In SWZ|Maritime's December China special, SWZ editor Willem de Jong takes a closer look at this country's massive maritime industry. Read his article online now.
In 1965, the Dutch Royal Schelde Yard built a general cargo ship, the Guangming, for what was then Communist China, also called Red China. The Dutch yards IHC and Van der Giessen-de Noord built more specialised ships for China, a few dredgers and ferries. Yet, the tables have turned; within a relatively short span of time, the Chinese yards have surpassed the otherwise dominant builders of Japan and South Korea. At the same time, Dutch and other international companies building for the maritime industry have set up subsidiaries and joint ventures with Chinese partners.
After the Second World War and the foundation of the People’s Republic of China, the Chinese government tried to develop and expand its maritime presence in the world. During the period of China’s planned economy (1949-1978), this was a slow and tedious process carried out by collectively-owned enterprises, imitating developments in the USSR (Russia under the communist period) and hampered by trade blockade and embargo policies from western countries.
The situation changed drastically after 1978 when Deng Xiaoping opened up the Chinese government, started to stimulate technological developments and science, introduced more freedom in the economy, allowed foreign companies to invest and allowed private ownership. The shipbuilding industry was one of the economic areas that profi ted greatly from this new approach. Just as Japan and South Korea had done years before, China saw the shipbuilding industry as a strategic core for its economic development.
In 1981, Chinese shipbuilding first appeared in the Lloyd’s Register shipbuilding statistics. From that year on, international classification societies were allowed to work in the country, enabling Chinese yards to build for foreign ship owners. At the end of that year, 35 ships, some 400,000 GT together, were on order in China for international owners. Gradually, the Chinese output increased and the Lloyd’s Register Annual Report of 1994 includes the following:
‘The major Chinese shipyards, of which 26 are owned by China State Shipbuilding Corp (CSSC), have undergone a comprehensive refurbishment programme during the past couple of years to begin
exploiting the overseas market.
Currently, export orders at CSSC account for over fifty per cent of the order book, and it is likely that output will at least double over the next five years.
Most of the yards suffer from lower productivity than their main competitors; however, they are flexible, and competitive costs can be achieved through lower wages, subsidised steel and no tax on imported equipment for vessels destined for overseas owners. It is probable that China will become one of the major players in the international shipbuilding market by the year 2000.’
The general cargo ship Guangming was built by the Dutch Royal Schelde Yard in 1965.
Taking Advantage of Cheap Labour
A report from Bremen University, written by Ludwig and Tholen, listed labour costs per month/worker in different shipbuilding nations for 2002 as follows:
- Germany/Netherlands: 2400 USD
- Japan: 1800 USD
- South Korea: 1400 USD
- Poland: 800 USD
- Turkey: 400 USD
- China (Shanghai): 375 USD
- Romania: 300 USD
- China (interior): 150 USD
Of course, the cost of labour is not the only factor, since efficiency, equipment, expertise and quality issues also play a role. Yet, in 2002 it was evident that China had become a strong competitor in the world shipbuilding market. Not only western shipping companies took advantage of the situation by ordering cheap ships from Chinese yards, western yards and other maritime producers also started to work in China with local partners or subsidiary companies for hulls, equipment and sometimes complete ships.
Since then, labour costs in China have risen, but it gave them a strong head start when seriously entering the international maritime industry.
The development of Chinese shipbuilding in million CGTs over the last twenty years.
Zenith in 2011
In 2000, China produced 135 seagoing merchant ships with a combined deadweight of little over two million tonnes. In 2005, the number of ships had increased to 493 with over 10 million tonnes. In addition, because many Chinese repair yards switched to newbuilding, by the year 2008 almost 600 yards were producing ships, the majority engaged in domestic building.
By 2010, when China became the largest shipbuilding nation of the world, both in GT and CGT statistics, an incredible 3000 yards engaged or were planning to be engaged in shipbuilding. The following year 2011 was to be the zenith of production with 1481 ships for a deadweight of almost 70 million tonnes.
Shipbuilding Bubble Collapses
However, this picture changed dramatically after 2011 when the shipbuilding bubble collapsed following the international financial crisis. New yards disappeared just as quickly as they had come, others switched to repair work or other activities. A Clarksons report shows that the number of yards that have at least one vessel above 1000 GT on order, has fallen to 112 in April 2018, the lowest level since 2003.
Since 2011, the number of independent yards plunged from 305 to 50, whilst state-backed players went from 52 to 44. The restructuring of Chinese shipbuilding in these years was carried out under government control. The state owned shipbuilding groups CSSC (southern China) and CSIC (northern China) and independent yards were listed and the yards that were considered viable were given support. The restructuring also included a scrapping scheme for domestic vessels to be replaced by new vessels.
The five yards with the largest order book in October 2018 are the independent yards Jiangsu New YZJ and New Times SB; the CSSC owned yards Shanghai Waigaoqiao and GSI Nansha; and the CSIC owned Dalian Shipbuilding. At present, each of these five yards has an order book of between 1 and 2.5 million CGT, in total representing some 300 ships.
Ever More Complex
Whilst in the early years of the Chinese international shipbuilding advance, the yards went for relatively simple ships, that is, bulk carriers and tankers, the larger yards now also have more sophisticated ships in their order books, such as chemical tankers, gas tankers, ferries, offshore units and large container ships.
