Changing market threatens to capsize ship making industry

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.
Source: Global Times