China’s shipbuilding industry has been going through attrition, with the balance of power skewed towards the state-owned enterprises. Zeng Xiaolin and Angela Yu detail the consolidation of shipbuilders and the growth of local equipment makers
Many Chinese shipbuilders focused on bulk carrie[ds_preview]r orders as the country’s booming demand for raw materials fuelled the Baltic Dry Index in the late 2000s. As bulk carriers were relatively uncomplicated to build, Chinese shipyards gained an advantage over their more established peers in Japan and South Korea, due to lower labour costs.
However, the bubble burst after the global financial crisis in 2009, and many of the small, privately-owned Chinese shipyards found themselves struggling. Attempts to diversify into offshore vessels were stymied by the recent collapse in oil prices. Subsequently, the Chinese government began taking steps to consolidate the country’s shipbuilding industry.
In September 2014, the Ministry of Industry and Information Technology (MIIT) launched a White List. Yards on this list met the Ministry of Industry and Information’s technical standards and were deemed to be able to compete effectively in the market. These shipyards also receive preferential treatment in terms of financing and state grants. The list helped to remove 10mill. dwt of shipbuilding capacity, or 12.5% of China’s peak shipbuilding capacity.
White List shipyards going bust
Nevertheless, this did not prevent certain White List shipyards from going bust. In January 2017, Sainty Marine Corporation, which was controlled by the provincial government of Jiangsu, ceased operations after a string of newbuilding cancellations when the dry bulk market collapsed. Through an asset purchase deal with its parent, Jiangsu Guoxin Investment Group, Sainty Marine switched to the power generation sector. Sainty Marine was renamed Jiangsu Guoxin Corp., Ltd and remains listed on the Shenzhen Stock Exchange.
In September 2017, the Taizhou Intermediate People’s Court dismissed Jiangsu Eastern Heavy Industries’ (JEHI) application to restructure, calling the move a »fake bankruptcy« to avoid its obligations to its creditors. Part of Singapore-listed JES International Holdings, JEHI declared bankruptcy and sought restructuring in October 2015. It was a long drawn-out process, marked by accusations that JES’ former chief executive Jin Xin and the latter’s family members of removing or destroying financial records. Auditors also found that JES had transferred plant and equipment to privately held entities without appropriate payment.
Jiangzhou Union Shipbuilding, another White List privately owned shipyard, and its parent, Hong Kong-listed China Ocean Industry Group, were in negative equity as at end-2016, after consecutive annual losses. While the latter has been diversifying into the car park business, auditors have cast doubt as to whether China Ocean Industry Group can continue as a going concern.
China Association of the National Shipbuilding Industry’s figures showed that member shipyard’s orders continued to decline in 2016, registering at 21.07mill. dwt, a 32.6% drop from 2015. The pace of decline was however, slower, compared to the 47.9% year-on-year decrease in 2015. than the previous year, at 31.26mill. dwt. The orderbook of Chinese yards also dropped again in 2016, standing at 99.61mill. dwt, compared with 123mill. dwt at the end of 2015.
Critics have suggested that the White List has been ineffective, as the shipyards were assessed by competitors based on criteria that were never made public. »The list was clearly meant to favour the state-owned shipbuilders, as all of these enterprises were on the list,« said one source from a privately run Chinese shipbuilder.
Looking ahead, the White List, which had 71 shipyards as at end-2016, could be reduced to 50 shipbuilders as several private enterprises have left the industry, while other state-run shipbuilders are being consolidated.
In May 2017, MIIT asked ten yards to provide an update of their operating status. These yards include Sainty Marine and the aforementioned Sinopacific subsidiaries that have ceased operations. An additional ten yards have been renamed or will be rebranded due to restructurings and consolidation. Among the latter ten yards, six are under Cosco Shipping Heavy Industry—Nantong Cosco KHI Ship Engineering, Dalian Cosco KHI Ship Engineering, Dalian Cosco Ship Engineering, Zhoushan Cosco Ship Engineering, Guangdong Cosco Ship Engineering, and China Shipping Industry (Jiangsu).
