01 August 2008

A Comprehensive Survey of China’s Dynamic Shipbuilding Industry: Commercial Development and Strategic Implications

China’s Future Nuclear Submarine Force Gabriel Collins and Lt. Cdr. Michael C. Grubb, USN, A Comprehensive Survey of China’s Dynamic Shipbuilding Industry: Commercial Development and Strategic Implications, Naval War College China Maritime Study 1 (August 2008).

China’s dynamic shipbuilding sector now has the attention of key decision makers in Washington. During testimony before the Armed Services Committee of the House of Representatives on 13 December 2007, Chief of Naval Operations (CNO) Admiral Gary Roughead observed, “The fact that our shipbuilding capacity and industry is not as competitive as other builders around the world is cause for concern.” Pointing directly to Beijing’s new prowess in this area, he concluded, “[China is] very competitive on the world market. There is no question that their shipbuilding capability is increasing rapidly.” The present study aims to present a truly comprehensive survey of this key sector of the growing Chinese economy. In doing so, it will provide decision makers and analysts with the clearest possible picture of the extraordinary pace of activity now under way in China’s ports, as well as the commercial and strategic implications flowing from this development.

China’s rapidly growing shipbuilding industry has focused primarily on commercial vessels. However, the People’s Republic of China (PRC) government classifies shipbuilding as a strategic sector and has limited foreign shareholdings in Chinese shipyards and marine diesel and crankshaft factories to 49 percent. Viewed through a commercial lens, these actions raise World Trade Organization (WTO) compliance questions. Strategically, this affirms that Beijing sees a strong shipbuilding industry, upon which it is able to exert considerable influence, as a central pillar in China’s maritime development.

China’s shipbuilding industry benefited greatly from Deng Xiaoping’s defense conversion program. Compared to other defense-related enterprises, such as aerospace, the Chinese shipbuilding industry has enjoyed a much smoother transition to international competitiveness. This stems from timing and structural advantages. The Sixth Ministry of Machine Building was “corporatized” into the China State Shipbuilding Corporation in 1982, giving the sector nearly twenty-five years to grow into the force that it is today. Shipbuilders have also enjoyed a relatively high degree of bureaucratic freedom, a broad shift toward commercial shipbuilding, an increasing wave of opinion that China must become a maritime power, early experience in the international ship market (first delivery in 1982), substantial domestic ship demand (which served as a jumping-off point into the intensely competitive international marketplace), and access to a huge and low-cost labor pool.

China’s two state-owned shipbuilders (the China State Shipbuilding Corporation [CSSC] and the China Shipbuilding Industry Corporation [CSIC]) report to the State Council via the State Owned Assets Supervision and Administration Commission (SASAC). Both companies are working to reform their business and management structures and are also raising capital, as well as their international profiles, by selling stock to the public. Ongoing changes include increased emphasis on hull-block construction, investment in major new “greenfield” shipyards, and bolstering of Chinese firms’ ability to produce marine diesels and gas turbines—all of which have military implications. Other areas of technological focus include enhancing systems integration abilities and fostering the growth of China’s currently weak ship-subcomponents industry, lest China become merely a “world-class hull builder.”

The Chinese shipbuilding industry is also increasingly focused on human capital. Chinese universities and maritime academies now produce nearly 1,500 marine engineers and naval architects per year, roughly seven times the number of such graduates from U.S. institutions. The large Chinese yards are also gradually emphasizing sound HSE (health, safety, and environment) practices, an important priority for many foreign ship buyers. Chinese yards are additionally realizing that the ability to hire and fire workers freely is an important tool that will allow them to build more productive workforces; Chinese yards’ per-worker production ($9,000) is an order of magnitude lower than Japanese ($550,000) and South Korean ($480,000) yards’ figures. Finally, the large and growing number of Chinese involved with and exposed to the maritime industry creates a “strategic reserve” of knowledge and experience upon which the country can draw if sustained international tension ever creates the need to expand military ship production rapidly.

