Shipbreakers to Shipmakers

Transcription

1 Shipbreakers to Shipmakers Case Number: 02 Course Number: BUS 525 Managerial Economics Submitted to Dr.Fouzul Kabir Khan Professor, Business School North South University Submitted By Group # 02 Nadia Shahrin Monali # Md. Humayun Kabir # Mohaimeen Kamal # Sabria Afrin # Md. Saimon Islam # Muhammad Rezaul Hassan #

2 Why Bangladeshi firm becomes shipbuilders from shipbreakers Bangladesh has a very rich history in the shipbuilding industry found in the writings of many travelers who visited Bengal more than four hundred years ago. Bangladesh is a maritime nation with 166,000 km 2 of sea area with more than 200 rivers with a total length of 22,155 km. It has wide coastlines offering opportunity for rapid development and contribution to international shipbuilding industry. Since 15th century Bangladesh started its journey of shipbuilding by constructing sailing ships. But the industry, based mainly in Chittagong, started waning in the latter part of the nineteenth century due to the use of steam engines and the discriminatory policy of British colonial rulers despite Bengali ships were cheaper and more durable. There are some reasons as major ship building nations are now only interested in making larger ships as comparatively heavier ships are cheaper than that of a small ship and that also take concentrated effort and plan from the builder company. On the other hand Vietnam is now one of the main destinations for foreign ship buyers. Even Vietnam, which is relatively new in ship building, is no longer interested to build small ships weighing up to 25,000 dead weight tones. So eventually the buyers had to search for a new nation which has the previous knowledge and skill on this sector as interestingly this sector developed in Singapore with labor force from Bangladesh. Around 80 percent of workers in Singapore ship building industries are from Bangladesh. Bangladesh has become a new home for making small ocean going vessels; traditional shipbuilding nations such as South Korea and China are now focusing on constructing large ships. This has offered an opportunity to Bangladesh to tap its full potential in shipbuilding country. According to the Danish study, the existing average labor wage per hour in Bangladesh is around US dollar 1.5, compared to $ 3.0 in a Chinese shipyard, $ 8 in South Korea, $ 16 in Italy and $ 18 in the US. Another thing is, in Bangladesh the use of English language is in better position compare to China, Korea and Vietnam. This is helpful for foreigner coordinators.

3 However, with IMO (International Maritime Organization) implementing new global shipbuilding requirement, an international slump in shipping was observed with many international ship owners getting forced out of business as the new rules proved too costly for them. The Europeans and the Americans faltered to compete with their Asian counterparts. As a result, all yards in China, Korea, Taiwan, Singapore and Japan are booked for apparently next ten years buildings super ships, and the owners could not find yards to build the smaller vessels i.e., up to 6000 DWT. The effect eventually forced the owners to focus their attention to Bangladesh. In the year of 2008, STELLA MARIS made by Ananda Shipyard was fleet to Denmark from Meghna river, Bangladesh. By this way Remarkable beginning on shipbuilding & exporting of Bangladesh was started. Later successful completion of various container and small ships give Bangladesh recognition as Ship Exporting nation by International Organization Germanija Loyed. Prevailing market structure of the world shipbuilding industry Recent economic crisis in Europe and America made a very hard competitive environment with the Asian shipbuilders. As a result, profit making has become very tough and many were compelled to shut their business or had to go for a high profit where they cater only categorized production. South Korea, China or even Vietnam already made their market all over the buyers. Buyers are well aware of the facilities and backdrops of these countries. But as a new comer in this sector, Bangladesh has yet to gain the required confidence of the international stakeholders in terms of proven capability to build quality ships and deliver on time and is therefore looking for additional guarantee which costs more money for our shipbuilders. Even China, being the second largest shipbuilder of the world after Korea, is under strong pressure from the international shipping community and classification societies to raise the quality of shipbuilding. The boom has seen an unprecedented rise of shipbuilding facilities in China to many shipyards and, according to media report at the end of % of the 160 million DWT order books have been contracted to yards that have yet to build a ship of any sort.

