Captains of industry – China’s first domestically built liner27 February 2015
In what could prove to be a historic agreement, Carnival, Fincantieri and CSSC signed a memorandum of understanding in November with the intention of constructing China’s first domestically built liner. Peter James looks at the reverberations of this potential collaboration and whether it could lead to a new superpower in cruise ship building.
Despite its stellar performance by Western standards, China's economy has been slowing, a trend that has particularly impacted heavy industry. The shipbuilding segment provides direct and indirect employment to millions, but, despite overtaking South Korea as the world's largest shipbuilder in 2010, has been badly hit by a prolonged slump. While naval expansion has partially ameliorated the situation for state-owned companies, China's largest private sector shipyard, Rongsheng, has been forced to restructure debt after its market value collapsed by over 90%.
In a recent government guidance document, developing the cruise industry was identified as a crucial part of revitalising the sector. Facilitating this has prompted Beijing to adopt numerous measures, including the encouragement of mergers and acquisitions, promoting increased specialisation, and driving reform of state-owned companies to enable mixed-ownership and private investment.
The rise of China's middle class has seen its domestic cruise sector surge in popularity - the sixfold increase in domestic cruises departing from the mainland is testament to that. According to figures from the 'China Cruise Industry Development Report', published in December 2014, over 400 cruise voyages set sail from the mainland in 2014, a year-on-year increase of 14.8% and up from just 25 cruises in 2006. The Chinese Ministry of Transport estimates that passenger numbers will hit 4.5 million by 2020, leaving it second only to the US. But growth ambitions don't end there. With the Asian cruise sector as a whole set to triple over the next half decade, the balance of global cruising is tilting to the east. Beijing is determined to capitalise on more than just passenger traffic.
Despite the increase in voyages, none of the ships arriving on Chinese shores will have been built domestically. Of the seven new liners currently on the 2015 order book, six are under construction in European yards. The seventh, AIDA Cruises' AIDAprima, is being built in Japan and the process has hardly been a great advertisement for looking beyond the industry's established construction base. Intended to re-establish Mistubishi Heavy Industries (MHI) as a leader in the cruise sector, the shipbuilder won a contract to build two ships for Carnival Corporation's German brand in 2011. In November of last year, it acknowledged losses of $900 million as a direct result of the undertaking and was candid about the problems faced.
"As work proceeded difficulties in constructing the prototype became evident," a statement from MHI read, "The volume of design work related to cabins and other areas was vast beyond expectation and significant design changes were made. The delay in the overall design work caused by these factors not only increased design costs but also made an adverse impact on the construction schedule and need for additional material procurement."
Delay on delivery now stands at over six months and reports suggest that MHI will be withdrawing entirely from the cruise sector in the near future.
The truth is that building a cruise ship is perhaps the most complex, specialised undertaking one can ask of any yard. Acknowledgment of this fact, combined with Carnival's ongoing Japanese nightmare, may go some way towards explaining a recently signed memorandum of understanding (MoU) signed between the cruise giant, Fincatieri and China State Shipbuilding Corporation (CSSC) which could see China turn its hand to cruise ship construction.
The MoU details the framework for investigating any potential joint shipbuilding exercise and includes the possibility of the world's first three-way collaborative shipbuilding effort in China. As one of the world's leading cruise ship builders, Fincantieri would provide CSSC with the specialist knowledge needed to produce high-quality vessels, while Carnival would work closely to help with ship design, overall specification and vision for the project.
As well as laying the ground work for cooperative shipbuilding and ship design, the agreement will potentially oversee the development of training programmes, ports and a domestic cruise company. Fittingly signed at the ninth China Cruise Shipping and International Cruise Expo in Tianjin, it was a move championed by Carnival's CEO, Arnold Donald.
"Building on our groundbreaking MoU signed with CSSC last month, this new agreement with Fincantieri gives us the opportunity to work with our long-time partner to further explore a formal joint venture that could forever change the landscape of shipbuilding in China," he said in the wake of the announcement.
"After working diligently to get a deep understanding of China's aggressive cruise ambitions, we're collaborating with two of the world's top shipbuilders in Fincantieri and CSSC to establish a framework for a world-class Chinese shipbuilding venture designed to help accelerate growth and demand for cruising in China in the years to come."
The MoU follows Carnival's recent announcement that it plans to expand capacity in China to meet demands, with market presence expected to increase by 140% from 2013, carrying over 500,000 passengers. Solidifying the agreement will allow it to gain a stronger foothold in what is already proving to be a lucrative market. It's a sentiment shared by Fincantieri CEO Guiseppe Bono.
"The deal with Carnival, which is already our partner, and with CSSC, shows our determination to pursue a strategy of making Fincantieri an ever larger global player and a point of reference for the sector, with a strong presence in those markets that are crucial to assuring a future for our business," he stated.
Stimulating cruise industry growth has already seen the Chinese Government make significant investments into its ports and surrounding infrastructure. It has also implemented subsidies designed to encourage shipping lines to order the construction of new high-tech vessels. Solidifying the MoU not only represents an extension on current policy but could also prove to be a valuable catalyst for sector growth.
"To me this seems like a decent deal for all parties in the short term, but the risk is that the Chinese partners will build up know-how through the joint venture and then decide at a later stage to go it alone, with the potential to outcompete foreign former partners not only in China but on the global market as well," says Matt Plowright, principal of China Confidential at the Financial Times.
"This is a tried-and-tested model. The closest example is probably high-speed trains. Chinese companies started by partnering with foreign firms but eventually disbanded the joint ventures and now regularly win contracts worldwide ahead of their former partners. With cruise liners, though, the foreign partners probably have the advantage that as a premium product, Chinese consumers will still probably be concerned about the quality and safety of domestic brand cruise liners. Distrust of domestic brands is still very strong at home, although may well be less so overseas."
While the MoU certainly represents significant progress the sector will still be starting almost entirely from scratch. It could be a long time before CSSC breaks away and becomes a competitor in its own right, ushering in a new era of independent Chinese cruise ship building.
"I think that will be the eventual goal, maybe in five to ten years maybe," said a Hong Kong-based Lloyd's List industry analyst. "But they haven't even formally established the joint venture yet and it's not really a short-term goal. European builders are dominant in this market. I don't feel CSSC are really competitive in the short term."
Foreign companies looking to enter the Chinese market have typically been obliged to form partnerships with domestic companies to share proprietary technologies and experience. It's a policy that's been aggressively pursued in a number of high-tech industries, allowing China to accelerate the development of various key sectors. But the markedly higher technical and safety demands involved in building modern luxury liners present a significant learning curve for CSSC to overcome, one which will take years to master.
Carnival is already exploring other opportunities for growth in the Chinese markets. Earlier this year it signed another MoU - this time with China Merchants Group (CMG) - with the intention of potentially accelerating growth in the country's sector. It would explore port and destination development, as well as building on the potential for domestic shipbuilding.
The agreement could see Carnival and CMG, China's oldest state enterprise, expand the state's current turnaround and transit ports, beginning with the currently under-construction Prince Bay Cruise Terminal in Shekou.
There are certainly challenges ahead for all potential parties involved in the various MoUs, but Carnival's announcement will undoubtedly have made a number of other companies ponder the possibilities of similar ventures of their own. But with no set date yet for crystallising the agreement, in the immediate future at least, European yards can expect to continue taking the lion's share of the orders for new cruise vessels.