Maritime Industry Competitive Landscape Shipping Industry

156 competition can be considered relatively inexistent or low. Particularly in large vessels sectors, there is only a very limited number of national shipping companies that are capable of providing large-size vessels. Furthermore, we can project the future competitive landscape of shipping industry in Indonesia by looking at the market of ship transportation in the United States, which has long implemented the cabotage principle since 1920. Competition is practically inexistent in the US, for example the range of charter fee for MR type tanker in the world is between USD 12,000 -13,000 per day, but charter fee in the US is more than USD 50,000 per day.             157 Competition in liquid transporter segment Liquid Transporter Market Share Source : Global Business Guide, March 2014 Competition in liquid transporter vessel segment operating in Indonesia is dominated by liquid cargo vessels, with total capacities up to 106 million DWT, whereas chemicals and CPO tankers contribute 3 million DWT and 9.5 million DWT, respectively. At the end of 2012 there are 574 liquid transporter vessel, 348 units of which are owned by members of INSA plus 115 barges and 50 self-propelled barges. There is no official data available regarding the market share of vessel charter transactions in Indonesia. According to Global Business Guide report March 2014 prepared based on interview and independent research, the largest portion of liquid transporter market share of 60 is controlled by numerous shipping companies, each controlling small market share of approximately 0.5 to 2. The companies sharing the said 60 share are, among others, Humpuss business group, Samudra Indonesia and Andhika Lines. Whereas major players with more than 10 market share are PT Soechi Lines Tbk and subsidiaries with approximately 15, Waruna business group with approximately 12.5 and PTK a subsidiary of Pertamina. Shipyard Industry Currently, there are approximately 250 registered shipyard companies, consisting of four SOEs, approximately 170 private companies outside Batam and Karimun island in Riau Islands Province, and approximately 75 private companies mainly owned by foreign countriesSingapore in BatamKarimun. Based on IPERINDO data for the year 2013, the total companies referred to above owns 160 shipbuilding facilities and 240 vessel maintenancerepair facilities in Indonesia. The data collected by Global Business Guide report issued in March 2014 regarding the expansion of capacities and new shipbuilding facilities is as follows:  11 facilities have the capacity to build ships with size ranging from 5,001 – 10,000 DWT;  9 facilities have the capacity to build ships with size ranging from 3,001 – 5,000 DWT;  8 facilities have the capacity to build ships with size ranging from 1,001 – 3,000 DWT;  27 facilities have the capacity to build ships with size ranging from 500 – 1,000 DWT; and  99 facilities have the capacity to build ships with size less than 500 DWT. Whereas for vessel maintenancerepair facilities, outlined below are the facilities owned by all shipyards in Indonesia:  3 facilities have the capacity to carry out works for ships with size ranging from 50,001 – 100,000 DWT;  6 facilities have the capacity to carry out works for ships with size ranging from 10,001 – 50,000 DWT;  7 facilities have the capacity to carry out works for ships with size ranging from 5.001-10,000 DWT;  6 facilities have the capacity to carry out works for ships with size ranging from 3.001-5,000 DWT;  25 facilities have the capacity to carry out works for ships with size ranging from1.001-3,000 DWT;  45 facilities have the capacity to carry out works for ships with size ranging from 501-1,000 DWT;  121 facilities have the capacity to carry out works for ships with size less than 500 DWT. Shipyard companies operating outside Batam, including 3 widely known SOEs are: PT PAL SOE, PT Dumas Tanjung Perak Shipyard, and PT Dok Perkapalan Surabaya SOE, which operates in Surapaya, PT JMI operates in Semarang, PT Dok Kodja Bahari SOE operates in Jakarta and PT Daya Radar Utama and PT Caputra. For shipyard companies outside Batam area, PT PAL is still considered the largest, not only in terms of capacity but also in terms of market share, which is predicted to reach 20 as PT PAL often receives new shipbuilding projects from the Government. PT dok and Perkapalan Surabaya, PT Daya Radar Utama and PT Dok Kodja Bahari are next, each holding a market share of 10 - 15. PT JMI, PT Caputra and several other shipyard companies each hold a market share ranging between 2 - 5. The remaining