In the past ten years, overcapacity reduction, mergers and reorganizations, and bankruptcy transformation have become the main theme of China's shipbuilding industry. With the recovery of the global economy, the shipbuilding industry has ushered in a ray of sunshine. At the same time, trade friction will accelerate the survival of the fittest in the industry. The final result is that the strong will always be strong.
"Finance" reporter Chen Liang intern Zhou Jian | Text Shi Zhiliang | Editor
According to statistics from the World Trade Organization, the average annual growth rate of global trade after the 2008 financial crisis was only 3%. However, since 2017, global trade growth has reached 4.7%, and the world economic recovery has begun to show obvious trends.
This is more clearly reflected in the Baltic Index (hereinafter referred to as BDI), the leading index of the international economy. Before the financial crisis, the BDI reached a historical high of nearly 12,000 points, and continued to fall after the financial crisis. It even fell to a historical low of 290 points on February 11, 2016. Then the index began to rebound and is currently stable at around 1,500 points.
The rise in BDI reflects the new year for China's shipbuilding industry. The shipbuilding industry is a pillar industry in my country, which not only brings hundreds of billions of total industrial output value every year, but is also a barometer of foreign trade.
Statistics from the China Shipbuilding Industry Association show that from January 2018 to August, my country's new ship orders and handheld ship orders maintained a growth trend, with year-on-year increases of 59.7% and 11.4% respectively. The year-on-year declines in major indicators such as shipbuilding completions and the total industrial output value of key monitoring enterprises continued to narrow.
However, geopolitical issues have intensified, trade frictions have intensified, and the recovering shipbuilding industry is also facing challenges.
(The market will continue to wash away some shipbuilding companies and continue to converge on industry leaders. Photo/Visual China) After the outbreak of the 2008 financial crisis, China's shipbuilding industry was in trouble. Shipowners demanded a large number of delayed deliveries or even canceled orders; the capital chain of domestic private shipbuilding companies was cut off by low down payment ratios and high loan thresholds, and a large number of shipbuilding companies fell into the ice and snow of the industry. The shipbuilding business of Rongsheng Heavy Industry, which had debts of tens of billions of yuan, finally came to a halt. Nantong Pacific Offshore Engineering, Zhejiang Shipbuilding and Yangzhou Dayang Shipbuilding under Chunhe Group went bankrupt and were acquired one after another. From 2009 to 2016, more than 140 shipbuilding companies in my country closed down and more than 90 were merged and acquired.
Ren Yuanlin, a member of the China Enterprise Confederation, a board member of the China Entrepreneurs Association, and chairman of Yangzijiang Shipbuilding, who has experienced two financial crises, said in an interview with Caijing that the decrease in new orders in the market is still felt, shipowners are increasing their efforts to lower prices, and the reshuffle and reshaping of the industry is accelerating.
From madness to silence
"Caijing": On September 15, 2008, Lehman Brothers in the United States filed for bankruptcy protection, and the financial crisis broke out. Before that, what was the situation of the entire Chinese shipbuilding industry?
Ren Yuanlin: From 2005 to before the financial crisis, the entire Chinese shipbuilding industry was in an irrational and crazy state. At that time, shipping demand was strong, and the BDI index soared, reaching a peak of nearly 12,000 points. As long as shipbuilding companies have production capacity, there will be orders in the market. If the cost of a ship is US$30 million, the profit can reach US$20 million, and the rental return generated by this ship in the shipping market may be US$80 million.
A large number of speculators are involved in the shipping market and shipbuilding industry, and there are even a number of so-called "beach" shipyards, which have just been established and have taken orders for shipbuilding before the infrastructure is completed. If some large shipbuilding companies have empty ship slots, they can even openly bid on the market and the highest bidder will win. China's shipbuilding industry has fallen into a cold winter after the financial crisis, and the industry's own problems are the main factor.
Caijing: After the financial crisis broke out, how did companies in the industry respond?
