About the aircraft carrier plan of China

[weasel1962]

Re:

There's no time limit on the ban and enforcement appears to be dependent on individual EU countries. However, I think whilst EU countries have maintained general unity in enforcement, there appears to be differing definitions on what actually falls under the ban.

There was a internal discussion within EU (with strong China lobbying) for a lifting in 2004/05. However, the discussions has been adjourned.

I think this has a good summary
http://www.observerindia.com/publications/IssueBrief/ib040227.htm

 

[LancerMc]

There has been support from certain countries to lift the ban on military goods. I have heard that France has been a big proponent of lifting the ban so they can sell aircraft and other military techology.

 

[alexsa]

over 1/4 of the commerical ships built around world are built in Chinese shipyards. Behind only the South Koreans and in front of the Japanese. They build huge tankers and cargo ships. Don't even compare the workmanship of Chinese shipyards with that of the Russians.

I am not goijng to embroil myself in the rest of the the discussion but chinese shibuilding capacity sat at 16.5% in january 2005.

http://www.dnv.co.uk/maritime/news/SpecialfeatureChinabuildingforthefuture.asp

However I would not suggest that bulk carriers, container ships and tankers represent the peak of technology. This is the farm machineray of the ocean, It should also be noted taht many of the systems installed in these ships are currently manufactured overseas. China's amazing growth in this area is driven by costs structure in construction. They still have significant quality issues in the majority of commercial yards (hence the incentives noted in the DNV article) requiring comprehsive owner/operator oversight of the construction.

Many more complicated projects are having hulls built in China and fit our else where. Current constrution costs in China are relatively low but growing. However as there is a ship building boom at the moment means that all yards are full.

The challenge for China will be to solve the quality hoodoo and keep costs down. The latter may be the biggest problem in regards to labour cost as their domesitic econmomy grows and skilled labour costs increase (same has happened to S Korea). The worst thing that could happen is the ship building bubble will burst (as it will) and China may be left with impressive infrastructure that is not paid for and does not have any orders to keep them working.

 

[Francois]

Agreed 100%.

 

[gf0012-aust]

The challenge for China will be to solve the quality hoodoo and keep costs down. The latter may be the biggest problem in regards to labour cost as their domesitic econmomy grows and skilled labour costs increase (same has happened to S Korea). The worst thing that could happen is the ship building bubble will burst (as it will) and China may be left with impressive infrastructure that is not paid for and does not have any orders to keep them working.

S Korea used to build the most cost effective and design efficient anchor boats in the world. their labour costs killed that off a few years ago. I'd be highly surprised if mainland shipbuilding has hit the anchor boat level of quality..

 

[Khairul Alam]

About 1 month ago,it is said that China will build their aircraft carrier and they bought 50 su-33 from Russia.Yesterday,the news from HongKong said the plan is canceled.The navy of China will concerated on submarine and destroyer.Is there any one know more about this?

My research on Chinese modernization efforts have not yielded any plans of bulding aircraft carriers. It seems for the time being the Chinese are focusing on subs, destroyers, frigates, and fast attack crafts (FAC).
By the year 2010 the PLA navy's submarine fleet will have about 12 Russian KILO conventional subs, 20 indigenous SANGA and YUAN conventional subs, and 5 more Type 093 nuclear attack subs (SSN). The PLA navy is also planning to procure 31 destroyers, 50 frigates, and 30 stealthy FACs. The latest procurements include SOVREMINNIY missile destroyers armed with Moskit anti-ship missiles and Kashtan combined gun/missile defence systems. Also procured were four indigenous No 168 and No 170 missile destroyers, two Type 054 stealthy frigates, and about four stealthy FACs. Again, no plans of carrier development.

 

[swerve]

The worst thing that could happen is the ship building bubble will burst (as it will) and China may be left with impressive infrastructure that is not paid for and does not have any orders to keep them working.

