How China Plans to Dominate the Shipbuilding Industry

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Date:2010/4/15/ 15:30

China is making a concerted effort to establish itself as a major maritime power.   It is now the world's third largest shipbuilder in terms of gross tonnage, surpassed only by Japan and South Korea.  The high volume of these three Asian countries comes from commercial, not naval (military), construction.  Commercial shipbuilding has, however, always been considered a strategic industry, and not only because its infrastructure can also support warship construction. England at the dawn of the industrial revolution, and Japan as it strove to catch up with the West in the 19th century, both used shipbuilding as a catalyst for wider economic development.

China is the world's tenth largest trading nation, accounting for 4 percent of world trade and the World Bank estimates that China could become the second largest trading state by 2020. The Chinese-flag merchant fleet numbers more than 1,500 ships, over 700 of which have a displacement over 10,000 deadweight tons.

In comparison, U.S.-flagged merchant ships over 10,000 dwt number less than 470, with a third of these owned by the U.S. government.  Less than 3 percent of America trade is carried in U.S.-flag ships, and American ships represent less than 1 percent of world commercial tonnage (down from 9 percent 20 years ago).  These low shipping figures persist despite the fact that U.S. imports account for 18.5 percent of total world imports and U.S. exports  make up 12.4 percent of the global total.  Washington has not followed a policy to leverage its position as the world's largest trading nation into leadership in maritime commerce or industry.

More than 600 Chinese-flag merchant ships, carrying 30 percent of China's trade, are operated by a single entity; the China Ocean Shipping Company or COSCO, which is a state-owned conglomerate with close ties to Beijing's military.  It routinely supplies shipping support to Chinese military and naval exercises, and is Beijing's principle carrier for foreign arms shipments.

A study of the Chinese shipbuilding industry by the European Commission found that Beijing has managed to expand its share of world shipbuilding to 7 percent.  This is still behind the goal of 10 percent set by Beijing.  "There has been significant capacity expansion in recent years both through the construction of new facilities and the upgrading of existing shipyards," reports the EC.  Beijing uses subsidies to offset costs which are estimated by the EC to be higher than in Korea or Japan due to lagging technology.  "These difficulties have not stopped the expansion process," says the EC, noting that China is constructing one of the world's largest shipyards at Waigaoqiao.

This Chinese expansion makes little sense from a purely economic perspective, given that there is already a worldwide overcapacity in the industry.  The Organization for Economic Cooperation and Development estimates that shipbuilding overcapacity may increase to around 40 percent by the year 2005.  However, if Beijing continues to follow a mercantilist policy of using its expanded trade to support its commercial shipping at the expense of rivals ? combined with subsidies and lower labor costs, it may be able to force other countries to be the ones that "adjust" (downsize) their shipbuilding industries.  This would be especially true if major rivals depend on "market" forces rather than strategic planning to guide their actions.

The United Nation's Economic and Social Commission of the Asia and Pacific Region predicts container ship traffic in the region will double over the coming decade, with Shanghai replacing Singapore as the second busiest port next to Hong Kong.  Correspondingly, the number of containerships also will rise.  It is estimated that 1,342 new containerships will be put into operation in the region by 2011.  At the same time, a total of 427 new port berths will be constructed, of which 164 are to be built in China.  Beijing will thus have the leverage to sustain and expand its shipbuilding capacity.

China's shipbuilding industry still has obstacles to overcome before it can take full advantage of the opportunities offered.  Beijing's goal of sourcing 80 percent of ship components from Chinese industry by 2000 was not met.  The actual use of Chinese-made equipment is very limited due to its poor quality.  This is most vexing in the area of propulsion systems.

China has also been importing advanced production methods and capital equipment, including complete production lines.  Using foreign sourced computer-aided design and computer-aided manufacturing (CAD/CAM) hardware and software, Chinese naval architects are becoming more proficient in designing ship hulls, compartment layouts, and propeller-rudder combinations that improve speed, efficiency and structural integrity.

Inefficiency is another pressing problem.  Many of China's 800 shipyards are underutilized.  A typical Chinese yard employs 9,000-12,000 workers, but these workers are not always kept busy.  Poor management, corruption, lack of technical knowledge and political mandates to use particular suppliers undermine operations.  In recent years, Beijing has been trying to reform the industry's structure by merging yards and making administrative changes.

As Chinese builders have become more competitive in world markets, particularly in dry cargo and crude oil tankers, Japanese and Korean shipbuilders are becoming attracted to the mainland.  Japan's Kawasaki Heavy Industries formed a joint venture with COSCO to create the Nantong Ocean Ship Engineering Company (NOSEC), the core enterprise of the newly founded COSCO Shipyard Group.  This group has already built the largest ship repair facility in China, and has announced its intentions to become "the No.1 ship repair yard group in the world."

In 1997, Korea's Samsung Heavy Industries opened its Ningbo Factory in the Quingshi Industrial Zone of Xiaogang, China.  Ningbo Factory manufactures and exports hull blocks of ships, steel structures and outfittings to Korean and Japanese shipyards.

Joint ventures between the developing Chinese shipbuilding industry and established Japanese and Korean yards will inevitably transfer technology, engineering skills and production know-how to Beijing.  Hundreds of Chinese engineers are being trained by their Japanese and Korean partners.  Such transfers are a prerequisite for doing business with any state-owned enterprise in China.  Both Japan and South Korean shipbuilders were able to make dramatic improvements in productivity, running as high as 15 percent a year, in their earlier periods of development.  With a strong commitment to the industry from Beijing and the inflow of foreign knowledge, it can be expected that Chinese shipyards will also make great strides over the next 5-10 years.

This is the way industrial policy works; and although it is not always successful, it is sometimes very successful.  And any policy ? in a world full of industrial policies and nations using trade as a zero-sum game ?  is better than no policy at all.  In America, however, we deify the ?invisible hand of the market' and believe that force alone will save our economy.  But when was the last time that an ?invisible hand' made your mortgage payment?

TAG: industry Industry shipbuilding Shipbuilding
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