CSSC expects mainland yards to capture 30pc of world vessel market in three years China State Shipbuilding Corp (CSSC), the biggest mainland shipbuilder, expects mainland yards to account for 30 per cent of the world's finished vessels in three years, challenging South Korea's leadership. The chief obstacle, however, is that the mainland has to import a high percentage of the ship engines. As they are expensive and make up about 30 per cent of total costs, this dependence lowers the profit margins of domestic shipbuilders. 'We are catching up with them and in some aspects are even more advanced than the Korean shipyards,' said vice-president Lu Xiaoyan. CSSC has more than 60 per cent of the mainland shipbuilding market, with nearly 30 shipyards and ancillary plants in Beijing, Shanghai, Jiujiang and Guangzhou. Its subsidiaries include Guangzhou Shipyard International, Shanghai Waigaoqiao Shipbuilding and Jiangnan Shipyard. The mainland is efficient in building medium-sized vessels. At its best, the CSSC group can assemble container ships with a capacity of a 3,500 20-foot equivalent units (teu) in 65 days. Its Korean counterparts took two days longer, said Ms Lu. The fewer days a ship stays in the shipyard, the more efficient the yard. The country also is in the process of building larger ships as shipping lines demand bigger vessels. So far, mainland shipyards have produced about 20 8,530-teu vessels. In June, construction of the first 10,000-teu vessel started at Nantong Cosco KHI Ship Engineering. Mainland shipyards have a 67 per cent market share in Cape-sized or 170,000 deadweight-tonne vessels. The mainland lags in the localisation rate - the use of local components and parts - which is lower than in Korea or Japan. Dependence on imported parts reduces the profit margins of local shipyards. 'Chinese engines are less tested and have shorter track records,' said Stanley Shen, a spokesman for Orient Overseas Container Lines. 'We chose BMW engines when we ordered two Panamax vessels from Hudong Shipbuilding two years ago.' About five years ago, 20 per cent of the components and parts used in Chinese shipyards were procured locally due to bottlenecks at suppliers. But ancillary plants could not keep pace with the speed of shipyard expansion in the country. Now, ancillary factories, such as Hudong Heavy Machinery, Dalian Marine Diesel Works and Anqing Marine Diesel Engine, have added capacity. That and a breakthrough in domestically produced diesel engines have improved the localisation rate. CSSC's Shanghai subsidiary Hudong Machinery, which produces 60 per cent of domestic diesel engines, has developed and patented 60-centimetre, 70cm, 80cm and 90cm diesel engines. The measurements refer to the diameter of the engine valves. Diesel engines and steering components account for 50 per cent of component costs, which in turn represent 60 per cent of total costs. On average, about 50 per cent of the parts needed to build ships could be procured in the mainland, said Ms Lu. The nationwide capacity to build ship diesel engines will increase more 200 per cent by next year to four million pferdestarke (ps), a metric unit for horsepower. But, local shipyards face a larger obstacle to further increasing the localisation rate. 'European shipping lines often prefer to use engines from their homeland or from other members of the European Union,' said Ms Lu. Most of the European shipyards closed due to growing competition from Asian rivals. The exceptions are a few key machinery brands such as MTU Friedrichsafen and BMW. 'Shipowners have to weigh the economic interests of their homeland and we have to respect them,' said Ms Lu. Mainland shipyards are in an unparalleled expansion cycle. In the first six months of this year, vessel completion volume topped 7.55 million tonnes, a 43 per cent rise year on year. New contracts increased 165 per cent to 42.6 million tonnes, with 92 per cent of the orders coming from overseas. Orders on hand exceeded 100 million tonnes, up 107 per cent. Shipyard slot time at CSSC has been scheduled up to 2011, with 44 million tonnes of orders on hand by August. CSSC was set to raise its targets to 90 billion yuan of sales and nine billion yuan of profits by 2010, said Ms Lu, who declined to provide further details. Profits of major shipyards soared 187 per cent to 3.5 billion yuan on a 54 per cent increase in sales in the first half. And mainland shipyards will expand their building capacity from 10 million dwt to 17 million dwt by 2010, with a goal to further increase to 22 million dwt by 2015. To capture the upside in the shipping cycle and be among the top three shipbuilders globally by 2010, CSSC is investing 4.5 billion yuan on Guangdong Longxue shipyard. The dockyard, which can produce ships with a total capacity of 2.12 million tonnes annually, will start operations next March. In addition to the existing 800,000 tonnes of combined capacity of Guangzhou Shipyard International, Guangzhou Wenchong Shipyard and Huangpu Shipyard, Guangdong will become one of the big three shipbuilding bases, along with Shanghai and Qingdao, with three million tonnes of annual capacity by 2010. 'Longxue is an ideal site for building very large crude carriers [308,000 dwt] and very large iron ore carriers [230,000 dwt],' said Ms Lu. 'We have gone through the weather archives in Longxue and found that no typhoon has threatened the area for the past 90 years,' she said. In addition, Longxue has a water depth of 14 metres along the coast, which enables the launch of very large vessels, a major reason for choosing Longxue over Humen and Dongguang. In addition to Shanghai Chengxi Shipyard, CSSC expects to become the largest shipbuilding group in the world by 2015 with a 14 million dwt capacity.