1. Overview of the Shipbuilding Industry

China has risen to become a strong player in the global shipbuilding market, with the three major indicators of the shipbuilding industry (completed shipbuilding volume, new orders, and orders on hand) ranking among the top in the world. Under the revitalization demands provided by the national government (to help shipping companies update their fleets) and financial support policies, the new orders and orders on hand in China's shipbuilding and marine industry have ranked first globally in recent years. Currently, the goal of China's shipbuilding and marine industry is to transform from a 'big country' in shipbuilding and marine to a 'strong country', with an international market share of marine equipment exceeding 20% and a localization rate of ship parts exceeding 80%.

According to data from the China Shipbuilding Industry Association: From January to May 2018, the new ship orders and orders on hand in China continued to grow, while the completed shipbuilding volume saw a narrowing decline, and the main economic indicators such as the total industrial output value of key monitored enterprises decreased year-on-year.

Related report: Beijing PwC Consulting Co., Ltd. 'Market Monitoring and Industry Investment Strategy Research Report on Ship Equipment Supporting Industry'

(1) National Three Major Shipbuilding Indicators: Two Up, One Down

From January to May, the national completed shipbuilding volume was 16.43 million deadweight tons, a year-on-year decrease of 28.3%. New ship orders amounted to 19.68 million deadweight tons, a year-on-year increase of 99.6%. By the end of May, orders on hand reached 89.03 million deadweight tons, a year-on-year increase of 7.5%, up 2.1% from the end of 2017.

From January to May, the national completed export ship volume was 15.48 million deadweight tons, a year-on-year decrease of 28.2%; new export ship orders were 18.34 million deadweight tons, a year-on-year increase of 108%; by the end of May, orders on hand for export ships were 80.04 million deadweight tons, a year-on-year increase of 1.5%. Export ships accounted for 94.2%, 93.2%, and 89.9% of the national completed shipbuilding volume, new orders, and orders on hand, respectively.

(2) Key Monitored Enterprises Indicator Situation

1. Two Up, One Down for the Three Major Indicators of Shipbuilding Enterprises

From January to May, 53 key monitored shipbuilding enterprises completed shipbuilding of 16.08 million deadweight tons, a year-on-year decrease of 17.8%. New ship orders amounted to 19.19 million deadweight tons, a year-on-year increase of 119%. By the end of May, orders on hand reached 86.75 million deadweight tons, a year-on-year increase of 7.6%.

From January to May, the 53 key monitored shipbuilding enterprises completed export ships of 15.12 million deadweight tons, a year-on-year decrease of 18.7%; new export ship orders were 17.85 million deadweight tons, a year-on-year increase of 127%; by the end of May, orders on hand for export ships were 78.08 million deadweight tons, a year-on-year increase of 4.1%. Export ships accounted for 94%, 93%, and 90% of the completed volume, new orders, and orders on hand of key shipbuilding enterprises, respectively.

2. Year-on-Year Decrease in Total Industrial Output Value

From January to May, the 80 key monitored enterprises in the shipbuilding industry achieved a total industrial output value of 131.2 billion yuan, a year-on-year decrease of 11.9%. Among them, the output value of ship manufacturing was 55.6 billion yuan, a year-on-year decrease of 17%; the output value of ship supporting was 9.5 billion yuan, a year-on-year increase of 5.6%; the output value of ship repair was 4.4 billion yuan, a year-on-year increase of 4.8%.

3. Year-on-Year Decrease in Ship Export Output Value

From January to May, the 80 key monitored enterprises in the shipbuilding industry achieved an export output value of 52 billion yuan, a year-on-year decrease of 12.3%. Among them, the output value of ship manufacturing was 37 billion yuan, a year-on-year decrease of 12.9%; the output value of ship supporting was 2.2 billion yuan, a year-on-year increase of 4.8%; the output value of ship repair was 3 billion yuan, a year-on-year increase of 11%.

4. Year-on-Year Decrease in Enterprise Economic Benefits

From January to May, the 80 key monitored enterprises in the shipbuilding industry achieved a main business income of 87 billion yuan, a year-on-year decrease of 21%; total profit was 500 million yuan, a year-on-year decrease of 66%.

In recent years, although the shipbuilding industry has been deeply affected by the international financial crisis, facing challenges such as difficulty in receiving orders, difficulty in delivering ships, difficulty in profitability, and difficulty in financing, the overall economic benefits of the industry have declined. However, China's shipbuilding industry has overcome difficulties such as the prolonged downturn in the shipping market, low fluctuations in the international ship market, and serious overcapacity in global shipbuilding, achieving further improvement in industry concentration, significant results in transformation and upgrading, breakthroughs in intelligent manufacturing, remarkable achievements in foreign cooperation, further improvement of the industry chain, and steady progress in mergers and acquisitions, thus enhancing its comprehensive strength and consolidating its position as a major shipbuilding country in the world.

