Pressure for new contracts piles on
South Korea and China may still be slugging it out for top position in today’s tough shipbuilding rankings but experts believe that once the present crisis is over, China will have emerged with a significant lead and could even become the “shipbuilding nation of choice”. Before that happens, however, the country’s shipbuilding sector will have to undergo a painful period of bankruptcies, takeovers, modernisation, consolidation and closures to streamline a business that today comprises more than 4,000 shipbuilding firms.
Sean Wang, chief financial officer of Rongsheng Heavy Industries, was addressing delegates at Seatrade’s China Money & Ships earlier this week. He predicted that Chinese shipbuilding is currently poised on the brink of a period of widespread consolidation in which thousands of small builders face likely closure, with only a relatively small number of lucky ones absorbed by larger entities. China overtook South Korea in 2010 and became the world’s number one builder in terms of contracts, orderbook and deliveries, only to lose its position to South Korea again in 2011 when new contracting plunged.
Wang outlined what he described as the “concentration gap” between China and South Korea: in China, 60% of delivered ships are built by the top ten shipyards, leaving some 4,000 other facilities scrambling to win small contracts of relatively low value. In contrast, he said, 80% of South Korean-built ships are delivered by the country’s top four yards, but there are only around 70 shipbuilding entities in South Korea in total. Chinese yards win contracts typically worth less than a fifth of those in South Korea, he told the conference, and many Chinese builders remained low in competitiveness, low in concentration, small in scale, dispersed in R&D efforts and rare in resource sharing.
However, set against this uncertain backdrop, Wang pointed to a range of positive points which, once the present order famine is finished, will leave surviving Chinese yards in a relatively strong competitive position. Some of these stem from the fact that China has become the world’s principal manufacturing factory. Many companies have transferred industrial production to China; there is a vast pool of manufacturing talent there; and there is also a growing preparedness to adopt new and green technology, a key requirement when ship owners embark on the next round of ship contracting in due course. Rapid corporate consolidation across various key sectors saw 54 Chinese companies in Forbes top 500 in 2010, up from three in 1995 and 11 in 2000.
Other plus points relate to the country’s long-term strategic plan in which high-end manufacturing such as offshore engineering and construction are key objectives. In this context, Wang drew attention to China’s liquid natural gas ambitions. In the wake of the Fukushima tragedy last year, the country’s ambitious nuclear energy development plans have been dropped. Instead, LNG is now a key focus, falling neatly within the Government’s aim to promote green products and manufacturing, and will provide the “core resource” for a range of new infrastructure projects. There is a long way to go. Compared with many western economies where gas can make up as much as a quarter of the energy mix, it accounts for less than 4% of energy consumption in China.
However, the biggest plus point favouring surviving Chinese yards in the future is the ability for owners to raise finance from Chinese banks. As was pointed out several times at the China Money & Ships conference, the Government has readily grasped the importance of the shipbuilding sector as a key component in modern industrialised infrastructure and as a major job creator. Bank funding for shipyard development is one angle, as are funds for domestic owners to place orders in Chinese shipyards.
However, the Government has also been keen to encourage Chinese banks engaged in the shipping sector to look at projects for foreign owners building in Chinese yards. Greek and Indian owners were cited amongst those who have already benefited from Chinese bank finance in relation to newbuilding projects. The ships they contracted would simply not have been built had these owners relied on traditional sources of ship finance, the conference was told. So far, a Chinese angle appears to be required and, in this respect, the country’s remaining builders will be well-placed when the upswing finally arrives.