If it isn't paid for, the creditors will take it. Who are they? Local banks, I expect, meaning the yards will still be Chinese-owned. Most won't be worth converting to any other use in the short-term. They'll be mothballed, awaiting a pickup in demand, or more likely, tick over on a few orders & government bailouts (the latter to prevent a sudden flood of unemployed shipyard workers). Hey, wait! What's a good way to give a shipyard some money? Buy a ship! Lemme see - the Chinese navy may suddenly find it has more LPDs & the like (those shipyards may not be able to build destroyers, etc) than it knows what to do with.

 

[Big-E]

Does anyone know how close China is to bursting her economic bubble? Her state owned industries have always operated in the red. If we audit those books is there more to fear than we might think?

 

[swerve]

There has been support from certain countries to lift the ban on military goods. I have heard that France has been a big proponent of lifting the ban so they can sell aircraft and other military techology.

The ban is not on "military goods". It's more limited. Weapons, military radars & the like. Dual-use stuff is mostly OK, e.g. the USA has been selling military (but not armoured) vehicles to China all along.

 

[swerve]

Does anyone know how close China is to bursting her economic bubble? Her state owned industries have always operated in the red. If we audit those books is there more to fear than we might think?

Loss-making state industry is a small part of the economy now. A lot of industry is wholly or partly owned by local governments, but that's mostly profitable. There are also joint ventures, e.g. the main phone companies - also profitable.

There's a dichotomy between what central government is trying to do, i.e. boost consumption, slow down investment, try to get more balanced growth, & what local governments are doing, i.e. working with local industrialists to maximise growth & corporate profits (the source of all that investment) & hence their incomes.

 

[alexsa]

If it isn't paid for, the creditors will take it. Who are they? Local banks, I expect, meaning the yards will still be Chinese-owned. Most won't be worth converting to any other use in the short-term. They'll be mothballed, awaiting a pickup in demand, or more likely, tick over on a few orders & government bailouts (the latter to prevent a sudden flood of unemployed shipyard workers). Hey, wait! What's a good way to give a shipyard some money? Buy a ship! Lemme see - the Chinese navy may suddenly find it has more LPDs & the like (those shipyards may not be able to build destroyers, etc) than it knows what to do with.

There is a considerable amount of foreign investmnet in China which is underpinning this development. In regards to shipbuilding we are taking massive development much of whcih is not on stream and is tailored to commecial construction of large cargo/container, bulk and tanker types. These are not naval yards.

 

[Francois]

First of all: I would like to wellcome Lastsalvo. You've started strongly - and if keep anywhere that level You are a usefull addition to this board in my modest opinion.

It is a pleasure to see the development of the debate, as it started out with tphuang and Yours sincerely not only not being on the same page; but we weren't in the same library.

My intention was to disregard the horticultural excentricities put in the pipe by the claims made from patriotism. The figures are hardly to be trusted - and trust me: I've seen my share of creative bookkeeping and unconvincing sales pitches. This leads us into a situation where there isn't much information to be gleened from the technical data available.

We have to proceed along paths. My avenue is the strategic analisys where You postulate a position to be achieved (in this case a serious challenge to the USA) from a given starting point (China say about 5 years ago) and investigate if it is possible to move from start to end within a given timeframe.

Is there the time?
Can the actions of the other be considered stable (unattentive) in the period?
What are the cost measured in resources used?
What non cost-sensitive obstacles are there?

To name a few factors.

My conclusion is that that China within a reasonable time frame (say 10-20 years) will be able to:
1. Build a boat with a flat top that might impersonate a carrier.
2. They might operate some sort of fixed wing aircraft from said bucket - provided they aren't to critical on the issue of recovering planes and boat.
Here I've been generous in saying they will build a Phantom - which actually was a very good plane.
3. They might operate submarines that occationally won't blow up whenever they fire a missile.
4. The Missile might - on a good day, with strong westerly blizzard hit somewhere in the USA - and it cannot be excluded that it will actually detonate.

But a PLAN that can challenge anything but the US Navy's SAR - no way.

So far so good.

I can see the String of Pearls ploy; but it is my guess (and it is a guess) is that it will backfire. It just might give Australia, Japan, Singapore and India something to talk about.
Furthermore the supporting cast for China is even worse than the one the Soviet Union had. Any positive impression from African countries (take your pick), Myanmar and Pakistan is due to fraudulent bookkeeping.