2. Overview of the Ship Equipment Supporting Industry

The ship equipment supporting industry refers to the industry that produces and manufactures all ship equipment and devices except for the hull, mainly including power equipment, control equipment, loading and unloading equipment, and safety equipment, which together with ship assembly and ship repair form a complete shipbuilding industry. The value of ship supporting products accounts for about two-thirds of the total value of ships, making the ship supporting industry an important component of the shipbuilding industry and also a significant factor affecting the development of the shipbuilding industry.

In terms of the level of installation rate, the development of China's supporting industry has gone through three stages: 'high-level development', 'sharp decline', and 'steady recovery'.

High-level development: In the 1980s, China's ship supporting industry, through the introduction of foreign ship supporting equipment production technology and strong support from national special projects, basically met the shipbuilding needs at that time, with the localization rate of domestic equipment reaching over 80%;

Sharp decline: During the 'Ninth Five-Year Plan' period, over 90% of the national investment in science and technology for the shipbuilding industry was used for the research and development of ship products, causing China's ship supporting industry to lag behind the development of the shipbuilding industry, with the localization rate of supporting equipment dropping to 30%, and the ship electrical and automation equipment being almost non-existent, severely relying on imported products.

Steady recovery: Since the 'Eleventh Five-Year Plan', with the rapid development of the shipbuilding industry, the problem of the supporting industry lagging behind the shipbuilding industry has become increasingly prominent, severely restricting the development of China's shipbuilding industry. The state began to pay attention to and increase investment in the ship supporting industry, especially from the end of the 'Fifteenth Five-Year Plan' to the beginning of the 'Eleventh Five-Year Plan', the state successively formulated documents such as the 'Medium and Long-Term Development Plan for the Shipbuilding Industry' and the 'Eleventh Five-Year Plan and Medium and Long-Term Development Plan for the Ship Supporting Industry'. With the support and guidance of a series of policies, the localization rate of ship supporting equipment has steadily increased. In the 'Thirteenth Five-Year Plan' outline, the state proposed that by 2020, the manufacturing capacity of high-tech ships, marine engineering equipment, and key supporting equipment will be significantly enhanced, entering the ranks of advanced countries in marine engineering equipment manufacturing, and becoming a major manufacturing country for supporting equipment in the world. With the release of 'Made in China 2025', by 2020, China will enter the ranks of strong shipbuilding countries in the world; establish a relatively complete system for the design, assembly, construction, equipment supply, technical services, and standard specifications of marine engineering equipment and high-tech ships; major equipment design and manufacturing capabilities will rank among the top in the world, and the international reputation of leading enterprises will continue to improve; the international market share of independently designed and constructed marine engineering equipment and high-tech ships will reach 35% and 40%, respectively. The introduction of this series of policies will promote the positive development of China's shipbuilding industry.

3. Competitive Landscape of the Ship Equipment Supporting Market

From the perspective of the competitive landscape of the ship supporting industry, the participating enterprises can be mainly divided into three categories: internationally leading enterprises, well-known domestic enterprises, and small and medium-sized private enterprises.

International leading companies, such as Schneider, Siemens, ABB, Hyundai, and Terasaki, are in a dominant position in the market due to their advanced technology, developed market sales networks, and global after-sales service networks, occupying a large share of China's export ship and offshore engineering ship market.

Domestic well-known enterprises have gained recognition from international leading companies due to their production scale and technological advantages, maintaining cooperation and competition in the market. At the same time, they fully utilize the international after-sales service networks of foreign companies to participate in the domestic export ship and ocean-going ship markets. Domestic well-known enterprises, relying on their own technological and craftsmanship advantages, as well as fast, comprehensive, and cost-effective professional technical services, have won a broad market space. In addition, domestic well-known enterprises, especially those with R&D and technological advantages, can establish stable cooperative relationships with downstream customers to build their brand, thus laying the foundation for the sales of their own branded products and newly developed products.

Small and medium-sized private enterprises have small production scales, a large number of companies, and serious product homogeneity, mainly focusing on imitation. The markets they participate in are mainly concentrated in inland ships, fishing boats, and small coastal vessels, facing fierce market competition primarily through price wars.