market share is divided between approximately 180 companies, both within or outside of Batam. Several shipyard companies operating in Batam are PT Batamec, Drydock World with 3 companies in its business group, including Nanidah, PT ASL Shipyard, PT Santek, PT Loh Loh and PT Asiatic Shipyard. Operational wise, shipyard companies located in Batam are more structured, in compliance with the Government regulations and in general are more cost efficient due to its proximity with Singapore. In terms of technology used, others 60.0 158 several shipyard companies in Batam are more sophisticated due to support from their shareholders from the neighboring countries who are also players in the shipping industry. SWOT Analysis on National Shipyard Industry Potential To assess the potential of shipyard industry in Indonesia, Global Business Guide March 2004 issued a SWOT Strength, Weaknesses, Opportunities and Threats analysis which summarizes the result of independent research on the condition of shipyard industry players. Outlined below are the SWOT factors that are relevant to the development, capital and competition between shipyard owners. SWOT Analysis on Shipyard Industry  Substantial potential demand for domestic vessels, including from the country’s captive market and the related government agencies  High demand for vessel repairsmaintenance services owing to the large number of domestic fleets  Low cost labor are available relatively easily  Establishment of several basic infrastructure, including industrial complex  Strategic geographical location  Availability of land for shipyard  Government’s commitment to developing the maritime industry  Tendencies of the government and SOEs to use domestic shipyards in order to support the shipping industry  Availability of human resources and institutions such as LHI, NaSDEC and Agency for the Assessment and Application of Technology Badan Pengkajian dan Penerapan Teknologi, ‖BPPT‖.  Relatively low skills in vessel design and production management  High dependency on imported raw material components  Production facilities and equipment that are relatively old  Weak regulation consistencies and coordination betwen various industries in the shipping and shipyard sector  Mandatory regulation implementation, which contributes to the high production cost  Lack of support from the banking industry  Domestic shipyards are relatively slow to adapt with the market’s new requirements, such as design, quality, efficiency and innovation partly due to the lack of adequate facilities and supporting components  Lack of skilled labor, including welder STRENGTHS WEAKNESSES OPPORTUNITIES THREATS  Relocation of shipyards from developing countries  The increase in domestic demand for new vessels to replace obsolete vessels  Increased cooperation with countries possessing advanced shipbuilding technology for example, South Korea, Russia with its submarines, and others.  Potential recovery of the world economy, which resulted in the increase in global demand for vessels  The start of ASEAN open market in 2015 will trigger business developments and market expansion steps  Tighter competition from foreign shipyards, particularly from the ASEAN region and China.  Cost increase in ship direct raw material, main components and equipment.  The improved investment climate and foreign companies in competing countries, particularly in ASEAN region  Domestic political stability issue, in particular the political issue in 2014  Domestic macroeconomic stability issue current inflation, interest rate and depreciation of foreign exchange currencies  Potential barrier in industrial relation, particularly in Batam, if workers from ASEAN countries are allowed to enter freely. Source: Global Business Guide, Indonesia’s Shipping Shipyard Sector, December 2013- March 2014

6. Role of and Support from the Government of Indonesia

Considering the rapid development and demand growth for national shipping industries and consideration of several legal aspects related to the geographical sovereignty in Indonesian waters, the Government continuously plays an active role in regulating and creating conducive industry climate, particularly for domestic business players. A series of laws and other regulations have been issued by the Government, with a single objective of supporting the development of national maritime industry and protect domestic business players from foreign business players, which tend to corner local players. 