I think it was my very esteemed collegue, Galrahn that said something about the prospects of Africa and South America - (If it wasn't You I apologise).

The only reason Africa isn't an important player on the international scene today is the social organisation; but that says it all. Africa hasn't gotten its act together dispite having had 20.000 odd years - no sign of them sobering up now - on the contrary.

South America will have to change their economic and social system, which will not happen without a real revolution (not the present changing of office among supernumerary colonels), that will keep the continent occupied for a decade or two and leave them in ruins similar to Cuba.

I would not have written this with such words, although I believe THs has been trying to sound funny. But few points are pretty valid IMHO.

 

[Ths]

Francois, Galrahn and others: Thank You.

A rather important point with shipbuilding:
I memory serves me: 2/3 of the value of a commercial ship - which only in rare cases are technologically advanced - is not necessarily produced in the country of the yard.

The way such accessories - which is again 2/3 of the value - are sold (f.i. pumps - I have a background in pumpmanufacture) is as follows.
Step I: Manufacturer approach the shipOWNER. The object is to convince the owner of the ability of the manufacturer to deliver a product that can do the job, can deliver spares - in 20 years and keep the equipment working reliably under difficult conditions. If you as manufacturer does not have references going back 50-60 years - you don't stand a chance. Shipowners are VERY conservative. An example:
We had a double acting piston pump designed before WW2, big as a small car and looked like it belonged in a technical museum, that sold very well as an emergency pump - because it had never failed - and it gave a good solid weight in the bottom of the ship.
If you convince the owner, that you might be able to do the job, then they might put you on the "makers list". Makers list is a catalogue of manufactureres the yard may approach as deliveres to a ship the owner is building.
Step II: Manufacturer approach yard with a tender, either before or after the yard submits its tender to the owner.
Then price negotiations start: Generally equipment manufacturers do not earn a great deal on deliveries to new ships. Their profit is in the spares deliveries. Where a discount to big shipping lines is generally negotiated into the conditions for being put on the makers list.

I don't know how the market shares of the Chinese yards are calculated; but if it is 15% of value, the part actually produced in China is 5%.

Now it is hard to imagine the PLAN wanting to be dependend on every obscure nations embargo policy. The accessories must be produced in China or f.i. Spain can clamp down on delivery of spare parts.
It is simply not possible to gain (as was our case 80 years of experience) overnight - those 80 years included periods where manufacturers died, because they could not deliver the goods.
Then they were bought by the competitors that need one or two pumps in their catalogue.

Precisely the same argument could be made about electrical engines and other equipment.

If you have any idea of how difficult it is to be even considered as a supplier to the USNavy....
One reason is to keep foreign competition out, that accusation has some merit; but the other is the hysterical demand for reliability - they buy nothing on trust!
The demand for reliability is well founded, as warships operate under different conditions than the 15 knot plodding across the ocean where every menauvre is anticipated days in advance and scarcely a person aboard: Emma Maersk the world largest containership has AFAIR 18 persons - cook included.

AS to yard bubble. There is a factor to consider:
The shipping line market is poorly consolidated - at the moment. Maersk is determined to do something about it. They bought Sea-Link and last year bought Ned-Lloyd.
They have filled the worlds major yards with orders for big containerships - partly to block their competitors from ordering capacity. This means when the competition is able to order, Maersk has big efficient ships with lots of capacity at hand, smacking freight rates so low the competitors will find it difficult to pay for their new ships.
If anybody think this policy is not in agreement with USNavy plans, they are more than naive..

As to the yard-bubble: I cannot predict when it will happen; but the question is when this pricewar on freight rates will come. It is not difficult to predict a bust on the market, to predict - even roughly when - is more than difficult (some work I've seen says impossible, as the distribution of fluctuation size is claimed not to have a variance).
Secondly: China keeps their currency undervalued in relation to USD.
Now deliveries to shipyards are generally made in USD. This means that of the contract value of a ship only a 1/3 is in Chinese currency. This means there is no leeway for cost rise due to payroll increase. Due to the contract structure and market structure, the shipowner can move his business at drop of a spanner. China will have a hard time undecutting their own prices.

