seem to be efficient, particularly with Japanese firms, however, in Asia generally, there remain some barriers to progress, for instance, a lack of government involvement and environmental friendly solutions. Perhaps, there are further steps can be taken from government in order to improve Asian economies of scale; intensive financial support for all types of domestic shipping industry, as well as setting up smoother maritime government policies in Asia and international markets.

References

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