China’s ‘White List’ of shipbuilders, first released in 2014 as a guide to the yards which the Chinese government wished to support, lists 71 builders which together delivered 11m CGT last year, 90% of Chinese output. However, several of these yards have encountered difficulties, and the criteria for inclusion on the ‘White List’ have now been revised to help address overcapacity in China’s shipbuilding industry.
Setting The Bar Higher
At the start of October 2016, a set of revised criteria was introduced for China’s ‘White List’ of domestic yards, with the potential for builders to be removed from the list if they fail to meet the guidelines. Builders can now be dropped from the list if they suspend production or declare bankruptcy, merge with or be acquired by other yards, fail to win a new order and deliver a vessel over a two year period, or fail to deliver a ship, receive a contract, and have no units under construction over a one year period. This month’s China Commentary takes a closer look at how the ‘White List’ might look based on the current status of the yards in relation to the new criteria.
Cleaning Up The List
Of the 71 yards on the ‘White List’, seven are in financial distress and have declared bankruptcy. Their closures could see the removal of around 1.7m CGT p.a. of estimated shipbuilding capacity. While some yards on the ‘White List’ have fared better than others, the financial distress faced by some builders is indicative of the significant problems being faced by many Chinese yards. Many yards expanded rapidly during the boom years, but in the following downturn, cost overruns and output delays have been apparent. These yards have been particularly vulnerable, and have suffered from dwindling cash reserves.
Although state-owned yards have not been affected to the same extent, they have not been immune to the very difficult market conditions. Consolidation has been apparent, with two CSSC shipyards and three CSIC yards merging with others in the same groups over the last year, and further similar activity is likely. The closure of facilities and redundancies may be required to reduce costs and increase efficiency.
The Warning Light
Taking into account the yards which have declared bankruptcy and merged with others, the ‘White List’ will shorten to 59 yards. While these builders currently meet the revised criteria, some may soon receive a warning for failing to secure new orders. 40 of these yards have not won an order in 2016 so far, 18 of which also did not receive an order in 2015. Most yards still have ships under construction, but four builders have not delivered a unit since the start of 2015.
Is It Enough?
While a number of yards were already struggling before the new criteria for the ‘White List’ was published, for those remaining it is clear that being on the list is not enough to guarantee their survival. Although the extent to which the government will react to changes in the market is unclear, the new ‘White List’ guidelines are a further indication that the industry in China is likely to continue to downsize.