 

[tphuang]

I am not goijng to embroil myself in the rest of the the discussion but chinese shibuilding capacity sat at 16.5% in january 2005.

http://www.dnv.co.uk/maritime/news/SpecialfeatureChinabuildingforthefuture.asp

it helps a lot when you have access to a financial terminal, I read through plenty of articles on the order % of shipyards in 2006. I believe the break down several month ago was 40+% for South Korea, around 25% for China and around 15% for Japan. Most of the orders are for ships to be produced four or five years from now. That's why there is this huge shipyard expansion in China.

However I would not suggest that bulk carriers, container ships and tankers represent the peak of technology. This is the farm machineray of the ocean, It should also be noted taht many of the systems installed in these ships are currently manufactured overseas. China's amazing growth in this area is driven by costs structure in construction. They still have significant quality issues in the majority of commercial yards (hence the incentives noted in the DNV article) requiring comprehsive owner/operator oversight of the construction.

I think you probably misunderstood my point. I was saying that in order to attract civilian orders to the point of having 25% market share, you have to have reasonable workmanship. So these shipyards would produce better quality/more reliable ships than the ones coming out of Russia.

Many more complicated projects are having hulls built in China and fit our else where. Current constrution costs in China are relatively low but growing. However as there is a ship building boom at the moment means that all yards are full.

The challenge for China will be to solve the quality hoodoo and keep costs down. The latter may be the biggest problem in regards to labour cost as their domesitic econmomy grows and skilled labour costs increase (same has happened to S Korea). The worst thing that could happen is the ship building bubble will burst (as it will) and China may be left with impressive infrastructure that is not paid for and does not have any orders to keep them working.

labour cost is going up, but the technology level and efficiency should also be going up, so hopefully the actual construction cost might not.
Again, they have orders booked full until 2012. They don't have to worry about this for a while. A lot of these orders are driven by domestic demand, so unless Chinese economic growth really slows, the domestic demand should remain strong.

I don't know how the market shares of the Chinese yards are calculated; but if it is 15% of value, the part actually produced in China is 5%.

it's based on value of the orders for Chinese yards/value of orders in total. In case of China, majority of those manufacturer's are also in China. Although some of these manufacturer's might be joint ventures with multinational companies. Again, hard to say for sure unless you look at the shipyard's financial statement.

As to the yard-bubble: I cannot predict when it will happen; but the question is when this pricewar on freight rates will come. It is not difficult to predict a bust on the market, to predict - even roughly when - is more than difficult (some work I've seen says impossible, as the distribution of fluctuation size is claimed not to have a variance).
Secondly: China keeps their currency undervalued in relation to USD.

hmm, after reading through all the economic forecasts on different Korean and Chinese shipyards, I disagree, you should read those too.

Now deliveries to shipyards are generally made in USD. This means that of the contract value of a ship only a 1/3 is in Chinese currency. This means there is no leeway for cost rise due to payroll increase. Due to the contract structure and market structure, the shipowner can move his business at drop of a spanner. China will have a hard time undecutting their own prices

You are assuming a bunch of stuff, but unless you evaluate from the Chinese economic model, it's hard to make that kind of conclusion. I can only say that the economic forecasts seem to be pretty good.

Does anyone know how close China is to bursting her economic bubble? Her state owned industries have always operated in the red. If we audit those books is there more to fear than we might think?

That's why there is so much privatization going on in China. The state owned companies are generally getting replaced by the more efficient privately owned ones. Actually, auto industry is a very good example. Geely automotives came out as one of the strongest domestic automaker, because it got no government subsidies. Whereas the other companies subsidized against foreign competition in the wake of WTO are actually having tougher time at staying afloat. As a result, a lot of the state owned companies are shut down and they should be.

 

[lokyuen12345]

visionnet

Does anyone know how close China is to bursting her economic bubble? Her state owned industries have always operated in the red. If we audit those books is there more to fear than we might think?

I don't think China is facing a Economic Burst crisis lately. As I may be the one who is more famaliar with China inland situation, because my living location is just in HK, and with regular business travel to China.

