Besides serving epidemic-hit nation, local M&A facilitate building of high-end vessels fit for multi-sector shipping industry across the world

Global cruise lines may be in choppy waters right now due to the COVID-19 pandemic, but mergers and acquisitions (M&A) are keeping the Chinese shipping industry's hopes for a bright future, and a leading role in the world market, buoyant－now that they have created the world's largest shipbuilder by production capacity, with total assets of 790 billion yuan ($112 billion).

Buoyed by these glad tidings, major shipping companies are able to strengthen the nation's epidemic fight even as they seek to enhance their global competitiveness.

For instance, in October last year, China State Shipbuilding Corp and China Shipbuilding Industry Corp merged to form China State Shipbuilding Corporation Ltd or CSSC, which will now set sail to dominate several industry segments relating to military vessels, liquefied natural gas or LNG carriers, luxury cruise liners, icebreakers and offshore engineering equipment among others.

The merged entity is expected to lead China on a path of self-reliance and independent innovation in the development of high-end ships.

CSSC now has 310,000 employees, 147 subsidiaries, including shipyards, R&D facilities, training institutes and manufacturing complexes. It will be the main force in research, design, manufacture, testing and supply of both civil vessels and naval armament like nuclear-powered submarines and aircraft carriers.

But that will all be over the long term. Right now, CSSC, like a massive ocean liner, is performing delicate maneuvers, to adapt itself to the needs of the epidemic-stricken nation.

Like other centrally-administrated State-owned enterprises such as Aviation Industry Corporation of China, CSSC has started making the equipment needed for COVID-19 prevention efforts, apart from helping increase the production of face masks, protective clothing and related industrial materials.

CSSC delivered the first batch of face masks and protective clothing machines to other SOE partners such as Sinopec Group and China National Petroleum Corp, the manufacturers of meltblown nonwoven fabric, an essential raw material for medical masks, earlier this month.

CSSC was among the companies that led work resumption at central SOEs, which helped bring sectors like petroleum, petrochemicals, shipbuilding, transportation, telecommunication and power generation to operational capacity of between 95 percent and 100 percent by March 5. The figures are from the State-owned Assets Supervision and Administration Commission, which is part of the State Council, China's Cabinet.

Under a unified management, the new group, also known as CSSC, will be better able to plan, promote and develop its business for products and services in the global market, said Hu Chi, a researcher at a research institute of the commission.

As separate entities before their merger, the erstwhile CSSC and CSIC had experienced both the boom as well as the struggles of China's civil shipbuilding industry. In 2008-09, the Global Financial Crisis dealt a big blow to the industry, said Hu, adding the strategic restructuring, coming a decade later, is in accordance with the government's measure of optimizing quality industrial resources and cutting backward production capacities.

Apart from constructing conventional ships such as bulk vessels, container ships and oil tankers, both CSSC and CSIC had begun to deploy financial resources and manpower to the development of products like mega-container vessels, LNG carriers, floating hospitals, semi-submerged ships, and ocean farms. They were capable of building dual-fuel ships and gas-fueled ships with the latest wind-power technologies.

Dong Liwan, a professor of shipbuilding at Shanghai Maritime University, noted that after their merger, members of the new conglomerate will be able to join forces to handle pressure and compete for new orders, as well as inject momentum into the sector and reduce unnecessary competition among domestic shipbuilders.

"The industry has become more intelligent, digitalized and environmentally friendly," Hu said, stressing it will take time for the two giant shipbuilders to operate as one firm after merger. They must accelerate the pace of internal integration and cooperation to achieve optimal governance.

CSSC and CSIC were set up in 1999 as a result of the breakup of the former China State Shipbuilding Corp. They were headquartered in Beijing. CSSC's major assets are in southern China while those run by CSIC are mainly in northern parts.

"The world's fast development of 'marine economy' has facilitated their merger. The meaning of the term marine economy has widened in recent years to include industries including shipping, equipment manufacturing, fishing, aquaculture, oil and gas," said Feng Liguo, a research fellow at China Minsheng Bank's research center.

Agreed Tan Naifen, deputy secretary-general of the Beijing-based China Association of the National Shipbuilding Industry. "Marine economy now includes sectors such as marine chemistry, biomedicine, ocean power, seawater use, marine tourism, ocean engineering and construction."

