The Spiral

E-mail Print PDF
AddThis Social Bookmark Button

Charting the meteoric rise and catastrophic stumble of China’s shipbuilding industry

Consider the plight of a Chinese shipbuilder. Unless the corporation he works for is state-owned, he faces extinction.

The problem is the global export market’s slump—predictably connected with the dire health of the US and EU economies—has killed orders for bulk carriers, which are the Chinese shipbuilders’ forte.

With no newly built carriers to ferry goods across oceans, shipbuilders have no business and cannot pay off multimillion yuan loans. The jittery banks, rather than give these private enterprises breaks, call in and the resulting bankruptcy is thinning the ranks of a sector that numbered 1,536 shipyards-strong earlier this year. (Some sources claim the actual number of shipyards exceeds 2,000.)

It was never supposed to end like this, but if there are any lessons worth learning, it is about expedience. While analysts, government officials, and even highly placed executives admit the shipbuilding industry will shrink in the coming years, there is a silver lining amid the gloom.

Thanks to its centrally-planned economy, the death of so many privately owned shipyards is acceptable to China’s leaders since there are more than enough reliable government-owned shipyards to pick up the slack.

Giants like the China State Shipbuilding Corporation (CSSC), for example, can even expect to remain busy even with a dearth of international clients. The reasons why are twofold. One is apparent and the other, strategic: All Chinese state-owned firms cannot fail and they will become the vanguard of new technology, which China needs to become competitive.

The bad news for the bit players in very grim, however. A maritime news service based in China described their plight by reporting the continuous drop in the volume of orders for deadweight tons, the metric used for shipbuilding.

Additionally, even the current president of the China Association of the National Shipbuilding Industry (CANSI) Zhang Guangqin admitted that the worst has yet to come, even when small and medium sized shipyards are closing shop from a lack of customers and financing.

Rewind
In hindsight, it is as if Chinese shipbuilding was built to fail. Despite 20 years of unrestricted growth, it was not until 2007 that the entire industry began to enter a new plateau. What drove its surge after so many years spent trailing nimble-yet-cutting edge South Korea (and even Singapore) was speculation in China’s appetite for raw materials, which produced orders for bulk carriers, usually Capesized— meaning built for travel across South Africa’s Cape of Good Hope.

In the lexicon of shipbuilding, bulk carriers make up the featherweight class that includes the ubiquitous Handymax plus the lager Panamax and Capesize— these are what transport cargo containers en masse—with the other end of the spectrum occupied by the VLCC and ULCC class—for liquefied natural gas.

From 2007 to 2010, China’s savvy shipbuilders focused on quantity and the lower end of the spectrum, like the Handymax and Capesize-class vessels. Shipyards across coastal provinces like Zhejiang, Shandong, Jiangsu, and Liaoning churned them out in record time. This is why a state-owned news organ eventually trumpeted China’s status as the world’s biggest shipbuilder by 2010, citing how the number of new orders and the volume of backlog orders accounted for as high as 46% of the world market.”

Back then, the orders constituted millions of deadweight tons worth of ‘holding ships’ or container vessels in the Handymax-class. This meant Chinese shipbuilders focused exclusively on building more of the easiest product to make than the next guy. So China did lead by a large margin even if South Korea remained dominant when it came to actual quality and innovation, not to mention a broader variety of building skill.

But by 2011, the placements on order books had plummeted. The US-European export market had evaporated and very profitable firms were hemorrhaging money. Then shipbuilders started to fail.

If survival is paramount, China’s more than 1,500 shipyards have to, at least, upgrade their skills or pivot their business models to remain competitive.

Earlier this year, Dongfang Shipbuilding already shifted its manufacturing to offshore projects. Another lifeline is building naval ships and support craft for both the People’s Liberation Army Navy and maritime security, both of which are undergoing across-the-board modernization. This is why Chinese state-owned shipyards are going to endure and eventually become formidable global leaders in their own right.

When times are bad, the lucky few have a tough government to lean on. And when the winds shift, they can sail ahead, confident of eclipsing their rivals. As for the deadbeats, total oblivion awaits.

Print ed: 12/12-01/13

 

On Newsstands Now

DECEMBER 2014:
The Asian Consumer Goldmine

14-12