Well, I am telling you thr truth behind all these numeric economic growth:

1. Intelltectual Property. In other words, it seems there is no such thing in China populations' mind. They just copy anythings, from DVD movie to computer hardware (except CPU or HDD with very high tech base), from clothes even to newspaper, they just duplicate everythings. When you buy anythings in China, almost 99% are counterfeits.

2. Appreciation of RMB with real economic value: Well, these issue is hanging out for a very long time. But China won't be going to let this issue cool down in the near future. As more RMB value rise, more expensive is their exporting products, that in turns, they are losing their advantages of cheap labor cost, cheap raw materials cost....

3. Environmental Pollution: China is the most polluted country I'll ever since. They just don't have this concept of protecting our natural environment. Their vechnicles are bad-quality based so that it keep emitting with really dark smoke, even on small vechicles, they even install these motor onto bicycles that makes it even worse. When you are in China cities, or even near one, you would always get a gasoline smell, that is very not the one we are feeling in advanced regions, even near highways.

4. People education standard: One word, is not the one we are expected in fast-growing economic country. They even don't understand what we are talking about. Their average education standard is around primary school gradulate. That's is also why China is not, or not tend to be diplomatic country.

5. Power of the Government: THe power of Communist is ABSOLUTE. Want they want something to be done, then it could be done. Unlike US, that Lockheed martin got a massive profits on F-35 development. But in China, military contractor got a reasonable profit, but that profit size could not be out-expected by chinese officials. In turns, they are controlling everythings, includes private organizations. That's may be good or may not be good, but this thing is hard to change, the reason can be traced back to traditional chinese culture, where any trade, diplomatic, personal, relationship are very "relationship style", not in moneytary terms. In diplomatic levelm their elections (internal) on any policy got over 95% unifications. And try to make more friends in mainland china, no one say anythings bad about their leader, even the notorious Mao, they just believe in it, any what they are complaining about are their pockets an stomach only.

So you guys are talking about shipyards burst,,, if you know more about china, even they got burst, gov will help them...

 

[Ths]

lokyuen12345: Good post.

Just like to supplement:

ad 2) Cheap raw materials... That is a truth with modifications. All energy for growth is to be bought, that is imported oil. Steel production needs lots of energy. Even if this energy is domestically produced coal, this coal could have been used for some other purposes - such as power production.

ad 3) Enviromental issues are also, and perhaps fundamentally a question of waste, thus poor economic efficiency.

 

[alexsa]

I don't think China is facing a Economic Burst crisis lately. As I may be the one who is more famaliar with China inland situation, because my living location is just in HK, and with regular business travel to China.

Well, I am telling you thr truth behind all these numeric economic growth:

A quick point of clarification. My point was in relation to the shipping bubbl enot China, althought any down turn will have an impact.

Trade is growing and up to mid 2005 freight rates increased sharply after many years of depressed rates in the bulk and general cargo (including container) sectors. Previously quite a lot of older tonnage was being scrapped however the upturn has prompted a major burst of new building orders and the cost of scrap has gone up as older ships are staying in the market. The current scrap cost is 300 to 400 USD per light loaded tonne as opposed to 150 to 200 USD per light loaded tonne about 8 years ago.

The net result is that a lot of tonnage has been ordered and there is a real risk that many sectors will again be overtonnage (it is a bit of a revolving cycle) but there is evidecne of a market downturn. the Braemar Container Index has drowped 2.15 points at the End of november 06 but the BOXi index shows a drop from a peak of about 245 in June 05 to 120 in November 2006 (lower than the january 2004 rate).

Bulk rates have increased in 2006 but are still lower than the 2005 peak but are still going up. Tanker rates are eratic but the general trend of the Baltic Spot and clean rates is downward. The charter rate for a VLCC hovering about World Scale 120 since September 2005. In November the total tanker order book stood at 116M dwt (1074 new vessels according to LR). The bulk nmarket will have 830 new hulls to absorb by 2011/2012.

This environment may explain the softening in orders in the last couple of months, however, despite the large backlog. However, China has been working hard to secure a lot of orders with very competitive prices which are not much above cost price, however the cost of steel and labour has increased since these orders were fixed (it has since stablaised to a degree). In addition the cost of systems such as main engines etc have also increased and the trend is now 'build to order'.

