Sea change

Being the nearest to downtown Shanghai among the three islands in the Yangtze estuary, Changxing has been a popular weekend destination for people from the city. It also boasts the biggest orange plantation base in the country. From this June, the island will add another feather to its cap as it becomes the largest shipyard in the world with the completion of the first phase of a $3.6 billion project.

"It marks a major step forward in China's ambition to become the world's leading shipbuilder," says Chen Xiaojin, chairman and general manager of China State Shipbuilding Corp (CSSC), the world's second biggest ship maker.

Last year, China's shipbuilding industry saw a sturdy growth, maintaining the country's third position for 12 consecutive years as well shrinking the gap with the second biggest producer, Japan.

According to a Morgan Stanley report released last August, "shipbuilding is a labor-intensive and heavy-machinery-reliant industry. With the change in economic growth models, advanced countries tend to retreat from such businesses while developing countries consider shipbuilding a strong growth driver. The global shipbuilding relocation from Europe to Japan, and then to Korea, supports this view".

It's thus believed that the next shift will be in China's direction. The boom in recent years has already made China confident enough to aim to be the world No 1 by 2015. But getting there will mean China will have to surmount several challenges in manufacturing high-value-added and hi-tech vessels to make it a quality player.

"To be the world's biggest shipbuilder, the industry in China has to develop faster, which is its biggest challenge right now," says Chen.

Promising growth

Last year, China's shipbuilding tonnage jumped 30 percent to 18.93 million. The total order at Chinese shipyards beat those of Japan, coming second only to South Korea. In terms of new orders, China has already become No 1 in 2007, totaling 98.5 million deadweight tons (DWT), or 42 percent of the global total, up 12 percentage points from a year earlier.

The new orders raised the country's total tonnage to 158.89 million, or 33 percent of the global total. The market share was 9 percentage points higher than in 2006.

In 2007, China's two dominant State-owned ship makers - CSSC and China Shipbuilding Industry Corp (CSIC) built 6.55 million DWT and 4.24 million DWT respectively. Shanghai-listed CSSC and CSIC received 23.52 million DWT and 16.16 million DWT of new orders last year.

"Our profit almost tripled last year as we boosted output and improved production efficiency," says Chen of CSSC, the world's second biggest shipbuilder after Hyundai Heavy Industries of the South Korea. "Net income surpassed 14 billion yuan last year, jumping from 5.2 billion yuan in 2006. Moreover, we are shrinking the gap with Hyundai. Actually, our profit to sales ratio of 25 percent surpassed Hyundai's 13 percent last year."

The rapid growth of the Chinese economy, which has fueled demand for container ships and other vessels, as well as the global boom in shipping - 80 percent of the output of Chinese shipyards is exported - have been the key drivers of the successes.

As a result, China's share of the global market expanded from 18 percent in 2006 to 23 percent last year, while the South Korea and Japan accounted for roughly 35 percent each. Some 14.9 million DWT of shipping output were exported to 151 countries and regions, according to the National Development and Reform Commission (NDRC).

Besides the two huge State-owned shipbuilders, China has in recent years also seen a large number of new entrants in the form of smaller shipyards run by local governments or private groups, or set up as joint ventures. There are now 3,000 of these smaller shipyards, up from just 350 a decade ago.

Nineteen Chinese enterprises figured in the list of the world's top 50 shipbuilders released by Britain's Clarkson Research Studies last August. "China has drawn up a blueprint to increase its annual shipbuilding tonnage to 23 million by 2010 and 28 million by 2015," says Zhang Guobao, NDRC vice-minister.

High-end ships

China's shipbuilders have been focusing on three major models - container ships, bulk ships and oil tankers - while there is a rising demand for hi-tech vessels such as liquefied natural gas (LNG) ships and super oil tankers, with China's energy imports rising rapidly. The industry also faces mounting challenges of rising material costs and renminbi appreciation.

"China has to shift its focus from quantity to quality to strengthen its competitive edge in the global market from a long-term perspective," says Zhang.

"Independent technology and high-end ships are key to China's success in the modern shipbuilding industry," agrees Zhang Guangqin, chairman of the China Association of the National Shipbuilding Industry.

In recent years, Chinese shipbuilders have started feeling the need for this strategic transformation. "We see continuous upgrade of product mix, with more high-end vessels being built in China," says the Morgan Stanley report.

Earlier April, Hudong Zhonghua Shipyard delivered the first Chinese LNG carrier in Shanghai, made with indigenously developed technology. The $160 million hi-tech LNG carrier, whose price equals that of five common bulk vessels, has a capacity of 150 million cubic meters and can deliver a month's supply of natural gas for entire Shanghai.

In 2006, the Dalian shipyard started to build the first semi-submersible drilling platform. Next year, Hudong Zhonghua delivered the first 8,530 twenty-foot equivalent unit (TEU) containership, while Waigaoqiao shipyard delivered a 300,000 DWT FPSO (floating production, storage and offloading).

By moving up the value chain, "Chinese shipbuilders will become more competitive in the global market", says the Morgan Stanley report. To achieve that goal, "shipbuilding bases will need to meet the demand of high-value-added and hi-tech vessels", says Chen of CSSC.

Jointly invested by CSSC and Baosteel Group, Shanghai Jiangnan-Changxing Shipbuilding's production base in Changxing island will be inaugurated on June 3, the 143rd anniversary of Jiangnan shipyard. After relocating to Changxing from Huangpu River to make way for Shanghai Expo 2010, the Jiangnan shipyard will expand its capacity from the current 800,000 DWT a year to 4.5 million by 2010. The new yard's first ship is expected to be delivered by 2009.

In the second phase of development, CSSC's subsidiaries, such as Hudong and Waigaoqiao, will add more shipyards along Changxing island's 8-km coastline.

"We will pump in more than 20 billion yuan into the construction of our Changxing base in Shanghai and Longxue base in Guangzhou to consolidate production for long-term development as well as to prepare for the world No 1 position," says Chen.

By 2015, CSSC is expected to have an annual capacity of 8 million DWT, half of China's current production capacity. By then, Shanghai will become the world's largest shipbuilding base, tripling its capacity to 12 million DWT.

"The central government wants the country to become the largest shipbuilder in the world. The Changxing base is the most important step forward in this plan," says Chen.

The Changxing yard offers CSSC an unprecedented opportunity to develop its business as the global shipbuilding market is still expanding. It will also increase Chinese production of hi-tech and high-value-added ships, including LNG carriers and super oil tankers as well as the luxury cruises that is currently produced only by European makers.

This month, CSIS signed a service agreement with China Classification Society, a non-governmental organization of professionals, ship surveyors and representatives, to develop 180,000-DWT bulk ships, the most efficient carrier in terms of tonnage, which will be delivered in 2011 or 2012.

"We are attaching great importance to technology innovation by investing 9 percent of our turnover into research and development every year to boost our long-term development," says Li Changyin, general manager of CSIS.

(China Daily 04/28/2008 page1)