Chinese yards’ have thus far primarily produced low-complexity ships, such as smaller tankers and bulk carriers. That said, the industry is now pushing to increase production of “high value” ships, including very large crude carriers (VLCCs), large container ships, cruise ships, floating production, storage, and off-loading units (FPSOs), and liquefied natural gas (LNG) carriers. Some sources note that China hopes to have thirty VLCC-capable building docks by 2015. China’s official goal by 2015 is twenty-four million tons of production capacity (35 percent of global capacity), which would make the PRC the world’s number-one shipbuilder.

While CSSC and CSIC garner the lion’s share of international attention, smaller “beach” and provincial yards are grabbing an increasing share of ship orders from Greek and other buyers seeking the lowest possible costs and trying to secure berths that may not be open at state yards. The quality of ships built at smaller yards varies widely; several hundred such yards were closed down or otherwise punished during a 2005 “campaign against low-quality ships.”

Commercial priorities are likely to dominate China’s shipbuilding industry for the time being. China’s growth could lead to a bifurcated global ship market, wherein China dominates low-complexity ship construction and South Korea dominates the high complexity end (LNG carriers, cruise ships, etc.). Under such a scenario, Japanese and European yards could lose badly.

If the global shipping sector suffers a significant slowdown, China’s rapid and massive capacity buildup could leave Chinese builders in a serious financial bind that government orders probably could not fully offset.

The activities of the massive new Longxue (Guangdong), Haixiwan (Qingdao), and Changxing Island (Shanghai) shipyards will be key indicators of China’s future intent with respect to balancing military and commercial shipbuilding. Each yard is more than 1,200 acres in size and if one were devoted to military shipbuilding, capacity would rise substantially from the current level. Alternatively, commercial operations at today’s Jiangnan shipyard (Shanghai) could all be moved to Changxing Island and Jiangnan dedicated to military ship production, which would allow the yard to be optimized for series production of selected warships. Thus far, Guangdong Longxue appears to be dedicated to commercial ship production; the yard was set to specialize in building 230,000-dwt ore carriers, 308,000-dwt VLCCs, 82,000-dwt bulk carriers, and 76,000-dwt crude/product tankers, as well as drilling rigs and other offshore energy equipment when it opened in March 2008.

In addition, during wartime merchant ships might be adapted to serve as auxiliaries, amphibious assault ships, and minelayers. Accordingly, the growing Chinese-flag merchant fleet represents a degree of latent military potential. Indeed, Chinese analysts have closely examined Britain’s rapid conversion of forty-nine merchant vessels to military roles during the 1982 Falklands War. It should also be noted that the Chinese government maintains a vessel tracking system known as China Ship Reporting System, or “CHISREP,” to which all Chinese-flag merchantmen must ostensibly report, no matter their location. Knowledge of where these vessels are at all times across the globe could have military utility during a time of conflict.

Other barometers of future Chinese strategic naval intent include

• Construction of covered building facilities for submarines and warships (particularly if used to build SSNs)

• Construction of the auxiliaries required by a blue-water navy (long-range oilers and resupply ships), and increased at-sea replenishment exercises

• Mass production of amphibious assault vessels that could be used in an invasion of Taiwan

• Acquisition of ship tenders for long-range repairs or acquisition of overseas port rights, particularly in the Indian Ocean region.

A fundamental conclusion of this study is that China’s ambitious drive for new and world-premier shipbuilding capabilities is not at present primarily driven by military factors but rather by commercial incentives. As determined by conventional economic theory, Beijing has a strong comparative advantage in shipbuilding, and its emergence in this sector is therefore natural, to a large extent. Nevertheless, strategists around the Asia-Pacific, as well as in Washington, need to be aware of the concern highlighted by the CNO in his December 2007 testimony on Capitol Hill. China’s dynamic commercial development in shipbuilding is presently adding very extensive latent maritime capacity that Beijing could draw upon in a future maritime rivalry or conflict. Such an outcome is not inevitable, especially given the many promising signs in China’s “new diplomacy.” Still, the risks that accompany present economic tendencies need to be noted, fully analyzed, and debated by experts. …