Nanjing Jinling Shipyard, a subsidiary of Sinotrans & CSC, a state-owned shipping group, will be rebranded after the merger of the former and China Merchants Group in April 2017. Another Sinotrans & CSC shipbuilding subsidiary, Qingshan Shipyard, will cease operations. Despite being on the White List, Qingshan has seen dwindling ship orders, with the remaining three bulk carriers in its orderbook scheduled for delivery by early 2018. Qingshan will stop building ships once these vessels are delivered and shift its focus to container distribution by tapping on its know-how in steel structures.
Meanwhile, speculation of a merger between China State Shipbuilding Corporation (CSSC) and China Shipbuilding Industry Corporation (CSIC), the country’s two largest state-run shipbuilding groups, is growing, after both groups suspended trading of their stocks in September and May 2017.
When asked about a merger with CSIC, CSSC president Hu Wenming said at a board meeting that the group will »follow the lead of the central government, accelerating reform and improve capital and management structure«.
Nonetheless, China State Shipbuilding Corporation, backed by government funding and contracts from state-owned shipping companies, has been going from strength to strength. CSSC oversees subsidiary shipyards in the east and south of China while CSIC manages shipyards in the north and west of the country.
While state-owned shipping lines are known to support the state-owned shipbuilders, the latter has been making inroads into segments that South Korean shipbuilders have traditionally dominated.
In August 2017, observers were surprised when CMA CGM chose CSSC subsidiaries Hudong-Zhonghua Shipbuilding and Shanghai Waigaoqiao to build nine 22,000TEU container ships. Hyundai Heavy Industries was widely expected to win the tender, but reportedly lost out due to pricing. Hyundai’s quotation of 175mill. $ per ship was 15mill. $ higher than what Hudong-Zhonghua and Shanghai Waigaoqiao submitted, according to Yang Hyung-mo, an analyst at eBest Investment Securities.
Yang said: »This shows that Chinese yards have attained a high technological standard. However, the impact on South Korean shipbuilding industry will be limited, because globally, shipbuilders are restructuring, with the top-tier ones dominating.«
It is not all doom and gloom for Chinese shipbuilders without any government links. Among the privately run Chinese shipbuilding companies, Singapore-listed Yangzijiang Shipbuilding is regarded as the best in its league. Year-to-date, Yangzijiang has booked 832 mill. $ of new orders, more than what it won in the whole of 2016, as the dry bulk market improved. Yangzijiang’s executive chairman Ren Yuanlin told HANSA: »Through innovation and introducing new ship types such as gas carriers, we maintained a healthy order book backlog when the market was weak, and we are making good progress in order taking when the market starts to recover. Looking ahead, the IMO’s new environmental regulations and China’s Belt and Road initiative should stimulate new orders.«
While Chinese shipbuilders are consolidating, the local marine equipment market is growing, fueled by the government’s Action Plan to Enhance Production Capacity of Marine Equipment Industry 2016-2020. The latter was part of a wider national strategy to develop China’s shipbuilding industry and involves tax breaks for equipment makers and joint collaborations between the public and private sector.
Shortage of core technologies
In 2016, revenue generated by Chinese marine equipment makers totalled 155 bn CNY (22.3 bn $), doubling from 2010, according to CANSI. Secretary-general Jin Peng said: »Better research and development has made it possible for marine equipment makers to grow quickly. Locally made integrated electrical propulsion systems, high-speed engines and radar equipment have been installed in Chinese-built ships.«
Essence Securities analyst Feng Fuzhang expects the Chinese marine equipment market to enjoy growth for the next five years. Feng said: »The market for power distribution systems in ships in China in the coming five years will reach 290 bn CNY, of which 150 bn CNY will go to the electrical equipment and automatic systems while the rest will go to the electronic equipment sector.«
Take-up rate of Chinese-made ship parts in more sophisticated vessels, such as Chinese-built drillships and liquefied gas carriers is low, however, when compared with similar vessels built in Japan and South Korea. The take-up rate of Chinese-made parts in domestically built bulk carriers, tankers and small and mid-sized container ships is around 50%, but less than 30% for the more high-end vessels.
The major reason for the low application rate lies in the shortage of core technologies as well as the weak capacity of self-development and innovation of Chinese marine equipment makers, stated Wang Yulu, an analyst from a local commodity data provider. »The global marine equipment industry is in the control of very few large companies, and Chinese manufactures do not have a say,« said Wang.
