China's shipbuilding industry has reached a critical juncture, after having been overtaken by South Korea in 2011 as the world's largest ship manufacturer. Its once strong shipbuilding firms have seen sharp declines both in terms of output and new orders in the first five months of this year thanks to falling global demand and a shrinking foothold in the market.
It is very likely that insufficient demand from abroad will continue to squeeze the sector's profitability for some time to come. If the industry remains in the doldrums, more than half of China's shipbuilders will face bankruptcy in the years ahead. But how can China's ship manufacturing industry cope with the severe challenges facing it? I have three suggestions.
First, ship makers should build up their scale and shore up their cash flows through mergers and acquisitions. For ship companies, having a steady supply of cash is critical for survival given the high fixed costs of the industry. Adding to cash supply pressure is the fact that most clients only provide a 30 percent down payment on ship contracts, which means that most ship makers have to scrape by financially until their orders are complete.
When the market is good, companies with tight cash flows can get by with prepayment money from the next order to complete the current deal. But, with the current downturn, an inability to get new orders has forced a sizable number of small and medium-sized ship builders to close down.
Chinese shipbuilders also need to step up their technological and management prowess in order to sharpen their competitive edge. At present, most ship makers in China still rely on cheap labor as their sole advantage. It is estimated that Chinese workers in the shipbuilding industry are paid only one tenth as much as their Japanese counterparts and only one sixth of what their peers in South Korea make. With many workers across China seeing their salaries grow by double-digit figures in recent years, the inexpensive manpower the country's ship makers have relied on for so long may soon evaporate, leaving them with little else to offer.
Finally, confronted by a weakening traditional market, ship companies should also pursue new market space. For example, boat manufacturer Sunbird managed to maintain profit growth by focusing on private yachts. Also, Jiangsu Zhenjiang Shipyard Co has weathered the industry downturn by turning to specialized vessels, such as ocean salvage ships.
According to CANSI, China ship industry has seen in overall weakness in the first five months this year. The three main shipbuilding indices, industrial output growth, ship export and economic growth have all been greatly depressed in the global shipping market downturn.
By the end of May, national new orders and newbuilding output totaled at 9.54m dwt and 22.53m dwt, falling by 47.3% and 10.1% separately year on year. Order catalog fell by 27% to 134m dwt, 10.4% down since the end of 2011.
In the period, national ship industrial output reached CNY319.5bn, increasing by 5.1% against the same period of last year. Shipbuilding, ship equipments, ship repairing, ship conversion and offshore plants respectively realized industrial output value of CNY240.6bn, CNY45.2bn, CNY7.08bn, CNY 13.5bn and CNY11.3bn. The traditional shipbuilding industry has seen the hardest hit.
In the first five months, China’s national ship export volume came up to 18.79m dwt, 11.5% down on year-on-year basis. New export orders and export orderbook have decreased by 48.4% and 27% to 6.84m dwt and 115m dwt separately. 83.4% of the delivered vessels, 71.7% of new orders and 85.3% of orderbook were for export.
Amid global economic slump, overall Chinese shipbuilding industry turns out to be under depression.
During the first five months, Chinese shipyards' newbuilding delivery and new order stood at 22.53m dwt and 9.54m dwt, down by 10.1% and 47.3% each, while orderbook, at the end of May, was 134m dwt, down by 27% yoy and by 10.4% on the end of 2011.
During the same period, China's delivery of export newbuildings decreased by 11.5% to 18.79m dwt and 6.84-dwt export ships have been newly ordered, down by 48.4%. As of the end of May, backlog for export ship declined by 27% y-o-y to 15m dwt.
Export ship accounted for 83.4%, 71.7% and 85.3% of China's overall newbuilding delivery, new order and orderbook, respectively.
