Shipbuilding accounts for half of Zhoushan's industry and diminishing orders are hurting the city badly. Analysts believe innovation will help improve the situation. Provided to China Daily

Zhoushan's shipbuilding industry prepares to navigate difficult route through slump

In 2011 it was grey, 2012 was black, and this year will be bloody. It's not a slogan for some Hollywood disaster movie. It's what they're saying in the shipbuilding yards of Zhoushan in East China's Zhejiang province.

"It was like riding a rollercoaster," says Chen Tongping, director of Zhoushan Management and Service Bureau of Shipbuilding. "The year 2007 was a peak season for the industry, when suddenly in 2008, the economic crisis happened and business went straight down."

Last year, new orders for Zhoushan's shipbuilders dropped 41.6 percent from 2011. Total output in 2012 still reached 69.2 billion yuan, rising 3.9 percent year-on-year, but in 2011 it had been a 21 percent increase.

Chen says business from 2009 to 2011 was not that bad because companies still had orders that were placed before the crisis. The decline really began to start last year, and this year, business is going to be worse.

Xu Caizhong, general manager of Zhejiang Zhenghe Shipbuilding, says the company has prepared for a very difficult year.

"We have almost finished the orders that were placed when business was good, and new ones barely came in," he says. "Even if we get orders, prices have dropped at least a third compared with those before the crisis."

Xu says before 2008, price was not a factor in the competitiveness of his company.

"Most ship owners value our quality and did not care about the prices we set," he says. "But since business became sluggish, they have become very cautious."

A 30,000-ton bulk carrier sold for more than 300 million yuan ($49 million; 37.5 million euros) before 2008, but its price has now dropped to 160 million yuan, says Xu.

"Material and labor costs keep rising, which make profits even thinner," he adds.

To make matters worse, pre-payments have also decreased from 80 percent of total cost to less than 20 percent.

Due to the falling demand, many ship owners are delaying delivery and payment dates on new ship orders.

"They think of any excuse to delay payment, like change of design, or implementing stricter quality checks," Xu claims. "They know they have no work for the ships, so they'd rather not take them. This puts a very heavy burden on us."

Because of low pre-payment rates and delayed delivery, many shipbuilding companies in Zhoushan are experiencing a shortage of capital, he adds.

"Banks are not willing to lend to shipbuilding companies because they are fully aware how sluggish the business is. Shipbuilding is listed as a high-risk industry by banks."

So the industry in Zhoushan is looking instead for ways to turn the crisis into opportunities for further development - essential for a city where shipbuilding accounts for almost half its total industrial output.

Chen says the city is considering decreasing the number of small and medium-sized shipbuilding companies through closures or mergers.

"Shipbuilding in Zhoushan is still at a low-end level, especially for the small and medium-sized companies," he says. "To better prepare for a revival, we need to provide room for big companies to upgrade using more advanced technology."

To this end, the city is to establish a foundation with more than 10 billion yuan in funds, aiming to bolster leading companies and encourage mergers and acquisitions with smaller ones.

Another plan is to focus on building ships with low fuel consumption.

"From both an environmental protection and cost reduction standpoint, low gasoline consumption is the future pursuit of ship owners. Once we get ahead in this technology, orders will rush in," says Xu.

On April 19, the company established a research institute to focus on this area.

Xia Xiaowen, an analyst with China Shipbuilding Economy Research Center, says that technology is the only solution for shipbuilding companies in Zhoushan.

"The largest gap between Zhoushan's shipbuilding industry and that of Japan's and South Korea's is lack of innovation," she says. "Most companies in Zhoushan rely on simply building bulk carriers. South Korea, for instance, is strong in innovation and diversifying the categories of ships they can build. This is the direction Zhoushan's companies should go."

And with Zhoushan's shipbuilding industry uniformly facing a bleak future, now is a good time to start on that road.

"We are going to prepare better, so we can capitalize when the good times return," says Xu.

Chen, Zhoushan MSBS director, says, "If you take a look at the history of the global shipbuilding industry, you will find it runs in 10-year cycles. In the recent cycle, 2007 was the peak."

That year, China's shipbuilding industry became the world's largest, surpassing Japan and South Korea, with Zhoushan accounting for about 15 percent of the country's output.

It was also in 2007 that PaxOcean Engineering Zhoushan Co was established - but it wisely decided to diversify. As well as shipbuilding, it also positioned itself as a marine and offshore service provider.

Zhang Zheng, deputy manager of PaxOcean, says that its investors had foreseen that Zhoushan's shipbuilding industry would need upgrading.

"So we took a step forward," he says.

Though the company entered Zhoushan at its peak, it did not seek instant profits. Zhang says the company is still laying foundations, and the real profitable time will be in another year or two.

The company is currently building two offshore platforms for oil fields in the Gulf of Mexico, each worth 1.8 billion yuan.

yanyiqi@chinadaily.com.cn

(China Daily European Weekly 06/07/2013 page19)