Harnessing the Tide: Unlocking the Potential of Bangladesh’s Shipbuilding Sector

Introduction 

Shipbuilding in Bangladesh has a rich history that dates back to the mediaeval era. Chittagong played a significant role as a hub for constructing ocean-going vessels, as noted by the European traveller Caesar Frederick in the mid-15th century. The shipbuilders of Chittagong are said to have built a complete fleet of war-boats for the Sultan of Turkey in the 17th century. The prominence continued during the Mughal period and British colonial rule, as approximately 25 to 30 ships built in Chittagong were exported annually to various countries at the beginning of the 20th century. 

Although the industry eventually lost its rank globally due to various reasons, successive exports of commercial ships at the turn of the millennium provided a surge of optimism for the sector to progress rapidly and reclaim its place as a major export sector. Existing and new shipbuilders invested billions of dollars in order to meet the increasing local demand and seize a significant portion of the global shipbuilding market. The initial excitement surrounding the sector, however, waned rather quickly as it was met with various challenges and obstacles. 

Progress of Shipbuilding 

Bangladesh emerged as a shipbuilding nation in the early 2000s, initially delivering a few small boats to Mozambique and the Maldives. The significant breakthrough occurred in 2008 when Ananda Shipyard & Slipways Ltd became the first shipbuilder to export sea-going ships from Bangladesh with the successful delivery of the ‘Stella Maris’ to a Danish firm. The availability of cost-effective human resources, simplified import facilities for raw materials, and duty-free market access to potential markets served as incentives for Bangladeshi entrepreneurs to enter the shipbuilding sector rapidly. Subsequently, Bangladesh generated approximately USD 200 million from the export of more than 40 ships to various countries in Europe, Africa, and Asia. 

The export journey has, however, been far from stable, as the global financial crisis and later the COVID-19 pandemic severely impacted the industry. Some European buyers even cancelled export orders, leading to substantial financial setbacks for shipbuilders. There was a brief turnaround in FY2017 and FY2018, when the sector raked in export proceeds, accounting for more than half of total receipts since 2008, but exports have once again declined significantly, partially attributable to the impact of the COVID-19 pandemic. 

The global shipbreaking industry experienced a contraction in 2020 due to the impact of the COVID-19 pandemic. Although there was a 5.2% increase in deliveries the following year, it remained below pre-pandemic levels. Notably, offshore vessels, general cargo ships, and gas carriers witnessed significant growth, while the ordering level for oil and chemical tankers reached its lowest point in 25 years. The industry’s progress is underpinned by a robust infrastructure, with over 120 registered shipyards and approximately 300 shipbuilding companies in Bangladesh. This thriving sector provides employment to around three lakh people and is poised to contribute significantly to the country’s economy. The annual building capacity for export orders is estimated at around 20 vessels, while vessels tailored for domestic use encompass a wide range of types and sizes. 

Amidst the global economy gradually recovering from the pandemic’s repercussions, there is a growing belief among entrepreneurs that the export market is reopening, supported by a noticeable increase in exports from Bangladesh during the first nine months of FY2023. Ananda Shipyard and Slipways Ltd recently made history by delivering a groundbreaking 6,100 deadweight tonnage oceangoing multi-purpose container vessel to the UK-based Enzian Shipping Company Ltd. This significant milestone is a testament to Bangladesh’s shipbuilding capabilities, as it marks the largest ship ever exported from the country. Ananda Shipyard’s remarkable accomplishment of exporting its second ship within two years reflects the industry’s inspiring recovery from a challenging decade that began in 2010. The ship’s impressive specifications, including its size, engine power, and speed, signify Bangladesh’s rising stature in the global shipbuilding landscape. 

This revival is not confined to a single company, as the entire sector is gaining traction. The demand for environmentally friendly ships in the European market has breathed new life into the industry, sparking increased inquiries and fresh orders. The Chattogram-based shipbuilding company FMC Dockyard Ltd has also secured a substantial order to build state-of-the-art ASD tugboats for the Sudanese government. Indeed, Bangladesh has an incredible opportunity to excel in the manufacturing of small and medium-sized ships, given that the focus of major shipbuilders like South Korea, Japan, and China is on larger ocean-going vessels. The country’s expertise in producing coastal and inland vessels for domestic commodity transportation positions it favourably to become a leading player in the global market of smaller ships, valued at over USD 400 billion. 

