China's shipping prowess
By Michael Mackey
SHANGHAI - China looks set to follow the route two other Asian countries did to herald their arrival as industrial powers - become a shipbuilding power.
Leading the charge has been China State Shipbuilding Corporation (CSSC), one of the country's two major shipbuilding companies. "We plan to boost our output to 4.36 million dwt [deadweight tons] in 2005 to ensure we meet our goal to be in the world's top five," said Chen Xiaojin, CSSC's general manager. Last year, the yards run by CSSC turned out 3.57 million dwt, up 64.5% over the previous year's total - most of which were for exports. Looking forward, by 2010 the group aims to be in the global top three and hopes to be No 1 by 2015 - propelling China's shipbuilding industry and China itself to becoming the world's largest shipbuilder. Chinese yards already are at a degree of technical proficiency that orients them for being quality, not just volume, suppliers.
Shanghai Waigaoqiao Shipbuilding Co Ltd, one of the jewels in CSSC's crown, has just signed a deal with ConocoPhilips China Inc to build a 300,000 dwt floating production, storage and offloading (FPSO) vessel. The contract is worth US$230 million - the most expensive ship and also the largest FPSO China has ever built. FPSOs, besides being able to load and process raw crude and store and offload stabilized crude, can also serve as production units for offshore oil and gas exploration projects. This one, due to be delivered in early 2007, will have a storage capacity of 2 million barrels.
Hebei Ocean Shipping Company (HOSCO) unveiled at the end of last year the Hebei Innovator. Previously a 250,000 dwt very large crude carrier (VLCC), its owner, HOSCO, China's emerging shipping star, saw there was more potential for the Hebei Innovator as a very large ore carrier (VLOC) and converted it. As the HOSCO statement less than modestly said, it was playing "a leading role in technical reconstruction and innovation". This is of course a major challenge to the established shipyards in Korea and Japan but is not without challenges for the Chinese yards themselves.
China has several big advantages, according to Even Winje, managing director of ship broking firm Winmar. For starters, he said, China's coastline totals 14,500 kilometers compared with South Korea's 2,413. "Korea is Indiana, Japan California and China the US. This tells you something about the scale," said Winje at the recent Shipping China 2005 conference.
His second point is more telling. The Korean and Japanese economies have moved far beyond the phase of industrial development associated with shipbuilding. There might be some amount of romanticism associated with sea trades but they, unlike computer software and services, are neither clean nor safe. And mature economies avoid any economic activity that entails the three Ds - dirty, dangerous and difficult. So the field is wide open for China.
Some two-thirds of the Chinese population is raring to head for the urban centers and join the wage economy - providing an incredible flow of cheap, three-D labor. Wage costs in China are a quarter of those in Korea. Again, some two-thirds of the working population in Korea and Japan are already employed in the services sector, which is unlikely to be reversed ever again. The advantage is China's yet again.
True, there will be some costs in training new workers and professionals to the standards already attained elsewhere, but they are likely to be low and borne by the government at this point. As some industry sources admit, there's a need to upgrade the Chinese yards' way of thinking, through research and development centers and bringing in more foreign experts.
The development of the Korean and Japanese economies also points to another advantage - the cost of suitable land. In China this is currently about $5-6 per square meter. "Possibly even lower in some regions if you have the local government supporting you," said Winje. This is much less than South Korea, where a comparative figure would be $30-50. These advantages, and the momentum created by the growth of the Chinese industry explain the spurt in shipbuilding. Winje said 15 new yards and expansions were underway at the moment. "We cannot really see a better place to build a shipyard," said Winje, a Norwegian.
There are a few caveats though. As so many of the inputs that go into shipbuilding need to be imported (notably steel), the industry is already a victim of its own success. "Currently, supply chain is the biggest bottleneck for Chinese shipbuilding," said Simon Liang, chief executive officer and president of SinoPacific Heavy Industries. There are two consequences discernible in all this - one clear and the other more complex.
One, China's emergence as a shipbuilder, paralleling its rise as a car maker, will establish it as an industrial power as opposed to a place of cheap volume assembly. Simply put, it will have passed a Rubicon that is very hard to reverse, though development does not stop at that point. Two, the losers could be countries such as Korea and Japan, who are still volume shipmakers and might not be able to cope with such a powerhouse on their doorstep.
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