China's leading ship enterprises enjoy the dividend of share improvement and structural upgrading

The center of the global shipbuilding industry is gradually shifting to China

From the 1890s to the 1960s, European countries dominated by the United Kingdom dominated the market. In the 1890s, Britain was at its peak, controlling massive trade flows, dominating the maritime industry, producing more than 80% of the world's ships and owning half the world's fleet. But with each world war, the British Empire shrank in size, the merchant fleet was weakened by wartime losses, and its trading partners became better able to conduct their own trade. As control over trade faded, so did shipping, and by 1960 the British fleet had slipped to just 20% of the world's tonnage. Europe's shipbuilding industry as a whole has gone through much the same boom-and-bust cycle as Britain's. Despite the closure of many shipyards, some have managed to diversify into high value-added vessels in niche markets where Far East shipyards have no competition. These markets include container ships, cruise ships, oil tankers, chemical tankers and many smaller vessels such as dredgers. All of these vessels are equipment-intensive, which allows the European equipment industry to remain at the forefront of design and development, for example in engines, cranes and engine room equipment.

In the 1950s, Japan overtook Europe and reached a 50% market share in 1969. Like Britain, Japan was an island nation, and post-World War II economic growth placed high demands on shipping. Initially, the development of the Japanese shipbuilding industry benefited from coordinated shipping and shipbuilding programs. Between 1951 and 1972, 31.5% of the total loans of the Japan Development Bank were for Marine transport. This domestic shipbuilding program has undoubtedly contributed to the success of the Japanese shipbuilding industry. In the 1990s, Japan was challenged by South Korea, whose shipyards faced high labor costs and an appreciating currency. In the face of these headwinds, Japan has remained highly competitive by increasing productivity through the use of production planning, production engineering and subcontracting. In the 1980s, Korean shipbuilding production grew rapidly, challenging Japan's dominance and eventually establishing the Far East as a shipbuilding center of the world. Unlike the United Kingdom or Japan, starting with low labor costs and large, efficient facilities, South Korea was the first country to build its business primarily around export markets, with a product range focused on large ships. With the development of international registrations and multinational corporations, the link between ships, shipowners and national interests is increasingly weak. The industry is also more concentrated, with a small number of very large shipyards focusing on large ships for the international market. By the mid-1990s, South Korea had a 25% market share and four of the world's top five shipyards.

As part of China's industrial expansion, the major expansion of China's shipbuilding capacity accelerated in the late 1990s, and China's importance began to increase, creating a tripartite situation between China, Japan and South Korea. At the beginning of this century, China's rapid economic growth, gradually become one of the world's largest consumer markets, import and export trade volume continues to increase, from 2003 to 2007, the total value of China's import and export surged from 851.2 billion US dollars to 2.17 trillion US dollars, an increase of 155.38%, a compound growth rate of 26.41%. Most of the import and export trade is completed by sea transportation, and the active economic trade effectively promotes the development of shipping industry and shipbuilding industry. At the same time, China's low labor costs and solid industrial base promote the gradual rise of China's shipbuilding industry in the international market, in 2008, in terms of deadweight tons (DWT), China's shipbuilding industry in the completion of shipbuilding, new orders and hand-held ship orders in these three indicators are more than Japan, ranking second in the world. In 2010, China surpassed South Korea in the three major shipbuilding indicators (DWT) and became the world's largest shipbuilding country.

2 Chinese shipyards have seen a significant increase in orders for high value-added ship types

China's shipbuilding industry rose in the last round of industry cycle, its product structure is mainly low value-added vessels. In the last cycle, China's shipbuilding industry, relying on comparative advantages such as labor costs, mainly focuses on the manufacture of low value-added vessels. Calculated by CGT, the new orders for dry bulk carriers account for a relatively large proportion, more than 60%, and China accounts for more than 50% in the world dry bulk carrier market. On the other hand, China has shown its weak capabilities in the field of high value-added vessels such as LNG/LPG, VLCC/ULCC, and large container ships. In the last cycle, in terms of the number of ships, these three types of high value-added vessels accounted for no more than 10% of China's new ship orders (except 2015). Among them, because the global LNG and LPG markets are basically monopolized by South Korea, the proportion of gas ships in China's new ship orders is very low, and China's share in the world gas ship order market is only about 10% (in CGT).

In the past 21 years, the proportion of new orders undertaken by Chinese ships has increased significantly, and the proportion of high value-added ships has increased significantly. In terms of CGT, China's new ship orders in 2012 reached 27.8 million CGT, an increase of 142.78%; China accounted for 50.1% of the world's new ship orders, up 6.6pct year-on-year. In 2013, the repair load ratio of China's new ship orders reached 0.468 (revised gross ton/deadweight ton, which is obtained by the total ship cargo multiplied by the ship type coefficient, taking into account the difficulty coefficient of ship construction), which is the best level in history, indicating that China's new ship orders have a clear trend of high-end.