The new-age marine economy has created new opportunities for shipyards. More so for Chinese shipyards because of the tangible development brought about by the Belt and Road Initiative, Feng said.

Tan said a large variety of vessels now serve these sectors. Conventional vessels like bulk ships and ore carriers are no longer the kings of the marine economy transport system. Only complex, high value-added vessels are able to reach buyers in new segments via international collaboration and R&D.

To exploit opportunities presented by this trend, the merged entity of CSSC started to build the nation's largest and most advanced research vessel in late October at its Jiangnan Shipyard Group in Shanghai. The vessel is expected to be ready in two years.

Hu Keyi, head of the shipyard's science and technology committee, said the ship will have a displacement of 6,800 metric tons, making it the largest research vessel in China and surpassing the 5,000-ton Dongfanghong 3, which was also built by the shipyard and is operated by the Ocean University of China in Qingdao of East China's Shandong province.

Upon its completion, the ship will be delivered to Sun Yat-sen University in Guangzhou, the capital of South China's Guangdong province, and will be used to carry out scientific expeditions and student training. It will carry modern scientific devices and high-performance servers, and will be tasked with conducting surveys on water, atmosphere, ecological systems and resources.

With podded propulsion units as its driving force, the vessel will boast better mobility than existing research ships in China, he said.

The merged entity of CSSC also delivered the Hailong, or the Sea Dragon, the most advanced diving support vessel China has ever built, to Jumeirah Offshore, a Singapore-based marine engineering firm, in December.

The vessel is capable of supporting a total of 24 divers conducting operations 300 meters under the water. It can carry two remotely operated underwater vehicles capable of diving to a depth of 3,000 meters, according to a statement released by the company.

"About 85 percent of ship parts and equipment such as diesel engines and marine propellers today can be purchased from domestic manufacturers," said Yang Zhizhong, president of Dalian Shipbuilding Industry Co Ltd, a subsidiary of CSSC.

He said CSSC will gather more resources to compete with South Korea and Japan in the field of building LNG carriers, pushed by China's cross-border reform in the natural gas sector, including market-oriented reform, transparency and improved infrastructure.

According to global independent maritime research consultancy Drewry, China will import between 60 million tons and 100 million tons of LNG annually by 2022 from countries such as Qatar, Malaysia and Russia, which means that the market will need around 60 to 100 LNG carriers by that time.

"Many economies participating in the BRI are seeking to develop trade, regional connectivity, offshore energy, tourism and other service businesses via the 21st Century Maritime Silk Road," said Yang. "Additional demand for ships is also coming from China's surging resource deployment into high-end and green shipbuilding."

In addition to building more high-end ships to ensure the country's energy security and meet the diversified demand of foreign shipowners, CSSC's shipyard in Guangdong province is building the nation's first maritime patrol ship with a tonnage exceeding 10,000 tons. The vessel will be operated by the Guangdong Maritime Safety Administration when commissioned.

Designed by the erstwhile CSSC (not the merged entity), the ship, with a length of 165 meters and a tonnage of 10,700 tons, will be China's largest and best-equipped maritime patrol vessel. It can carry multiple types of helicopters and is able to carry out cross-zone patrols as well as search-and-rescue missions under rough sea conditions.

As China's flagship for patrol, and search-and-rescue missions on the high seas, the vessel will greatly promote maritime safety in the Guangdong-Hong Kong-Macao Greater Bay Area, according to the company.

The international trade arms of CSSC also announced they had signed contracts for building two 13,800-ton stainless steel chemical tankers and two 158,000-ton crude oil tankers, as well as for constructing two 79,900 cubic meters LNG carriers earlier this year.

Since SOE mergers in many industries, including shipbuilding and equipment manufacturing, have proven to be effective, China will accelerate the pace of integration in the areas of equipment manufacturing, chemicals, maritime engineering, and overseas oil and gas assets this year, said Peng Huagang, secretary-general of the SASAC.

To improve the efficiency of State capital, China has reorganized 41 central SOEs since 2012, including the merger of China North Railway and China South Railway, and the structural reorganization of China Poly Group Corp and China Silk Corp.

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