According to ambitious plans being drawn up by the central government, China aims to become the world's largest shipbuilder by 2015, writes China Daily's QUN SHAN

The central government is drafting preferential policies, including massive tax breaks and more open funding options, to lure domestic and foreign investors help turn China into the world's largest shipbuilder by 2015.

The National Development and Reform Commission has completed an initial draft of the policies and is circulating it among companies and government departments for comment.

Senior State leaders, including top legislator Wu Bangguo, Premier Wen Jiabao and Vice-Premier Zeng Peiyan, have all have voiced strong support for the ambition in the last few months.

The central government is planning to establish three large ship-production bases and targets to have their combined production account for more than 20 per cent of global output in 2010 with over 80 per cent of the spare parts localized.

According to goals set by the State Commission of Science, Technology and Industry for National Defence, the competitiveness of China's shipbuilding industry should catch up with South Korea and Japan in 10 to 15 years, with the output reaching 10 million tons in 2005 and 24 million tons in 2015 respectively, achieving an international market share of 16 and 35 per cent.

China has been the third largest shipbuilder in the world since 1995 -with production of 4.53 million tons in 2002, an increase of 16.2 per cent over the previous year, a new historical record. The country clinched new ship orders totalling 6.68 million tons in 2002, an increase of 14.2 per cent, despite sluggish international demand.

Incitant incentives

The new policies represent major breakthroughs in the use of foreign capital and technology in the shipbuilding industry, according to the National Development and Reform Commission, the administrator of the sector.

Domestic investment before 2010 will be exempted from business income taxes equivalent to 50 per cent of investment.

The business income taxes of a shipbuilding company in the year before such investment will be counted as a cardinal number. The growth portion of the due income taxes in and after the year of the investment will be exempted. However, the accumulated exemption period should not last longer than five years. In other words, the company will have to pay full business income taxes in the sixth year after the new investment no matter whether it has used up the tax cut quotas.

The government will encourage the establishment of joint ventures between domestic and foreign research and development institutions, encourage domestic equipment manufacturers to set up joint ventures with foreign investors, and allow foreign investors to launch wholly-owned equipment companies.

Foreign investors will be able to set up new joint-venture shipyards and produce low-speed diesel engines for ships, but their Chinese partners in the ventures must hold a stake no smaller than 51 per cent; and the ventures must set up their own research and development centres.

The central government supports large shipbuilding companies to issue corporate bonds or go public for shipbuilding infrastructure construction.

The government will provide financial and tax support to the establishment of share-holding ship-leasing institutions.

Such institutions, set up by large domestic corporations in the shipbuilding, transportation and petrochemical industries, will be encouraged to attract domestic and foreign investment and enjoy government capital support if necessary.

Loan applications by these institutions to buy ships will be included in the credit plans for ship purchases of the National Development and Reform Commission, and preferential policies for exports of ocean-going ships will be applied to the purchases by these institutions.

New ship-leasing institutions will be exempted from paying business taxes for five years after they start operation, and their business tax rate will be only 1 per cent between the sixth and 10th year.

Meanwhile, shipbuilders, after passing technical examinations of ship inspections by government financial departments, can apply for circulating-capital loans with mortgage on their ships under construction.

Business alliances between large shipbuilding companies and steel plants. The government will provide policy support to steel manufacturers in such alliances on technical upgrading, aiming to support Chinese steel producers to provide more than 80 per cent of the steel needed by the shipbuilding industry.

Besides the new policies, the commission is also promising "key support?to the shipbuilding industry in the country's 11th Five-Year Plan (2006-2010.

As another indication of strong government backing, ships are not in the list of commodities whose export tax rebate rates will be cut starting in the new year.

Meanwhile, among the first batch of key construction projects approved by the commission following a recent central government decision to rejuvenate the national industrial base of Northeast China, two are in the shipbuilding sector.

Marine maps

The policies will, for the first time, designate three key shipbuilding bases in the country -in Bohai Bay and the Yangtze and Pearl river mouths.

The government will concentrate its support on the construction of new facilities; and renovate existing shipbuilding facilities in the three places before 2010. It will not back similar development in other areas.

Shipbuilding companies in the three places will be required to introduce internationally-advanced logistics and management skills and cut production costs, shorten production terms and improve productivity.

The policies also clearly stipulate that, before 2010, the central government will only support existing manufacturers of low-speed diesel engines for ships in Dalian, Shanghai and Yichang and the establishment of new production facilities of such engines will be discouraged.

Chen Xiaojin, president of China State Shipbuilding Corporation (CSSC), said he is confident that the nation would become the largest shipbuilder in the world in 2015 and his company the fifth-largest shipbuilding company in the world in 2005, third largest in 2010 and the largest in 2015.