Domestically, the shipbuilding industry is flourishing due to various factors, including the country’s heavy reliance on waterways for transportation. With nearly 90% of fuel, 70% of cargo, and 35% of passengers moving through waterways, the domestic demand for vessels is substantial. Steady economic and trade developments, coupled with infrastructure projects, have contributed to an average annual growth rate of 5.39% in the number of locally registered vessels. This growth trend extends to both the domestic and export markets, with the former expanding at a rate of 10%–15%, and the latter at 5%–6%. 

However, to capitalise on this opportunity and ensure the sector’s sustainable and robust growth, it is crucial to approach the situation prudently and provide substantial support. Given the significant investments made in recent years and the potential risk of major companies collapsing, it is imperative to foster a resilient environment through proactive measures and assistance for the shipbuilding sector to flourish. This will require a comprehensive strategy that addresses challenges, strengthens capabilities, and leverages opportunities for sustainable development in the shipbuilding industry.

However, to capitalise on this opportunity and ensure the sector’s sustainable and robust growth, it is crucial to approach the situation prudently and provide substantial support.

Main Challenges Facing the Shipbuilding Sector 

In this section, we delve into the critical challenges faced by Bangladesh’s shipbuilding industry, exploring the complexities of a changing global trade landscape, dependence on imports, financing constraints, capacity and management issues, and the imperative need to maintain international standards. By addressing these challenges head-on, the sector can pave the way for sustainable growth and secure its place on the global shipbuilding map once again.

Global maritime trade is  projected to lose steam: The shipbuilding industry is heavily influenced by the state of global maritime trade. Unfortunately, shipbuilding volumes have remained low, and the global commercial fleet’s growth rate has slowed. According to UNCTAD, the growth projection for the sector is moderate, with an estimated annual growth rate of 2.1% from 2023 to 2027. This rate is slower than the 3.3% average recorded in the past three decades. Several factors contribute to this subdued growth, including rising inflation and living costs worldwide, which could dampen consumer spending. Additionally, the ongoing war in Ukraine continues to impact global food, energy, and fertiliser markets, creating further uncertainty. 

Lack of a robust backward linkage: Shipbuilders in Bangladesh face a significant challenge due to their heavy reliance on imported raw materials. Approximately 50%–60% of the required materials need to be imported, as there is no well-established backward linkage industry in the country. This reliance on imports leads to longer construction times compared to global competitors. Furthermore, the disruption caused by the pandemic highlighted vulnerabilities in the supply chain, especially in terms of raw material availability from China. Establishing a robust backward linkage industry is crucial for reducing dependence on imports and improving the efficiency of shipbuilding operations.

Inadequate capacity and management: Bangladesh’s shipbuilding sector faces capacity and management-related issues that hinder its growth and competitiveness. The time required to build a ship in Bangladesh is longer compared to countries like Vietnam, which can impact delivery timelines and customer satisfaction. Additionally, the lack of facilities for designing international-standard ships within the country adds complexity and additional costs. Design work often needs to be outsourced to other countries, such as Singapore, China, Europe, or India. The absence of testing facilities in Bangladesh further adds to the challenges faced by shipbuilders. Moreover, the cost of building ships in Bangladesh is higher by approximately 15%–20% compared to countries like China, Korea, Japan, and India. Import taxes on spare parts further escalate manufacturing costs.

Maintaining international standards and timely delivery: Shipbuilders in Bangladesh face difficulties adhering to international standards and delivering vessels on time. This issue has damaged the confidence of buyers and resulted in penalties and losses for shipbuilders. There have been instances where it took 1.5–2 years to build a ship that was supposed to be completed within six months. Failure to meet contractual obligations leads to penalties or ships being sold at a loss. Multiple lawsuits are currently ongoing, highlighting the need for improved management practises and timely project execution. 