During January-May period, export trading from China's shipbuilding-related companies above certain level reached around CNY 112bn ($17.6bn), down by 10.7% on the same period last year, of which shipbuilding industry saw a drop by 11.3% to CNY 102.6bn, while ship equipment and ship repair industries increased 2.8% and 6.6% to CNY 4.35bn and CNY 1.84bn each. Ship conversion declined by 21.5% to CNY 880m, while offshore facility construction industry sharply increased by 42.7% to CNY 780m.
Meanwhile, during the first five months of the year, 1,630 shipbuilding-related companies above certain level in China's overall production value stood at CNY 319.5bn, up by 5.1% year-on-year. Of them, shipbuilding and ship repair industries rose by 0.7% and 10% to CNY 240.6bn and CNY 7.08m each. Ship equipment and ship conversion grew by 27.1% and 24.6% to CNY 45.2bn and CNY 13.5bn. Offshore facility construction also increased by 11.4% to CNY 11.3bn.
Chinese shipbuilding industries forecast that recent troubles would be hard to be recovered in a short period.
China Securities Journal reported that Chinese shipbuilding industries had had a boom from 2004 to 2010, but things started to go difficult from last year. Some private shipyards are even going bankruptcies.
Also, it pointed out that Chinese shipyards would take enough time to overcome current depression and during the period, they should carry out R&D and get over increasing production cost and declining productivity.
Amid global economic depression and overtonnage, decreasing demand pressures down newbuilding price as well, which has dropped over 40% comparing to that from the boom period and over 10% on the end of last year.
A market player said that with labor cost rising 12% every year, China has begun to lose edge on price competitiveness.
According to Clarksons on June 7, Chinese shipbuilders contracted 40 vessels of a cumulative 661,000 cgt in May, while South Korean yards booked 18 vessels of a combined 324,000 cgt during the same month.
However, Korean shipyards contracted around $1.048bn last month, exceeding China's $967m.
From January to May, 2012, Korean shipbuilders have contracted a cumulative of 2.84m cgt (99 vessels), $11.7bn, while Chinese shipyards have inked 2.08m cgt (142 ships), $3.6bn.
Meanwhile, during the five-month period, as for newbuilding delivery, Korea recorded 7.32m cgt (241 vessels) and China 7.61m cgt (437).
As at the end of May, China secured 38.72m-cgt orders on the book and Korea's backlog stood at 31.73m cgt but the difference between the two countries are getting smaller.
Amid global shipbuilding market depression during the first four months, Chinese shipbuilding industry saw its major shipbuilding-related indexes fall. Also, its total production value slowed down, export ship decreased, etc.
According to the China Association of the National shipbuilding Industry (CANSI)'s offcial data, China's delivery, during January-April 2012, decreased by 16.8% to 15.65m dwt, year on year. Chinese shipbuilders contracted a total of 7.37m-dwt newbuildings in the four months, down by 45.9%, while their orderbook at the end of April stood at 139.24m dwt, down by 26.1% y-o-y.
Export ship delivery and export newbuilding order declined by 21.4% and 49.5% to 12.67m dwt and 5.58m dwt, each. Backlog for export ship, as of the end of April, dropped by 27.3% to 117m dwt. Export ship took 81%, 75.8% and 83.8% of overall delivery, new order and orderbook.
Meanwhile, during the first four months, China's 1,624 shipbuilding-related companies over a certain level's total production value of completed product increased by 6.3% to CNY 249.8bn ($39.2bn), among which newbuilding segment grew by 2.3% to CNY 188.3bn, marine equipment rose by 26.2% to CNY 35.2bn, ship repair, conversion and offshore facility construction went up by 8.7%, 31.1% and 6.6% to CNY 5.5bn, CNY 10.9bn and CNY 8.5bn, respectively.
During the same period, total export value of ship related product from these companies decreased by 10.9% to CNY 87.9bn, of which shipbuilding industry declined by 11.6% to CNY 80.4bn, marine equipment and ship repair increased by 4.7% and 4.8% to CNY 3.4bn and CNY 1.4bn, while conversion dropped by 17.9% to CNY 700m and offshore facility construction rose by 44.3% to CNY 600m.