CSSC and China Shipbuilding Industry Corporation (CSIC) are the two largest shipbuilding companies in China.

CSSC has signed an agreement with the Shanghai municipal government to construct the world's largest shipyard along 8 kilometres of the coastline of Changxing Island. The shipyard, requiring a total investment of US$3.6 billion, will take 10 years to construct.

In Dalian and other Bohai Bay areas, CSIC aims to increase its production capacity to 4 million tons in 2005, 6 million tons in 2010 and 9 million tons in 2020.

In Guangzhou, CSSC has signed a pact with the city government to build another shipyard on Longxue Island, with a first-phase investment of 4.5 billion yuan (US$543.4 million).

Construction of the shipyard is expected to be completed in 2008 with an annual capacity of 2 million tons, said Wang Yijing, an official of CSSC's Guangzhou Shipbuilding Co.

The shipbuilding capacity of CSSC alone aims to reach 12 million tons in 2015 from only 3 million tons at present.

Promising prospects

Rocketing ocean shipping demand and labour-cost advantage are the solid foundations for China to realize its dream to become the No 1 shipbuilding in the world, said Yang Jiuyan, a renowned researcher specializing in the shipbuilding industry.

He predicted that international demand for ships would reach 45 million tons a year in 2010, much higher than the present figure.

Chen Xiaojin said that international ship demand is expected to support a production growth of 8.83 per cent in the next five years, compared with only 3.1 per cent during the 1998-2003 period.

Meanwhile, China's fast economic and foreign trade growth is expected to create a huge demand for new ships. The three largest shipping companies in the country, COSCO, China Ocean Shipping and Sinotrans, will together buy 200 new ships with a total capacity of 10 million tons worth 45 billion yuan (US$5.43 billion) during the 2001-05 period.

Annual domestic demand is estimated at 30 million tons currently.

The recent central government decision to build ocean oil-shipping fleets alone will create a large demand.

The fleets are designed to have an annual capacity of shipping 50 million tons of crude oil imports in 2005, 75 million tons in 2010 and 130 million tons in 2020, said Zhang Guofa, deputy director of the Water Transportation Department of the Ministry of Communications.

To support the construction of large oil tankers, the central government has decided to subsidize all the interest on loans needed by shipyards to produce the tankers, Zhang said.

Chinese shipping companies currently transport only about 10 per cent of the country's annual oil imports of roughly 80 million tons, a situation subject to risks of war, diplomatic and other possible crises, experts warned.

Shipping is becoming an increasingly important sector involving national security, they said.

According to estimates by the State Council Development and Research Centre, China's oil demand is expected to reach 300 to 400 million tons in 2010, and between 450 to 610 million tons in 2020, depending on national efforts to increase energy consumption efficiency.

Domestic oil output in 2020 will be about 180 to 200 million tons, according to recent studies by the centre, indicating that imported oil will account for at least 55 per cent of national demand, close to the United States?58 per cent at present.

"China is becoming the world's shipbuilding centre,?said Zheng Yan, a CSSC official, "with the industry following the market rules to shift from high to low production cost places.?

The shift means huge development potential, industry analysts said.

China was the third largest shipbuilder in the world for the eighth consecutive year in 2002, but accounted for only 8.3 per cent of the world's output. The figures for 1982 was 17th and 0.8 per cent.

The current ratio is far behind Japan's 35 per cent and South Korea's 33 per cent.

Besides huge market demand, China boasts abundant steel supply, a key material in shipbuilding industry, and low labour costs. The country's annual output is 180 million tons, twice as much as Japan, the second-largest steel producer in the world. Its labour costs are only one-seventeenth of Japan and one-ninth of South Korea.

Furthermore, Chinese-made machinery and electronics for ships have witnessed remarkable progress in the last 10 years.

However, experts warned that China must upgrade its shipbuilding technologies and productivity to catch up with Japan and South Korea.

The technologies in China are still at the world levels during the early 1990s and domestic manufacturers lack the ability to satisfy new market demand for high-tech products, such as luxury pleasure boats and large container, liquidized petro and gas ships.

Meanwhile, shipbuilding companies in China are lagging behind modern corporation management requirements. The country's productivity is only about one-fifth to one-seventh of Japan and two-thirds of South Korea. Per capita production in the industry is only 8 per cent of Japan and 17 per cent of South Korea.

Nonetheless, Yang noted that these weak points, on the other hand, represent huge development potential.

The draft of the up-coming new policies have taken them into careful consideration with strict improvement requirements.

The policies are expected to turn a brand new chapter of China's shipbuilding industry, experts said.

(HK Edition 12/31/2003 page1)