From the perspective of ship type: in terms of CGT, the proportion of gas vessels in China's new signed orders gradually increased, especially in 22 years, significantly increased to 22.66%, an increase of nearly 20pct; In 22 years, the new orders of Chinese shipyards for tankers, bulk cargo, containers and gas vessels accounted for 32%, 60%, 55% and 32% of the relevant global markets respectively. The share of container ships and gas vessels increased significantly compared to the previous cycle. In terms of the number of vessels, the new orders signed by China's three types of high value-added vessels have shown an upward trend since 2017, rising from 28 to 163 in 22, accounting for the world's relevant market share increased from 13% in 16 to 44% in 22. It is worth noting that in the field of LNG carriers, according to the statistics of the China Shipbuilding Industry Association, in 22 years, China's new LNG carrier orders reached 4.81 million CGT, an increase of 480% year-on-year, hitting a record high. China's market share has grown from 12% in 2021 to over 30%. Among them, large liquefied natural gas (LNG) carriers made a great breakthrough, and undertook 55 large liquefied natural gas (LNG) carriers with 174,000 cubic meters of orders. In the VLCC field, the only two VLCC orders in the world in the whole year of 22 were all undertaken by Dalian Shipbuilding Industry Co., LTD., a subsidiary of China Shipbuilding.

From the perspective of shipyards: in 22 years, China's LNG carrier orders have rapidly expanded from 1 to 5. Experts in the shipbuilding industry believe that as more and more Chinese shipping companies enter this field, it will drive the development of the entire industry chain, and China's competitiveness in the competition for high-end ships market will also be enhanced. We believe that as Chinese shipping enterprises accelerate the layout of the high value-added ship market, core technology breakthroughs, and the improvement of the shipbuilding industry matching rate, China's shipbuilding industry is expected to improve its competitiveness in the field of high value-added products and obtain higher market share.

The concentration of the shipbuilding industry and the barriers to entry have increased from the previous cycle

3 The shipbuilding industry has experienced more than ten years of reshuffle, and the concentration of the supply side has been greatly improved

In the last round of the downward cycle, the global shipbuilding industry has serious overcapacity, and the merger and reorganization of shipbuilding enterprises has become a trend, and the concentration of the global shipbuilding industry has increased significantly. After the 2008 financial crisis, the global shipbuilding industry mainly contracted and optimized its capacity through bankruptcy liquidation and merger and reorganization. Among them, from 2012 to 2016, the capacity adjustment of the shipbuilding industry was mainly based on shutdown, bankruptcy and liquidation, and gradually spread from small and medium-sized enterprises to large shipbuilding enterprises. From 2016 to 2020, the adjustment of the shipbuilding industry will shift to the merger and reorganization of large and medium-sized enterprises, including the acquisition of high-quality shipyard assets by advantageous enterprises and the merger and reorganization of large enterprise groups, such as the acquisition of Daewoo Shipbuilding, one of the three largest companies in South Korea, by the Korean military giant Hanwha Group in 2023; In 2013, Imaji Shipbuilding acquired 30% of JMU's shares and established a joint venture sales and design company "Nippon Shipbuilding" with JMU. From the perspective of the number of active shipyards in the world, the number has shown a significant downward trend after 2008, from 1023 in 2008 to 355 in January 23. From the perspective of hand-held order share, as of July 2023, the top ten shipbuilding groups have a 73.5% share of global shipbuilding orders, an increase of 34.6pct compared with 2010, indicating that the concentration of the global shipbuilding industry has increased significantly.

In the past decade, in the context of the overall sluggish demand in the international shipbuilding market and the global shipbuilding overcapacity, China's shipbuilding industry has implemented supply-side structural reform, and the number of active shipyards in China has dropped significantly and the concentration has gradually increased. From the perspective of shipbuilding enterprises, the number of active shipyards in China reached a maximum of 455 in 2008, and then showed a sharp decline trend, to 155 in January 2023, a decrease of 66%; The CR10 of Chinese shipbuilders in 2010 increased from 35% in 2009 to 51% in 2022. From the perspective of shipbuilding groups, since 2016, COSCO Group and China Shipping have implemented restructuring, during the same period, Sinotrans Group has been integrated into China Merchants Group as a wholly-owned subsidiary, and in 2019, CSSC and CSIC have implemented joint restructuring and newly established China State Shipbuilding Group. The scale advantage and synergy effect brought by merger and reorganization are significant. At present, the hand-held orders of the three central enterprise shipbuilding groups account for 53% of the total domestic orders (in CGT), and the concentration of the domestic shipbuilding industry has reached a high level.