6.1 Implementation of the Cabotage principle Based on Laws of the Republic of Indonesia No. 17 Year 2008 ―Law no. 17 Year 2008‖ concerning Shipping, cabotage principle is defined as the obligation of all commercial ships operating in Indonesian waters to use Indonesian-flagged ships and the ban on foreign ships carrying out inter-islands or inter-ports passengers andor goods transportation in Indonesian waters. The law is effective by 1 January 2011 at the latest. Ships executing transportation contracts signed prior to the issuance of Law No. 17 Year 2008 are granted allowance until 7 May 2011 or 3 three years subsequent to the issuance of the aforementioned law. This principal essentially means domestic shipping management is the sole right of the coastal state. In this regard, the coastal state has the right to prohibit foreign ships from sailing and trading in the waters of such state. AHTS Vessel≥5.000 bhp with dynamic positioning √ √ √ √ √ √ √ √ √ √ √ √ √ √ √ √ √ √ √ √ √ √ √ √ √ 159  ncluding          production        S            The implementation of cabotage principle is supported by the provision of the International Maritime Law with regard to coastal state’s sovereignty and jurisdiction over its territorial waters. The implementation of this regulation follows the footsteps of the American government, who also implements the US Jones ACT, which stipulates that all domestic shipping in America shall be carried out by American-flagged vessels built in US shipyards, and at least 75 owned by American citizen. Economic wise, the purpose of cabotage principle implementation is to develop the economy of Indonesian society by providing business opportunities as wide as possible for national and local sea transportation companies. The law is believed to be able to increase domestic ship production since all ships sailing in the Indonesian waters have to be Indonesian-flagged. Other objectives of the cabotage principle implementation are to prevent or reduce the society’s dependence to foreign ships; expedite the flow of goods or services and passengers to all areas of the archipelago with maximum services and reasonable price, including to remote areas; as an effort to provide job opportunities to the citizen; and lastly as the backbone and support of national defense and security system. In addition, since the implementation of cabotage principle requires every commercial ship transporting domestic cargo to use Indonesian-flagged vessels, it will automatically increase the level of employment and reserve Indonesia’s foreign exchange income as a result of the reduction in use of foreign ships for transporting domestic cargo and the increased role of national shipping companies and industry in transportation of export or import cargo. The cabotage principle, which requires the use of Indonesian-flagged vessels to transport domestic cargoes, particularly for oil and gas upstream and downstream business activities support services, was implemented by 1 January 2011, at the latest. Ships executing transportation contracts signed prior to the issuance of Law No. 17 Year 2008 are granted allowance until 7 May 2011 or 3 three years subsequent to the issuance of the aforementioned law. Presented below is the mapping of cabotage principle implementation plan based on Law N. 17 Year 2008, Government Regulation No 22 Year 2011 and Minister of Transportation Regulation No. 48 Year 2011: Roadmap of Cabotage Principle Implementation in Indonesia No. Activity Vessel Type 2012 2013 2014 2015 1 Offshore Support Vessels AHTS Vessel≥5.000 bhp with dynamic positioning √ √ √ Platform Supply Vessel √ √ √ Diving Support Vessel √ √ √ Offshore Construction Diving Support Vessel √ √ √ 2 Dredging Drug Head Suction Hopper Dredger √ √ and Talling Suction Happer Drugger √ √ 3 Underwater construction activities and offshore rescue Heavy Floating Crane, Heavy Crane √ √ Barge and Survey Salvage √ √ DerrickCrane, PipeCableSub Sea √ √ Umbilical Riser Flexible Laying Barge √ √ 4 Oil and Gas Survey Seismic, Geophysical, and Geotechnical √ 5 Drilling Jack Up Rig, Semi Submersible Rig Deep Water Drill Ship, Tender Assist The Government, through the Ministry of Industry has prepared a roadmap that will serve as a guidance for the implementation of Law No. 17 of 2008, which does not only cover the use of Indonesian-flagged vessels but also implements guidance for the shipyard segment. By 2025, Indonesia is expected to be able to independently produce vessels with total capacities of 2 million DWT per year and to be able to carry out repair works up to a capacity of 20 million DWT per year. The specification of vessels to be produced independently are various tankers with total capacity of 400,000 DWT per unit or cruise ship with a capacity of 2,000 passengers.