The re-ordering of geopolitics is impacting many sectors of the global economy and shipbuilding is no exception. Rising geopolitical risk is driving an increase in shipbuilding activity, spurred by higher defense spending as countries re-think their national security strategies.
The fragmenting of international alliances - as examined in this previous WTW insight - has prompted nations to increase defense spending and seek new partners to achieve the necessary scale.
Some large commercial shipyards, such as Hanwha Ocean and HD Hyundai Heavy Industries are seeking to establish market share in the reinvigorated U.S. defense programs. European yards, meanwhile are attracting increasing interest from foreign navies in collaborating on newbuilding programs.
The U.K. Government has secured a £10bn deal to supply the Norwegian navy with at least five new warships. The agreement to provide Type 26 frigates will be the U.K.'s "biggest ever warship export deal by value," according to the Ministry of Defence (MoD), supporting 4,000 U.K. jobs into the 2030s.
However, it's important to note, that with constraints on the supply chain, shipyard capacity and skills are coming under pressure from renewed demand as suppliers and shipbuilders struggle to meet a higher level of commitments.
We've seen the Constellation-class frigate program at a Wisconsin shipyard canceled recently by the U.S. Navy due to design modifications and delays, opting instead for faster-to-build alternatives. Initially based on a proven Italian design, government-mandated changes pushed the launch from 2026 to 2029, costing $2 billion without a single ship in the water.
Leading asian yards see new technology as critical to the opportunity of securing U.S. shipbuilding contracts. HD Hyundai Heavy Industries plan to use artificial intelligence to modernize American shipyards by combining South Korea's manufacturing expertise with U.S. computing power.
The company also sees AI as key to tackling shipping's chronic labour shortages and has already introduced AI-powered tools, including a translation tool and a planned 'Shipbuilding AI Master Agent' to improve efficiency and retain expertise.
The influx of orders is putting pressure on space at shipyards, prompting a shift towards a joint-venture approach between established players and newer yards in other locations.
Recent examples include French shipbuilder CMN Naval and UAE-based Edge Group, which owns Abu Dhabi Ship Building, which have formed a joint venture AD Naval to focus on building small to mid-size naval vessels in Abu Dhabi for non-NATO navies.
In the commercial space, HD Hyundai Heavy Industries and IMI announced plans to expand their shipbuilding co-operation, including the operations of IMI Shipyard and Makeen Engine Manufacturing Company in Saudi Arabia, as well as the development of a local shipbuilding supply chain in the kingdom.
With joint ventures between yards on the rise, the need increases for due diligence by buyers towards yards and between yards and their new subcontractors. As builders look to create new partnerships, build supply chain capability and train workforces, risks can be amplified despite the upfront advantages of greater capacity.
For naval and defense contracts, the need for knowledge transfer to workforces that may have less experience in the sector creates potential risk in terms of security, access to technology and safe working conditions.
While more applicable to commercial contracts than defense agreements, Builders’ Risk policies should consider the impact of construction delays in protecting the yard from penalties and buyers from lost of revenue.
From an insurance perspective, the decision by a prime contractor to add capacity potentially equates to an increase in risk. In such cases, the question at issue is which is the correct party to assume that risk.
Where there are multiple insurable interests between shipbuilding parties, it is imperative that the leading principal ensures that they have sufficient cover in place to consider all contracting parties.
WTW hopes you found the general information provided here informative and helpful. The information contained herein is not intended to constitute legal or other professional advice and should not be relied upon in lieu of consultation with your own legal advisors. In the event you would like more information regarding your insurance coverage, please do not hesitate to reach out to us. In North America, WTW offers insurance products through licensed entities, including Willis Towers Watson Northeast, Inc. (in the United States) and Willis Canada Inc. (in Canada).
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