In the first four months, Jiangsu shipbuilding industry has been greatly depressed in the international shipbuilding slack. The three main indices of shipbuilding – new orders, orderbook, newbuilding output – have all seen great declines in the period. However, Jiangsu still takes the lead in Chinese shipbuilding market.
By the end of April this year, the shipyards in Jiangsu have delivered 144 vessels of 6.256m dwt, falling by 4.4% year-on-year in tonnage and occupying 39.9% of national total. 87.7% of the 144 ships were for export.
In the same period, Jiangsu successfully won new orders of 48 vessels and1.467m dwt, falling by 55.1% year-on-year and accounting for 19.9% for the total volume nationwide. 62.9% of the new orders were export ships.
In the corresponding time, the orderbook for Jiangsu shipyards has declined by 28.2% to 984 vessels of 51.207m dwt, of which 85.1% were for export. However, the final volume still accounts for 36.7% of national total.
Since the beginning of the year, shipowners have delayed, cancelled and stopped more new orders, which makes the conditions for shipyards more challenging. Shipyards will try every means to make sure the scheduled delivery realized in the following months of the year.
With China's shipbuilding industry mired in its steepest earnings slump in three years, the announcement from one of Australia's wealthiest businessmen to construct a replica of the Titanic comes as sweet music to the ears of Chinese shipyard CSC Jinling Shipyard Co Ltd.
Though company spokesman Li Wenbao says it is too early to talk about economic gains from the contract, Li noted that the company "hopes the deal will expand our international influence and thus win us more orders".
In late April, Clive Palmer unveiled plans to build the Titanic II with plans for a maiden sailing from London to New York in 2016. CSC Jinling Shipyard Co Ltd, based in Nanjing, Jiangsu province, signed a Memorandum of Understanding on April 20 with the Australian tycoon to construct the ship in China.
"We will try to build a liner that has the same dimensions as the original Titanic. The Australian side is in charge of the design," Li says.
The deal comes as China's shipbuilding industry faces choppy waters amid sluggish demand and intensified competition.
In the first quarter, China built ships amounting to 11.2 million deadweight tons, down 22.5 percent year-on-year, according to the China Association of the National Shipbuilding Industry.
New orders totaled 5.59 million deadweight tons, a drop of 48.7 percent from a year earlier. Combined outstanding orders were 141.9 million deadweight tons, down 5.3 percent from the end of 2011.
Industry heavyweights, including China Shipbuilding Industry Co Ltd, reported a drop of 11.5 percent in revenue from January to March, posting a 27.3 percent drop in net profit. Revenues from China CSSC Holdings Ltd also slumped by 20.2 percent, with net profit sliding by 62.7 percent year-on-year.
The shipbuilding industry has undergone vast development during the 11th Five-Year Plan (2006-10). Chinese shipyards surpassed South Korea to become the world's top manufacturer in terms of new deliveries, new orders and outstanding orders, says Xiao Zhijia, an industry analyst at the China Shipbuilding Economy Research Center.
The industry for cruise ships is growing in China. According to the China Association of Port-of-Entry, the number of people traveling in and out of China on cruises reached 718,000 in 2011, accounting for just 0.4 percent of overall inbound and outbound travel.
"However, the financial crisis became a turning point, where demand for ordinary ships such as bulk cargo ships and oil tankers slumped the most. The need for value-added vessels is on the rise, which will put Chinese yards in an unfavorable position," Xiao says.
The Chinese shipbuilding sector is reportedly on the cusp of evolving, with shipyards becoming less dependent on bulk carriers and seeking to increase the share of, for instance, container ships and liquefied natural gas storage tanks.
The building of the Titanic II in a Chinese shipyard could be a strategic shift as the shipbuilding sector becomes less dependent on bulk carriers and seeks to increase its share of containers, says Steen Lund, managing director of international ship classification society Germanischer Lloyd's Southeast Asia-Pacific operations.
Of the 21 orders CSC received last year, the majority came from overseas.
