1. Executive Summary
- Situation: Oceangoing vessels (ships) are the facilitators of global trade, with as much as 90% of the global trade being transported by sea.
- China currently relies on seaborne trade for 70% of its energy needs (80% of oil and 50% of natural gas), as well as 42% of its trade in goods. Approximately 10% of China’s total global trade goes to and from Europe by sea. The demand for ships will increase in line with China's growth ambitions, and its promotion of trade growth with countries along the Maritime Silk Road.
- Goals: The Chinese shipbuilding strategy is linked to several of its most important long-term national and international political goals. Through developing an advanced and capable shipbuilding industry, China seeks to facilitate and support:
- National energy security - through its "national oil, nationally carried" campaign.
- Its Blue water navy ambitions through having the capacity, tonnage, and technology to defend and operate within and outside of what is often referred to as the first and the second island chain – imaginary lines of defense between the Chinese coast and the open Pacific, stretching from Northern Japan to Southern Philippines.
- Lower costs of trade both inter-Asia trade and between China and the rest of the world through higher capacity and more ships in all categories.
- Chinese dominance in terms of ship ownership of bulk carriers, tankers, general cargo, and container ships along the Maritime BRI. Chinese ownership equates to better control for the Chinese Government, as well as the ability to manipulate shipping pricing and regulation along the route.
- The control of a strategically important part of the shipping industry (shipbuilding), which would in effect create control over the entire shipping supply chain - from raw materials and commodities to the price and availability of finished goods traded worldwide.
- The commercial/civil shipbuilding industry is closely linked to naval/military functions in the China. The development of industrial processes, capacity, technical knowhow and technology through civil shipbuilding is, in most instances, directly transferable to naval military ships.
- The Chinese Government employs a series of economic tools to support its commercial shipbuilding industry, such as tax benefits, lucrative financial terms, export credits, and tariffs. The availability of these benefits for European (and other foreign) ship-owners seeking to build new capacity and tonnage for their fleet is uncertain.
- European companies operating, owning or financing ships, as well as European shipyards should seek to define a clear strategy on how to deal with the increased output of ships from China to reduce overcapacity in the market.
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2. Who are the main actors influencing strategy decisions in shipbuilding in China?
The Chinese Government
The Chinese Central Government is the prime engine in the country's efforts to develop a globally competitive shipbuilding industry. The Central Government is responsible for allocating available finances, creating a favorable operating climate, develop the infrastructure needed and to create political support for the industry. Moreover, The Chinese government, through having tight control on some shipbuilding´s complimentary industries through its State Owned Enterprises, has the ability to create optimal operating conditions for shipbuilding in terms of cost and regulations. To execute and build the capacity and technology needed to compete globally on shipbuilding, the Chinese Government has consolidated the industry into two State Owned Enterprises (SOEs), namely: 1) China Shipbuilding Industry Corporation (CSIC), and 2) China State Shipbuilding Corporation (CSSC). CSIC is responsible for Northern and Western China, while CSSC is responsible for eastern and southern China.
Although real decision power and influence on the strategy sits with the Chinese Government, European and other foreign companies have a small influence on the strategy through choosing Chinese yards for their supply needs instead of building ships in other countries.
3. What are the goals and sub-goals of the main actors in shipbuilding in China?
The Chinese Government
A stable supply of ships to compliment the trade ambitions of the Maritime Silk Road
By supporting its domestic shipbuilders, the Chinese government ensures availability of shipyards to build the needed tonnage and capacity for its trade growth ambitions along the maritime silk road. By having domestic capabilities and capacity, the country reduces the risk of not obtaining the ships needed to facilitate trade after trade deals are signed.
Economic development and employment
The shipbuilding industry has a deep and broad contribution to both the economy and employment in a country. Through its strategy to develop the shipbuilding industry, the Chinese Government indirectly supports all related industries and companies in the supply chain of the shipbuilding industry. Shipbuilding creates ripple effects throughout the economy of the country, and is either directly or indirectly connected to for example the commodities market, the labor market, chemicals, technology, paint, machinery and so on and so forth. As an example, as one of the largest steel producer in the world, China creates a stable demand for steel through the development of its shipbuilding industry - which could help reduce overcapacity and stabilize prices.
Rapid advancements in technology
Chinese shipbuilders are still relying on acquiring key technology and machinery from abroad to produce ships of the quality demanded on the global scene. With an increasing number of foreign customers choosing Chinese yards to build their ships, technology will also be transferred in the long-run.
