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October 15, 2013

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Home » Business » Manufacturing

Shipbuilding industry struggles to keep head above water

Source: Xinhua | October 15, 2013, Tuesday | Print Edition

Chinese shipbuilders have been sailing toward bankruptcy in recent years while China trying to consolidate the industry and bail it out from the woe of overcapacity.

With delays in deliveries, order cancellations and falling prices for newly-built vessels, shipbuilding firms have been in a slump since late 2008 when the global financial system was in free fall.

Cash-strapped shipping companies froze expansion plans by scrapping or delaying orders. The euro crisis from late 2009 made the situation even worse.

Statistics from the China Association of National Shipbuilding Industry showed that in the first half of 2013, the combined revenue of 80 major enterprises totaled 120.3 billion yuan (US$19.6 billion), down 18.5 percent year on year. Total profit dropped 53.6 percent to 3.58 billion yuan.

Their production is estimated to sink around 50 percent in 2013, according to a Ministry of Finance report in August.

“The color of the industry was gray in 2011. It was black last year. For this year, it’s red, bloody red,” said Chen Qiang, president of Rongsheng Heavy Industries Group Co, China’s largest private shipbuilder. The shipbuilder’s operating revenue for 2012 was 7.9 billion yuan, a tumble of 50 percent year on year.

China’s shipbuilding industry swam in the “golden age” in 2004 when shipyards, especially private ones like Rongsheng, rode the waves as a symbol of the country’s booming economy.

Before 2000, the number of shipyards in China totaled in the hundreds before quickly ballooning to above 3,000 by 2007 under a “get-rich-quick” mindset. China became one of the world’s top three shipbuilding nations together with Japan and South Korea.

Now, the industry is a shadow of its former self.

Though bankruptcies remain rare despite mounting losses even at well-connected state-owned firms, many are teetering on the brink.

In Jiangsu Province, the country’s largest shipbuilding region, companies have been warned that if there are no new orders, the backlog will merely be enough to “feed” enterprises for another two years.

According to the provincial commission of economy and information technology, the number of ships completed sank 32.9 percent while current orders fell 17.5 percent year on year in the first half of 2013. Of the 66 shipbuilders, only 23 received new orders.

But even those with orders are not positive.

“Profit margins are already razor thin as prices are being pushed down,”  said Tang Yong, chief financial officer of Dayang Shipbuilding Co Ltd in Yangzhou, adding that the price for a new ship is the lowest in a decade.

Many firms are not willing to go out of business as China lacks a bankruptcy mechanism to allow creditors to be compensated. Many believe the company that sticks it out stays alive.

“The industry itself is a ship so bloated that a slimming plan is in dire need to push it in the right direction,” said Song Songxing, a business management professor at Jiangsu-based Nanjing University.

“Otherwise, low-end products will continue snowballing until it drags down the whole industry,” Song warned.

Li Yanqing, director of China Shipbuilding Information Center, said low value-added products like bulk carriers, oil tankers and container ships, are the main products built by the yards. He said Chinese shipbuilders trailed Japan and South Korea badly in  production management, work efficiency and developing high value-added products for ocean engineering projects.

“Chinese shipbuilders are competing fiercely with each other on the easy-to-make-but-cheap products, while few are willing to invest in the development of high-end products,” said Li. This lack of investment “is no good for the long-term health of the industry.”

Signpost on the sea

The central government has also identified that structural reform must go deeper to remedy the inefficient and debt-laden industry.

The State Council, or China’s Cabinet, unveiled a three-year plan to consolidate the industry in August, which includes halting approvals for new shipbuilding projects and freezing credit support for expansion of facilities.

Meanwhile, the Cabinet has vowed to prioritize the development of ocean engineering products, for example deepwater drill ships and rigs, due to rising global need as the world seeks energy resources from the sea.

Chinese yards are trying to tap into the ocean engineering market as they will be able to access bank credit while advance payments are available.

Chang Jianhua, Rongsheng’s vice president, said in August that the company plans to accelerate development of ocean engineering products, estimated to bring 40 percent of the firm’s total income by 2015.

By then, the profit margin of Rongsheng’s shipbuilding business may rise to 20 percent from 5 to 10 percent now. “The more difficulties, the more opportunities,” said Chang.

However, ocean engineering products demand high technology, which is an Achilles’ heel for the country’s shipbuilders, especially private yards, said Ni Tao, general manager of the China Ocean Shipping Company.

“That’s why most Chinese firms are subcontractors or co-builders in the international ocean engineering market,” said Ni. “We need government support to develop ocean engineering products based on home-grown technology.”

Rongsheng invested heavily in a new research and development hub in Singapore last year. It aims to combine foreign know-how with Chinese national identity.

“Traditionally, Singapore is a talent pool for ocean engineering product development and management. We set up the new R&D center there, which allows Rongsheng to speed up the product-development cycle,” said Chen, Rongsheng’s president.

But experts warn the government should stop micromanaging the industry while it upgrades. It should ensure the market runs smoothly by having a level playing field and stronger rules.

 

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