IV. Layout of the domestic ship equipment supporting industry

From a regional distribution perspective, there is a clear trend of major ship supporting equipment production enterprises gathering towards large shipbuilding bases, forming four major supporting clusters in the Yangtze River Delta, Chongqing-Hubei region, Bohai Rim, and Pearl River Delta. From the competitive landscape, a development and competition pattern has basically formed among state-owned enterprises, private enterprises, and joint ventures. From the product classification perspective, production bases have formed centered around Dalian, Shanghai, and Qingdao, with low-speed diesel engines, propellers, valves, and ship electrical and automation systems as the leading products; centered around Xi'an and Luoyang, with high and medium-speed diesel engines and generator sets as the leading products; centered around Nanjing, with marine machinery and small and medium-sized ship supporting equipment as the leading products; centered around Wuhan, with deck machinery, crankshafts, and large forgings as the leading products; and centered around Chongqing, with diesel engine secondary supporting products and marine instruments as the leading products.

V. Market prospects of the ship equipment supporting industry

1. During the "12th Five-Year" and "13th Five-Year" periods, the ship supporting industry will achieve cross-regional growth in ship installation rates.

The installation rate of domestic equipment is an important indicator of the development level of a country's ship supporting industry. Compared to the 80%-90% or even 100% installation rates of domestic equipment in developed countries, China's current domestic equipment installation rate is very low. Although the localization rate of ship supporting in China reached 54% in 2009, the installation rate of domestic ship electronic and electrical equipment was only 13.31%, and the installation rate of domestic ship automation systems was only 1.66%. This indicates that the production scale and market space of China's ship supporting industry still have great growth potential. With the introduction of a series of documents and policies such as the "13th Five-Year Plan Outline" and "Made in China 2025", the installation rate of domestic ship equipment in China will further increase, and the ship supporting industry will welcome important development opportunities during the 13th Five-Year period.

2. The offshore engineering ship market shows bright performance, and the ship market presents structural growth.

Building a strong maritime nation is an inevitable requirement for China's current economic development. Currently, China's economy has developed into a highly ocean-dependent export-oriented economy.

For many major trading countries in the world, China's dependence on maritime trade is even higher. Huge maritime trade relies on strong maritime power for protection, which includes a maritime transport fleet, marine resource development, maritime passage security, and naval forces for national foreign trade systems, property, and personnel safety protection. Currently, China is strengthening naval construction and increasing the development of main battle equipment for the navy; on the other hand, it is also increasing the construction of maritime law enforcement forces. The reform plan for the State Council submitted for review by the National People's Congress in March 2013 shows that China will reorganize the State Oceanic Administration, integrating the four law enforcement teams of maritime supervision, fishery administration, anti-smuggling, and maritime police into a new maritime law enforcement force. This move will undoubtedly bring development opportunities for industries related to maritime strategy, especially marine law enforcement equipment. In recent years, various departments such as fishery administration, maritime supervision, maritime affairs, border defense, and customs have been accelerating the construction speed of related ships, but still cannot meet the law enforcement needs of millions of square kilometers of sea area. Compared to Japan, which is also in East Asia, China's maritime supervision forces still have a significant gap in the number of law enforcement vessels per unit area. Therefore, to meet or approach the requirements for public vessel configuration in developed maritime countries, China will still need thousands of public vessels in the future and must build more modern ships. It is expected that during the 13th Five-Year period, China's public vessel market will continue to maintain a rapid growth rate, thereby driving the market demand for electrical and automation equipment for public vessels.

In addition, offshore engineering ships have become a development focus, driving a significant increase in the demand for ship equipment and related accessory products for offshore engineering ships. With the active development of oil and gas, the continuous prosperity of the drilling platform market and floating production platform market will alleviate the low utilization rate of offshore engineering ships, providing strong support for the offshore engineering ship market. Secondly, as offshore oil and gas development moves into deeper waters, outdated ships that do not meet the needs will be accelerated for elimination. During the 13th Five-Year period, the demand for replacement equipment brought by oilfield development projects will continue to rise.

3. China will continue to undertake the transfer of the world's shipbuilding industry, and the long-term growth trend of the domestic shipbuilding industry remains unchanged.

From the perspective of the future competitive landscape of the world shipbuilding industry, China's advantages in labor, raw materials, and coastline still exist, and the world shipbuilding industry will continue to transfer to China. In recent years, China's shipbuilding industry has accelerated its pace of structural adjustment and transformation to adapt to market changes. First, the development, undertaking, and delivery of high-end ship types have increased in quantity or achieved breakthrough developments; second, large enterprises with technological strength have increased their efforts in exploring marine engineering equipment.

Currently, the world ship market is still in a slow recovery period, but with the deepening of economic globalization and international trade, the trend of rising world ship demand amidst fluctuations will gradually strengthen. Moreover, with continuous technological innovation and increasing awareness of energy conservation and environmental protection, the added value and technological content of new ships will continue to improve, the types of ships will continue to optimize, and the long-term growth trend of demand in the ship supporting industry, especially for ship equipment, will not change.