Build capacity and capability
By having a political and economic focus on developing and modernizing Chinese shipyards, the yards will create economies of scale, improve their industrial processes, and the learning curve of building ships will allow China to soon manage to have a capacity and capability to fully compete with their South Korean and Japanese equivalent on the global scale. This civil/commercial capacity could be exploited the countries naval/military needs as well.
The competition and higher capacity China introduces into the shipbuilding industry would in most instances mean that new builds also get cheaper. Cheaper ships means larger profits, and could be translated to a competitive advantage for ship owners.
4. How do the main actors plan to reach their goals - what are their strategies?
The Chinese Government
The Chinese Government, as the only real influencer on this strategy, employs a mix of tools to develop and support its shipbuilding industry, namely financial subsidies, taxation, tariffs and Export Credit Agencies:
China is offering a subsidy of between 17% and 20% on Chinese built ships to domestic Chinese ship buyers, as well as providing loans with preferential interest rates (4 to 8%) to domestic shipbuilders by utilizing its state-owned banking sector. Moreover, the Chinese Government provides funds for scrapping older ships, which has two effects: Firstly, it provides important contracts for the shipbuilders, since they also take part in the scrapping process. Secondly, it decreases the overcapacity of ships and increases demand for new builds.
China protects its domestic shipbuilding industry by placing tariffs on the import of foreign ships. These tariffs are coordinated by the Chinese Ministry of Finance, and vary between 3% and 10.5% of the contract value depending on the ship type (Aistleitner, 2016). Furthermore, the Chinese government provides import tariff exemptions on key marine equipment that is needed to build ships, but which cannot be found domestically (Tsai, 2011).
Taxation and VAT
Foreign customers get a full refund of VAT if they buy their ships from a Chinese shipyard and shipbuilders can claim export tax rebates on vessels constructed for export (Moore, 2002). Certain shipbuilding companies receive corporate income tax reduction because they fall under the classification of the encouraged “high tech industry” (the reduced tax is 15% from the national average of 25%) (Devonshire-Ellis et. al., 2011; Yanzijiang Shipbuilding, 2015). The Ministry of Industry and Information Technology (MIIT) offers shipbuilding companies tax rebates if they follow their recommendations on improvement of the sector (World Maritime News, 2015), and the many Provincial Governments offer capital tax rebate for the purchase of land used for shipbuilding.
Export Credit Agencies (ECAs)
Two export credit agencies are currently established to provide export credit and reduce financial risk for both buyers and producers of ships, by transferring parts of the risk to the Chinese Government through the:
o The Export and Import Bank of China (CEXIM). Under the direct leadership of the State Council, CEXIM is the largest ECA in the world, and handles buyer's credit, seller's credit, and refund guarantee for Chinese-built ships (OECD, 2015b; CEXIM, 2015)
o China Export and Credit Insurance Corporation (Sinosure). Under the leadership of the State Council. Sinosure mainly handles export credit insurance and overseas lease insurance to ship buyers (OECDb, 2015; Leong, n.d.)
5. What are the opportunities and threats of the Chinese strategies? What are the implications of these strategies in the main actor? (Focus on EU actors, where it makes sense/or local actors in case of different world regions)
A higher supply of ships also pushes the prices down on the cost of the ships themselves, which could lead to lower initial investment costs for ship owners seeking to increase their tonnage and/or capacity. Moreover, since China still rely on imports for certain types of ship-machinery and technology (such as radar systems, engines, communication systems, etc), the increased output of ships in China may open up sales opportunities for EU companies producing ships equipment.
For ship-owners, higher global output of ships creates the possibility of a flooded global market with regards to ship capacity and tonnage. This would not be advantageous in a market that has stayed extremely difficult since the global financial crisis in 2008, with rates at times too low to even cover operating costs.
For all companies utilizing ships, there is also a possible threat of an uneven global playing field in shipping, where Chinese companies may get priority on ship orders through Chinese shipyards.
EU shipbuilding countries
Most EU countries with a domestic shipbuilding industry would find it hard to compete with the cost of the two main inputs in shipbuilding (labor and steel) and the economies of scale developed in Chinese shipbuilding. The loss of shipbuilders, shipyards and following loss of employment is a real threat to EU shipbuilding countries.