Li says preparatory work is being done on the Titanic replica. He was unable to disclose the cost of the deal.
The ship will be equipped with "the latest navigation and safety systems", Palmer was quoted by the Australian Associated Press as saying in Brisbane.
Palmer said design work in conjunction with a historical research team has begun on the Titanic II, which will have 840 rooms and nine decks.
"It will be designed as a modern ship with all the technology to ensure that (an accident) doesn't happen," he said. "But of course if you are superstitious, you never know what could happen."
He added that the Titanic II will be "the ultimate in comfort and luxury, with onboard gymnasiums and swimming pools, libraries, high-class restaurants and luxury cabins. The only differences will be below the waterline. The ship will be powered by diesel rather coal and will include a bulbous bow for greater fuel efficiency, plus an enlarged rudder and bow thrusters for improved maneuverability. It will have four smoke stacks like the coal-powered original, but they will be purely decorative".
Apart from the Titanic II, the tycoon's shipping company, Blue Star Line Pty Ltd, has commissioned the Chinese shipyard to build bulk cargo ships.
In 2011, bulk carriers delivered the largest tonnage at Chinese shipyards, while deliveries in South Korea were more diversified over a wide range of vessel types.
Xiao says the Titanic II will be a pioneering endeavor for the Jinling shipyard. It will be the first Chinese yard to embark on such a large-scale luxury cruise ship.
Globally, there are seven to eight new orders for luxury cruise ships each year. For a 120,000-160,000-ton cruise, contracts usually range from $600 million (464 million euros) to $900 million.
"Chinese yards have taken steps to become builders of offshore installation vessels and are entering the cruise vessel segment," Lund says.
"It is also part of the trend where, driven by cost reductions, the market has seen the construction of such high-tech and high value-added ship types as cruise vessels move from Europe to Asia."
But Xiao foresees possible hurdles in designing the ship.
"Any cruise ship will be tailor-made. They cannot be mass-produced. Therefore it poses challenges for ship makers, as it requires coordinated efforts in integrating various parts of the ship," Xiao says.
Nevertheless, the order may be a good example for Chinese yards to study, especially those who are looking to gain more international exposure, he says.
China will add 790 new standards to the shipbuilding industry this year to make it more international, according to the Ministry of Industry and Information Technology, China's top industry regulator.
The country had 1,984 standards in this industry by the end of 2011, with about 70 percent of them being adapted international standards, the ministry said.
However, the country's shipbuilding industry still falls behind global development, especially in the adoption of global standards and ocean engineering equipment production, added the ministry.
According to a previous report, China's shipbuilding industry faces problems such as declining demand and intensified competition.
The country received only about 5.59 million deadweight tons in new orders in the first quarter, a drop of 48.7 percent from a year before.
The built ships only had 11.2 million deadweight tons in the first quarter this year, down 22.5 percent year-on-year, according to the China Association of the National Shipbuilding Industry.
Chinese shipbuilders are in the throes of change into high-value sectors, such as LNG carrier, offshore-related vessels, etc.
According to Economic Research Center of China Shipbuilding Industry Corporation (CSIC), in Q1, only 3.8m-cgt newbuildings were contracted in the world, down by 58.9% year-on-year.
Also, International Bank for Reconstruction and Development reported that the amount of global shipbuilders' damages would reach $50bn in 2012.
In the present, China's shipbuilding industry specialists said that global shipbuilding industry will go through the most difficult time this year. And China is no exception.
Meanwhile, South Korean shipyards contracted 1.93m cgt and keep its global top with over 50% of market share. However, China only contracted 1.05m cgt.
Korean shipbuilders booked orders for high-value vessels, including product carrier, LNG carrier, etc., and offshore facilities, such as FPSO, drillship, etc., as well as bulker, tanker. On the other hand, China mainly inked orders for bulker, small sized tanker, etc.
Chinese shipyards should make a change into high-value sectors and diversify portfolios by developing new ships, high-end technology, etc.