Rough Waters for China's Shipbuilding Industry
China Law Blog has posted in parts one and two on the 2008 Maritime Conference in Wuhan, China, where Dan's colleague Steve Dickinson was attending. Since shipbuilding is a key industry in making the world's supply chains go 'round, there is some solid insight to take away from these posts. The first post provides the following highlights:
"The presenters all agreed on the following. The downturn in shipping is having a profoundly negative effect on all segments of China's maritime industry.
Shippers are finding that their customers are refusing to honor long term shipping agreements and are demanding extreme reductions in shipping rates.
- Ports are finding their volumes rapidly decreasing. This is an especially serious problem with smaller and newer ports. It is also a problem with ports in the middle of ambitious expansion plans."
Read the rest for some additional evidence of how companies are dealing with the collection of debts as companies lose business or fall out of business completely during this financial crisis. This all strikes at the heart of a supply chain's financial architecture. Because the funds generated from this architecture is essentially what maintains every other architecture--physical, informational, relational, innovational, and human--companies must decide which aspects of their business will have to take the hit and which receive scarce funds. Of course, in extreme situations the whole supply chain can collapse.
In the second post, Dan highlights a Q&A session where Steve acted as moderator:
"In my role as moderator, I then posed the following questions/comments to the speakers and to the audience:
"Steve: The shut down in bank financing will have a severe impact on the Chinese shipbuidling/shiprepair industry, right? Answer: Correct.
"Steve: Historically, in the U.S. and Europe, when worldwide bank financing dried up, local banks usually stepped in to provide financing. Are Chinese banks stepping in to fill the financing gap? Answer: No, they are not. Chinese banks have no appetite for risky loans right now. Further, they do not understand international ship financing and they have no real desire to learn.
"Steve: It appears China's shipbuilding industry is taking a passive approach to both the contract default and financing issues. Answer: Yes.
"Steve: It therefore appears China's ship building/ship repair industry will be heavily impacted over the next 18 months, with few companies surviving. Answer: The audience did not answer. The presenters agreed that this seems to be a reasonable conclusion. These Singapore and Hong Kong lawyers are therefore turning their efforts towards cementing their relations with Korean and other national shipbuilders they think will survive the current situation. Even during private discussions after the formal presentation, the Chinese company representatives remained silent about their plans for dealing with the key issues facing their industry.
"It is not clear to me whether the Chinese industry will wake up to the situation in time to resolve the critical issues facing the industry. In the interim, however, it appears there will be some very good deals on new vessels from Chinese yards as customers begin to abandon existing contracts. I also think there will be very good deals on Chinese shipyards, many of which are state of the art. It is also possible, of course, that China will institute a stimulus package that will save at least some of its shipyards."
It seems the financial crisis will last beyond when many companies will need the economy to pick back up to survive; thus, as Steve mentions above, there is likely to be some consolidation of the existing capacity with perhaps some of the strongest players in the shipbuilding market looking for deals on any failing shipyards.
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