Ren Yuanlin: With the outbreak of the financial crisis, BDI fell off a cliff. By December 2008, it was only over 600 points, and fell to the peak of 5% in half a year. The shipping market was sluggish, and shipowners had financing problems. They proposed price cuts or delayed delivery to domestic shipbuilding companies, but many domestic shipbuilding companies disagreed and were unwilling to help shipowners when they were in difficulty.
At that time, the down payment paid by the shipowner was at least 20% of the order amount, and some even reached 50%. Domestic shipbuilding companies believed that the delay in ship delivery was due to the shipowner's financial problems, which resulted in the inability to perform the contract. They ignored the reality that China's shipbuilding technology and craftsmanship were still very rough at the time. Whether the built ship could be delivered needed to be approved by the professional supervisor assigned by the shipowner.
When negotiations with domestic shipbuilding companies failed to produce results, shipowners turned to requesting supervisors to strictly control ship construction quality. Many of the reasons for delayed delivery turned to domestic shipbuilding companies' construction quality issues. According to the construction contract, shipbuilding companies will pay shipowners compensation on a daily basis for delayed delivery, and even shipowners can withdraw from the order and claim compensation after a certain time limit. In this case, domestic shipbuilding companies appear to be very passive if they take the initiative to negotiate with shipowners.
After the outbreak of the financial crisis, our shipowner China Ocean Shipping (Group) Corporation (hereinafter referred to as "COSCO") made three demands: cancel the order for 10 ships; postpone the delivery of the 10 ships that have already started construction; and reduce the price. We partially agreed, for example, the order cannot be cancelled, and the delivery of the 10 ships that have not started construction can be postponed indefinitely and the technical specifications can be modified; the price cannot be reduced, and the additional US$2 million/ship cost to meet the new specifications will be borne by Yangzijiang.
The result of such negotiation was to meet COSCO's requirements in disguise without changing the contract. This was a method that benefited others without harming itself. When the first few ships were delivered, COSCO's funds were tight. After promising settlement time, we agreed to deliver first and postpone the final payment. At that time, the Chinese government's 4 trillion yuan and the U.S. government's 700 billion U.S. dollars bailout stimulated the shipping industry to rebound, and COSCO put these ships on the newly opened China-U.S. route. 100 The final payment of more than one million US dollars arrived quickly, and even more was settled due to exchange rate fluctuations.
Another method is to help shipowners solve the financing gap. Generally, 20% of the shipowner's shipbuilding funds are self-owned funds and 80% are bank loans. The bank's valuation of the ship will fluctuate with market changes, but the contract price signed by the shipowner and the shipbuilding company is fixed. When the market goes down, there will be a financing gap.
In order to complete the order delivery, you must be willing to solve the financing gap problem for the ship owner. The collateral is the private credit of the ship owner, because in Europe and the United States, the consequences of a company's credit bankruptcy are very serious. In the ten years since the financial crisis, I have helped various ship owners solve the financing gap of about 700 million U.S. dollars. Currently, there are still more than 100 million U.S. dollars that have not been recovered, but as long as the ship owner's operating conditions are acceptable, I will continue to provide help.
Industry reshuffle
Caijing: What impact has the ten-year cold winter had on the industry?
Ren Yuanlin: I think that in the past few years after the financial crisis, the "Double 28" phenomenon in China's shipbuilding industry has become more and more obvious. 20% of the 20% of the shipbuilding companies have taken 80% of the 80% of the orders in the market. That is, 4% of the shipbuilding companies have received 64% of the orders in the market.
The market will continue to wash away some shipbuilding companies and continue to converge towards industry leaders. There are more than 1,000 registered shipbuilding companies in China, and there are only about 100 active shipbuilding companies (delivering or accepting new orders within a year), but I think there are only 30 to 40 companies that are truly active.