Environmental compliance and sustainability standards: As the shipbuilding industry strives for growth and competitiveness, it must grapple with the critical imperative of environmental compliance and sustainability standards. Shipbuilders are increasingly conscious of the potential environmental damage caused by their work and the need to mitigate adverse effects on the ecosystem, particularly the rivers that surround their operations. Waste products such as grease, burnt oil, kerosene, used welding rods, and debris often find their way directly into the rivers, posing a threat to marine life and ecosystems. Furthermore, ensuring the safety and well-being of workers is an equally pressing concern that demands attention.

 In addition to these immediate challenges, the industry faces the daunting task of addressing the rising greenhouse gas emissions from the global maritime fleet. Recent data reveals a concerning trend, with emissions increasing by 4.7% between 2020 and 2021, primarily driven by container ships, dry bulk carriers, and general cargo vessels. Moreover, the average age of the fleet is also on the rise, exacerbating environmental concerns as older ships tend to emit higher levels of pollutants. The ageing fleet is partly attributed to shipowners’ uncertainty regarding future technological developments, cost-efficient fuels, changing regulations, and carbon pricing mechanisms.

Digital transformation is intensifying competition: While digital transformation sweeps across industries, revolutionising operations and boosting efficiency, the shipbuilding sector in Bangladesh finds itself lagging behind in this global wave of innovation. Companies worldwide, regardless of their product, are embracing digitalisation to enhance output and reap numerous benefits, such as improved security, streamlined processes, and the reduction of human error. In shipbuilding, digital transformation is taking centre stage, with renowned companies striving to reach unprecedented levels of advancement. They are adopting multi-project management systems with efficient resource allocation and pioneering fifth-generation-based smart shipyards. These innovative shipyards equip workers with neckband cameras featuring 5G functionality, enabling rapid responses to emergency situations.

Automation is also gaining ground, automating repetitive tasks and reducing overall construction time. Panel assembly lines, for instance, produce building blocks for vessel construction. Moreover, new approaches, such as the integrated product development environment (IPDE), are emerging, aiming to foster collaboration among diverse shipbuilding units towards a shared goal. With careful planning and implementation, technology, automated processes, and big data are revolutionising long-established working practises, enhancing efficiency, productivity, profitability, reliability, quality, predictive improvement, and one that is often overlooked – shipbuilding’s manpower scarcity. Regrettably, the shipbuilding sector in Bangladesh has yet to fully embrace this digital transformation, impeding its ability to leverage these technological advancements and compete on a global scale. 

Financing difficulties: The shipbuilding sector in Bangladesh often struggles with a lack of adequate financing. Banks are generally hesitant to extend loans to shipbuilders, resulting in a funding crisis for many companies. Some shipbuilders, enticed by the prospect of shipbuilding, took on bank loans without securing a steady revenue stream. Consequently, they are now unable to repay their loans, exacerbating the financial strain. The liquidity crunch and higher interest rates on industrial loans have further contributed to the decline of the sector. The shipbuilding companies require immediate working capital and urge the government to provide policy and financial support to help them overcome these challenges.

Addressing these challenges is vital for the shipbuilding sector in Bangladesh to regain stability, attract investment, and foster sustainable growth. The government, in collaboration with industry stakeholders, should focus on developing robust policies and support mechanisms that address financing gaps, foster backward linkage industries, enhance capacity and management capabilities, and streamline import processes. By addressing these issues, Bangladesh can position itself as a competitive player in the global shipbuilding market and capitalise on emerging opportunities. Furthermore, addressing environmental challenges and embracing sustainable practices are crucial steps for the shipbuilding sector to thrive while minimising its ecological footprint, driving the sector towards long-term success. 

The government, in collaboration with industry stakeholders, should focus on developing robust policies and support mechanisms that address financing gaps, foster backward linkage industries, enhance capacity and management capabilities, and streamline import processes.

