Wallex Industry Insights: Shipbuilding in the Philippines

The Philippines might surprise you when it comes to shipbuilding, a sector where it consistently ranks as among the top ship worldwide. Today, it is the sixth largest shipbuilding country in the world in terms of deliveries of newbuilds by major vessel type and country of construction. Between 2021 and 2022, over 1 million of gross tonnage in newly built ships was produced by the sector.

With a network of over 100 shipyards scattered across the islands, the industry employs an estimated 50,000 Filipinos and contributes significantly to the local economy.  But what kind of ships are built here, and how is this sector positioned for future growth? We dive deep into the fascinating world of Philippine shipbuilding in this edition of Wallex Industry Insights!

What vessels or ships does the Philippines build and export?

The Philippines primarily caters to domestic demand for smaller vessels and exports larger commercial ships to the international market. The country produces and exports bulk carriers, containerships, and some tankers. These are known as locally constructed vessels (LCVs). As of 2022, the industry had built 292 LCVs with a total gross tonnage of 828,823.

Of the 292 LCVs, 270 were built for domestic use while the rest were exported. In terms of tonnage, it is worth highlighting that the exported LCVs for the bigger share of total tonnage, with 817,802 gross tonnage. The exported LCVs were all cargo vessels while LCVs for domestic use consisted of a mix of fishing boats, passenger ships, cargo ships, and a tanker, among others.

Foreign-owned shipbuilders such as Tsuneishi are responsible for the majority of the Philippines’ vessel exports. Another notable player in the industry is Australia’s Austal Philippines, which specialises in smaller commercial and military vessels. Their presence in the Philippines has led to a significant knowledge transfer to the more than 9,000 Filipino workers employed in those companies.  

What’s behind the success of the Philippines’ shipbuilding industry?

Several factors contribute to the Philippines’ excellence at shipbuilding despite it being labour-intensive, requiring a significant amount of raw materials, strong and sustained financial backing, and the right technical expertise. Here are three key reasons.

Skilled workforce

Being an archipelagic nation has contributed to the Philippines’ rich maritime tradition, and this has laid the foundation that enables the country to consistently train and produce a skilled workforce for the domestic and global shipping and shipbuilding industry.  

Due to its large population, the Philippines has a readily available supply of workers with a reputation of having a strong work ethic and lower wages compared to other peers in its region such as Japan, China, and Singapore. In fact, Filipino seafarers are widely renowned for their capabilities globally.

Geography

The Philippines lies along key Southeast Asian commercial trade routes. This is a natural and strategic advantage as it is positioned to provide ship repairs. Moreover, with a total coastline length of over 36,000 kilometres, the country is easily accessible via both the ocean and sea for building and repair. Its seabed characteristics such as water depth make it possible for the Philippines’ shipyards to build and accommodate large ships as well.  

Its many islands create the perfect environment for shipyards to operate in. For instance in the country’s shipbuilding capital of Cebu, there is a canyon strait where sea trials can be conducted while providing natural protection from typhoons, rough seas and strong winds. Its proximity with East Asia is another advantage since shipbuilding tends to be concentrated in Japan, China and South Korea.  

Lower costs, higher value

The Philippines offers foreign shipbuilders a lot more value for their money in several ways. Companies like Austal picked the Philippines for its commercial shipbuilding due to its more competitive cost environment in terms of salaries and facilities. The skilled local workforce was another advantage that they enjoyed.

Another firm is South Korea’s Hyundai Heavy Industries. The company set up a Lifetime, Support Service Center (LSSC) in the Philippine Naval Base Subic Bay to perform maintenance, repair and overhaul (MRO) support for vessels it has built for the Philippines. This allows the company to save on costs needed in terms of labour, travel expenses, and resources as local workers can perform MRO work.  

Being based in the Philippines also means that Hyundai can partake in future vessel order projects from the Philippine government or Filipino companies.

How is the Philippine government supporting shipbuilding?

The main arm of support for the Philippines’ shipbuilding industry stems from the Department of Transportation (DOT). Let’s look at what it entails and other support pillars.

MIDP

The Maritime Industry Authority (MARINA) is an agency under the Department of Transportation of the Philippine government. It has ambitious plans to propel the maritime sector forward through its Maritime Development Plan (MIDP) which was first implemented in 2018. The goal is to increase the sector's contribution to GDP from PHP 720 billion to PHP 1.44 trillion.

