Report says better-managed production is key to overtaking Japan and Korea China could be the world's leading shipbuilding nation within 15 years but its top yards will have to change how they manage production to reach the summit, according to a soon-to-be released report by US-based tanker broker and consultancy firm Poten and Partners. The mainland shipbuilding industry surprised its critics last year by producing blue-chip quality dry bulk, tanker and container vessels on its way to capturing about 7 per cent of the delivered market. But production levels must increase to overcome financing constraints and heighten profitability if the industry is to challenge the leaders in Japan and South Korea next decade, according to Hong Kong-based consultant Matthew Flynn, author of the report to be released next month. 'Financing is an important challenge for Chinese yards. Because the industry is largely untested on the international stage, owners are reluctant to sign contracts with heavy front-end payments,' said Mr Flynn. 'Less money up front puts China at a comparative disadvantage in that if the ship is delayed the cash-flow problems compound themselves. 'Chinese yards are making the vessels the owners want - they are happy with the quality - but that is still a long way from being profitable or productive.' Mr Flynn suggests, given the high quality of vessels being produced in China, attaining higher productivity levels would go a long way to relieving the capital crunch. 'If they build ships faster, they will receive the bulk of their money faster,' he said. China's leading state-owned yards, such as Dalian New and Shanghai's Hudong-Zhonghua, are averaging 12- to 18-month or longer cycle times from steel-cutting to delivery, roughly double the production rates of top Korean yards such as Hyundai Heavy Industries. Industry watchers say part of the problem lies in the culture of state-owned enterprises in China. The chaebol system in South Korea, for example, allows for workforces to be slashed when business wanes and for production targets to be accelerated, even dramatically; state-run companies are largely unable or unwilling to act as aggressively, or even prudently. 'When the state is the owner there can be a lack of incentive to increase productivity,' Mr Flynn said. 'The chaebol system in Korea creates the pressure to optimise productivity which you don't have in China. That is one of the things that drove the Korean shipbuilding industry to the top.' According to the report, Korea delivered 39 per cent of finished vessels last year, the largest market share and ahead of Japan by three percentage points. Another equally important factor driving the emergence of the Korean yards is steel. Korean steel prices meant yards there earlier this year were paying US$100 per tonne less for steel than Chinese yards, which can factor out to several million US dollars for the larger ships. Moreover, steel in Korea is delivered in bigger plates than in China, which means mainland yards dedicate more time and labour to welding and fitting. 'Steel is a crucial issue for China to overcome as the industry moves forward,' Mr Flynn said, adding if Chinese yards are to realise their potential, they also will need to break into the export market for bigger ships. While New Dalian, Nantong and Hudong-Zhonghua are all building postpanamax-sized ships, all are for domestic companies such as China Ocean Shipping and the China Shipping Group. No Chinese yard has built a postpanamax vessel for export. 'If you apply the growth rates to the numbers, China could be near the top by 2015. That is the shortest time frame and they will have to work hard to get there,' he said. 'When you look at how Chinese yards compare in regards to the bigger ships, the data suggests it will be closer to 2020. But rather than a dominant country, what we will likely see is a sort of north Asian shipbuilding triumvirate, all very close in market share.'