Opportunities in the Horizon

Growing local demand and shipbuilding activities: The shipbuilding sector in Bangladesh is experiencing a surge in local demand, driven by the country’s rapid expansion of international trade through sea routes. Entrepreneurs in Bangladesh have invested billions of dollars in the shipbuilding industry to meet their own demand for vessels, creating a significant market despite challenges in ship exports. With over 90% of the country’s USD 110 billion in international trade occurring via sea, there is a growing need for ships to transport raw materials from the Chattogram port to factories or warehouses through inland waterways. The increasing movement of goods requires larger ships, and major industrial groups like Meghna Group, City Group, and Delta Shipyard have made substantial investments in building their own fleet. Meghna Group, in particular, has emerged as a leader, manufacturing a substantial number of ships of international standards at their subsidiary, Meghna Shipbuilders & Dockyard. 

The shipbuilding industry in Bangladesh is expected to continue attracting investments due to its promising potential. Currently, the country boasts over 100 shipbuilding yards, primarily catering to the local market and generating revenue exceeding BDT 30 billion. Catering to the growing local demand can help Bangladesh reduce vital foreign currency that would otherwise be spent on exports, as well as limit the pressure on foreign shipping lines and exposure to freight rate increases and surcharges, as overdependence for shipping and associated services on foreign-owned, foreign seafarers, or foreign flags can be a source of vulnerability. 

Bangladesh’s remarkable progress in the shipbuilding industry is evident, as it has climbed 13 places in the global rankings over the past five years, securing the 14th position ahead of countries like the US, India, Singapore, and Spain. This upward trajectory positions Bangladesh as a significant player in the shipbuilding market. As strong local demand and production continue to enhance local shipbuilders’ experience and capacity, Bangladesh can also take advantage of the gap in the global market as leading shipbuilders are opting out of producing small-sized ships of less than 25,000 deadweight tonnes (DWT).  

Bangladesh’s remarkable progress in the shipbuilding industry is evident, as it has climbed 13 places in the global rankings over the past five years, securing the 14th position ahead of countries like the US, India, Singapore, and Spain. This upward trajectory positions Bangladesh as a significant player in the shipbuilding market.

The rising demand globally for environmentally friendly ships: The global maritime industry is undergoing a transformation, driven by the need for environmentally friendly ships that can operate efficiently and comply with new regulations. As the demand for vessels that utilise cost-efficient fuels and integrate smart digital systems continues to rise, there is a growing sense of urgency to adapt ports and transport infrastructure to the impacts of climate change, as reflected in the regulations of the International Maritime Organisation (IMO), which has been actively working on regulatory initiatives to address greenhouse gas emissions from shipping

In July 2011, mandatory measures were introduced to enhance the energy efficiency of newly constructed ships, setting a new benchmark for emissions reduction in the global fleet. Ambitious goals were outlined in the IMO’s Initial Strategy adopted in April 2018, including a 50% reduction in greenhouse gas (GHG) emissions by 2050 and a 40% reduction in carbon intensity by 2030 compared to 2008 levels. The IMO’s recent adoption of additional short-term measures further emphasises the need to achieve a 40% reduction in carbon intensity by 2030. These measures, such as the Energy Efficiency Existing Ship Index (EEXI) and carbon intensity indicators, require the industry to adapt and adopt new technologies and practices. The 2020 Sulphur Regulation, which limits the sulphur content of fuels used on board ships, also presents challenges and opportunities for shipbuilders. Scrubbers and LNG-fueled vessels are emerging as viable solutions to meet the new regulations. 

As shipping companies closely monitor these developments and anticipate future requirements, the evolving regulations, carbon pricing mechanisms, and technological advancements will undoubtedly drive an increased demand for new ships. This presents an opportunity for Bangladesh’s shipbuilding sector to capitalise on the growing market, but it will require significant investments in technological capabilities and workforce capacity to prepare for the ships of the future. 

Increasing Importance of Facilitative Financing and Policy Support 

A crucial aspect that can play a pivotal role in supporting the shipbuilding sector is the establishment of facilitative financing mechanisms. These mechanisms can provide the necessary financial support, promote innovation, and help overcome barriers, allowing the industry to capitalise on emerging opportunities. 