The number of shipbuilding companies will only become smaller and smaller through mergers. The number of state-owned enterprises is also concentrated. For example, Guangzhou Shipbuilding International, a subsidiary of China State Shipbuilding Corporation, continues to merge with shipbuilding companies under the group such as Wenchong, Huangpu, and Longxue. Private shipbuilding companies also need to occupy a certain market share through mergers. Yangzijiang acquired Changbo in 2010 and Xinfu in 2012 to gradually reach its current scale. Shipbuilding manufacturing is different from other industries such as steel. It was the first to be marketized and the first to go abroad and integrate into the world. But now it has become a traditional manufacturing industry with a low degree of marketization, because China, Japan and South Korea account for more than 80% of the world's shipbuilding market. Among them, Japan has declined, but shipbuilding manufacturing is South Korea's pillar industry. When encountering market problems, the South Korean government and banks will come to the rescue, that is, de-marketization.
In China, the domestic state-owned shipbuilding companies include North and South Shipbuilding Corporation (CSSC and China Shipbuilding Industry Corporation), and now there is a third pole - COSCO Shipping Lines. Most of the leading companies in the industry are state-owned shipping companies. The possibility of a merger between the two major North and South Shipping Groups in the future cannot be ruled out, and there will be pros and cons, but we can only know the difference after market practice after the merger.
Caijing: In the merger process, what factors do shipbuilding companies value from the other party?
Ren Yuanlin: First of all, the price is relatively low, especially when the market is sluggish, which is much lower than the cost of new production. Secondly, expansion projects of new production capacity are unlikely to be approved due to environmental protection, policies, etc. Finally, my personal view on mergers is that if you control costs low enough, having excess production capacity will be a powerful threat. When companies control excess production capacity through mergers, the market will be relatively balanced.
In the market now, shipbuilding companies have become rational, and the situation of accepting orders at low prices or even at a loss has been basically eliminated. Low-priced orders are like "poisoned rice balls". If you don't eat them, shipbuilding companies will starve to death, and if you eat them, you will be "poisoned" to death. This is like poison to quench thirst for shipbuilding companies. This kind of elimination of orders mainly depends on several points. First, private shipbuilding companies with no strength have almost no support from bank credit, and banks will not even provide guarantees for low-price orders. Secondly, the shipowners' low down payment conditions. As a result, many shipbuilding companies are barely able to survive and cannot afford low-price orders. If they can have a site in a place with good hydrological conditions, it will be a good thing for the future development of the company.
Caijing: The shipbuilding manufacturing industry is an industry that is reducing overcapacity. What is the current situation?
Ren Yuanlin: Although there are constant bankruptcies, mergers and reorganizations, and the number of shipbuilding companies is decreasing, the production capacity in the industry has not really decreased, because the technology and technology of shipbuilding have also matured, and the efficiency of shipbuilding has been greatly improved. A few years ago, it might have taken two to three years to build a 10,000-container ship on the Yangtze River, but now it only takes 12 months. As the efficiency of shipbuilding has improved, the production capacity of the same scale has been amplified. If the shipbuilding industry is not truly market-oriented, Some excess production capacity is converted into reserve capacity and cannot be removed. For example, South Korea protects some production capacity because shipbuilding is South Korea's pillar industry.
Geographical friction will accelerate the reshuffle
Caijing: What do you foresee as the prospects for industry recovery?
Ren Yuanlin: The probability of industry recovery is not high at present. It is now more in the "L" stable stage and will continue to be stable. The BDI has risen above 2,000 points and will not fall below 1,000 points. An important reason for the inability to rise is that the traditional shipbuilding cycle driven by shipping demand has been broken. The traditional shipbuilding cycle fluctuates according to the shipping cycle. When the shipping market is short of ships, shipowners will place orders for shipbuilding.
Now the identity of shipowners has become investors, or even financial institutions such as funds. The leasing companies of many domestic banks have ship leasing businesses, and China State Shipbuilding Corporation has also established ship leasing companies. These shipowners do not place orders according to the fluctuations of the shipping market, but place orders when they can make a profit based on calculations, and do not wait until the market really reflects actual demand.
This change subverted the traditional cycle and cut off the peak part. What is more, as mentioned earlier, production capacity has not been reduced and there has not been complete marketization. Without the peak, the trough will not be lower, because there are valuable laws in it. First of all, ship transportation, especially ocean transportation, is still the most economical mode of transportation in the world. The shipbuilding industry is a sunset industry, but it will not set.
