China Grows Strong While the Maritime Market Waits for Recovery

Mega-mergers, strong alliances and a narrowing competitive gap between global shipbuilding powerhouses mean that when market recovery commences, China is aiming for a greater share. Jane Chen, MacGregor’s Vice President, Strategy and Head of China, explains:

The global shipping and shipbuilding markets are waiting for recovery, and at the forefront of this hungry queue is China. When this comes, it will be met by leaner, more efficient and technologically advanced players than the industry has ever known.         

Gaps between the global shipbuilding giants are narrowing, and capabilities that once distinguished a country’s expertise in building particular vessel types are gradually diminishing. Within this levelling market, China is poised and ready to compete in both its traditional grounds and within previously untapped arenas. 

It is not possible to consider China’s maritime position without taking into account the whole market and its potential for growth. Intelligence specialist, Clarksons Research, has downgraded its 2019 forecast for global seaborne trade growth from 2.9 percent to 1.7 percent, representing the slowest annual growth rate since 2009. However, it still predicts a recovery commencing in 2020 with more meaningful growth forecast during 2021 and 2022.

The recovery of the offshore oil and gas market is expected to take a few more years. Currently, the price per barrel of oil has stabilized at around $60, which has been widely accepted as a viable level for offshore field development. This is possible because the industry has become more cost-competitive than before, and adopted new solutions and technology advances that have realized efficiency benefits. However, oversupply in the market means that there are still many vessels waiting to be re-activated before the need to build new ones materially increases. 

Barriers to growth

Global economic uncertainty still grips the maritime industry; a difficult situation exacerbated by protectionism, trade tensions and sanctions. 

As the growth of advanced economies has been slowing down, growth in emerging economies has not been sufficient to close the gap, adding to current difficulties. Furthermore, service growth, which should be visible in a market where owners are keeping vessels for longer, is also slow and indicative of cash-strapped companies undertaking only essential maintenance.

An additional impact is the need to comply with environmental regulations, particularly the lower limits on sulfur emissions, and associated costs. Global shipbuilding recovery in both the merchant and offshore markets is driven most strongly by the scrapping of older fleets, with the greatest driver being environmental and regulatory legislation.

Whilst environmental regulations place short-term capital and operating expenditure pressure on the industry and its participants, it will bring us all a much better world in the longer term.

Global shipbuilding stakes

China’s position in the global shipbuilding industry is substantial. In terms of contracting activity, Clarksons’ analysis at the end of August showed that China held a 44 percent share of global shipbuilding by number of newbuild contracts placed and a 38 percent share by tonnage. 

However, China currently only secures around 33 percent of the market by value which is similar to the European shipbuilding industry that builds around ten percent of the global fleet by tonnage. 

This indicates that whilst China has diversified from building smaller, simpler vessels to larger and more value adding ships, it is still not comparable with the European yards focused on high-value, high-technology vessels and cruise ships in particular. 

This is well-recognized by China; it has been a long learning curve but the gaps are narrowing. Whilst this has been driven in part by the ‘Made in China 2025’initiative, strategies were already in place to close the value gap. Chinese state-owned shipyards are now targeting higher-value shiptypes, including LNG carriers and cruise ships. 

In preparation for growth and consistent with the industry consolidation trend, there are mega-mergers taking place within China’s shipbuilding industry, primarily between the two state-owned enterprises (SOEs), China Shipbuilding Industry Company (CSIC) and China State Shipbuilding Corporation (CSSC). Post-merger, the combined group will be the largest shipbuilder in the world.  

Increasing shipowning position 

China also has a growing shipowning role in the industry. For a long time, it ranked fourth in this sector but in 2018 became the second largest shipowning nation, overtaking Japan. 

Whilst Greece remains the world’s largest shipowner, many new investments have been backed up by Chinese financing and China also became the leader in the second-hand tonnage market during this year. 

Central state-owned China COSCO Shipping, including newly acquired OOCL, is now the largest global ship owner with a relatively young and modern fleet, and is also expanding it’s footprint in international ports through significant investments.  

Becoming self-sufficient

All Chinese companies, and particularly the SOEs, are being encouraged to be more independent in technology development and self-sufficient. This is designed to safeguard the country’s long-term growth, the integrity of critical industries and to push China to move up the value chain with more speed.

China’s SOEs are also major employers, stabilizing local communities, and their survival and increasing competitiveness is therefore essential. A strategy that ensures this is one of vertical integration, where a company controls more than one aspect of the supply chain. 

While the market is depressed, it is natural for the Chinese SOEs to prioritize “feeding the family first.” Hence being regarded as a family member for a Western players would be beneficial, either through a strategic cooperation or joint ventures.

MacGregor in China

MacGregor has held a strong market position in China for decades, which has been further strengthened through the recent acquisition of TTS.

TTS has three joint ventures in China, two with CSSC and one with CSIC, which are well established and recognized by the Chinese customers. In accordance with Chinese competition authority conditions related to the acquisition approval and for a hold-separate period, MacGregor and the TTS joint ventures must operate independently in the China market. This applies to certain equipment supplied for newbuild projects, with the requirement continuing through to July 2021.  

The combination of MacGregor and TTS capabilities globally provides a stronger service network, a wider product range and greater expertise to offer optimized solutions that create even more value for customers, both shipbuilders and shipowners. With a strong parent company and shareholder support, we also have the financial capacity to invest and innovate for our customers; something that not everyone can afford in this climate. 

MacGregor also needs to compete effectively in the Chinese market with ‘fit for purpose’ reliable equipment that is cost-competitive. As such, and for example, we have reengineered and optimized our portfolio of selected equipment to ensure that it meets the needs of customers with both technologically advanced and more simpler requirements.    

Ready for tomorrow

As an industry leader, we must move forward. MacGregor is doing this through the development of innovative, digital technology-enabled and environmentally sustainable solutions that deliver real commercial and operational benefits to customers and fulfill our social responsibilities.

One notable example is OnWatch Scout, a cloud based digital solution designed to maximize operational availability and minimize unplanned downtime through continuous monitoring of installed equipment performance. A number of OnWatch Scout pilot trials are currently ongoing, including with Chinese shipowners. 

Whilst we are operating in an era of considerable change, MacGregor has extensive local experience and we are able to compete strongly in the market through leveraging an asset-light business model and striving to ensure that our products, systems and services fully meet the needs of our shipbuilding and shipowning customers.

Strategic alliances and joint ventures with Chinese state-owned key stakeholders further strengthen our relationships and market foothold, and help to build a stronger platform to support future growth in China.