Facilitative financing to bolster growth and seize opportunities: Government policy support and surging freight costs globally have encouraged large amounts of private investment in the sector. At present, Bangladesh has the capacity to transport about 20% of trade goods through local flag vessels. To capture the emerging opportunities in the short and medium term, both locally and globally, and improve management and technological capacity to ensure international standards and stay on top of environmental compliance, substantially more investment is required. 

The shipbuilding sector in Bangladesh has long struggled with a fund crisis, as traditional banks are often reluctant to extend loans due to the perceived risks associated with the industry. To address this issue, Bangladesh Bank has recently set up a refinancing scheme of BDT 20 billion (around USD 200 million) to provide entrepreneurs in the shipbuilding industry with low-interest loans at only 4.5%. The loan is to be repaid in 12 years with a grace period of three years. 

While the refinancing scheme has promised to provide loans at low interest rates and moderately flexible repayment terms, it might not prove to be sufficient to cater to all the builders and falls short of the significant amount of investment required in the industry to keep ahead of the trends and emerging global landscape. India, on the other hand, has taken steps to offer cash subsidies, lower taxes, and other incentives to bolster its shipbuilding industry. Besides establishing a ten-billion-rupee maritime development fund to support and provide facilitative financing to the sector, currently consisting of 35 shipbuilding companies, it has also granted ‘infrastructure’ status to the industry, which is expected to help with long-term financing from banks.

Shipping in the short-to-medium term will need more investment in energy-efficient shipping technologies and an accelerated shift to alternative, low-carbon fuels to cut the carbon footprint of maritime transport and remain competitive in the global market, in line with the new regulations set by the IMO. There thus needs to be substantial investment in R&D, infrastructure, and trials, while also lifting the capacity of local builders and their personnel. Bangladesh’s shipbuilding industry needs longer-term loans to operate and expand, as return from investment usually takes around 9–10 years.

The government and financial institutions could consider enhancing the refinance mechanism, tailored to the specific needs of shipbuilders. Furthermore, a grace period of 4–5 years and a lower interest rate of 3%–4% could be considered to not only enable the shipbuilders to secure the necessary capital for their projects and improve their financial stability but also spur the development of the sector and claim a major portion of the local and global market.  

Besides, a few large export-oriented companies face tremendous problems with cash shortages, which have been exacerbated by various domestic and international situations, especially the COVID-19 pandemic and the cancellation of some large orders. They now owe huge debts to banks and financial institutions, which puts lenders at risk of debt recovery given that the debt burden is several times higher in some cases. The number of these industries may increase in the future in the face of an emerging global scenario amidst the Russia-Ukraine war. Rescheduling some of those loans with facilitative terms for a few of those builders with export potential might be considered to enable a fast turn-around and retain some thousands of jobs. 

Establishing specialised financial institutions: The establishment of specialised financial institutions focused on supporting the shipbuilding sector can be instrumental in addressing the financing challenges. These institutions can offer tailored financial products and services, such as project financing, working capital loans, export financing, and green transformation. They can also provide guidance and expertise to shipbuilders, assisting them in navigating the complexities of financing, risk management, and international trade.  

Role of insurance:  Insurance plays a crucial role in the development and sustainability of the shipbuilding sector. It provides essential protection and risk mitigation for shipbuilders, shipowners, and other stakeholders involved in the construction and operation of vessels. Shipbuilding projects involve significant investments of capital, resources, and manpower, making them inherently exposed to various risks such as accidents, natural disasters, equipment failures, and delays. Insurance coverage, including marine and construction insurance, can help mitigate these risks by providing financial compensation for damages, losses, or liabilities incurred during the shipbuilding process. Additionally, insurance can facilitate the financing of shipbuilding projects by providing lenders and investors with confidence in the risk management strategies implemented by shipbuilders. It also supports the industry’s growth by ensuring the timely completion of projects, safeguarding against unexpected losses, and maintaining the overall stability of the shipbuilding sector. Moreover, insurance companies can contribute to the development of the shipbuilding industry by offering specialised products and services tailored to the unique needs and challenges of the sector. By effectively managing risks and providing financial security, insurance plays a pivotal role in fostering a conducive environment for shipbuilding, attracting investments, and promoting sustainable development in the maritime industry.

