The global shipbuilding global value chain (GVC) is enormous, with 1,664 ships weighing approximately six million gross tons and valued at $80.2 billion delivered in 2016 alone, according to a 2017 report prepared by Stacey Frederick and Lukas Brun of the Center on Globalization, Governance & Competitiveness at Duke University.

In 2015, there were about 730 active shipyards, though less than half of them received an order. And the largest 20 to 24 yards churn out almost 50% of the ships consistently.

The thing is, according to the report, the global industry is in overcapacity, and the global fleet, on average, is still young. “[H]owever there will still be demand for new builds, as well as conversions and repairs, particularly due to increasing environmental regulations,” the report said.

This is where the Philippines comes in. The report, which examined the role of the country in the global shipbuilding industry and identified opportunities for upgrading, said it is in “a unique position in the shipbuilding GVC as it has both demand for (smaller) vessels in the domestic market and it is an exporter of large, commercial ships for the international market.”

Export-oriented shipbuilding is a substantial contributor to the Philippine economy, and has been so since 1994. It accounted for 2.6% of Philippine exports, or $1.5 billion, in 2015, while the revenue generated by the shipbuilding and repair industry was estimated at $1.6 billion. In the global shipbuilding, the country’s role is also considerable. The Philippines is actually the fourth largest ship producer based on gross tons. It was responsible for 2.8% of world ship completions based on gross tons and 1.3% of ship exports in 2015.

The vessels the country exports are mostly bulk carriers and containerships, and export is driven by foreign-owned shipbuilders. Domestic shipyards, meanwhile, are largely focused on repairing ships, an activity where the bulk of their revenue comes from. There are more than a hundred domestic shipyards, 17 of them large or medium-sized, plus service and afloat contractors.

Around 48,000 people are employed in the industry, and many of them are located in Manila and Cebu. And while domestic firms account for the largest share of the industry based on number yards, the two largest foreign-owned exporters — Hanjin and Tsuneishi — are responsible for nearly all exports, 75% of employment and 97% of revenue.

The report identified work force as one of the country’s advantages for upgrading. “The work force, particularly at the operator level; specific strengths include English language skills, supply (availability), cost competitiveness, and work ethic. The merits of the work force are not unique to shipbuilding as it has been a key contributing factor across all industries studied in this report series,” it said.

Another advantage is geography. The report said the country possesses geographical competitive advantages such as abundant coastline that provides necessary ocean access and adequate water depth. These strategic location advantages are a result of the country’s closeness to the center of global economic activity for shipbuilding and shipping. “Shipbuilding is concentrated in three East Asian countries, and the Philippines is located along key Southeast Asian trade routes, making it a convenient location for repair,” the report added.

Then there’s a key driver of foreign investment — incentives. These include tax and non-tax incentives for capital investments and import duty exemptions.

But the country is held back by certain challenges. One has to do with inadequacy of the local manufacturers of materials and equipment. “All equipment and materials used to construct export-oriented vessels must have IACS [International Association of Classification Societies] class approval. There are few providers in the Philippines (foreign or Filipino-owned), so inputs must be imported.”

Since subcontracting is common in shipbuilding, there’s a need for a readily available supply of high-quality service providers that meet international standards to facilitate workflow. The dearth of these providers is a problem here, and it is more apparent in greater Manila Areas.

Surprisingly, work force — the very first advantage the report identified — is also a constraint. The particular work force-related challenges are “[w]ork force with skills certifiable to international standards and the ability to retain talented workers.” The report explained, “Operators, particularly welders, are readily available, but most only have a TESDA NC [National Certificate] Level I/II certification, whereas Level III/IV are needed. Adding to the issue is the loss of top talent to the Middle East and Singapore.”

“Moving forward, the Philippines is in a good position to expand global market share in the export-oriented segment by increasing global awareness and proactively targeting new foreign-owned shipbuilders and suppliers seeking more cost-effective locations,” the report said.

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