As long as the sea is not closed, there will be demand for ships and opportunities for shipbuilders. At the same time, ships on the market are being updated frequently, and environmental protection and large-scale have become trends. This will inevitably eliminate many old ships that are uneconomical and do not meet the new standards. Even if these ships have several years of service life, they can only be scrapped early. Finally, the industry is also cleaning up some shipyards that lack capacity and do not operate in accordance with the market. The result is that the price difference of ship construction has become smaller, compared with 2008 Before and after the financial crisis, from 12,000 points to 600 points, BDI fluctuations between 1,000 points and 2,000 points became an insignificant range.
Caijing: What do you think of the intelligence of the shipbuilding industry?
Ren Yuanlin: The shipbuilding manufacturing industry is an all-weather traditional heavy industry. If intelligence is applied to more dangerous and difficult links, it is cost-effective even if the cost is higher. But generally traditional operations cannot be replaced. We are more semi-automatic to reduce the labor intensity of workers, such as the large-scale use of fillet welders. I think that the current level of automation has only been improved, but intelligence has not been achieved.
An important reason for promoting intelligence is that it is currently difficult for shipbuilding companies to employ workers. First of all, when a shipbuilding company in the industry went bankrupt, laid-off workers did not return to other shipbuilding companies in large numbers, and many skilled workers disappeared from the industry. Secondly, the shipbuilding industry is too hard, young people are unwilling to do it, and older people cannot do it. Our recruitment of workers is becoming more and more remote. Ten years ago, we were recruiting workers in the surrounding provinces and cities of Jiangsu, but now we have to recruit workers in Yunnan and Guizhou. Maybe in the near future, we will need to go to Southeast Asia to recruit workers.
Caijing: Is it possible to transfer some production capacity to Southeast Asia?
Ren Yuanlin: It is impossible to transfer. I have done due diligence on the shipbuilding industry in China and even around the world. Shipbuilding has several specific requirements that restrict industrial transfer. First, regional restrictions. Areas that are too hot and too cold are not suitable, which will increase costs. For example, European shipbuilding companies are mostly close to warm currents, while the Indian Ocean coast is too hot. Second, comprehensive industrial strength requirements. The shipbuilding industry requires more than 70 supporting industries, and Vietnam, the Philippines, etc. do not have matching comprehensive industrial strength. Third, capital intensive. Fourth, it is labor intensive. Based on the above four factors, only China and South Korea can satisfy the development of shipbuilding industry.
Caijing: If a state-owned shipbuilding company undergoes mixed ownership reform in the future, will you participate in it?
Ren Yuanlin: I have several indicators for whether to participate in the mixed reform of state-owned enterprises. First, the state-owned assets occupy a large share but cannot control, and the voting rights are in accordance with the board of directors system. Second, the operators must participate in the shares. Generally, the management level’s shareholding should be about 20%. It is not advisable for the management level not to participate in the mixed reform. Third, market-oriented entry. All parties participating in the shares must participate in the competition for equity according to the marketization, rather than simply "matching up".
Caijing: What impact will trade friction have on the industry?
Ren Yuanlin: The direct impact still comes from the shipping industry, and the impact of tariffs is not obvious. First of all, the taxes on ship import and export are related to the flag country; secondly, the amount of domestic equipment or accessories that needs to be purchased from the United States is very small, and there are many substitutes. Even if imports are restricted, there will be no impact. For domestic shipping companies, the biggest problem is the reduced demand for new ship orders.
Recently, the market has shown concerns about the impact of trade friction on the trade volume between China and the United States, resulting in sluggish shipping. When we received orders some time ago, we could feel that the demand for new shipbuilding was decreasing and shipowners were increasing their efforts to lower prices. Therefore, we gave up our original profit expectations and accepted orders first at a breakeven price. I predict that trade frictions may continue, which will accelerate the reshuffle of China's shipbuilding industry and accelerate the survival of the fittest in the industry. The final result is that the strong will always be strong.