Government policy support: Government policy support has evidently spurred the sector’s growth since 2019. Legal protection and tax benefits have encouraged new entrepreneurs to sign up in the ocean-going shipping sector with the intent of taking a bigger slice of the freight charges that now largely go to foreign ship operators. The newly enacted Bangladesh Flag Vessels (Protection) Act 2019 has given businessmen VAT exemption for registration of vessels with over 5,000 DWT capacity, priority berthing for Bangladeshi flag carrier vessels at local ports, allowed 50% of goods to be carried by local ships from the earlier 40%, and ensured hassle-free registration. 

While this has boosted investment, the shipbuilding sector requires comprehensive policy support from the government to foster a conducive business environment for further investment in technological capacity and innovation to gain a competitive advantage and maintain international standards. Bangladesh’s shipyards face ongoing challenges, whereas counterparts in other countries benefit from the most favourable interest rates for their shipyard development and projects. To ensure the sustainability of the shipbuilding sector in this highly competitive global market, it is crucial for the government to devise policies that enable access to long-term loans at the lowest interest rates. 

Additional support, such as lowering the tax on freight,  streamlining bureaucratic processes, and reducing regulatory burdens, can facilitate the growth of the industry. The government can also establish partnerships with private entities and international organisations to promote skill development, technology transfer, and research and development initiatives in the shipbuilding sector.  

Encouraging Public-Private Partnerships: Collaboration between the public and private sectors can unlock significant opportunities for the shipbuilding industry. In a recent development, the government has entered into an agreement with two foreign companies, Gentium Solutions and Damen Shipyards Group, for a shipbuilding facility at the Payra seaport in Patuakhali. With a significant investment of USD 1.58 billion, this venture aims to reduce reliance on vessel imports and expand the market for locally constructed ships. The Bangladesh Steel and Engineering Corporation, operating under the Industries Ministry, will provide the land for the shipyard construction, further supporting the country’s shipbuilding ambitions. Public-private partnerships (PPPs) such as these can facilitate the sharing of resources, knowledge, and expertise, leading to the development of advanced shipbuilding infrastructure and the enhancement of technical capabilities. PPPs can also attract foreign investment, technology transfer, and access to international markets, strengthening the competitiveness of Bangladeshi shipbuilders.

Public-private partnerships (PPPs) such as these can facilitate the sharing of resources, knowledge, and expertise, leading to the development of advanced shipbuilding infrastructure and the enhancement of technical capabilities.

International Cooperation and Investment: Collaboration with international stakeholders, including shipowners, shipping companies, and global financial institutions, can bring valuable opportunities for the shipbuilding industry in Bangladesh. Encouraging foreign direct investment and joint ventures can facilitate technology transfer, knowledge sharing, and access to global markets. International cooperation can also assist in meeting environmental compliance requirements, promoting sustainable practices, and enhancing the overall competitiveness of Bangladeshi shipbuilders.

Conclusion

Given the capital-intensive nature of shipbuilding, significant investments are required. Facilitative financing mechanisms, supported by government policies, can play a pivotal role in addressing the challenges and capitalising on the opportunities in the shipbuilding sector. Additionally, by promoting local production of various raw materials such as steel pipes, furniture, power equipment, and upholstery instead of costly imports, the industry can experience a multiplier effect on the economy through subcontract servicing and increased employment opportunities. 

To maintain the industry’s growth momentum, it is imperative that the proposed shipbuilding policy be fully enacted and address these pertinent issues more effectively. By ensuring accessible financing, promoting innovation, and fostering collaboration, Bangladesh can further strengthen its shipbuilding industry, propel economic growth, and position itself as a competitive player in the global maritime trade. Embracing these mechanisms will not only benefit shipbuilders but also contribute to job creation, technological advancement, and sustainable development in the country.