It is further expected that in cooperation with Fincantieri, the Waigaoqiao yard will be building cruise ships to serve the Chinese cruise market for the Carnival Group. The first of these should hit the water in 2023.
The Chinese shipbuilders presently benefit from the growth of Chinese bank finance and leasing facilities available for ships, replacing shipping finance from European banks. Many international shipping companies make use of these facilities.
According to IHS-Fairplay, the order book figures in October 2018 for Chinese yards and the three other major shipbuilding areas are as follows:
Newbuilding completions and order intake for the above areas during the twelve months from October 2017 to October 2018 were recorded by IHS-Fairplay as follows:
According to Clarksons, the present Chinese order book includes the following ship types:
Ship Repair, Surveys and Conversions
The above figures all refer to new construction activities. However, the Chinese shipyards are also extremely active in the field of ship repair, surveys and conversions. Most probably, China is the largest in the world in this area with many facilities for dry-docking and many shipping berths. The country is presently also actively engaged in scrubbers and BWMS (ballast water management system) retrofits. The past one to two years also saw an increase in the number of cruise ship dockings in China.
Second Largest Blue-water Navy by 2020
Chinese yards are also very much involved in the building of war ships. According to the recent Global Market Report from Defense IQ, it was reported by state media that the Chinese Navy commissioned eighteen ships in 2016, including destroyers, corvettes and guided-missile frigates. In April 2017, China launched its first domestically built aircraft carrier that should enter service in 2020. By that year, it is expected that China will have the second largest and most capable blue-water navy in the world, exceeding 270 ships.
Chinese Merchant Shipping Companies and Their Fleet
Earlier this year, China became the world’s second largest ship owning country, overtaking Japan, see the figure on the right. Strong and accelerating growth in the China owned merchant fleet has unfolded. In 2017 an increase exceeding nine per cent was seen, and this year’s annual rise could be similar. The extensive order book for new vessels due to be delivered through the next two or three years will add further substantial tonnage.
The China owned fleet earlier in the year was built up as follows:
At present, Chinese owners have some 450 ships on order with a total of over 9 m.CGT. These are mainly tankers, bulk carriers, gas carriers, container ships and offshore vessels and represent well over ten per cent of the total world order book.
State owned China Cosco Shipping Corporation is the biggest tonnage based ship owner of the world according to IHS-Fairplay, with some 800 ships of various types representing 40.5 m.GT and another 8.9 m.GT on order. The company does not only operate ships, but also owns ports, terminals and logistics subsidiaries.
Inland Waterway Shipping
China has 123,000 km of navigable waterways of which 61,000 km is classified and about 24,000 km is considered “commercially significant”. The length of commercially significant rivers and other waterways is about equal to those of the USA and EU combined. China also has about the same volume of freight in “tonnes handled” as the USA and EU combined.
In the southern part of the country, rivers have large and stable discharges and are ice-free all year round and navigation is flourishing. In the northern part, rivers have small and unstable discharges and are frozen in winter. Therefore, the development of waterborne transport in this area is constrained. Some 6000 km of waterways are navigable for 1000 ton class vessels.
The total gross domestic product (GDP) of the seven provinces and two cities the Yangtze River corridor covers, takes up about forty per cent of the total GDP of China. This 6300 km river of which some 3000 km is navigable, plays an essential role in the development of this area.
World’s three largest fleets, by owner nationality (million gross tonnes, at year end, Clarksons Research data).
In terms of freight, waterway transport accounts for some fifty per cent of the country’s total freight turnover. In 2014, river ports handled 3.5 billion tons of cargo, with building materials, coal and coal products as the main cargo. Container shipping is important on the Yangtze with some 12 million TEU in 2014. Since the year 2000, inland waterway transport has experienced fast growth with an annual increase of over seven per cent in traffic tonnage and more than ten per cent in tonne-kilometres. By the end of 2017, about 145,000 ships were in operation on the Chinese waterways.
Boundless Ambition
According to Xinhua, one of China’s government press agencies, in 2017, the Chinese maritime economy generated 7800 billion Yuan, corresponding to about 1200 billion U.S. dollars. China’s ambition is to increase this figure to 10,000 billion Yuan by 2020 and have it account for around fifteen per cent of the country’s GDP by 2035.
With the largest shipbuilding output in the world and the second largest merchant and naval fleets, this country already is the strongest maritime nation of our planet and with such plans it is evident that it intends to protect and enhance this position.
In the world of merchant shipping, it increases its presence through the relatively recent introduction of shipping finance tools, including forms of leasing. Chinese financial institutions expand their operations and establish themselves as global players in the shipping sector. This will result in greater shipping power for China which, together with the funding and building of maritime infrastructure around the world (the Maritime Silk Road, as part of the Belt and Road Initiative), will give it a greater leverage and influence over the global shipping routes and greater control over global supply chains.
It is perhaps time that leaders of the USA , Russia, the EU, Britain (after the Brexit) and other countries start to apprehend the consequences of this development and get some sleepless nights. At the same time, the Chinese maritime industry has to be complimented with what has been achieved since Ding Xiaoping took the helm.
Acknowledgement
With thanks to Christopher Hughes from Lloyd’s Register China for providing some of the information for this article.
Subscribers can read SWZ|Maritime's December issue online or download it from the SWZ Archive.
Picture (top): The Muntgracht is a general cargo vessel built in 2012 by Zhejiang Ouhua Shipbuilding in Zhoushan, China, for Spliethoff in the Netherlands.
