Abandon ships? not so fast

The Hengfu Shipyard, headquartered in east China's Zhejiang province, used to be an industrial heavyweight with an annual production capacity of 1 million deadweight tons of vessels. However, the ship producer declared bankruptcy in 2011 due to a lack of orders and mounting debts. Zhejiang province is clustered with many ship builders operating within private shipyards. But since 2009, many of them have gone belly-up like Hengfu.
Government-backed shipyards are facing tough times, too. The CSSC Jiangnan Heavy Industry Co Ltd, one of the top five state-owned shipyards in China, recorded a severe loss of 60.31 million yuan ($9.85 million) in the first half of 2013, while its business revenue plunged 39.49 percent year on year. In 2012, the company registered a loss of 97.37 million yuan ($15.91 million).
The combined profits of 80 major ship builders monitored by the Chinese Association of the National Shipbuilding Industry nose-dived by 53.6 percent in the first half of the year to 3.58 billion yuan ($584.1 million), while business revenues plunged 18.5 percent to 120.3 billion yuan ($19.66 billion).
The shipbuilding sector is closely related to 113 other industries, including iron and steel, petrochemical engineering, equipment manufacturing and digital information. The Central Government has expressed deep concerned over the industry's woes.
China grew to become the world's leading ship builder over the last decade as hundreds of private yards opened to compete with State-run companies. Now, the government is poised to regain control as the industry heads for consolidation.
To this end, the State Council issued a support plan on August 4 aimed at keeping the shipbuilding sector afloat. The three-year plan for the industry includes controlling capacity, upgrading shipbuilding standards and developing higher value-added products.
Capacity glut
The shipbuilding sector is capital-, technology- and labor-intensive, with an extremely long industrial chain. It has been a highly competitive industrial field that major global powers have participated in. China is no exception. The export-oriented economy took off in China after the country entered the WTO in 2001, leading to a boom in the country's shipbuilding sector.
From 2002 to 2010, the number of shipyards with a production capacity of 300,000 deadweight tons or above increased from five to 33, while the number of yards with a capacity of 100,000 deadweight tons or above surged from 13 to 59. The number of shipyards in China has swollen to over 1,600, among which 60 percent were built after 2001.
In 2010, China overtook South Korea to become the world's largest ship builder after it outdid its rival on new orders and shipbuilding capacity. Just when China's shipbuilding sector embarked on a fast track of development, the global financial crisis erupted, resulting in falling new ship orders.
"The dilemma of China's shipbuilding sector is a result of sluggish foreign trade, but also a result of earlier rampant expansion," said Li Zuojun, a research fellow at the Development Research Center of the State Council.
Li attributed the heavy losses in the shipbuilding industry to "crazy expansion" over the past several years, when bank loans and private capital flocked to the sector. "Many shipyards produced vessels even before receiving orders, resulting in severe excess capacity. Later, the downturn in the global economy made things worse."
"Chinese ship builders lack strong innovation, while overcapacity persists and ocean engineering equipment development lags far behind," said Li.
To boost the sector, the Ministry of Industry and Information Technology issued a support plan in June 2009 to ensure shipyards have easier access to credit. Thus, local banks gave the green light to private yards, intensifying the overcapacity problem. The production capacity of shipyards soared to 50 million deadweight tons in 2011.
But only 50 percent of the capacity was eventually utilized in 2012. "A reasonable rate of capacity utilization should be over 85 percent," said Li. Chinese-made ships are mainly bulk freighters, tank ships and container ships, while high-end technology is lacking. "Excess capacity persists in lower value-added products," he said.
Source: China Daily