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Where now for China’s offshore shipyards?

Wed 10 Jan 2018 by Hong Liang Lee

Where now for China’s offshore shipyards?
Shanghai Waigaoqiao Shipyard has not been doing much offshore business despite being on the white list

The authorities in Beijing have long espoused the need to boost the capability and technical prowess of offshore shipyards in the country, but there is little evidence that they are succeeding

Two years have passed since China introduced its first ‘white list’ offshore shipyards. Issued by the Ministry of Industry and Information Technology, the aim was to enable preferential access to domestic bank loans and policy support. These aids are crucial to the capital-intensive industry that the yards operate in.

The seven offshore yards that made it to the white list are all state-owned. They are Yantai CIMC Raffles, Shanghai Zhenhua Heavy Industries Company (ZPMC), Cosco (Qidong) Shipyard, Cosco (Nantong) Shipyard, Shanghai Waigaoqiao Shipbuilding (SWS), China Merchants Heavy Industry (Shenzhen) and Dalian Shipbuilding Industry Offshore.

The brief statement from the Ministry of Industry and Information Technology did not spell out in detail the benefits for the white list offshore yards. It was however mentioned that they met the standards required by a panel put together by China International Engineering Consulting Corp (CIECC) and China Classification Society (CCS).

The ministry added that the aim of the initiative was to encourage them to develop proprietary products and inhouse designs, make technological and innovative progression, improve on project management and promote industry collaboration.

Beijing also made it clear that the white list offshore yards needed to pump an annual investment of at least 2% of their yearly revenue into technology and R&D, believing as it did that enhanced technology is a key requirement for offshore shipyards to propel them onto the global stage.

A year after the offshore white list was drawn up, the seven listed yards announced in December 2016 the formation of an alliance, the China Offshore (Deepsea) Industry Alliance or CODIA, with the aim of raising competitiveness through shared resources and a keener focus on R&D.

China’s deputy minister of the Ministry of Industry and Information Technology Xing Guobin said at the launch of CODIA that, by 2020, the alliance aimed to be one of the world’s leading players in offshore engineering.

Mr Xing’s statement would now appear to be a rather far-fetched ambition with less than two years to go until 2020. How many of us have heard of CODIA, much less the innovations that they have come up with?

It is a known fact that China’s offshore shipyards continue to lag behind their international counterparts. It is also well known that Chinese offshore yards are able to crunch out the numbers – from delivering only 11 offshore support vessels (OSVs) in 2003 to having a backlog of possibly 400 newbuild OSVs waiting to leave yards amid the sluggish market we are now in. In a way, it is their ability to build vessels quickly that has failed them – they simply do not possess the capability to deliver high-specification OSVs.

The previously profitable, privately owned Chinese shipbuilding Yangzijiang only managed to avert disaster by not venturing too deeply into the offshore sphere. Yangzijiang exposed itself to a co-owned jack-up rig back in 2014, just ahead of the offshore sector crash. That year, 5% of Yangzijiang’s revenue was generated from the oil rig.

Yangzijiang’s executive chairman Ren Yuanlin said that, apart from the poor market that led to the unfavourable outcome of its rig business, Chinese shipyards continue to lack the kind of technological edge needed to take on rig-building powerhouses such as Keppel in Singapore and specialist offshore yards in South Korea.

“The technological barrier between Chinese yards – be they state-owned or private – and the Korean yards is too wide. I have not foreseen when this barrier can be bridged,” Mr Ren told OSJ.

China Association of the National Shipbuilding Industry (CANSI) president Guo Dacheng said during his 2018 new year speech that the Chinese shipbuilding sector needs to internalise the idea that progression means making technological advancements.

The problem is that Mr Guo has made this same point in every one of his new year speeches. What was new in his speech this year, however, is the realisation by some Chinese yards that automation is a proven way to reduce operating costs and raise efficiency.

Mr Guo cited broad examples in 2017, such as Jinhai Heavy Industry lowering operating costs by 40% with increased automation and Jiangnan Shipyard raising output efficiency for its new products by 90.9% based on improved technological R&D.

There was mention of three of the white list offshore yards, with Yantai CIMC Raffles having reduced its procurement costs by approximately US$20M after it reformed its global supply chain. Dalian Shipbuilding Industry Co, which Dalian Shipbuilding Industry Offshore falls under, expanded its automatic welding processes by 76%. Cosco (Nantong) Shipyard saw a threefold increase in production at its automated production lines.

Cosco (Nantong) Shipyard, however, faces a closure threat as its parent Cosco Shipping Heavy Industry plans to streamline the number of its offshore shipyards from five to two by 2020. If the Nantong yard is to shut down as planned, the offshore white list will be left with six names, leaving the sister firm Cosco (Qidong) Shipyard in the list.

A source close to ZPMC told OSJ that 2017 was a tough year for the yard, and there was no mention of developments in the offshore business.

China Merchants Heavy Industry (CMHI), in collaboration with GTT, Gabadi, Lloyd’s Register (LR) and Shanghai Merchants Ship Design & Research Institute (SDARI), recently launched new membrane technology liquefied natural gas (LNG) carriers. While this development for CMHI is not directly linked to the offshore sector, it is a breakthrough for the shipyard, as the only other Chinese yard capable of building LNG carriers is Hudong-Zhonghua Shipbuilding (Group) Co.

Shanghai Waigaoqiao Shipbuilding (SWS), sister firm to Hudong-Zhonghua, also made a breakthrough as it won contracts to build LNG-fuelled 22,000 TEU containerships.

Although the offshore white list still exists, what the yards on it can achieve in the foreseeable future is unlikely to be revolutionary.

If progression is to be made, one of the major changes needed is for China’s state-owned companies to reform themselves, in particular at the management level. The heartening note is that this is now happening, especially since the graft crackdown initiated by President Xi Jinping when he assumed office in 2013.

The leaders of state-owned corporations typically enjoy too many privileges until there is little incentive to motivate them to do better. Bad management at offshore yards is a nail in the coffin when technological progression, innovation and staying ahead of the market are the keys to success.

The offshore equipment market is also driven by core designs and cutting-edge technology, leading to the importance of intellectual property laws, which are not properly enforced in China. American and European companies continue to fear that Chinese firms will not respect intellectual property, leading to little international collaboration, hindering China’s offshore progress.

The country also lacks an experienced, skilled domestic workforce to produce quality offshore structures to match those of international standards.

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