4. Ship upsizing and new energy upgrade the industry entry threshold

The upsizing of ships and the design and construction of new energy ships raise the technical threshold of the industry, and the competitiveness of China's leading ship enterprises is strengthened. With the vigorous development of global economy and trade, the stimulation of economies of scale, the progress of shipbuilding materials and shipbuilding technology, the strong promotion of green shipping policies, and the promotion of shipping alliances, the trend of ship upsizing continues to evolve. The average tonnage of China's new ship orders has shown a significant growth trend since the end of the 20th century. The larger the ship, the higher the requirements on its own ship structural strength, hydrodynamic performance, ship stability, fuel consumption, environmental protection and other aspects of technical performance. Therefore, the leading enterprises have prominent competitive advantages over small and medium-sized ship enterprises with weak technical capabilities.

In addition, as IMO's global shipping greenhouse gas emission reduction strategy continues to advance, the demand for new energy vessels is increasing. Clarkson data show that in China's new shipbuilding orders in 2022, the proportion of alternative fuel vessels has reached about 54%. At the end of June 2023, shipping giant CMA CGM Shipping ordered 10 24,000 TEU LNG twin fuel tank ships in China's largest private shipping company Yangzijiang Shipping Industry, which is scheduled to be delivered in 2026; Maersk, another shipping giant, has ordered six new medium-sized methanol-dual fuel vessels at Yangzijiang. At present, the emergence and application of dual-fuel engines is considered to be one of the effective means to solve Marine air pollution, but the construction of dual-fuel ships requires advanced technology accumulation, patent certificates and supply chain support, which also accelerates China's small boat enterprises to withdraw from the market.

90% of the world's maritime traffic is driven by low-speed engines as a power, and in the early years, the development of China's low-speed machines lags behind, and the three international brands occupy the global market. Low-speed engines generally refer to reciprocating internal combustion engines with a speed of less than 300 RPM, which can be divided into low-speed diesel engines and low-speed dual-fuel engines according to the fuel. The low-speed machine has the advantages of high power, high thermal efficiency, flexible fuel, high reliability and easy maintenance, and is the main propulsion power of ocean-going ships. Due to the large investment in low-speed machine research and development, the need for global service capabilities, with a certain scale to produce benefits, so low-speed machine since the 1950s experienced a period of mergers, acquisitions and demise of the process, to the 1990s, there are only three low-speed machine brands: Man, Wartsila and Mitsubishi. Among them, MAN was formed by the merger of the low-speed machinery businesses of the former German MAN and Danish B&W, and Wartsila's low-speed machinery business was acquired from Sulzer of Switzerland. In the early stage, China mainly carried out production through the introduction of patented technology, the purchase of production licenses transferred from overseas brands and some foreign professional supporting industrial chains.

China acquired Wartsila to fill the gap in low-speed diesel engine technology, and became one of the three global low-speed machine brands after integration. In 2015, the former CSSC acquired Wartsila's low-speed machinery business to form Winterthur Gas & Diesel (WinGD). The joint venture company will have Wartsila's two-stroke engine technology, so that China has obtained the European hundred years of Marine low-speed diesel engine development accumulation of massive engineering test database and patent technology, leapfrog to enhance China's Marine low-speed diesel engine independent research and development capability, so that China from many years of Marine low-speed diesel engine patent introduction country jumped to patent ownership country and technology exporting country. In 2017, Mitsubishi Corporation's low-speed engine business was merged with Kobe Engine Corporation to form Japan Engine Corporation (J-ENG). At present, the three low-speed machine brands in the world are MAN ES (MAN renamed MAN Energy Solutions), WinGD and J-ENG. In addition to J-ENG's existing brand and own production, MAN ES and WinGD are only responsible for technical research and product design of low-speed machines, which are manufactured by authorized patent factories through licenses. Low-speed machine patent factories are mostly located in China, Japan, South Korea, in recent years, the share of low-speed machines manufactured in China has increased significantly, 22 years China's share reached nearly 30%, an increase of 6.4pct from 19 years. Among Chinese enterprises, Hudong Heavy Machinery Co., LTD., a subsidiary of China Shipbuilding Group Co., Ltd. occupies more than 20% of the market share of low-speed machinery manufacturing, ranking second in the world, second only to Hyundai.

Dual-fuel engine is one of the main ways of shipping carbon reduction plan, and in recent years, China has a certain independent research and development and manufacturing capabilities in this field. In 2017, Anqing CSIC Diesel Engine Co., Ltd. launched the ACD320DF dual-fuel engine for the first time, its single-cylinder power can reach 405kW, using a combination of Miller cycle, lean combustion, micro-ignition, multi-point injection, exhaust gas bypass and other technologies. This enables gas mode exhaust emissions to meet Tier III standards.