Rig builder CIMC Raffles is banking on winning more global orders to move up the value chain. Provided to China Daily

But a lack of management and operational skills is hampering progress

Not a single barrel of oil has been discovered in the deep waters off the coastline of Singapore, but the small country has managed to gain a leading position in rig building with more contracts than any other shipyard in the world.

However, boosted by newly acquired expertise, lower production costs and Beijing's strong desire to secure more offshore oil to better develop its marine economy, aspiring Chinese rig builders are gearing up to fight for more market share and seek to take the crown from offshore oil rig manufacturers in Singapore.

CIMC Raffles in Yantai, Shandong province, is one of them. Though it is relatively new to the sector, the offshore drilling rig builder, a subsidiary of China International Marine Containers (Group) Co in Shenzhen, has already learned a lot and expects to be making money in the next few years, the company says.

CIMC started to acquire stakes in Yantai Raffles Shipyard Ptd Ltd, a joint venture between the local government and a group of Singapore investors, in 2008 and later renamed the company CIMC Raffles. It now has almost total control.

"It has cost us a lot to learn over the past several years, but we've progressed rapidly," says Gao Shang, director of CIMC's offshore division.

"The company hopes to become a world leader and to move the axis of global offshore rig building from Singapore to China," Gao says.

It may seem like a long shot, but the company, with annual turnover of about $700 million (536 million euros), is betting its future on the country's low engineering costs with a new research and development building staffed by about 800 researchers and engineers that is due to open shortly.

"Rapidly rising labor costs may end China's days as the low-end manufacturer to the world," Gao says. "But the upgrade of China to become a high-end manufacturer is about to take off, thanks to the country's low-cost researchers and engineers."

In developed Asian countries such as Japan, the lowest annual salary of an engineer can be as high as $50,000, but in the company's headquarters in Yantai, an engineer is paid less than $20,000, he says.

"That is China's biggest advantage in offshore rig building. I can't see why it can't overtake Singapore to become the world No 1."

However, even with its advantages of low costs and increasing orders resulting from robust offshore oil activity, the company has been losing money.

The company registered a loss of 1.1 billion yuan ($176 million; 135 million euros) in 2011, according to its financial report. Gao says it lost a lot less last year, but would provide no more detail.

The company has delivered all kinds of giant rigs since late 2010, from semi-submersible drilling platforms, pipe-laying vessels, to self-elevating drilling units, and, recently, a semi-submersible accommodation vessel as big as a football field for more than 500 people, but how to deliver those rigs on time to avoid financial losses has been a big challenge, Gao says.

"Building an offshore drilling rig usually takes three years. It may be hard to believe, but the delivery of one of our rigs was delayed for almost a year because of our lack of experience."

Liu Yanjia, vice-president of CIMC Raffles, says it usually takes 30 months for a Singapore company to finish a drilling platform, but because of a lack of management experience in his company, it needs 35 months to build something comparable.

"A longer production process means higher production costs."

Given buyers' concerns on delivery reliability, China remains a distant No 3 in terms of offshore rig-building market share, a report from Reuters says. In the first half of last year China secured just three orders out of the 29 placed during the period, against 11 for South Korea and six for Singapore, data from Credit Suisse shows.

However, Gao says his company and its Chinese peers can overcome that shortage with their growing experience in building rigs. Industry insiders agree, saying the technology gap between Chinese offshore rig builders and their rivals can be closed in a relatively short time. What is hurting at the moment is the gap between management and operational expertise.

Gao says that construction of one of the rigs CIMC Raffles is building is ahead of schedule. With an increasing number of orders resulting from the boom in offshore oil exploration, the company will soon gain more experience, he says.

The company, which delivered three rigs last year, has three incoming orders and is now building a total of seven, he says.

Despite the years of development and the achievements the company has made, Gao acknowledges that CIMC Raffles still has a long way to go.

In a mid-to-long term ocean-equipment industry development plan the government issued in March 2012, it said the country expected to boost its share of the global offshore energy equipment industry to 20 percent by 2015 and to 35 percent by 2020, from less than 8 percent in 2011, and nurture five to six world-class companies that are set to have annual revenue of 40 billion yuan each by 2020.

"The key obstacle to achieve that goal is to establish a full supply chain of offshore equipment building in China," says Yu Ya, the president of CIMC Raffles, which plans to be one of the five to six world-class companies that China aims to have by 2020.

"I can find all the suppliers our company needs in Singapore in two hours, but in Yantai even if I spend two days searching, I may still end up with no suitable suppliers at all."

It is sometimes frustrating to think that a high-end manufacturing company like his has fewer options for suppliers than a local seafood factory, he says.

mengjing@chinadaily.com.cn

(China Daily 01/11/2013 page6)