In the envirnment China is till investing in more infrastructure and quoteing cheaply to increase market share. The risk is they will have fixed a large number of contracts very cheaply to build market share but need to keep producing vessel in order to recoup the cost and apy for the infrastrucure. If orders dry up or signficantly reduce they cannot do this and end up having to renegoiatiate contracts (as happend in S Korea) or runingup losses (as happened in S Korea).

It may not happen but I wouel suggest Chinese yards are very exposed at the moment to even a moderate market down turn that stiffled orders and the evidence is the order rate is slowing.

 

[Big-E]

It may not happen but I wouel suggest Chinese yards are very exposed at the moment to even a moderate market down turn that stiffled orders and the evidence is the order rate is slowing.

As mentioned before, couldn't PLAN place military orders to fill any gaps in the commercial market as required? How does Chinese shipbuilding compare to that of the UK?

 

[Ths]

Alexis: Very good post. Perhaps because it backs up my main argument - and in considerable detail.

There is an other factor - somewhat overlooked - that comes into play on the currency front:
If China revalues its RMB against the USD all the assets - especially financial - China has as a result of years of trade surplus will be devalued. We are talking very large amounts of money.
That is the Chinese have sold cheaply; but they have yet to discover how cheaply. Furthermore they have left themselves very exposed to the threat of a freeze on assets by the USA - which is a factor when push comes to shove. China will do a lot to avoid a major upset with the USA.

Big E: As to military building programmes taking up any significant amount of slack in the event of a commercial turn-down (here Alexis is probably in a better position all around to inform).
I don't see it:
1. I don't think even a large military building programme can outweigh even a modest down turn in commercial order - tonnage wise. If I recall correctly: A commercial yard has to turn out 8-10 big ships annually (please correct me Alexis).
2. The amount of building - from the yards point of view - on a military ship is not very big as the major part of the value is going into weapons systems.
3. There are yards and there are yards. It is worth noting that the US yards build good warships, but their commercial competitiveness is not impressive.
F.i. (I'm very open for corrections here) I don't think an average yard building movers big boxes have the expertise to build submarines - if I'm not wrong: Submarines juggle different types of steel and have to meet other demands for wealding.

 

[tphuang]

As mentioned before, couldn't PLAN place military orders to fill any gaps in the commercial market as required? How does Chinese shipbuilding compare to that of the UK?

can't say for sure, but many people are saying that they are closing the gap against the South Koreans.

As for military shipyard, you only have several shipyards producing battleships basically.

JN - that's the big one producing 052B/C, 039, x number of type 22s
HD - another major one producing 054/A, replenishment ships and 071 LPD and 072 landing ships
HP - producing 054/A, type 22s
Dalian - produces some 072 LST, 051B/C, has Varyag
Wuhan - produces 039 series basically
Huludao - produces the nuclear subs
also you have a shipyard in Guangxi and Qingdao producing type 22s I think.

In the envirnment China is till investing in more infrastructure and quoteing cheaply to increase market share. The risk is they will have fixed a large number of contracts very cheaply to build market share but need to keep producing vessel in order to recoup the cost and apy for the infrastrucure. If orders dry up or signficantly reduce they cannot do this and end up having to renegoiatiate contracts (as happend in S Korea) or runingup losses (as happened in S Korea).

It may not happen but I wouel suggest Chinese yards are very exposed at the moment to even a moderate market down turn that stiffled orders and the evidence is the order rate is slowing.

well, if they have several years of order backlog, they have a buffer zone if there is a moderate market downturn. I don't think these Chinese shipyard owners are all idiots in their current expansion plans.

However, China has been working hard to secure a lot of orders with very competitive prices which are not much above cost price, however the cost of steel and labour has increased since these orders were fixed (it has since stablaised to a degree). In addition the cost of systems such as main engines etc have also increased and the trend is now 'build to order'.

The Chinese shipyard industry is still inefficient. I think with time, you are going to have more efficient workers and the increased labour cost will be offset by the higher efficiency. There also seems to be a surplus of steel coming out of China, so I don't think that's going to be a huge problem.