The Chinese Government
The most obvious opportunity is the transferability from civil to naval shipbuilding within the same shipyards. Through strong political and economic support of the civil shipbuilding industry, the Chinese government is also developing its ability to build naval ships and other ocean-going vessels.
Once a shipyard has grown big enough to compete on the global market, it is also big enough to create serious negative ripple effects on the domestic market, should the market for ships suddenly drop and orders dry up. Such a scenario would heavily affect the two largest inputs into ships; the steel industry (which would in return affect the coal and iron ore industry), and employment (through laying off of mostly skilled and unskilled workers). This scenario has happened in other countries, where shipbuilding has been strategic industries, such as South Korea – which has been forced to bailout shipyards because they have been “too big to fail for the economy.
South-Korean and Japanese shipbuilders
China, South Korea and Japan combined build 92% of all the global ships yearly (UNCTAD, 2017). With an increased Chinese focus on developing its domestic shipbuilding industry, the two other countries may suffer from tough competition in the near future . Although the two countries currently dominate the global market for ships, the Chinese strategy will most likely create serious competition for the two countries. Once the Chinese yards have become capable and trusted enough to receive a higher number of orders globally at prices that would be very hard for South Korea and Japan to compete with due to the availability and low cost of steel and labor in China compared to the other two countries.
6. Forecast of possible future developments and outcomes
The author believes China will continue its push to dominate the world in terms of shipbuilding capacity, technology and prices. This would in return make it very difficult for both European and Japanese/South Korean shipbuilders to compete on the world scene. Both Japan and South Korea have shipbuilders that are “too big to fail”, so it remains to see what would happen should any of them fail. It may have serious negative consequences on their economies. For Europe, however, a failed shipbuilding industry may not be as catastrophic in terms of the economic impact, but would most likely still have ripple effects into supporting industries with unemployment as a result. The capacity in terms of ships tonnage and size that follows a possible Chinese push to build more ships could create keep the global shipping market at the low levels they have stayed since the last financial crisis in 2008 through further pressure on rates. The author also believes that China will intensify its utilization of shipyards to build naval vessels in order to support its Blue Water Strategy the next few years.
7. Possible strategy options for local/EU companies and decision-makers.
- For ship-owners that seek to order ships from Chinese yards, establishment of strict quality control and assurance of quality on requirements and designs of ships is crucial. This recommendation is not based on the bias of "made in China quality", but rather that shipyards in their early developments may unconsciously look for shortcuts along the learning curve either to save costs or because of lack of technical knowhow. Ships built in the early stages of South Korean shipbuilding also had issues with quality and cost estimations. Ship owners should also create an understanding of the financing (and co-financing) structures available through the Chinese Government to capitalize on possible preferable loans, lower VATs and available funds for ships.
- For shipbuilders that build ships in Europe: perform a solid analysis on the pricing structures and availability of material and labor inputs in China, and understand where your competitive advantage lays. If no real competitive advantage is found, consider moving into specialty vessels or seek opportunities to penetrate the Chinese market through establishing a yard or by partner up with an established Chinese shipyard.
- For companies in need of shipping services: Analyze whether any barriers to utilize Chinese ships are in place. On tanker and certain types of dry and wet bulk, Chinese ships are exclusively for Chinese customers. With greater tonnage and capacity in container ships, expect lower shipping rates from Asia to Europe and vice versa.
- Analyze and prepare for the supply of increasingly larger ships in terms of size and tonnage. Possible port upgrades, dredging of ports (to facilitate for deeper going vessels), procurement of larger port equipment may be needed.
- Continue the work on strict emission control of ships operating in European waters to ensure that ships built in China follows the same regulations as the ones built in Europe.
- Be alert on EU shipbuilders losing orders on the global scale, in order to prepare for possible bankruptcies in the industry.
- Be alert on Chinese naval tonnage and technology developed in China, and how this capacity is to be used along the maritime silk road. An example: the Chinese naval base in Djibouti creates a point of rapid response along the Horn of Africa and the Gulf of Aden, the entry point to the Suez canal - where most of the Asia-Europe trade passes.
- Demand an even global playing field on shipbuilding, or implement taxes and tariffs on shipbuilding equipment being imported into the EU
- select an appropriate research question for each hypothesis, strategy option or forecast that you are contributing to the debate
- if possible, state the source of your knowledge
- write in the format of bullet points