After decades of manufacturing bulk carriers and tugboats, China is jumping ship from the inefficient and dated vessels that are clogging up Chinese shipyards and investing heavily in the rapidly growing market of liquefied natural gas carriers, luxury cruise ships and drillships.
The new course by many shipyards in China, such as Shanghai-based Hudong-Zhonghua Shipbuilding (Group) Co Ltd, of abandoning low-end vessels that are quickly fading into disuse in maritime commerce, comes at a critical time for the nation and the world. Shipyards around the world reported losses in 2010 and 2011 because of overcapacity and surging prices in energy, raw materials, and ship parts.
The reason for the new strategy is an oft-used one: the global economic recession. Orders for bulk carriers - once dynamic in China's boom years before the economic crisis - have dwindled, creating an oversupply. The European debt crisis added to Chinese shipyards' woes.
Before the crisis, many European shipowners chose Chinese shipyards to build simple vessels in a cheap and efficient manner. But last year alone, global orders declined 13 percent from a year earlier to 146.28 million compensated gross tonnage (CGT), an indicator of the amount of work needed to build a ship.
Orders for Chinese shipyards dropped 3 percent from 2010 to 57.58 million CGT, according to Clarkson Research Studies, a British intelligence provider on the shipping industry.
China is now betting on vessels deemed higher in value, such as LNG and liquefied petroleum gas carriers, as well as marine fishing vessels, offshore pipe-laying vessels, large icebreakers and chemical tankers. Shipyards hope the new foray will help them tap into more buyers and reach new and farther destinations.
Hudong-Zhonghua Shipbuilding, a State-controlled enterprise that is China's only builder of LNG carriers, is one large shipyard that has responded to this national shift. The company is expanding its manufacturing capabilities to not only LNG carriers but mega containers, drilling vessels and luxury cruise ships.
"Industrial nations are all eager to purchase natural gas from abroad. LNG carriers are exactly what they need to own," says Jin Yanzi, Hudong-Zhonghua vice-president. "Our LNG carrier-building capacity has grown along with their consumption demand and import of natural gas."
The company has invested $320 million in technologies to build LNG carriers more efficiently. It has also increased spending to set up more research and development centers and has formed partnerships with shipowners in the energy transportation industry and ship-designing companies around the world.
Last year, Hudong-Zhonghua signed a $1 billion contract to build four LNG carriers in a joint venture with Mitsui OSK Lines, Japan's major merchant fleet operator. It also finished developing the technology to build container vessels that have a capacity of 13,000 twenty-foot equivalent units (TEU), the unit of cargo capacity for container ships.
Last year, Hudong-Zhonghua delivered 28 ships to different shipowners throughout the world. More than 80 percent of the buyers were from Germany, the Netherlands and Greece. The company's sales grew by 4 percent from 2010 to $2.06 billion last year. It hopes to make $2.14 billion by producing 26 vessels this year.
The company's next move is to sell small- and middle-sized cruise ships to the United States in the next few years by investing 2 percent of its annual revenue. New ships will be built at its new shipyard on Changxing Island near Shanghai.
"We discovered that individual tourism has become more popular in America as many US and Canadian tourists are keen to take special cruises to visit the South Pole or Arctic areas. This will be an appealing market for us to make a profit," Jin says.
As Chinese shipyards become less dependent on the European market, there have been more deals with the US, Canada and the nations of Scandinavia, where there is a growing demand for Chinese ships.
Yangzijiang Shipbuilding Holdings Ltd, based in Jiangsu province, obtained the biggest order in its company history in signing a $2.5 billion contract with Canadian shipping giant Seaspan Marine Corp last year for 25 10,000-TEU container vessels, the biggest container vessel contract in China. These vessels will be delivered in 2014 and 2015.
"Having these big contracts in place shows that large Chinese shipbuilders are fully capable of producing high-value-added ships to compete with South Korean rivals and shake their monopolistic position in the global market for mega-containers," says Yangzijiang Shipbuilding spokesperson Zhang Yao.
Zhang says the Chinese shipping industry is facing increasing challenges from buyers to reduce the operating costs for ships and improve energy efficiency.
"We have all seen the dramatic transformation caused by the global economic crisis, which has created a buyer's market," Zhang says.
Yangzijiang Shipbuilding signed a preliminary agreement with China Development Bank and Germany's Peter Dohle Schiffahrts-KG to build eight 10,000-TEU container vessels last year. China Development Bank will provide $1 billion in financing over the next five years to enable the German company to purchase ships from Yangzijiang Shipbuilding.
But there are major problems for the shipbuilding industry in China, which saw total revenue of $95.3 billion in 2010 and revenue in exports of $40 billion. Under the current global economic climate, a number of shipowners from Europe do not have sufficient funds to support long-term shipbuilding projects that generally take one to two years to complete. Many Chinese shipbuilders, as a result, are struggling to complete their orders quickly and cheaply.
Officials at Nantong Mingde Group, a private-owned shipyard also based in Jiangsu province, said the company is more inclined to increase business activities with foreign buyers that didn't suffer as greatly in the recession or have at least recovered quickly from the recession.
Mingde stopped its business partnership with southern European nations, especially with Greece, four years ago. The company has been betting on the rising demand of chemical tanker ships and vehicle carriers.
"I would rather make deals with giants from North Europe, US and Canada, who are capable of making payments and don't have credit problems in their countries," says Ji Fenghua, board chairman of Mingde.
Countries such as Norway, Denmark and Germany, major manufacturers of chemical products, reportedly have a rising demand for chemical tankers to transport high-contamination liquids or materials.
In 2011, Mingde delivered 12 ships to buyers from Norway, Denmark, Germany and Singapore, including four chemical tanker carriers and two vehicle carriers. Sales reached $410 million last year, with a profit of $20 million.
Ji says one reason for Mingde's success is that it has adopted new designs for ship buyers. Japanese and South Korean shipbuilders, he says, insist on using their own design to build ships to avoid financial risks.
"(Adopting new designs), even though it is quite costly, has played an important role in gaining a favorable impression from (buyers)," he says.
Torbjorn Sjoblom, a Swedish site team manager who works for Norway's Jo Tankers, one of the world's main providers of deep-sea transportation services for chemicals, says China's ability to "offer high-quality design and after-sales services significantly improves the marketing credibility of Chinese shipyards on the international stage".
Sjoblom and his multinational team are responsible for overseeing a new deal signed in 2011 for two chemical tankers being built by Mingde.
Mingde plans to work closely with shipowners such as Germany's Schulte Group, Danmark's A.P. Moller-Maersk Group, Norway's Wilh.Wilhelmsen Group as well as P. D. Gram & Co AS.
The company also secured an order for one chemical tanker for the US and two self-unloading bulk carriers for Canadian shipowners in 2011.
Ji says selling these type of vessels to new buyers can make up for declines in other markets such as Italy, Spain and Greece.