4 It is true that global fleet owners in the last couple of years have been looking at newer destinations like China, India, Vietnam, Malaysia, and the Philippines in order to meet the unprecedented shipping boom driven by increased sea borne trade, rise in off shore oil exploration and the ongoing "replacement cycle" of aging vessels worldwide. According to shipping pundits, the shipping boom will, however, smoothen out and stabilize by the year The galloping Asian economies of China and India combined, emerging economies of Afro Asia, and the increasing demand for vessels that meet newer regulations in ship construction, will be the key factors in maintaining a relatively steady demand for ships beyond the boom period. The rising labor cost in China, India, and Vietnam (main competitors of Bangladesh for smaller ships) will create an opportunity for Bangladesh to remain competitive beyond 2016, if Bangladesh can gain a foothold now. Effects of entry of new firms on the shipbuilding industry in Bangladesh Actually there are three situations and they are, perfect competition, monopoly and monopolistic competition. But here we find that the perfect competition is exactly applicable. The key conditions for Perfect Competition are as follows: a. Many buyers and sellers b. Produces homogeneous product c. Buyers and sellers have perfect information d. Free entry into and exit the market When new firm enters the market, some important managerial economics concept can be applied as follows: Firm and Market Demand under Perfect Competition In competitive market price is determined by the intersection of the market supply and demand curve. From fig 1 where the equilibrium price is Pe is the intersection of market supply and demand curve. Thus new firm can sell as much as it wishes at a price of Pe. Thus the demand curve is perfectly elastic (D f ). Slightly high charging above the market price will sell nothing. Figure 1 represents the market level and figure 2 individual firm level.

5 P P S Pe Pe = D f D Q Q Figure 1 Figure 2 Profit Maximization under Perfect Competition If the market price is given by Pe, this price intersects the marginal cost curve at an output of Q*. Thus Q* represents the profit maximizing level of output. For output below Q*, price exceeds marginal cost. That implies that by expanding output the firm can sell additional units at a price that exceeds the cost of producing the additional units. Thus a profit maximizing firm will not choose to produce out level below Q*. Thus Q* is the profit maximizing level of output. (Figure 3) MC ATC Pe D f = Pe = MR ATC(Q*) Q* Figure 3

6 Entry and Exit: The Market and Firm s Demand (Long Run Decisions) P P P 2 P 0 P 1 S2 S 0 Exit Entry S 1 Exit Entry MR 2 MR 0 MR 1 D Q m Figure 4 Figure 5 Q f Figure 4 and 5 respectively represents the market level and firm level. As the more firms enter the market the industry supply curve shifts to the right. In fig 4 we can see the shifts from S 0 to S 1, which lowers the equilibrium market price from P 0 to P 1. This shifts down the demand curve for an individual firm s product which in turn lowers it profits. When exit occurs in the industry the market supply curve shifts from S 0 to S 2, which increase the equilibrium market price from P 0 to P 2. Likely impacts of recent financial crisis and impending recession in developed countries on Bangladesh Shipbuilding Industries Due to the recent economic crisis huge worker get laid off. One of the major shipbuilding industries is Singapore having 80% worker from Bangladesh. Most of them are laid off and they are coming back to Bangladesh and joined to local shipbuilding industry. As result Bangladesh get a very efficient set of people who are very much equipped with technical knowledge. Also at a lower wages rate become a very competitive advantage for Bangladesh. Due to the recession buyers are now looking for country where they can have low priced ships. At this point of view Bangladesh are on top from every other competitor countries.

7 References Financial Express Website bd.com/more.php?news_id= bd.com/more.php?news_id= bd.com/2008/02/05/24509.html of Global Shipbuilding Market.html shipbuilding industrynow a promising sector/ Industry Bangladesh/ A PRESENTATION OF THE BUSINESS POTENTIALS FOR COMPONENTS AND SERVICE PROVIDERS IN THE SHIPBUILDING INDUSTRY IN BANGLADESH by Ministry of Foreign Affairs of Denmark. The Daily Ittefaq, issue: 27 th Fabruary, 2010, from the page of Economics Section. Website Embassy of Denmark ldingindustryisonitsway.htm Reference material supplied by Professor Dr.Fouzul Kabir Khan, Business School, North South University. He was Secretary, Power Division, Ministry of Power, Energy and Mineral Resources, Government of Bangladesh ( )