Rough Winds Ahead for China’s Shipbuilding Industry
Rough Winds Ahead for China’s Shipbuilding Industry

shipbuilding in China
Workers stand beside a freight boat under assembly in Qingdao, east China's Shandong Province on April 10, 2012. Due to the long build-times, the shipbuilding sector is prone to large boom and bust cycles, as production cannot be adjusted quickly. (STR/AFP/Getty Images)

The global collapse of shipping rates and general oversupply of vessels as well as the slow-down in the Chinese economy is forcing more and more Chinese ship building companies to close shop.

According to a report in the Southern Metropolis Daily, a newspaper serving the Pearl Delta region in southeast China, the China State Shipbuilding Corporation general manager Tan Zuojun recently said that 50 percent of mainland Chinese ship builders will be closed in the next 2-3 years.

A staff member at the Taizhou Economy and Information Technology Bureau told 21cbh.com that companies are running on borrowed time. Some still have old orders to complete, as the building cycle for a large ship can span several years, but without new orders coming in, the number of companies to go bust might be even higher than anticipated.

Due to the long build-times, the shipbuilding sector is prone to large boom and bust cycles, as production cannot be adjusted quickly. At this moment, there is a persistent glut in vessels and productive capacity on the global market. Mainland China alone has enough capacity to service the entire world’s demand for new ships, as was reported by a Chinese shipping industry newsletter.

According to China Economic Weekly, mainland Chinese state and private companies went into the shipbuilding business in a large scale beginning in 2007. Relying on low raw material costs and underpriced labor, the industry grew by leaps and bounds.

In 2010, the Chinese shipbuilding industry overtook South Korea as the world leader in total shipbuilding capacity. During its peak, there were over 3400 shipbuilding companies in China compared to 329 shipyards—including different yards of the same company— in the United States today according to data sourced by the website shipbuildinghistory.com.

Two years later, however, sailing is not as smooth anymore for the Chinese shipbuilding industry. Data released by the China Shipbuilding Industry Association Aug. 28 shows that during the first seven months of this year, the three major indicators relating to production and orders were pointing down.

Total finished capacity amounted to 35.49 million tons, a 7.7 percent decline compared to same period last year. Total new orders amounted to 11.64 million tons, a 50.7 percent decline from last year. The current order-book stands at 123.48 million tons, a 29.9 percent decline from last year.

The situation is quite bleak according to Shanghai International Shipping Research Center deputy director of market analysis Zhang Yongfeng. He told Time Weekly in July this year: “With the worldwide shipping industry continuing to be in a slump, the Chinese builders are entering a bitter cold winter period: It’s hard to get orders, hard to meet orders, it’s hard to finance, we have high costs and low profit.”

These factors put enormous economic pressure on these very capital-intensive companies. As the new order flow stalls, many Chinese shipbuilding companies were shutdown down over the past year.

According to a report by Chinese Economic Weekly on Sept. 4, the main factors affecting the Chinese shipbuilding industry are tight lending standards, a reduction in new orders, and the difficulty to deliver on old orders—higher input costs and lack of financing are some reasons for delays, which usually carry heavy penalties. The most pessimistic prediction says the number of shipbuilding companies will go down from 3400 at its peak to less than 300, according to the report.

Data released by the Leqing City Economy and Information Technology Bureau in Zhejiang Province provides some more color on this dire prediction: Among the 23 shipbuilding companies in Leqing, 13 were still operating normally at the beginning of this year, but now there are only 7 left as more than two-thirds of the companies have stopped production.

Hu Jintao, director of the Shanghai Merchant Ship Design and Research Institute, told Dongfang Daily, a local newspaper in Shanghai, that 2012 is only the start of it and it will get worse in 2013 and 2014.

Experts suggest that the brisk development of the Chinese heavy industries is reminiscent of the infamous “Great Leap Forward” in the 1960s, where China set ambitious goals for heavy industry production that lacked the necessary infrastructure and resulted in a famine that killed millions of people.

Today, China mainly builds low value-added large ships and does not have the necessary technological prowess that provides an edge.

At a forum held on Dec. 15, 2011 in Taizhou City, Jiangsu Province, a leading expert in the field, Shen Wensun of the Chinese Academy of Engineering, said: “Regarding key technologies in ship design, research, manufacturing and development of key components, [China] still lags behind Europe, Japan, South Korea and other advanced nations and regions. …There are too many copy-cat companies that lack innovation and most stay at the initial stages,” according to a report by Cansi.

At the same event, Chinese Academy of Engineering academic Zhang Bingyan said that increasing energy efficiency and reducing pollution are the big trends in new ship design and that those who don’t have these technologies will not get any new orders.

Read the original Chinese article.

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