Modernising the Philippine shipbuilding and ship repair industry is a key goal of the MIDP. It has identified the following as strategic support measures.  

1. Establishment of an Eco-Industrial Maritime Park

This project aims to position the Philippines as a “go-to-location” for international shipbuilding and ship repair services. Establishing of an eco-industrial maritime park (EIMP) will support the modernisation of shipbuilding and ship repair facilities in the country, and empower Filipino seafarers to work as marine surveyors, technical superintendents, and managers of ancillary industries.

2. Develop Financing and Incentives Programme

Financial support is key for shipyards to undergo modernisation. To support Filipino shipyards in this endeavour, MARINA and the Development Bank of the Philippines (DBP) entered a partnership by signing a Memorandum of Agreement (MOA) to set up a framework through which both parties can deliver financial assistance and training and consultancy services to shipyards and workers. This MOA will cover investments in the shipbuilding and ship repair sector as well.

Through such partnerships between the government and financial institutions, it will become easier to promote, develop and foster sustainable progress for the sector.  

3. Promote Research and Development

Research and development (R&D) is valuable for enhancing the quality of shipbuilding and ship repair while allowing the sector's participants to move up the value chain. Ship recycling is one way for the industry to level up, and the MIDP is exploring the potential of promoting ship recycling in the Philippines to ensure that ships that are recycled do not pose any risks to human health, safety and environment

Elsewhere, the MIDP is looking to cooperate with the National Steel Industry and other ancillary industries to support the SBSR sector in overcoming the challenge of inadequate equipment and raw materials

CREATE Act

Shipbuilding has been earmarked as an industry eligible for economic benefits under the Corporate Recovery and Tax Incentives for Enterprises (CREATE) Act, which offers fiscal relief for both domestic and foreign shipyards based and operating in the Philippines.

Through the CREATE Act, shipbuilding companies will be entitled to a reduced corporate income tax (CIT) rate from 30 to 25 percent for both foreign and domestic shipyards, retroactively from July 2020. Further incentives may be granted on a case-by-case basis to highly desirable and promising projects with a minimum investment capital of $1 billion or capable of generating 10,000 jobs.

Other incentives offered by the CREATE Act include the exemption of shipyard owners from paying import duties on items like capital equipment, raw materials and accessories. They will also be exempted from paying Value Added Tax (VAT).

Opportunities for businesses in the Philippines’ shipbuilding industry

The Philippines' shipbuilding industry is on an exciting trajectory, offering diverse opportunities for businesses seeking to expand their reach in Southeast Asia.  

As e-commerce volumes grow, the importance of not just shipbuilding, but ship repair and maintenance services will come to the forefront, and the Philippines already has a headstart. With that in mind, here are some key opportunities for foreign companies:

Building a more sustainable supply chain

A robust supply chain for much-needed raw materials is essential for the industry’s sustained growth.  Foreign companies can play a key role by helping to establish reliable sources for these raw materials, along with other types of equipment not easily accessible to local shipyards.

This can involve both identifying dependable international suppliers and exploring localisation of production. Collaboration can also extend to improving logistics infrastructure and implementing sustainable sourcing practices.

Strengthen ship repair and maintenance facilities

Most of the advanced or updated facilities, equipment, tools and machinery belong to shipyards with foreign partners or strong financial backing. Around 66% of the total main yard facilities nationwide need some form of upgrading.  

This is an opportunity for businesses specialising in maritime equipment and facilities to provide the expertise needed to refurbish and upgrade existing shipyards.

Upskilling the workforce

Foreign companies can collaborate with local institutions like MARINA or directly sponsor training programmes to equip Filipino workers with the latest shipbuilding techniques and technologies. This not only elevates the domestic workforce but also creates a pool of highly skilled personnel attractive to foreign shipbuilders operating in the Philippines or elsewhere in the region.

Sail into the Philippines’ lucrative seas with Wallex

The Philippines' shipbuilding industry is propelling the nation's economy forward and its momentum is only going to grow. With a rich maritime heritage, a skilled workforce, and a government committed to growth, the Philippines offers a strategic and lucrative environment for international businesses looking to expand their reach in Southeast Asia.

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